The heady cocktail of politics and economics has left the Eastern Mediterranean gas industry with a hangover in recent years. While demand within the region has been growing, and the restart of Egypt’s two LNG liquefaction terminals has reopened another export route, it remains difficult to see how the first phases of Israel’s major Tamar and Leviathan projects sell enough gas to both reach plateau, while potential second phases on both and all of the discoveries made in Cypriot waters remain without firm customers.
The political picture had already been improving, not least between Israel and its Arab neighbours and co-regionists. There have even been murmurings that its relationship with the Turkish regime of Recep Erdogan, one of Mena’s largest political nuisances of the recent past, might be getting warmer. But, while no-one should downplay the tragic and outrageous nature of Russia’s unprovoked invasion of Ukraine, it is also undeniable that one of its consequences is a seismic shift in awareness of political risks around energy supply and the advantages of diverse sources.
Mathios Rigas, CEO of East Med gas-focused producer Energean, attended a mid-April meeting with Greek government officials, after which the country’s prime minister announced Greece was restarting exploration for hydrocarbons both onshore and offshore. Energean’s 100pc-owned Ioannina onshore is “the most mature” of six the Greek prime minister highlighted as active, and is “on trend with Albania”, Rigas tells Petroleum Economist.
“What is interesting is that, four months ago, the narrative was that Greece only wanted to do green investments and was going to be the first country to shut down lignite,” Rigas continues. “Being very pragmatic and realistic Greece is now saying: ‘We have a different world, we have to move away from Russian supply.’
“Greece has restarted lignite-fired power stations and restarted exploration of hydrocarbons, with a clear focus on gas. I think that is probably the biggest change that I have seen in any of the countries in which we are developing assets.”
Rigas notes that there was also a mid-April statement from the five biggest political parties of Italy supporting the proposed East Med pipeline to bring the region’s gas to Europe. “What is interesting to me is that we have a huge shift in European policy—starting, of course, with having gas classified as a green fuel in the taxonomy, then moving to government policies like the one we see from Greece and hopefully will see from Italy,” he says.
But the keen basketballer admits that securing the export infrastructure to link the East Med’s currently abundant gas resources to newly enthusiastic European demand centres is still no slam-dunk. “When you see big lenders like [Dutch bank] ING, or the major multilaterals, pulling out of hydrocarbons, who is going to fund the projects?” he asks. “These are big investments that require capital.”
Energean proposed to the Cypriot government that it would install a floating LNG (FLNG) liquefaction terminal in Cypriot waters, build a pipeline from Israel and export gas through Cyprus into Europe. “This is a $1.5bn project; it needs funding,” Rigas cautions. “Unless we start to see money flowing back into the system, we will not be able to proceed with investments.”
The most economic option for LNG export out of the East Med is, in Rigas’ opinion, always likely to remain the existing terminals at Damietta and Idku, given that they are “fully depreciated”. “The marginal cost of liquefaction there is going to be always more competitive than anything else—the best and cheapest option to get gas out of the East Med is always going to be through Egypt, liquefied and out to wherever it needs to go,” he says.
An additional onshore liquefaction plant in, for example, Cyprus is possible. But the Energean chief warns the country “has, unfortunately, demonstrated its total inability to deliver LNG projects”. “I remind you that they discovered gas at Aphrodite in 2011, and they are still not producing gas.”
The country continues to burn fuel oil owing to “huge problems”, including wrangles with the project’s Chinese contractors, suffered by a planned LNG import terminal. “If suddenly they can change and are able to build an LNG [liquefaction] terminal onshore, I seriously doubt it,” says Rigas.
“Once the Egyptian terminals are full, and if we need more capacity, then the next best option is to utilise small FLNG terminals, at least until we find a big structure,” he continues. And here Rigas is more cautious than some of the more bullish analysts on the East Med’s current gas export potential.
He notes that “there is no other big field to supply all this gas” in the region outside of Egypt’s Zohr, which largely serves domestic production, and Leviathan, a portion of the first phase of which is already being exported to Egypt, as well as other regional commitments.
By Rigas’ calculations, a 10bn m³/yr East Med pipeline—growing to 20bn m³/yr in a subsequent phase—over 15 years would require up to 300bn m³ of reserves. And this is on top of Egypt’s demand of 65bn m³/yr, projected to rise to 80bn m³/yr, Israel’s 12bn m³/yr, which could expand to 20bn m³/yr, and Jordan’s requirements.
“If you look at the bigger picture, gas from the East Med will have to cover 100bn m³/yr+ consumed by Israel, Jordan and Egypt. To start to think about exporting, whether by LNG or by pipeline, we need more gas,” Rigas cautions. “We need more economic discoveries, otherwise none of the [proposed export] projects work.” Energean is trying to do its bit, with the first well in a planned five-well drilling programme in Israel, targeting at least 100bn m³ of additional resources, already underway.
Price remains a big issue in terms of the incentive to explore for more gas. “What all upstream companies today are trying to do is to achieve an agreement where they can get access to global energy prices without being landlocked in Israel or Egypt—where you have to be a price-taker of whatever the government of Egypt decides to give you,” says Rigas. “But the same message goes to the Egyptians: if they want to see investment and wells drilled, the industry must be allowed to see the benefit.
“We cannot be selling gas at $3/mn Btu or $4/mn Btu in Egypt when global prices are $30/mn Btu. No-one is going to invest in Egypt; we are going to go somewhere else,” he warns. “The industry and governments have to work together to find the optimal solution that satisfies security of supply—which is a top priority for all politicians—and ensure that the industry gets access to [any upside].”
Within the regional market, Turkey remains a material wildcard, both as source of demand and a potential transit route to lucrative European markets. “We have seen Turkey start to get close to Israel again—discussions are ongoing about pipelines,” says Rigas. “Imagine if we had another 70bn m³/yr of demand on the other side of the East Med? We could be talking about close to 200bn m³/yr to be consumed in the area.”
Turkey’s existing pipeline infrastructure into southeast Europe could represent another competitively priced export option for East Med gas. But the two options to connect resource to transit route, either subsea or onshore, are fraught with political complications. The former would inevitably involve going through waters claimed by Cyprus as part of its internationally recognised exclusive economic zone (EEZ), but subject to competing Turkish claims to be part of the EEZs of either Turkish recognised Northern Cyprus or Turkey’s own waters. The latter involves connecting the northern Israel-Jordan-Syria section of the Arab Gas Pipeline through war-torn northern Syria and into southern Turkey.
Room for optimism
While acknowledging the diplomatic challenges, Rigas is not completely pessimistic. For a subsea Israel-to-Turkey pipeline, “there has to be co-operation with the Cypriots”, he agrees. “The Cypriot president has made a public statement saying that, if the Turks are prepared to negotiate and they recognise the Republic of Cyprus, we could get into a negotiation about EEZs, to share the resource of our waters and to talk about pipelines,” he notes.
“In the East Med, things change constantly. If we had this discussion five years ago and I told you that the Israelis would be flying to Abu Dhabi and the Arabs would be coming to Israel to buy into its gas resources, you would have thought I was nuts,” Rigas jokes. “But we have seen it.
“So, I would not be that surprised if, say, five years from today, we see a normalisation of [East Med] relationships in the interest of developing gas resources. I would not rule out gas going to Turkey, albeit clearly it is not doable today because the Cypriot problem still exists,” he continues.
As for a northern extension of the Arab Gas Pipeline as an alternative, “then you have to deal with Syria, you have to deal with Lebanon, there is no perfect solution”, Rigas warns. “What we need to do as an industry is to continue finding resources and to continue developing infrastructure—with the support of governments and the EU,” he says.
And there is a significant prize at stake. “What the politicians need to understand is that whoever builds the infrastructure controls the game. If the Cypriots move fast and create an LNG terminal in Cyprus, all the gas will go there,” the Energean chief predicts.
“If the Egyptians have the cheapest transportation rates in their pipelines, all will flow through there. If the Turks come to an agreement with the Cypriots and there is a pipeline, that is obviously the best route to get gas from everywhere [in the East Med] into Europe. If the Israelis wake up and accept the fact that an LNG terminal in Israel will give them total control over exports, if they allow it to happen, they will control the gig,” says Rigas.
“It is a very fluid dynamic. Infrastructure will be key; funding of infrastructure is going to be extremely important. Finding gas resources is number one—whenever and wherever we have the resource, we will find a way to bring gas to market,” he concludes.
Israel’s environmental lobby is opposed to LNG export infrastructure on its coast. But Rigas can point to dramatic changes both in that country’s energy market and in regional attitudes to gas as precursors to potential changes in that position. “Israel is the best example of a positive story in the East Med,” he says.
“Ten years ago, they were importing gas and today they are self-sufficient, they are exporting, and they have low gas and electricity prices. I think they are the only country in the world where electricity prices have come down recently, because they have an abundance of gas sold into the domestic market. The countries that invested in exploration early are now the ones that are reaping the benefits,” Rigas continues.
“The Greeks have an environmental lobby, and now they are burning lignite,” Rigas says of his fellow countrymen and the start point of Energean’s business. “The environmental lobby needs to understand that we are all on the same page; we all want to transition to the future. But we want it through gas, we do not want it through lignite. If we do not develop gas resources, the planet is going to burn more lignite.
“The public has started to realise that the nice theory about going straight to a green future does not exist in practice. Security of supply is important and, while energy must be a lot more sustainable, it must also be affordable and continuously available. And today it is not affordable and it is not continuously available,” he warns.
“Now we have big supply-demand imbalance that is leading us to a worse environmental impact than what we would have had if everything had been done through a properly organised transition plan that included gas. Gas is the catalyst for and foundation of a more sustainable energy system because it partners with inherently intermittent renewable energy. Until there is viable energy storage, you need gas.”