Europe's new energy frontier

October 27, 2011 | 00:00

Europe's new energy frontier

Europe is about to acquire a new major oil and gas province: the Levant Basin. In this region in the Eastern Mediterranean the world's two largest deepwater gas discoveries were made in 2009 and 2010. More exploration is underway. But it is too soon to start cheering; players in this new energy frontier have to address formidable challenges - complex regional geopolitics, huge technical and financial requirements, and the lack of a stable regulatory and fiscal framework.

 
The Levant Basin in the Eastern Mediterranean (Source: United States Geological Survey)
As onshore conventional oil and gas reserves are ever more difficult to come by, the oil and gas industry has in recent years turned its attention more and more to exploring the oceans and seas. Offshore exploration and production may be relatively costly, thanks to new technologies and high oil prices, it is usually well worth the effort.

The Nile Delta Basin offshore Egypt has long been known as a significant source of gas and oil. According to a May 2010 assessment of the U.S. Geological Survey (USGS), two regions of this 250,000 square km basin, the Nile Cone and the Nile Margin Reservoirs, contain undiscovered technically recoverable reserves of 6,321 billion cubic meters (bcm) of gas and 1.8 billion barrels of oil. According to the U.S. Energy Information Administration (EIA), Egypt already has proven reserves of 1,670 bcm of gas (the 2011 BP Energy Review puts Egypt’s reserves higher at 2,200 bcm). This has allowed the country to become a gas exporter, comparable to a country like Norway. (Note that technically recoverable reserves are not the same as proven reserves of course.)

The Coming of Leviathan

However, until recently, before 2008, few had seriously considered the adjacent Levant Basin, an 83,000 square km region northeast of the Nile Delta Basin, as a potential major oil and gas reservoir. There had been some promising signs. Thus, in 1999, the relatively small Mari-B gas field, which initially had 35 bcm of proven gas reserves, was discovered offshore Israel by a consortium led by US oil and gas company Noble Energy. Mari-B started producing in 2004. The same year, British Gas hit on the Gaza Marine field offshore Gaza.

For the rest nothing much seemed to be happening in the region. There may have been a good reason for that. Although Mari-B had contributed to the development of a gas market in Israel, the Israeli government froze offshore exploration activity between 2000 and 2006. According to a recent article in Offshore magazine, this freeze was intended to give the government the time to amend its regulations, which dated back to the 1950s, and to raise production royalties. Once exploration was allowed again, activity slowly re-started offshore Israel by small local and foreign independents. They had several targets, among them a field called Tamar.

In 2009 came the breakthrough: Noble Energy announced that Tamar was confirmed as a major gas field. With an estimated 238 bcm of in-place gas resources it was the largest deepwater discovery in the world for that year. Tamar was followed by the smaller Dalit discovery – 14.2 bcm, closer to the coast, again by a consortium led by Noble Energy. Then, at the end of 2010, Leviathan was announced – the new field, located 130 km west of Haifa (in Israel), contains an estimated 453 bcm of gross mean gas resources.

Leviathan, discovered by a consortium led by the same Noble Energy, is the world’s largest deepwater

The significance of the recent discoveries goes far beyond their direct economic benefits. They will have a major impact on the already complex geopolitical landscape of the region - and on Europe's larger energy equation 
gas discovery of the last decade. Exploratory work will continue in 2011-2012 to appraise the reservoir and get a final estimate of the economically recoverable gas reserves. To gauge the significance of these fields: the three of them together contain estimated in-place resources of 700 bcm, equivalent to some 58% of the 2010 proven gas reserves of the Netherlands – with the same caveat that not all the in-place gas resources will prove to be economically recoverable.

Tamar, Dalit and Leviathan have sparked an exploration frenzy offshore Israel. The next targets are called Gabriella, Myra, Samuel, Sara, and Shemen. Raising the stakes, USGS has estimated in a March 2010 report the undiscovered technically recoverable reserves of the Levant Basin at 3,465 bcm, equivalent to 55% of the undiscovered technically recoverable reserves of the neighboring Nile Delta Basin, as well as 1.7 billion barrels of oil – almost equal to those of the Nile Delta Basin.

National Security Concerns

The significance of the recent gas discoveries goes far beyond their direct economic benefits. They will have a major impact on the already complex geopolitical landscape of the region – and on Europe’s larger energy equation. Most of the countries that can lay claim to parts of the new oil and gas offshore basin would benefit economically by reducing their energy imports, switching to gas as a cleaner fuel compared to the oil and coal that currently dominate their energy mix, creating new direct and indirect jobs, and potentially even becoming energy exporters. For the region and for the EU as a whole, this could significantly increase security of supply. However, for political and historical reasons, it will not be easy for the countries involved to find the common ground needed to turn the Levant Basin in a booming oil and gas province.

 
 The capacity of natural gas fields at the Tamar I drilling site have exceeded the most optimistic expectations (Source: Noble Energy)
Israel so far has been the most active in exploring the Levant Basin – Mari-B, Tamar, Dalit and Leviathan are all in Israeli territorial waters or in its exclusive economic zone (EEZ). According to the 1982 United Nations Convention on the Law of the Sea (UNCLOS), the EEZ is the offshore area where a country has exclusive rights to explore for and use any resources, including oil and gas. The EEZ can be extended up to 200 nautical miles (370 km) from a country’s coast. However, sometimes, as in the case of the Levant Basin, the exclusive economic zones of countries overlap. When this happens, it is up to the countries to delineate their common maritime borders.

Israel started using natural gas in 2004, when the Mari-B field started production. In 2011, according to an editorial in Offshore magazine, natural gas will already represent 36% of the country’s energy mix. And the country intends to continue to move away from coal and oil towards gas. In 2020, the share of natural gas is expected to reach 70%. This will naturally raise natural gas to a national security concern.

At this moment Mari-B covers 60% of Israel’s natural gas consumption. The balance is imported from Egypt through a pipeline that crosses the Sinai Peninsula. As Mari’s B production is rapidly declining (the field is expected to be depleted by 2013), Israel’s import needs look set to increase. However, since the February 2011 regime change in neighbouring Egypt, the supply from that country has become more uncertain. The pipeline exporting gas to Israel has been attacked several times in recent months by unknown assailants. These attacks have already temporarily stopped the gas flow and the future situation in Egypt looks highly uncertain.

This creates a strong incentive for Israel to source its energy needs elsewhere, and to encourage the exploration and production from the Levant Basin. Based only on the current gas discoveries and if development plans proceed without delays, a UBS report from April 2011 estimates that Israel would be able to increase its natural gas consumption from around 5 bcm/year in 2010 to 15 bcm/year in 2020, with 5 to 10 bcm per year left for export after 2017, when Leviathan is expected to start producing.

Earlier this year, the Israeli government approved new regulations and a new fiscal regime for the
offshore oil and gas sector to stimulate activity, but also to create new revenue streams – from corporate taxes and the new Tax on Petroleum Profits (TPP) - for the state budget. In December 2010, Israel also signed a maritime border agreement with Cyprus, delineating each country’s exclusive economic zone. In this agreement, the two countries also commit themselves to cooperate in developing any cross-border resources that may be discovered.

Cyprus has quickly recognized the game-changing potential of the newly-discovered gas fields. The country’s energy mix is 100% based on imported oil and long before the discoveries in the Levant Basin the government was looking to diversify its energy sources. Before the discovery of Leviathan, the Cypriot government had already been planning to build an LNG import terminal in Vasilikos (Larnaca) to reduce its dependence on highly-polluting fossil fuels. The terminal was scheduled to be taken into operation in 2014, but the project was advancing slowly. Encouraged by the recent gas discoveries in its neighborhood, Cyprus has recently started to discuss various energy cooperation opportunities with Israel, including gas imports through a pipeline or an LNG terminal.

Moreover, Cyprus has given out an exploration and production license for a 3,240 square km offshore block (Block 12) bordering the Leviathan field to Noble Energy and the government plans to have a further offshore licensing round soon. In fact, according to the energy news portal Energia.gr, the exploration well offshore Cyprus has discovered already significant intervals of natural gas in the Aphrodite structure of Block 12 less than a month after drilling started. This is of course only the first step towards delineating and confirming the existence of economically recoverable gas reserves.

Regional energy game

The other two countries that can claim an exclusive economic zone that would cover part of the Levant

Two countries that do not have any claims in the Levant Basin - Turkey and Greece - are nevertheless heavily involved in the new regional energy game  
Basin are Lebanon and Syria. Lebanon is strongly opposed to Israel’s offshore exploration activities. According to press reports, the Lebanese government claims that up to a third of the Leviathan gas field extends into the Lebanese EEZ and sent a letter to the UN in January 2011 urging it to monitor Israel’s actions. Lebanon and Israel have not started to discuss the delineation of the common maritime border. Lebanon would benefit from potential oil and gas discoveries in its EEZ, as the country does not have domestic oil and gas production.

Syria, which does have its own domestic oil and gas production, mostly from onshore fields, is currently too much focused on its internal political turmoil to be worrying about Israel’s offshore activities.

On the other hand, two countries that do not have any EEZ claims in the Levant Basin - Turkey and Greece – are nevertheless heavily involved in the new regional energy game. According to Upstream Online, Turkey, which supports the Turkish Cypriot state in Northern Cyprus, opposes the Cyprus-Israel maritime border agreement from December 2010. Turkey also argues that the Cyprus government should not allow any exploration or exploitation of its offshore resources before an agreement is concluded between the two governments of the island. The row escalated in September 2011. After drilling started in Block 12 offshore Cyprus on September 20, Turkey retaliated by signing a maritime border agreement with Northern Cyprus on September 21. Two days later, Piri Reis, a Turkish seismic survey vessel set off from Izmir to carry out a survey in the waters north of Cyprus.

Greece, on the other hand, started in January 2011, immediately after the announcement of the Leviathan discovery, discussions with Israel about opportunities it can offer for transporting the gas from Leviathan to markets in Europe. Defencegreece.com, among other sources, even talks about a Cyprus-Greece-Israel energy triangle.

Geopolitical picture

It is clear that the story of the Levant Basin as a new energy frontier is still being written. 2012 will be an interesting year in the region: exploration in Israel and Cyprus will continue to accelerate and reveal not only the true size of Leviathan (exploration of the gas field is still ongoing and experts talk about a potential oil field in the same area) but also potentially new gas and oil discoveries. This will require extraordinary technical and financial efforts from the companies involved, as the exploration costs in the region are very high. A single exploration well – that could come up dry in the end – costs from 30-60 million dollars in the shallow waters close to the coast to up to 190 million dollars in the deep waters of Leviathan.

In the end only actual production will show if the Levant Basin will live up to its promise. Starting up oil

Brussels will also have to attend to this potentially revolutionary development in its not-so-very-quiet backyard  
and gas production requires even more significant technical and financial resources than exploration.
In June 2011 the Israeli government authorized the development of the Noa offshore gas field, a satellite of Mari-B, which will take about a year before the first gas is produced. The consortium that has discovered Tamar intends to start production from the field by the end of 2012 or early 2013 and has already invested $1.4 billion of the total $3 billion required for developing the field. Developing Leviathan will cost proportionally more – the UBS report quoted above puts the price tag for fully developing Leviathan at no less than $14 billion - and will take more time: the field should start to produce gas in 2017.

But technical and financial challenges can be overcome. Much more worrisome are the geopolitical difficulties: disagreement over the exclusive economic zones in the region, the division of Cyprus, the increasingly strained relations between Israel on the one hand and Turkey and Lebanon on the other, the political developments in Egypt and Syria, and many others.

Another important aspect is the regulation and taxation of the offshore activities. Although Israel is rapidly developing a structured and hopefully stable regulation and fiscal framework, the other Levant Basin countries have not even started on this. This could significantly delay or slow down the exploration activity in their economic zones.

Finally, a lot of questions are still unanswered. How big are the total economically recoverable oil and gas reserves in the Levant Basin? Is any oil or gas going to be exported from the region, and if so, where will it go to and how (pipelines, LNG)? Are Leviathan and the other recently-discovered gas fields good news for other under-explored regions in the Eastern Mediterranean region – the Aegean Sea, the Ionian Sea? What is Syria’s position with regard to the oil and gas potential of the Levant Basin?

Brussels will also have to attend to this potentially revolutionary development in its not-so-very-quiet backyard. What does the Levant Basin gas mean for EU members Greece and Cyprus? How does it relate to the EU’s security of supply? What does it mean for the new EU approach to strategic energy infrastructure projects, e.g. the Southern Corridor? And what will be the impact in the Levant Basin of the new offshore safety regulations that the EU will soon propose in the wake of the Deepwater Horizon disaster in 2010?


Vlad Popovici is a professional energy analyst who has published widely on various international business and economics topics since 1996. He is currently focused mainly on energy policy, renewable energy resources, energy infrastructure projects, and energy geopolitics.

Popovici holds an MBA degree (2005) from McGill University, Montreal, Canada, as well as other degrees from universities in Austria, France, Germany, Romania and the US.

This is the second article he wrote for European Energy Review. His first article is an account of energy policy in the Danube region: The Danube region – a future European Energy Corridor?
He can be reached at vpopovici@balkanalysis.com

 

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