Our work is only possible through the generosity of private philanthropy. Find out how you can support our mission and can contribute to our work.
Join the HJS mailing list and keep up to date.
Chair: Alan Mendoza, Chief Executive Henry Jackson Society
Host: Glyn Davies
Speaker: Mona Sukkarieh, co-founder, Middle East Strategic Perspectives
Thursday 21st January 2016
Committee Room 9, House of Commons, SW1A 0AA
Transcript written by Rachel Oliver
My name is Glyn Davies I am a member of the Energy and Climate change committee I am developing a growing interest in energy, and the more I know, the more I realise I don’t know. While here we look at what is happening in Britain essentially clear that what happens in the rest of the world has a huge impact on Britain. So when I was invited by the Henry Jackson Society to sponsor and chair this meeting, I was hugely pleased. We are very lucky that we have a renowned expert to tell us about what is happening in the Middle East. I think we have got a presentation here from Mona Sukkarieh and then we will have a Q+A. So there is nothing more for me to say except to allow our expert speaker today to take the floor.
Thank you Mr Davies for the introduction, it is a great pleasure to be here and discuss some of the issues of common interest. It’s been one of the issues which has not received a great deal of action lately. I brought together a combination of factors in the security concerns of terrorism, conflict, illegal immigration are contributing to this renewed interest. Below the sea floor there is a relatively important oil and gas potential is attracting a new type of attention in the region outside Egypt and Syria which we are not used to. So we are looking here at the Levant Basin an offshore area covering around 83’000 square kilometres located in the Eastern Mediterranean, underlying parts of Syria, Lebanon, Israel and the Palestinian territories. According to the US geological survey, the region is estimated to hold 1.7 million barrels of recoverable oil and 122 trillion feet of recoverable gas. Now that is significant for the small and resource poor countries in the region but hardly a game changer on the global scale. Especially that these resources are likely spread among various countries. To put things in perspective, the reserves for Algeria alone are estimated at 159 trillion cubic feet of gas and the oil potential of the Levant Basin is infer to the proven reserves of Syria.
About a third of the gas potential has been discovered so far mainly off the Israeli coast with two major gas feed which together hold about 33 trillion cubic feet of gas and there is an important gas feed in Cyprus Aphrodite with around 4 trillion cubic feet of gas. The Levant Basin has been until recently a largely unexplored area. The rise in demand in the 1990s and the rising prices of oil have generated a promising and underexplored areas such as the Levant Basin. The exploration activity was mostly conducted off the Israeli coast with modest oil discoveries in the early 1990s followed by gas discoveries in the late 1990s. Now amongst others these discoveries have weakened in the industries interest in the area. Further discoveries in deeper water indicate gas potential with good evidence that there is also oil potential.
Let’s start with Israel which has the most developed gas and oil sector amongst newcomers in the Mediterranean. The first discoveries there sparked interest for exportation in the Eastern Mediterranean including Cyprus and Lebanon. The discoveries of reserves in 2009 and 2010 radically changed the prospects for the Israeli gas sector. These reserves can meet local demand for decades and allow Israel to become a natural gas exporter. Since 2010 though, policy makers in Israel have had to repeatedly intervene in the sector and deal with challenges, not just opportunities presented by these large discoveries. In December of last year the Israeli gas sector was brought to a halt which both delayed and complicated the development of Levant. This episode is not an isolated event. During the major discoveries, Israeli authorities have had to adjust their policies and adapt to the new environment. A major tax increase was introduced in 2011 followed by a cap on gas exports in 2013. That’s upsetting companies who argue that the Israeli market is too small to justify huge development costs.
Stability and the ability to anticipate the regulatory framework is particularly vital for the energy sector. A sector that requires major investment in the initial phase with an expectation for a return on investment. This is even more important in volatile markets. The issue here is not anticipating developments and always being a step behind. Failure to anticipate the possibility of larger discoveries and developing an adequate fiscal framework. The lengthy period to make a first decision regarding noble and the like for forming a monopoly then adopting a decision which fails to address monopoly concerns by forcing them to sell two very small gas firms which together equalled 3 trillion cubic feet of gas and finally deciding a year later to retract that decision. The uncertainty over Zohr might jeopardise gas exportation being initiated with clients in Egypt and Jordan, Palestinian territories
More than any other country, Israel views its gas resources as a strategic commodity. Beyond the obvious economic benefit contributing to meeting local demand, Israel moves these resources would provoke a geopolitical change that would strengthen its position in the region. The idea here is to weaken animosity by creating shared interest and that explains why expert deals are being negotiated with clients in Egypt, Jordan and Palestine with an eye of course on Turkey, despite not a easy relationship in the past few years. It’s precisely this dimension which is threatened by the delays caused by the regulatory uncertainty. It appears that the time factor was not taken into account. After the major discoveries there was endless regulatory debates which denotes a certain weakness in anticipating the developments. One day its result was driving away Australia’s Woodside who was initially interested in requiring a stake in Leviton. Ironically it would have been Israel’s best bet to avoid a monopoly.
Moving on to Cyprus, Cyprus organised a licensing round in 2007 after it awarded one block, block 12 to Noble energy, later joined by Iraq in 2013 and more recently Egypt. With the discovery in late 2011, Aphrodite was first estimated to hold around 7 trillion cubic feet of gas, the drilling later lowered it to around 4 trillion cubic feet. Encouraged by the discovery, Cyprus organised a second licensing round in 2012 in which it awarded 5 blocks, blocks 10 and 11 to Dubai and blocks 2, 3 and 9 to a consortium made up energy and inaudible gas.
Last year any drill tools in block 9 in Cyprus did not see a positive result. As for inaudible after failing to identify more targets for drilling it was decided that it would quit exploration in Cyprus but after negotiations with Cypriot authorities it agreed relinquish black 10 and keep block 11 for further exploration. A few months later, inaudible discovered a very big gas leak a mere 5/6km away from to Togas block. Zohr by the way is the first discovery in the East Mediterranean of carbon inaudible previous discoveries off Cyprus and Israel were made. There might be an opportunity for future discoveries and this is something which has prompted the Cypriot authorities to at least consider the possibility of organising a third licensing arm.
For the moment though, Aphrodite remains the first and only gas discovery off the coast of Cyprus. The local market is small, requiring less than 1 cubic litre of gas per year, so it does not on its own justify the development of Aphrodite and construction of an L&G plant for long and absolute priorities of Cypriot authorities. Again Cyprus has seemed to be confronted by what seems to be one of the main characteristics of East Mediterranean gas. The resources so far are modest in size and in post corporation for exploiting and exporting them. And since local markets are small, there is also a need to find expert markets before developing and that is what Noble has to do to in order to proceed with the development of Aphrodite.
On paper the most reasonable way to monetise Aphrodite gas is through a pipeline to Turkey. A large market with a growing gas consumption and seeking to diversify supplies. But this option is not feasible unless considerable process is made in negotiations between Greek and Turkish Cypriot. Now according to statements from both sides, it seems that they have never been closer to an agreement, but an agreement is not an agreement unless it is signed. A pipeline to Greece is not easy technically speaking and carries a large price tag. Egypt with its large market and two under used energy plants remains an option, even after the discovery of Zohr because Egypt is expected to keep importing gas until at least 2022. Or to liquefy the gas at one of the two L&G plants however the drop in L&G prices is a major challenge here and raises doubts about the viability of exporting gas as L&G via Egypt.
It’s interesting to note here that despite excellent relations between Cyprus and Israel and despite positive but never deceive signals, Cyprus waited in vain for Israeli gas. Israel never gave Cyprus the autonomy to export its gas. Instead Cyprus has to drop and develop Aphrodite and although settling the Cyprus dispute is one of the priorities, of the inaudible administration, Greek-Cypriots ruled that they would have added to the negotiation table with a stronger hand if they would of ensured a greater autonomy in monetising their resources. I guess that despite uneasy relationships between Israel and Turkey lately, Israel still views Turkey as an important strategic partner and seems hesitant to take its relations with Cyprus to a place which would flatten its connections with Turkey.
Egypt now and although it isn’t part of the Levant Basin, its resources, infrastructure and policies affect the whole Eastern Mediterranean. Egypt is a very good example of a country what has done many bad things in the past and we have seen the result and a country which is thinking practically and we are starting to see the results. The key words for the next phase are stability and pursuing and not halting reforms. The energy crisis in Egypt was very predictable and as such I guess it could have been avoided. A combination of factors including a very low price ceiling and political instability in 2011 made the country less and less attractive for investment. Over the past year though, Cairo has been steadily pursuing a policy to encourage investments in the energy sector to boost production. They have adopted to improve terms for foreign companies by offering better prices for gas purchase. The apparent determination to repay the debt to foreign companies, it was originally estimated at around $6.5 billion and now it stands at around $3 billion.
And three this is a bold but vital measure – the introduction of subsidiary reforms because the decline in gas production in Egypt was aggravated by a growing consumption of fuel by economic development, low prices in a fast growing population. The energy shortage forced Egyptian authorities to divert resources away from exports to the local market much to the dismay of the two L&G plants in the country. That is important for the East-Med because if conditions are right, there might be an opportunity here to supply these energy plants with Cypriot or Israeli and/or Cypriot Israeli gas. Also to address the shortages, Egypt started to import L&G last year after the acquisition of terminals. It is in this context that Zohr was discovered. The discovery could of not have come at a better time for Egypt. Zohr is hoped to bring some balance between supply and demand and elevate Egypt from its energy crisis. That said, and based on what we currently know, more gas is needed to restart exports. All the more reasons to pursue reforms and not halt them although it might be tempting for Egyptian authorities after the discovery of Zohr to put reforms on hold. Zohr gave a much needed boost but the sense of urgency has not dissipated indeed the decision, there is still room for improvement, prices are not fully liberalised, the decision to fully eliminate subsides within 5 years was reversed and now we are talking about a more modest reduction. There is repeated delays in paying the debt to companies and the freeze on exports is another major concern for international companies.
Following the discovery of Zohr many were quick to conclude that East-Med gas exports to Egypt were doomed but this is not necessarily the case. The local market is going to absorb must of Zohr and this is the priority at this stage. First output is expected later this year but Egypt plans to export gas until 2022 at the very least. Which leaves the door somewhat open for East-Med gas which is less expensive than L&G.
This situation puts Israeli and Cypriot gas in competition with on one hand and an advantage for Tomar because it is already in production and possibly offset the less problematic Cypriot gas. Also in favour of Cypriot gas the acquisition of BG lately of a stake in block 12 which improves the prospect of sending Aphrodite gas to inaudible. Although it needs to be seen what Shell intends to do with the L&G facility in Egypt. In addition, and because most of Zohr would be absorbed by the local market, this leaves to L&G plants still needing to be refilled. The prospect for L&G experts in Egypt is theoretically still on the table especially in inaudible is able to push forward its plan for a gas export hub in Egypt, connecting gas from neighbouring countries – Cyprus, Israel, maybe even Libya for exports to Libya, Europe and beyond. However, it should be noted here that in order to be competitive in Europe, energy imports need to match the price of packed gas which is not a given. In addition, future developments in the region may make Turkey Egypt’s main competitor for monetising gas and boosting its positioning in the region. Certainly an added bonus for Turkey. Price wise exports via Turkey could be more competitive.
Lebanon, the latest newcomer in the region. Lebanon launched their first licensing round in May 2013. Previously 52 companies thought to have pre-qualified, 36 amongst them were successful including some of the biggest names in the industry. But the tender was launched in the absence of basic documents including tax law and to decree one defining offshore block coordinate and one defining the tender protocol exploration production and agreement. So we had to repeatedly delay the closing of the tender because companies can simply not drill if the framework is not clear. In a way I guess that the success of the pre-qualification round acted as a catalyst and brought into centre stage the sector to which the public, including many amongst the political class were largely indifferent. The political class became aware of mistakes and even engaged in over estimating these stakes so stalling the process became inevitable. And the political deadlock in the country certainly did not help either. But Lebanon retains a certain attractiveness. The process so far was fairly transparent, in addition the government sought to reduce the reception of this in its unexplored waters by preparing comprehensive data packages that were sold to interested companies. Lebanon’s offshore area covers approximately 22’700 square kilometres, the entire area was covered by surveys and almost 70% 3D surveys showing prospectively as high. Based on available data the Lebanonise government to be mostly gas produce but the presence of liquids is not ruled out.
Syria, although not a newcomer have not always drilled offshore but in the 1980s four wells were drilled in a coastal area – they were either dry or encountered small amounts of oil. In 2007, Syria launched their first bid round which received limited interest. They only received 1 bid by a British consortium led by Dove energy. But no licence was rewarded. A second licensing round was launched in March 2011 just as protests were flaring up in the country. In 2013 the Russian state controlled inaudible gas and was awarded and exploration and production licence in block 2, but in September of last year the Chairman decided not to proceed with the project because of the risk involved at this stage and reportedly passed the project to another Russian company. The current Russian regime would certainly like Russia’s involvement in offshore Syria but does not necessarily perceive this as exclusive. In any case, opportunities in Syria will depend on the outcome of the war.
To wrap up I am going to list what I believe are the key features of East Magda. The Levant base and resources are modest. They are significant for the small and resource poor countries of the region but not a game changer on the global scale. Although not a game changer the potential is interesting. Not only for these countries but for other countries in the region with rising gas demand, some of which are keen to diversify supplies. Up until this point the size of the discoveries in Levant basin and the size of the local market did not grant these countries the autonomy they would of wished for to exploit these resources. This fact imposes cooperation between countries and entities that have not always enjoyed the best of relations and that explains or partly explains why the extraction of these resources was developed and why every export option comes with challenges. Whilst it is important to be precise here, these resources are not an instrument for peace but by their very nature they impose cooperation. Some are keen to use them to appease tense situations but whether or not they are used in opposing conflicts is a different matter. The countries in the region have to attract billions of dollars of investment to monetise these resources and that is challenging considering the current market conditions, security concerns and politics.
In the past few years we have been noticing new alignments troubled relationships with Turkey have deepened the relationship between Egypt, Cyprus and Greece and also Israel, Cyprus and Greece. But the foundations of these partnerships are not as robust as they would appear at first, the rationale behind them being the troubled relationship each of these countries hold with Turkey at this present time. So a possible improvement in relations with Turkey which is looking like a possibility would test the importance of these partnerships. And finally the East Mediterranean is a complex environment for gas producers and countries aspiring to become gas exporters in the next few years. Not only do they have to manage with the usual industry challenges but they even have to deal with a tougher factor and that is geopolitics. To maximise benefit authorities must consider geopolitical and political risk when devising their framework and also always have to have that factor in mind. As we have seen this has not always been the case until now at least.
Right if we want to move onto questions and anyone asking questions please do say what your name is and the background of who you represent.
Beginning of question inaudible … so we have global doubts and energy is one of them. The prices have gone down and inaudible gas prices so we see a very different matter by and large in inaudible so my question really I suppose what is the likely scenario for exports of gas production in this region without the L&G and so what would be the estimation for this inaudible?
I think the most logical destination for East-Med gas is first and foremost the countries in the Eastern Mediterranean. If you can go back to the slide where there is a figure showing gas in the countries of the Eastern Mediterranean and projected estimates for 2030, this is a major market and the most logical destination for East-Med gas. Also there is the possibility to export gas to Europe. Although the size will contribute to diversify European supplies of gas but on its own not enough to diversify supplies. Energy is a challenge now considering the L&G block in the market that has pushed markets down and prices are expected to stay low until at least the early 2020s. So there is a challenge at the moment which explains why the prospects of exporting gas via L&G in Egypt currently has a lot of questions around it.
I have taken an interest in the resilience of gas of the Gulf coast and Jeremy Corbyn very kindly tabled an EDN for me in 2015 about the natural gas in inaudible …… Rigidly there is about 5 million dollars of natural gas off the Gaza coast and British Gas, the BP group have inaudible contract since 1999 and nothing has happened and they are not allowed to exploit their gas. In the meantime the British government and the European Union are pouring billions of pounds into Gaza, and inaudible for years and if they were allowed the access to their natural resources, then presumably there would be less need for this vast amount of money that we keep having to give them and inaudible MEP very kindly he also in 2014 submitted a parliamentary question around this and in the answer it was said that all EU states were united and in favour in support for the UN Secretary General resolution 28, the resolution confirmed the inaudible rights of the Palestinian people to their natural resources inaudible sorry to go on but my main point is I’m going to form a list, you didn’t mention Palestine, as far as I know the blockade on Gaza partly because Israel in law has blocked the trenched mile, 20 miles around the coast of Gaza and nobody is blocking inaudible that means that access cannot be made to them 2 gas feeds which I mentioned and nothing can be done about it .
Can I just stop you there, sorry you asked a lot of questions and could we get to the answer..
My question is are the Palestinians in law allowed to access inaudible and have any control?
That’s a bit complicated. As you mentioned there was a discovery off the coast of Gaza, Gaza marine is estimated to hold 1 trillion cubic feet of gas but the development has been put on hold for two major reasons – one involving Israel and the other the Palestinian problems between Hamas and the Palestinian authority. The rise of Hamas is Gaza made it more complicated, at least at the Palestinian level to agree on the development of this field. But the other problem with Israel is also there and is possibly the major obstacle. Whether they have the right or not, of course they do.
The Iran factor is one of the most fascinating these days. It will defiantly have an impact but Iranian gas is not expected to be in the market in large volumes, before the 2020s because Iran has to invest billions in its infrastructure for example it currently does not have energy capacity so it has to invest in I’s infrastructure to be able to export considerable volumes of gas and that will take a few years. Now the focus area for Iran is not going to be Europe as much as it is going to be Asia and nearby markets like India, Pakistan and China. It will have so an indirect effect on East-Med gas because Iran and other factors are all contributing to lowering gas prices and it is in this way that it will have an impact.
In Iran there is a lot of plans to build pipelines but the number of pipelines that actually see they are very much minor in comparison to these plans.
I was wondering about your thoughts on the global demand and certainly take the point of inaudible… governments encourage more natural gas in terms of inaudible…
Of course ye, there are policies I guess to switch generating energy from fuel to switch to gas power energy but even taking this into consideration, the market remains very small.
So for your first question, Israel has drilled hundreds of wells, how many I am not sure but I believe Cyprus was lucky – the first well which was drilled inside Cyprus exclusive economic zone revealed a very interesting gas feed so Cyprus was luck. The two dry wells which didn’t show any positive results should not be taken as an indication that there no more reserves off Cyprus. We have drilled dozens of wells before, let’s take Zohr for example, the latest discovery in Egypt. Zohr I believe before any, was licensed to Shell and Shell drilled about 9 or 10 wells and didn’t find gas. Then Eni came and drilled and it encountered a large feed of gas from the first well drill. Now regarding your second question they can obviously play a part and please correct me if I am wrong but I do think that they did play a part in bringing in bringing Greek and Turkish Cypriots back to the negotiation table and although it is a priority for both I understand, but I guess these resources played a part in getting them together. So they might contribute to appeasing certain tense situations but it can be more difficult when it comes to situations of war for example between Israel and let’s say Lebanon or Palestine.
Was what is happening in the East-Med have any implications at all for the position in Britain? I mean gas is going to remain a major factor in the next 20/30 years and it is an area of some debate about where it is going to come from. Does this make any difference at all to the position here?
For the supply of the local British market?
Ye, one of the ways we can respond to building interconnectors is to build a lot of interconnectors in to Europe but I suppose if the Middle East supply is the European market then that in a sense could come to Britain. The concern we have got is that Russia is supplying the Middle East now and could Russian supplies come to Britain, it is just an area of debate and I don’t know whether this has any impact on that?
Well I am not aware about the supplies of the local British market with East-Med gas but English or rather British companies are some of the companies that have shown the most interest in the East-Med gas, whether in Egypt or even in Lebanon, I could testify for that. The British I think, there was 4 or 5 British companies who qualified for the first licensing round and four years ago the minister William Hague was directly involved. He was present when launching the onshore surveys in Lebanon. I guess in a way that indicates a certain interest but to say that this interest is for supplying the local market is different again. I guess Britain has more logical supply sources that are closer to them.
You brought up the issue of Syria and the Russian company has got a concession but then didn’t develop it, as you said the Russian concession was given during the period of the war and to a Russian company which sort of indicates some of the geopolitical considerations going on there, do you think that the Russians are going to return on the Syrian front at least especially with the unrest in the country, do you think the Russians who own the companies sort of play a role in exploiting the Syrian finds?
The Russians are clearly very interested in the region in the geopolitical sense of the term and energy is one of the aspects of this interest. I would expect them to be interested in offshore Syria post war but it depends on who is going to win the war. If it is a regime which is friendly to Russia then we may be fairly sure that Russia can be involved. If not, then it gets more complicated.
Because at the same time we had a rapid decline in production and a growth in demand. Feeds for example that are plenty on stream for example are expected to produce about 1.8 billion cubic feet per day in 2022. Gas consumption is estimated at 5 billion cubic feet per day. In order to meet local demand, Egypt has to produce at least 3 more billion cubic feet of gas per day between now and the early 2020s. There is a possibility because besides Zohr there are a couple of important gas feeds that are expected to be developed by 2020. These feeds are expected to meet local demand and reduce the need for import probably also eliminate the need for import in the early 2020s.
If there is a resolution of the conflict I imagine there will be very much expected.
One thing that does occur to me, I have just been in the preparation of Palace talks and the conclusion of the Palace talks really is reduce the worlds usage of fossil fuels moving towards, how much of an impact are the Palace conclusions, whether those conclusions are deliverable, whether the verifications to enable them to be is one major question and if they were delivered what impact would it have on inaudible Middle East?
Renewables are not my area of focus but I understand that the countries of the region are all working to increase the share of power generated renewable energy. Lebanon for example is aiming for 20% by the early 2020s, Lebanon is always great at least on paper. I am not sure about Israel or Cyprus.
In Britain I think Paris actually is helpful to the gas market because really it involves the end of the coal. But with renewables it needs a bit of development and central storage before it can become a real game changer. But it is interesting hearing that we are having a discussion about the Middle East development based on really the potential for gas when we have just had a world completely focussed on how we can move away from fossil fuels.
I think that since power generation is mainly through coal and other fossil fuels, the first step for these countries is to switch to gas ahead of increasing their energy use.
Inaudible in gas inaudible is that a feature in our energy mix inaudible renewables but inaudible not going to replace entirely inaudible…
I just sense that we have a debate in 2016 if we had a similar debate in 10 years’ time it would be dramatically different.
Even the Saudi’s are investing heavily now in even in the solar which presumably makes sense for most of the countries in the region to look at that, Egypt for example are looking and that and there is a mixture in the approach and what you said Philip about the fossil fuel side is clearly going to have an impact.
We have got to have storage for solar to really be a game changer in the world, I mean there has got be an effective and economic storage system of some sort. There is a lot of work being done on that but whether or not we are going to get there depends who you talk to. It has been a very controversial change and actually this is very much in British politics and up until the election there was a real focus on renewables and pretty generous subsidiary levels and the new government has come in and the budget which was for that has been used up and the new secretary is not doing what they said, but I think we have still got a bit to go on the Secretary of State telling us what she is going to do. Any long term view of energy that I read has got solar as a major part of it but we have got to have the battery technology and some form of storage.
Mono Sukkarieh thank you very much for coming, I am certain that everybody has enjoyed it. I am grateful to the Henry Jackson Society for asking me to come. I have greatly enjoyed what you have to say and I feel I go away armed certainly with some knowledge of the Middle East which I didn’t have before and it has been really really helpful. So I just think that we should give Mono a round of applause.
Thank you to Alan Mendoza for inviting me.