The discovery of natural gas in the South East Mediterranean is without a doubt, very good news for the countries concerned and for the region in general. To what extend these discoveries will constitute a game changer for the countries concerned will not only depend on the timing and the content of the decisions they will take but also on the evolution of global energy market within which they will be competing. In order to assess the importance of South Eastern Mediterranean natural gas deposits it is necessary to consider them in the context of the evolution of the global energy market. The technological advances, geopolitical developments, nuclear energy, renewable energy sources, the financial crisis, the energy price fluctuations and potential other competitors coming on stream are considered below in order to present the context within which of SE Mediterranean discoveries will have to be assessed.
- Technological advances: The discoveries of natural gas in the South East Mediterranean would not even have been possible if the technology had not advanced so rapidly in recent years. These deposits only became extractable following recent technological advances that enabled deep sea drilling at water depths of more than 1,500 meters. Technological advances have also meant that it is now possible to extract even more gas from existing wells that in the past would have been abandoned as being depleted. It is estimated that 22,000 fewer wells are needed on an annual basis now to develop the same amount of oil and gas reserves as were developed in 1985. Technological advances are also at the core of the shale gas revolution which is redefining the world energy map. The USA alone is expected to be a net exporter of energy in the next few years – some even say by 2015/6. Technology is also advancing in the methods that are feasible for the extraction of natural gas in offshore operations. For example, Floating Liquefied Natural Gas (FLNG) operations are now feasible, although these have yet to be tested on a commercial basis.
- Geopolitical developments: Ensuring access to energy sources is fundamentally about national security. If a country does not have access to energy sources, it simply cannot function.
USA foreign policy, for the last decades, has focused on the Mediterranean and the Middle East region partly, but not solely, because this area was the source of about 13% of energy supply to the USA. Currently, analysts have started to argue that the US strategic interests in the Middle East have drastically changed and the interests of the US in the region are now more with respect to its role as a potential export market. Recent USA foreign policy is said to have “pivoted to the East”.
Russia’s economy is highly dependent on tax revenues from oil and gas exports. The EC launched last year an investigation under competition law into Gazprom practices, including on the issue of natural gas prices being oil indexed in long-term contracts. The outcome of this investigation could potentially have an effect on existing and future contracts with Russia and beyond. At the same time, the quickly unfolding Ukrainian crisis is impacting European and USA relations with Russia. Currently Russia supplies about 30% of Europe’s natural gas and about half of that is transported via Ukraine. The effects on this crisis on the energy market geography is not yet known, but it is easy to imagine that the efforts to diversify away from supplies from Russia will now be stepped up.
China and India, with their rapidly increasing populations and their very fast increase in energy needs are becoming key drivers in the global energy market. In fact, the global energy demand is increasing predominantly due to increase in demand from non-OECD countries and by the year 2030 global demand is expected to be up by 33% with respect to today’s demands. By contrast, European energy demand in the last year has decreased. This is making energy thirsty China been increasingly more interested in the East Mediterranean.
The Arab Spring and the instability in the Middle East has affected major energy exporting countries and has changed the world energy exporting allegiances. For example, Libya two years after the collapse of the Gaddafi regime is experiencing an 85% reduction in oil exports. Similarly, Egypt has undergone drastic political changes in the last few years and major changes with respect to its role as an energy player in the region. Egypt’s energy woes are set to increase since they are forecasting energy shortages in 2015 in the midst of falling domestic production.  Analysts are forecasting that Turkey will also be experiencing energy shortages in the 2015-6 timeframe.
Overall it can be said that the East Mediterranean is currently undergoing a repositioning vis-à-vis the spheres of influence of the world super-powers.
- Fukoshima nuclear disaster: Following the tragic accident at the Fukoshima nuclear power station in Japan inMarch 2011, the global energy market has not been the same. Many countries have taken decisions to move away from nuclear energy. For example Germany took a sudden decision in May 2011 to phase out all nuclear power plants by 2022. Others have re-thought their long-term investments in nuclear power plants as a result of the accident. Yet other countries of the region in order to address their high dependency on energy imports are now planning big investments in nuclear power plants. Jordan has taken action to have a nuclear power plant by 2016 while Turkey has recently signed contracts for two nuclear power stations to be operational by 2021 one with the cooperation of Russian and the other with a French-Japanese consortium.
- Renewables: Many countries in the last few years have been addressing the problem of dependency on energy imports by promoting energy efficiency and by introducing renewable energy sources in their energy mix. Technological advances have meant that energy from renewable energy sources has become cheaper and more competitively priced so that more and more countries have turned towards renewables. Wind, solar, geothermal, hydropower energy sources are now becoming more popular and more economically viable. The EU, for example, has set a target of at least 20% of the EU energy being from renewable sources by the year 2020 and a EU-wide binding target for renewable energy by 2030 is on the agenda of the European Council of March 2014.
- The economic crisis has greatly impacted the global energy market. The very costly energy infrastructures needed for new developments are now even harder to finance. The financing of new energy infrastructures is even a bigger problem for natural gas discoveries. Oil can be exported relatively easily but natural gas requires huge investments in pipelines or LNG plants. The economic crisis has meant that there has been a fall in private investments and very tight financing conditions which drastically affects the economic viability of natural gas infrastructure projects.
- Energy prices: Countries taking decisions regarding their energy supply need to forecast energy prices in the future. However, in the last few years so many factors have influenced energy prices – that predicting what energy prices would be in the future has been compared “to making long term weather forecasts”. For example, on the 28th of August 2013 – when the US and Western Allies where considering military action in Syria resulted in fears of oil supply disruptions and this resulted in a 6% increase in the price of Brent to $117 per barrel which was the highest we had seen since 2011. Other developments, such as, the temporary agreement just reached with Iran will also impact energy supplies in the East Mediterranean and Asia markets. The outcome of the dispute between the Kurdish Regional Government and the Iraqi central government in Baghdad is another potential game changer for the world energy market. Energy is a global commodity and energy prices are determined on a global level so no country or region can act in isolation.
European Union, for example, has set a deadline of 2014 for the completion of the internal energy market. The energy mix and the level of interconnection varies between the Member States but nonetheless no one country can be in isolation from price fluctuations and developments in the rest of the European market. As Lord Browne said in a recent interview concerning the UK’s shale gas potential “We are part of a well-connected European gas market and, unless it is a gigantic amount of gas, it is not going to have material impact on price”.
It is important to note that although energy prices are determined globally, a number of other factors such as the need to make massive investments in infrastructure in order to address new emerging markets, the geographic proximity of suppliers to importers, long term contracts versus shorter term contracts, oil indexed or non oil indexed contracts, etc. also influence energy prices. As a result, there is a huge price differential of 35-50% between natural gas sold to Europe and Asian market prices.
- Other new discoveries of oil and natural gas: in the next decade discoveries off the coast of Africa in Kenya and Mozambique are expected to be providing energy into the world energy market. The new discoveries of oil in central Australia, estimated to be worth trillions of dollars, are also going to be having their affects on the global energy market.
The brief analysis provided above highlights the complexities, the volatility and the interdependency of the of global energy market. It also highlights that significant events are taking place now that will influence the energy markets for the decades to come.
Over the last year or so there has been significant progress in the development of the natural gas discoveries in the East Mediterranean. Some of these developments are described below.
- Israel just in the last couple of months signed new ground breaking agreements with the Palestinians and with Jordan for exports of natural gas. However, further decisions also need to be taken in order to fully utilize the potential of its natural gas deposits.
- Cyprus has been exploring alternative scenarios for the monetization of its deposits and in the next year additional drilling will take place both by Noble Energy which is involved in the Aphrodite field, but also ENI/Kogas and Total, which will clarify the magnitude of the reserves in the island’s Exclusive Economic Zone. How these deposits will be exported is yet to be decided.
- Lebanon’s bidding round is finally set to open in April 2014, after previous three postponements. It is believed that the delays may have discouraged some potential investors from taking an interest in the development of Lebanon’s offshore natural gas deposits which believed to be vast.
Countries of the South East Mediterranean region, may on occasion, focus on developments in the region and loose sight of the fact that they are functioning in a wider world context. This very complex and very beautiful part of the world, with its traditional alliances and animosities, this very explosive at times region of the world, functions in a broader world order and any decisions that are taken with respect to future energy policies, need to take this global context seriously into consideration. Time is of the essence and the window of opportunity for decisions that would optimize benefits from the natural gas discoveries is now.
This article first appeared in the EUCERS Newsletter
Androulla Kaminara is a Special Advisor to the European Commission currently Academic Visitor to the European Studies Centre of St. Antony’s College Oxford University. She is carrying out research into the geopolitics of energy in the South East Mediterranean. Views are personal. Follow her via blog akaminara.wordpress.com and @akaminara on Tweeter