East Med pipeline: maybe someday
Studies on the possible route may be under way, but if the project materialises at all, it is unlikely to be on an ambitious schedule
Israel’s ratification of an agreement struck earlier in the year to build the Eastern Mediterranean Gas (East Med) pipeline, designed to ship Israeli and Cypriot gas to Greece and on to Western Europe by the middle of the decade, coincided almost simultaneously with Chevron’s $5bn deal for Noble Energy, one of the region’s leading operators. Unsurprisingly, both stoked renewed optimism around the project.
But many experts caution against premature enthusiasm for the 10bn m³/yr link—1,300km of the total 1,900km of which would be offshore, making it among the longest undersea gas links in the world, and that does not include a further more than 200km subsea connection from Greece to Italy. Beyond Byzantine geopolitics and the Covid-19 pandemic that has temporarily decimated gas demand, economics weigh heavily down on it.
“I do not think it will happen soon,” says Panos Papanastasiou, an engineering professor at the University of Cyprus. “This is not a very mature project.”
1,900km – Length of EastMed pipeline
The politics are convoluted but may prove soluble. Turkey has a long-running dispute with Greece and Cyprus, while its relationship with Israel has been on the rocks for about a decade now over the Palestinian issue. East Med would have to run through waters claimed by Turkey as its exclusive economic zone.
But those politics have been in flux recently. Israel has made its peace with major Arab political mover the UAE. In turn, Turkey has been making diplomatic gestures toward improving relations with Israel, such as the resumption of Israeli flag carrier El Al cargo flights to Istanbul in May.
On the other hand, Ankara is actively pursuing an ambition to become a regional gas hub. Turkey’s state media, which rarely deviates significantly from government-approved positions, cheerleads for the country to provide an alternative to East Med.
“The cheapest way to route the pipeline is to Cyprus, then to Turkey, and then cross the Sea of Marmara into Europe,” says Ariel Cohen, a senior fellow at the Atlantic Council thinktank in Washington, DC. “If that’s not possible, it will go to Crete, and from Crete to Greece and then to Europe.”
Turkey’s adventurism in East Med waters and in Libya has galvanised influential actors opposed to the Erdogan regime’s posturing—including France, Greece, Cyprus, Egypt and the UAE—to rally (with Italy notable for much lesser enthusiasm) behind the project. If demand and price can be made to work with the East Med’s proven and probable reserves, now could be the project’s time.
The challenge, at least in the short term, is in both too much alternative global supply and lacklustre post-Covid European demand. Competition is stiff from other existing and potential gas suppliers to Europe, ranging from Norway to Russia to Algeria to Azerbaijan to Libya—and, in the case of LNG imports, exporters more globally.
“The only potentially foreseeable event that could garner sufficient commercial attraction to the project, would be if supplies from Algeria to Europe were seriously disrupted and were no longer viewed as reliable,” says Brenda Shaffer of the Energy Academic Group at the US Naval Postgraduate School. “Algeria is going through a period of instability, which has not received much media coverage. And security is North Africa is getting worse, with IS fighters moving to the region after being dislodged from Iraq and Syria.”
Italy, which failed to sign on to the €6bn ($7.1bn) East Med agreement in January, imports significant volumes from Algeria through the c.18bn m³/yr Transmed pipeline. It also has the 8bn m³/yr Green Stream link to Libya, although fighting there has curtailed flows in recent years.
“The only potentially foreseeable event that could garner sufficient commercial attraction to the project, would be if supplies from Algeria to Europe were seriously disrupted” Shaffer, US Naval Postgraduate School
But the country is not short of supply options. Another 10bn m³/yr connection, the Trans-Adriatic Pipeline (Tap), is expected to start pumping gas from Azerbaijan through Turkey to Greece, Albania and Italy by the end of the year.
Domestic opposition to fossil fuel imports and an abundance of import options that also include three LNG regas terminals further motivates Rome’s reluctance to join the project, adds Shaffer. “Without an anchor market like Italy, it is hard to see the commercial viability for the East Med pipeline,” she says.
A combination of sluggish demand projections—due to the impact of Covid-19 and more lukewarm attitude to gas as a solution in the low-carbon future—and abundance of other supply options is not an obstacle to the East Med dream in Italy alone. It is Europe-wide.
Most new offshore work in the Eastern Mediterranean is on hold for at least a year, experts say, due to anaemic post-Covid European and global gas prices. But challenging gas price trends predated the pandemic and will likely outlast its immediate impact.
Structurally, Europe’s domestic gas production is gradually declining, mostly due to falling output in the UK North Sea and the Netherlands’ decision to shutter its giant Groningen field. EU (including UK) supply was down by 9pc year-on year in 2019, to 109bn m³.
But demand growth will be slow at best. Most coal-to-gas switching in major electricity markets is already done, while industrial demand for gas will never recover from the continent’s de-industrialisation. While an increase in electrification could see requirements rise substantially, renewables will likely grab an ever-growing slice of existing and new power demand.
Other trends, such as environmental lobbying against gas for space heating and growth in green hydrogen, will also impact negatively on the continent’s appetite. “[European] demand is expected to increase only marginally or flat-line in the 2020s,” thinktank the Oxford Institute for Energy Studies (OIES) concluded in a mid-2019 report. Its projections back then, even prior to the impact of Covid-19, were that demand would not recover to 2010 levels until 2025.
But Europe still remains attractive to global gas producers, “the sinking ground for gas” in the OIES’ words. Any supply-demand issues arising from its domestic production decline will have plenty of would-be fillers.
Russia, which already supplies around 40pc of Europe’s gas, would be one candidate. As its Arctic LNG projects have spectacularly proven, its access to more low-cost reserves is far from exhausted.
“The cheapest way to route the pipeline is to Cyprus, then to Turkey, and then cross the Sea of Marmara into Europe” Cohen, Atlantic Council
The 27.5bn m³/yr Nord Stream 2 pipeline expansion to Germany could, admittedly, face long delays or even, if less likely, abandonment due to US political pressure. But its ability to significantly increase supply to northwest Europe, the continent’s demand hub and area most affected by production decline, remains through its existing transit links—should it choose, and have available supply, to use them fully.
And Russia’s ability to supply southern Europe, East Med’s initial stamping ground, expanded by 15.75bn m³/yr in January with the startup of the 31.5bn m³/yr Turkstream pipeline to Turkey and Bulgaria. Project extensions to expand deliverability further into Serbia and Hungary are underway.
But Russia does not necessarily see its ambitions as competing with other would-be European suppliers in a zero-sum game. East Med is “an interesting and important regional project”, says Stanislav Ivanov, an expert at the Russian Academy of Sciences’ Institute of World Economy and International Relations.
And Europe’s desire for optionality could be a trump card for the project, particularly given that domestic gas production is expected to decline another 25pc over the next decade, according to IEA data.
The EU is offering significant financial backing not just to new import initiatives, such as East Med, that it defines as projects of common interest, but also supporting investment in being able to move gas around the European network more easily. So, in the future, it will matter considerably less if Europe’s supply deficit is in its northwest, but East Med offers a new southeast supply option.
“The reserves offshore Cyprus, Israel, Egypt et al are quite considerable and the Europeans having it relatively close, closer than Russian gas, would be amiss if they do not develop it,” says Cohen. “If the Europeans decide not to do it, most of that East Med gas will become LNG and will be sold to the global market, especially to East Asia.”
The EU has already invested €35mn in Feed studies, as has the joint venture between Greece’s Depa and Italy’s Edison that is promoting it. Building contractors are also reportedly being sought, in line with a 2022 FID aim. That timescale is probably too ambitious; the pipeline itself may be less so.