logo-hurriyet-daily-newsHürriyet Daily News |  November/25/2015

*Simone Tagliapietra/ **Georg Zachmann

In recent years, the eastern Mediterranean has been a hot topic in international gas markets. Since the Tamar and Leviathan fields off the shore of Israel and the Aphrodite field off of Cyprus were discovered in 2009-2011, a number of export options have been discussed, including pipelines to Turkey or Greece and liquefied natural gas (LNG) plants in Cyprus, Israel and Egypt.

Analysts have expressed hopes that the new gas discoveries might also pave the way for a new era of economic and political stability in the region. However, despite high expectations, progress has been slow. In Israel, this was due to long-lasting internal political debate and uncertainty about the management of the gas discovered, while in Cyprus, the initial enthusiasm has been tempered by successive downward revisions of the expected resources.

But the discovery of the Zohr gas field in offshore Egypt, the largest ever made in the Mediterranean Sea, has revived hopes for further cooperation on natural gas in the Middle East. Regional geopolitics will ultimately decide whether this new development remains confined to Egypt or affects the overall eastern Mediterranean region.

The development of Zohr will primarily serve the Egyptian domestic market, making up for a rapid decline in production which has left the country increasingly struggling to meet its domestic demand. Egypt even started to import LNG in 2015 through two floating storage and regasification units leased for five years. Accordingly, Egypt’s LNG exports dropped from a starting level of about 15 bcm/year in 2005 to almost zero in 2014, leaving the country’s two LNG plants completely idle. With a potential 20-year plateau production level of 20-30 bcm/year, Zohr would thus be a major relief for Egypt’s constrained gas market.

Zohr could be the first of a new string of oil discoveries off the shore of Egypt.  International oil and gas companies have already started to increase exploration in the area, and if Zohr and other offshore fields reach their full potential in the 2020s, Egypt might by that time again become an LNG exporter.

The impact of the Zohr gas field could well go beyond Egypt’s boundaries, due to its location and infrastructure. Zohr is close to the gas fields of Aphrodite and Leviathan, allowing the development of the fields to be coordinated, and the economies of scale needed to put in place a competitive regional gas export infrastructure.

Egypt already has LNG export infrastructure in place in Idku and Damietta, which is currently sitting idle. Putting this into use would allow gas to be exported from Zohr and other Egyptian fields not used in the home market. Given the growing domestic demand in Egypt, it is fair to assume that some export capacity would be left for Israeli and Cypriot gas – if it could be brought to the Egyptian terminals. As both LNG plants can be expanded, Israeli and Cypriot developers would have a flexible outlet.

For Israel and Cyprus, cooperating with other players in the region is crucial. Building the export infrastructure and developing the fields is a circular problem: if there are political or commercial risks that no export infrastructure will be in place when the production starts, a lot of money will be lost. If the field underperforms compared to expectations, expensive export infrastructure (the Cypriot LNG Vasilikos project is estimated to cost USD 6 billion) will sit idle. Consequently, bringing together an underused and scalable export infrastructure with several promising fields could be the key to unlocking untapped regional potential.

Egypt holds the keys to the Eastern Mediterranean gas future. It could decide to proceed alone by exporting the gas volumes that will progressively become available on top of the domestic demand, or it might decide to proceed together with Israel and Cyprus, by creating a new eastern Mediterranean gas hub based on its existing exporting infrastructure.

Creating a new eastern Mediterranean gas hub would present benefits for all players involved, allowing Egypt to enhance its role in the region and secure revenue from a transit scheme, and Israel and Cyprus to fully exploit their gas reserves. It would also present an opportunity for Europe, where imports requirements will grow post 2020 due to declining domestic production and the expiration of long-term contracts with Norway and Russia.

Albeit commercially sound, the realization of a new eastern Mediterranean gas hub will ultimately depend on foreign policy considerations and domestic politics in Israel and Egypt. Public opinion in both countries will be critical of tight cooperation in such a strategic sector.

For its part, the EU should support a regional cooperation scheme aimed at developing an eastern Mediterranean gas hub, for both energy policy and foreign policy considerations. In terms of energy policy, this initiative could provide much-needed substance to the long-lasting EU gas supply diversification strategy. In terms of foreign policy, this initiative could allow international collaboration in an area that otherwise currently presents very few opportunities for cooperation.

*Simone Tagliapietra is a visiting fellow at Bruegel and a senior researcher at the Fondazione Eni Enrico Mattei.

**Georg Zachmann is a research fellow at Bruegel and a member of the GermanAdvisory Group in Ukraine and the German Economic Team in Belarus and Moldova.