The Mediterranean surprise

Moisés Naím / World Energy & Oil

The eastern Mediterranean was the cradle of three great religions, bureaucracies and market institutions. Alexander the Great was born there, the region was the center of the Roman Empire and its ocean was known as Roma’s “mare nostrum.” Centuries later, the countries bordering the eastern Mediterranean became the Byzantine Empire, and this is also the region where Islam reached its golden age. Cyprus, Greece, Lebanon, Syria, Israel, Turkey and Egypt, the countries touched by this sea, were as alluring as they were unlucky. Recurrent drought, famine, mass migrations, pirates and constant wars made the region dangerous and chronically unstable. In early modern times, between the 16th and 19th century, successive waves of European invaders regularly destabilized the region. Inevitably, the fragmentation and poverty that besieged them took a toll and led to the decline of the region’s weight in the world.

The present is even more turbulent
Surprisingly, despite their deeply troubled past, the countries of the eastern Mediterranean and their neighbors are even more dangerous and unstable today than ever before. Syria is rocked by prolonged and bloody civil war, the Shia-Sunni clashes boil over throughout the region. Israel and Palestine seem to have abandoned any hope that peace negotiations can lead to a desirable solution to their old, intractable disputes. Egypt’s turmoil is repressed by an increasingly tough military dictatorship. Turkey’s economic success has faded from the news and been replaced by news of an increasingly authoritarian government that feels threatened by Islamic terrorists, separatist insurgents, bellicose neighbors and an opposition bent on stopping the hegemonic ambitions of those in power. The Syrian crisis has produced not only over 200,000 deaths but has also spurred the largest movement of refugees in Europe since the end of World War II. Huge numbers of desperate individuals and entire families flee into Turkey and other countries in the region, as they try to seek permanent refuge in Europe. A new version of the Cold War seems to be emerging in the region, as Russia boldly increased its military presence in Syria only to leave a few months later. Powerful terrorist groups such as ISIS have risen in the region while Iran and Western powers surprised the world–and especially the Middle East–by agreeing to an improbable deal in which Iran forsakes its nuclear ambitions in exchange for the lifting of the severe international sanctions it has long suffered and which have ravaged its economy.

A new force is changing the eastern Mediterranean: gas
While the eyes of the world were trained on the multiple tragedies of the region, a major development that has not attracted as much media attention as the conflict may spark unprecedented changes. Revolutionary technologies used to explore and produce oil and gas lying under deep Mediterranean waters have led to the discovery of hydrocarbons in volumes that, once commercially available, will reshape the energy map of the Middle East and, perhaps, Europe. A changed energy panorama will inevitably alter the geopolitical landscape, thus creating new opportunities— and perils. Between 2010 and 2011, when oil prices hovered around $80 per barrel and the price outlook for the medium term was rosy, international energy companies engaged in an ambitious effort to find oil and gas in the Mediterranean Sea. And they did. In fact, their efforts yielded far better results than anyone had expected. In 2010, they discovered the Tamar and Leviathan gas fields in Israeli territorial waters. These fields have combined estimated reserves in the order of 25 trillion cubic feet of gas, a volume that would place them among the 30 largest gas fields in the world, larger— for example—than most gas fields found in the North Sea. These gas reserves are roughly equivalent to two years of Europe’s gas consumption. The U.S. Geological Survey estimates that some 122 trillion cubic feet of natural gas could eventually be found in the Levantine Basin, in the eastern Mediterranean Sea, a volume that would make the region an important player in the world of energy. The costs of developing these resources will be high, as a typical development well drilled in that basin will cost between $80-90 million and a gas pipeline to Europe is expected to cost as much as $15-20 billion. These high costs and the technical complexity of the operations had delayed exploration efforts for years. Now, these important discoveries have sparked not just great hopes of energy self-sufficiency for the countries of the eastern Mediterranean but also of an important source of export revenues for their economies.

Two problems: prices and rules
The elation in the region about the natural gas finds has been dampened by the current outlook for oil and gas prices. At current and expected midterm prices, the economics of these new finds are not that promising. In addition, Israel’s stance on its domestic pricing of the gas and the regulations that are being considered regarding about the volumes of gas that will be available for exports have raised some concerns among the foreign operators, concerns that could also appear among operators of the newly found Egyptian gas finds if their regulations track those of Israel. The regulatory and tax frameworks are still being debated and negotiated and therefore their final design is still uncertain. In order for the eastern Mediterranean gas discoveries to become commercially feasible, the international price of oil will probably need to return to the levels that made exploration an attractive proposition in the first place, about $70-80 per barrel.

Will new gas create new friends?
Although these obstacles have generated some skepticism and even the argument by some that these gas fields may never be developed, the magnitude and, particularly, the strategic location of these gas discoveries, close to the European market, are so important that their positive impact will likely outweigh the impact of prices that are too low or regulations that are overly onerous. Prices and regulations will fluctuate, the size and site of the fields will not. In fact, the regional expectations of energy self-sufficiency have already triggered surprising new political alliances and pacts among the countries in the region. Perhaps the most important is the recent alliance of Israel, Greece and Cyprus, which according to the official statement aims to “promote a trilateral partnership in different fields of common interest and to work together towards promoting peace, stability, security and prosperity in the Mediterranean and the wider region.” The countries hastened to add that such an alliance did not exclude other parties, possibly referring to Turkey. It is easy to mock the empty rhetoric of these official communiqués but, in this case, a powerful economic reality undergirds the goal of a closer economic partnership among the countries that partake in the eastern Mediterranean energy boom. This alliance of nations that so far have been more prone to be divided than integrated rests on the fact that a joint approach will maximize the benefits of exploiting their shared geological riches.

The core of this alliance is the East Med Pipeline project from Israel and Cyprus via Greece that would export the eastern Mediterranean gas to the European market. This alliance represents a major change in the traditional foreign policy of the countries that take part in it. Greece, for example, had traditionally maintained close links with Palestine but it is now forging a new, energy centered, alliance with Israel. Other potential political and policy moves also triggered by the findings of the Israeli Leviathan and Tamar fields and the smaller Cypriot Aphrodite field include those related to possible gas supplies from Israel to Turkey, and the potential supply of Israeli and Cypriot gas to Europe through the use of existing Egyptian LNG facilities, which are currently underutilized. Egypt had already signed letters of intent to import Israeli gas, in order to re-export it to Europe through its LNG terminals. With the 2015 discovery of the Zohr gas field in Egyptian waters, this possibility now looks more distant. Nonetheless, representatives from the companies developing the Israeli Tamar gas field have argued that the Tamar field is already producing gas, so it will be much faster and cheaper to build a pipeline to the LNG terminal in Egypt than to develop a new field. These uncertainties and fluidity of negotiations about the future utilization of the gas and the norms that will govern its development illustrate the geopolitical complexities prevailing in the eastern Mediterranean region, where multiple economic agendas and political attitudes coexist within a compact geographical area. Nonetheless, it is good news that, despite the problems, the flurry of activity generated by the gas discoveries has brought new energy companies and private investors into the region, attracted by the promise of major economic trade between eastern Mediterranean countries and Europe.

The region between old patterns and new promises
The new gas-driven alliance between Greece, Israel and Cyprus could add further complications to the instability that plagues the eastern Mediterranean nations. Turkey, Palestine or even Egypt might feel excluded and try to respond by launching their own counterbalancing pacts. Will the eastern Mediterranean region be condemned to stay in turmoil forever, or shall its newly found energy muscle provide the necessary impetus for the emergence of a new vibrant and more stable region? There are reasons for optimism, but as Lawrence of Arabia said to Ali in the great Hollywood epic: “Nothing is written.”