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Politics bedevils East Mediterranean gas ambitions

Gas discoveries have added fuel to the fire of regional tensions in the Levant

Beirut's politicians haven't been slow to acknowledge the substantial financial windfall that might come their way as a result of the exploitation of offshore reserves, estimated to contain 20 trillion to 80 trillion cubic feet (cf) of gas.

Advertising billboards went up across the capital in July, paid for by the government's Petroleum Administration, announcing to hitherto unsuspecting citizens that Lebanon would soon have billions of dollars to spend on a new metro system, healthcare provision and fresh weapons for the army.

All this has come before a single rig has been deployed, and many weeks before the country's debut licensing round is due to close. But for Lebanon's factional chieftains, the possibility of future gas revenues has provoked one of the earliest manifestations of the resource curse. Factions are pushing pet economic projects, and competing for resources, all founded on the expectation that gas export receipts will put an end to the country's colossal public debt worth more than 140% of GDP.

Few upstream openings have been this politically charged, and Lebanon is not alone in experiencing this phenomenon. Across the eastern Mediterranean, from Israel to Cyprus and Turkey, governments are grappling with tricky geopolitical issues that are dimming the lustre of the resource base.

The East Med hydrocarbons boom, which kicked off in 1999 with Noble Energy and Delek Energy's discovery of gas offshore Israel, has complicated an already confusing picture. As the International Institute for Strategic Studies (IISS) noted recently, the string of gas discoveries has complicated rivalries in the eastern Mediterranean, an area already full of long-standing security issues.

The IISS thinks that the complex nature of the overlapping claims, history of conflict in the region and potential riches available to cash-strapped nations actually make it more difficult to resolve the various disputes.

Rivalries

In Lebanon's case, the location of its most promising gas reserves - in the southern offshore, they lie close to a disputed maritime area that contains Israel's Exclusive Economic Zone (EEZ)' also happens to be the area where Lebanon's powerful Shia faction holds sway.

According to one senior Lebanese opponent of Hezbollah, this has given Iran a stake in East Med gas, embroiling it in a broader geo-strategic battle between East and West. Iran is Hezbollah's main foreign backer.

This is not hyperbole. "Any southern Lebanese offshore gas exploration and development would be done under the oversight of Hezbollah," says Bill Farren-Price, head of consultancy Petroleum Policy Intelligence. "There are political angles regarding their desire to present themselves as the protector of Lebanon's sovereign rights. It's not to be dismissed."

There are more prosaic challenges facing Lebanon than having Tehran's theocrats using its future gas as a form of bargaining chip. Progress on the country's vaunted offshore programme is flagging. The country has had no functioning government since prime minister Najib Mikati's resignation in April 2013. A caretaker administration is in place, but lacks the authority to sign off on key energy-focused legislation.

The Council of Ministers has been sent two critical decrees relating to the 10-block licensing round, including the protocol for the tendering process, which will need to be passed by 4 September. If the caretaker government is unable to pass these decrees, the licensing round deadline will not meet its 4 November target, causing further delay.

The government needs to decide on an exploration and production sharing contract, how the blocks should be demarcated and what the procedure for tenders should be. None of this is considered likely, making the chances of getting exploration contracts signed by a February 2014 deadline increasingly slim.

According to Roudi Baroudi, a Doha-based energy consultant and former adviser to Lebanon's energy minister, the combination of the lack of progress on forming a government, bickering in parliament, and the general absence of the rule of law, are discouraging oil companies from venturing into the Lebanese offshore. "There is good will in government for it go ahead but because of the political quagmire in Beirut, this is stopping anyone from making courageous moves. You cannot move ahead with all this if it is not well supervised or regulated," he said.

Then there is the maritime border dispute with Israel over the delineation of the EEZ. Lebanon has identified an equidistant point between it, Israel and Cyprus as the southwestern limit of its EEZ. However, in Tel Aviv's view, that location should be around 17 km north of where Beirut suggests it should be. This leaves an area of 840 square km under dispute.

In Beirut, rumours have circulated that US mediators have proposed a compromise that would hand around 500 square kms of this to the Lebanese.

Israel's discovery of a new gasfield, Karish, 4 km from the Lebanese coast, has raised the stakes. Lebanon's Hezbollah-aligned energy minister Gebran Bassil has warned that if it goes ahead with the development, Tel Aviv would effectively be siphoning off Lebanese gas.

Israel's rivalries

Israelis, meanwhile, have their own problems to deal with, as they seek to capitalise on their own newfound status as independent oil and gas producers. One question is what to do with the gas that is due to on stream from the Tamar and Leviathan fields.

The government has proposed capping exports of gas at 40% of reserves, or around 34 trillion cf of gas. This would still earn the country a healthy $60bn in export revenues. Critics charge that the limit would curb international oil companies' appetite for exploration in Israel's offshore. "I'd hoped the government would approve a higher cap for export to attract more exploration activity, making Israel a more attractive place for gas exploration," says Amit Mor, chief executive of Israel-based consultancy, Eco Energy. "Much more exploration activity is required for Israel to discover its full hydrocarbons potential."

As Petroleum Economist went to press, the Israeli High Court was due to decide whether the government should have the final say on this proportion, or whether the country's parliament, the Knesset, should. 

Though not on a par with the political travails afflicting Lebanon's gas programme, it still highlights the difficulties of progressing energy projects when political consensus is in short supply.

Says Farren-Price: "Whether the cap is 40% or 50% is neither here nor there. The Israeli Labour Party is seeking parliamentary approval for any gas export deal and that is proving a major hold up for Israeli attempts to line up buyers."

Israel, says Farren-Price, could find itself in a situation where it is trying to do a deal and the Knesset can easily block it.

Meantime, Israeli officials are eager to cut a deal with Turkey that would see an Israeli gas export pipeline run to the south of the country. Turkey's Zorlu Group was reported to have held discussions with Israeli officials, including representatives of Noble Energy, about such a proposal - exploiting the closer political relations that have bloomed between Ankara and Tel Aviv this year.

Says Mor: "The Turkey pipeline is (a technologically and) economically viable project, and the improvement in the bilateral relations between Turkey and Israel could enable it to go ahead."

Commercially and politically, sending gas to southern Turkey would be a highly attractive option for Israel, locking it into a formal strategic relationship with Turkey, a nearby market that is displaying strong economic growth and robust gas demand. Crucially, Turkey is also a conduit for onward gas supply to south-eastern Europe, potentially integrating Israeli gas into the EU supply chain.

The commerce and politics may stack up nicely for Israel, but logistics are complicated. Given Lebanon's state of war with Israel, it is hard to conceive any scenario under which Beirut would sanction a pipeline link traversing its waters.

Cyprus option

"It could go through Cypriot waters, but it's still a tricky one to carry off," says Farren-Price.

Cyprus has its own issues to deal with. It is pursuing a liquefaction plant to process gas from its newly discovered Aphrodite gas field, even though the easiest method of monetising the gas would be to pipe it to Turkey and then onward to European customers.

Turkey has been affronted by Nicosia's offshore drilling campaigns, which Turkish Prime Minister Recep Tayyip Erdogan has described as "sabotaging" the negotiation process between Turkish Cypriots and Greek Cypriots.  In response, in April 2012, state-run Turkish Petroleum began exploration drilling offshore northern Cyprus.

The Turkish-Cypriot bickering confirms that rather than providing soothing balm in the form of a joint resource shared by all, the hydrocarbons finds in the East Med are aggravating long-standing tensions.

As the IISS notes, the long-running rivalries within the region now have an additional driver in the form of hydrocarbons projects, arguably making them more difficult to resolve than ever.

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