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Who Are The Biggest Winners In The East-Med Gas Game?

The EastMed gas pipeline between Cyprus, Greece and Israel will revolutionise the economies and geo-politics of the region. The project comes from an emerging alliance between the three countries who must move forward cautiously in the face of neighbouring States’ opposition.

Eastern Mediterranean: the Bigger Picture

On December 20th, the Prime Ministers of Cyprus, Greece and Israel converged on the southern Israeli city of Beersheba. All three parties publicly committed to signing a high-level agreement in the near future. Such an agreement would solidify one of the longest and deepest underwater gas pipeline in the world.

It is expected to deliver approximately 10 billion cubic meters (BCM) of natural gas to the European Union (EU) through Greece and Italy. The EU is keen to support the project and diversify its natural gas imports away from the heavily sanctioned Russian Federation and declining North Sea gas production. The EastMed project would fulfil roughly 10-15% the EU’s projected natural gas needs. The United States is also supporting the project as it sees the growing trilateral alliance as a bulwark of democracy and stability in a largely authoritarian and war-torn region.

A New Regional Alliance

This development is also the culmination of an alliance that has been years in the making. The last decade has seen growing cooperation between Cyprus, Greece and Israel as all three countries have been supporting one another in various strategic areas. This includes deepening military ties in the face of an increasingly unstable and conflict prone Eastern Mediterranean. These developments are specifically aimed at Turkey, a neighboring state that has become increasingly aggressive and authoritarian. Turkey is threatening to derail the project within the context of ongoing Cypriot Conflict. Related: Canada’s Natural Gas Crisis Is Being Ignored

The project will be the culmination of a strategic alliance between three smaller countries who are faced with increasingly more aggressive competitors and crisis’s in the region. Turkey, Russia and Iran are all increasingly active in the region looking to forward their own interests. As the United States continues to play less of a role on the ground Cyprus, Greece and Israel will be able to create positive reinforcement through bilateral relations or the newly created secretariat economically, politically and militarily.

Who Stands to Benefit?

The domestic economies of the individual states within the trilateral alliance stand to benefit immensely from the project. Cyprus is estimated to have roughly 4.5 BCM of natural gas in the Aphrodite Field which is currently being developed within its Exclusive Economic Zone (EEZ), a huge sum. Israel is estimated to have significantly larger amounts within its EEZ in the form of the Leviathan and Tamar fields. Both of these small countries will benefit immensely from being able to export to the massive EU market through Greece. The latter’s own economy will likely see a boost from the investment needed to support the infrastructure of the pipeline. There is also the possibility of linking the pipeline to the operational Egyptian Zohr Field.

The EU will benefit from being able to diversify its energy sources. It would allow the EU to guarantee some energy security to its Member States as North Sea production falls. An over reliance on Russian natural gas also places the EU in a difficult position, because it continues sanctioning Russia over its activities in Ukraine and the meddling in the democratic processes of EU Member States. The EU will likely try to lower market prices on natural gas which have been steadily rising the last few years. In the long run, the EastMed Pipeline may provide nearly double the expected output of 10 BCM for export if ongoing offshore exploration provides positive outcomes.

Who is Missing Out?

Turkey and Russia are both set to lose out given current developments. Greece and Turkey have a historically difficult relationship which has recently flared up within the context of the 2016 Coup and Refugee Crisis. Cyprus and Turkey continue to butt headsover the northern half of the island following the 1974 War. Israel and Turkey were once close allies. The rise of Erdogan and the AK Party over a decade ago made Turkey a major patron of Hamas. The Mavi Marmara Incident has contributed to the deterioration in ties between the two sides. Turkey would have been the natural route for the Pipeline, but the ongoing disputes show why this will never happen. Related: Has U.S. Fracking Activity Peaked Already?

Russia is the main supplier of natural gas to the EU and a historical ally of Greece. If the EU is able to continue to diversify its energy needs away from the Russian gas giants – of which the EastMed is a small but important first step – Russia will lose leverage over the EU within the context of both gas prices and geopolitical issues between the two sides. The historically close relationship between Russia and Greece is also in jeopardy. The pipeline project is heavily supported by the United States; when we couple this with Russia and Turkey’s warming ties, Russia appears to be losing a historically important relationship in an increasingly strategic region.

Possible Obstacles

Two major obstacles to the project are present in the form of the Lebanese based Hezbollah and Turkey. Hezbollah is Israel’s arch-foe, the two sides fought an all-out war in 2006, a conflict neither side wishes to repeat. This is something Hezbollah is attempting to use for its own advantage threatening to strike at Israel’s sea-based gas fields. Israel is preparing for this outcome, but Hezbollah’s missile arsenal is vast and powerful; any escalation in conflict, especially given the ongoing Operation Northern Shield may lead to disruptions in the project.

President Erdogan has made it very clear that he is vehemently against any development of the Cypriot gas fields within the EEZ without some form of resolution to the conflict. This has materialized with Turkish naval action in the past and with the beginning of own explorations in the EEZ. Turkey has used military force in the past and ongoing developments in the region -specifically the US withdrawal from Syria following a phone call with Erdogan – has emboldened Turkey. Aggressive action by Turkey to safeguard its own interests cannot be discounted.

By Global Risk Insights

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  • Mamdouh G Salameh on January 07 2019 said:
    The real winners in the East Mediterranean gas game will eventually be Egypt, Turkey, Russia and Israel. The losers will be Cyprus and the EastMed gas pipeline that is supposed to transport Cypriot and Israeli gas supplies under the Mediterranean to Italy and then the European Union (EU) via the Island of Crete and the Greek mainland. I will venture to explain my logic.

    Though Turkey and Egypt find themselves on opposing sides over the growing tension and conflict surrounding the gas discoveries in the Eastern Mediterranean, they still share two major strategic objectives. The first is Turkey’s ambition to become the energy hub of the EU and Egypt’s ambition to also become the energy hub of the Eastern Mediterranean.

    The other objective is that both oppose the proposed EastMed gas pipeline. Turkey opposes it because it will compete with the TurkStream gas pipeline which will bring Russian gas supplies once it becomes operation by the end of 2019 to Turkey and the EU under the Black Sea and also with the Southern Gas Corridor SGC) bringing 10 billion cubic metres (bcm) of Caspian gas from Azerbaijan to Turkey and then to the EU via the Trans Adriatic Pipeline (TAP). Egypt, on the other hand, would not welcome the EastMed gas pipeline since it hopes to get any Cypriot gas exports shipped by a subsea gas pipeline to its 2 LNG terminals in Damietta and Idku for conversion to LNG and re-exporting along with Egypt’s own LNG to the Asia-Pacific region.

    There is no doubt that both Egypt and Turkey will achieve the two aforementioned strategic objectives and thus emerge winners.

    Israel is already benefiting from its sizeable gas discoveries. These discoveries will satisfy its domestic needs for years to come and will also leave a sizeable amount for export. So it is a winner economically

    Russia supplies more than 200 bcm of gas to the EU or almost 40% of the EU gas needs. It has consolidated its grip on EU’s gas market well into the future by offering reliable and cheap supplies of natural gas. And with the completion of both Nord Stream 2 and the Turk Stream by the end of 2019, its grip on the EU’s natural gas market will be unshakeable. Even if the EastMed gas pipeline becomes operational, its proposed delivery of approximately 10 bcm of natural gas to the EU will be so minuscule to be felt in the EU gas market or to impact on Russian gas supplies to the EU.

    The EastMed may never see the light of day. It seems that the EastMed which is to stretch over a distance of 1900 km and cost an estimated $7 bn is all but dead. Cyprus has not yet discovered any sizeable gas fields like Egypt’s Zohr (30 tcf) and Israel’s Leviathan (18.9 tcf) with the exception of two relatively small gas fields: the 6-8 tcf Calypso and the 4.5 tcf Aphrodite. If we are to judge the viability of the EastMed on the current situation, there is only Calypso and Israel to fill the pipeline. Israel has already signed a deal worth $15 bn of Israeli gas exports to be sent to Egypt for conversion to LNG and re-exporting. Cyprus on its own couldn’t muster enough gas exports to fill the EastMed throughput capacity of 20 bcm per year. Moreover, Turkey will never allow the Greek Cypriots to produce gas let alone export it without securing a share for the Turkish Cypriots. The other obstacle is that the price of shipped gas via the EastMed pipeline couldn’t compete with Russian piped gas to the EU once production costs and shipping have been added.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • JayTe on January 09 2019 said:
    LOL! Hmmm. How long have they been trying to get this project off the ground. It can only be built through EU subsidies. And the cost of the gas will be far higher than any gas coming from Russia. I seriously don't think that Russia is concerned about this pipeline. Italy et al will be paying far more than Germany who will be the principal beneficiary of Nord Stream 2. That doesn't even consider the political risk from Turkey as well as the environmental risk (i.e. volcanic area of the ocean between Cyprus and Greece). For someone who is supposed to provide cogent analysis of the dynamics of the European gas market, you seem rather slow to understand a losing proposition when it is in front of you. It's not even close to being a game changer.

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