Atlantic Council Energy & Economic Summit: “New Opportunities in a Dynamic Region”

Session 2: Eastern Mediterranean and Black Sea
Gas and Transit

David Koranyi,
Deputy Director,
Atlantic Council

Jennifer Coolidge,
Executive Director,
CMX Caspian and Gulf Consultants

Amit Mor,
Eco Energy

Hugh Pope,
Project Director for Turkey and Cyprus,
International Crisis Group (ICG)

Harry Sachinis,
Chairman and CEO,

Lausanne Room
Swissôtel, The Bosphorus
Istanbul, Turkey

9:00 – 10:15 a.m.

Friday, November 16, 2012

Transcript by
Federal News Service
Washington, D.C.

DAVID KORANYI: Welcome to all of you. My name is David Koranyi. I’m the deputy director of the Atlantic Council’s Eurasia Center. We are responsible for organizing the summit here. It’s my pleasure to give you a very brief introduction to today’s panel.

In September last year a tempest was looming in the Eastern Med. A Turkish exploration vessel named after the famed Turkish explorer Piri Reis, accompanied by warships and jets, approached a contested area of the newly discovered hydrocarbon resources around Cyprus. The direct confrontation was eventually avoided, but nevertheless this incident stoked fears of further instability in an already tense region.

Oil and natural gas exploration is gearing up all across the Mediterranean, with potentially far-reaching implications on European energy security and relations with current suppliers. But due to a number of unresolved issues, that we will discuss in detail in this panel today, harnessing the resources in the Eastern Med. leads to a geopolitical minefield.

This gas and potentially oil-rich basin stretches from Egypt through the Gaza Strip and Israel’s coastal waters all the way up to the Cypriot and Lebanese borders. The area off the coast of Israel and Cyprus may contain natural gas for up to nine years of the EU’s annual gas demand at current consumption rates.

So this new energy rush in the Eastern Med. holds great promise. These abundant natural gas reserves could increase Israel’s security and also jumpstart the Palestinian economy, provide an incentive for the unification of Cyprus, help satisfy Turkey’s increasing energy demand, et cetera – of course in an ideal world, which we are not living in.

But this Piri Reis incident, just to refer back to that, showed how elusive these dreams could be. Today none of the stakeholders seemingly show genuine interest in exploring a sustainable compromise solution.

The question is, will we let this opportunity pass? Or to throw in a very provocative idea here to jumpstart the discussion, will the countries of the region, the stakeholders, with possibly U.S. and European Union help, be able to solve the seemingly intractable problems of today and perhaps lie down the basis for a Middle Eastern – (inaudible) – union for the future?

This panel fits well into what we call the Eurasian Energy Futures Initiative at the Atlantic Council, which is essentially a series of events we do in the United States in Washington, D.C., in Brussels and the other national capitals throughout the wider Eurasian region on issues like these crucial geopolitical energy security issues for the future of the region. And their aim is to help keep these issues on the radar screen, because very often they tend to slip down lower on the priority – on the agenda of the decision makers.

So thank you for coming, and without further ado I will now turn to Jennifer Coolidge, our able moderator. Thank you very much.

JENNIFER COOLIDGE: Thank you, David, for the introduction. Is this microphone – thanks. Is the microphone on? Yes? OK. Great.

Well, thanks to everyone for coming here today. We’re competing with “What Does the Recent Presidential Election in the United States Mean for the Future of U.S. Foreign Policy?” So thank you for your interest in Eastern Mediterranean gas. It’s going to prove to be an excellent session. I’ll introduce the three speakers and then I’ll give a brief contextual overview of what we can expect the discussion to look like.

So first we have Dr. Amit Mor, the CEO of Eco Energy. Next we’ll hear from Mr. Harry Sachinis, the CEO of DEPA, the Greek state gas company. And finally we will have Mr. Hugh Pope, the project director for Turkey and Cyprus at the International Crisis Group.

What I would like to do in terms of contextualizing today’s discussion is to ask you to reflect on several factors. That, first of all, is the price of gas in the global and European gas market dynamics, especially since the global economic crisis in 2008 where, at that time, pricing between the Asian, the national balancing point, and Henry Hub was quite tight.

And we’ve gone through a period of the last four years where pricing has become very divergent, partly due to long-term take-or-pay oil indexed pricing and also due to the development of shale gas in the United States. Asian pricing was also highlighted by the Fukushima incident. So I would encourage you to consider whether that highly divergent price regime is sustainable, and if so, for how long.

Then we come to the situation in the European gas market. After the global financial crisis and the insistence by Gazprom of maintaining very high take-or-pay pricing at sometimes double the price that gas was available at Hubs, European gas demand decreased by between 5 (percent) and 10 percent across Europe – introduction of more renewables, introduction of efficiency measures.

Then we’re looking at two other factors. We will know around 2016 or after whether gas will arise in the form of LNG from the United States, and also after 2020, or around that time, whether unconventional gas development will be successful in Europe itself.

So we have a picture of a variety of moving targets, interrelated factors which will determine pricing in the European gas market and the global gas market. It will also determine demand and the demand growth trajectory. And then I would ask our panelists to consider where the development of Eastern Mediterranean gas fits within this larger picture.

I will sum up by saying that I believe we’re seeing a critical paradigm shift in the European gas market where the supply/demand balance will remain tight for the next two to three years, but that at the end of that period we will see the delinkage of oil-indexed gas pricing settle to a situation of competitive market regional hubs in Europe, so a much more competitive but also more volatile gas-pricing regime within Europe.

And with that I’d like to turn to our first speaker. And our speakers will speak for between five and 10 minutes. Then we will open up to questions from the floor and engage in an interactive debate.

AMIT MOR: Thank you, Jennifer.

And indeed first I would like to thank the Atlantic Council for inviting me to this incredible and important conference. Coming from Israel, I’ll try to give a brief overview of the latest discoveries offshore in the Eastern Mediterranean, Israel, Cyprus, prospects in Lebanon and the implications for Europe, as you’ve suggested, and possibly other markets.

But these days I have to – coming from Israel, I have to basically feel the need just to (hint ?). As you know, beginning Wednesday afternoon as I was just departing Tel Aviv Airport, an additional new wave of violence began. In fact, it began a few weeks ago when an additional – a wave of rockets launched by Hamas and Islamic Jihad from Gaza to Southern Israel. The Israeli government decided enough is enough; civilians cannot suffer any longer, and launched this operation basically after 20 years, 21 years sirens are heard in Tel Aviv.

Personally I believe that this wave of violence will end shortly, but basically it’s hinged directly to the fragile security problems which also have major effects on the energy developments and economic developments in the region. I think that Israel was blessed by major discoveries of natural gas in the past four years. In fact, the two largest discoveries of gas in the world took place offshore Israel.

The Tamar field, they have about 250 billion cubic meters. It was discovered exactly four years ago by Noble Energy, a mid-size upstream company, American company, and its Israeli partners, Delek and others, 90 kilometers offshore Haifa, water depth of one mile, 1,600 meters’ water depth. And a year later the Leviathan – which is a “whale” in Hebrew – a mega field of about 17 trillion cubic feet, 450 billion cubic meters, was discovered. The Tamar field itself can supply all Israel’s natural gas needs for the next 20 years at least, whereas the Leviathan could further supply gas to the domestic market, aimed especially at export.

Now we are experiencing a world-record shift in the use to natural gas. Just two figures: Eight years ago, 80 percent of the power in Israel was produced by coal, two coal stations, and 20 percent by oil, heavy fuel oil. In Israel, already two years ago, coal share was reduced to 60 percent and gas increased to 40 percent. The past two years and until next March, April we are experiencing a shortage in gas due to the halt and seizure of the Egyptian gas supply – talking about energy security issues – and also the depletion of the only field producing offshore Israel that started to produce 2004.

So Israel Electric is utilizing a lot of heavy – millions of tons of heavy fuel oil and gas oil to compensate for the lack of gas. Israel did not suffer electricity shortcuts as Jordan suffers. And the Jordanians, in Amman, sit a lot in the dark since they were 100-percent dependent on Egyptian gas and were not able to switch to alternative fuels.

Electricity prices have increased by 30 percent in the past year, but very soon – March, April this coming year – Noble Energy and their partners will start supplying gas from the Tamar field, a $3.5 billion development. And again, in two years’ time, 70 percent of our electricity will come from gas. Coal share will decrease to about 25 percent. Renewables will increase.

So basically this is a world record in shifting to gas in energy utilization, especially in power, but basically also all the industrial use will shift to gas in fact in the process of shifting, and including transportation and other sectors – a very, very quick transition.

And with all the benefits of gas, the relatively low cost of gas in our region, about $5 per million BTU versus more than $10 in Europe, about 3 (dollars) in the U.S. these days, 16 (dollars), 17 (dollars) and higher in Japan, energy, so relatively low gas prices will – and of course the environmental benefits and energy security benefits in the long run.

But in the shorter run – and that’s another consideration to take – think about that: 70 percent of the electricity, all the industrial utilization, including transportation, hotels, hospitals and so on, which are shifting to gas, from one field 90 kilometers offshore, 150 kilometer pipeline, a platform to treat the gas, which is located 20 kilometers offshore Ashkelon and 20 kilometers offshore Gaza.

And this means the technical problems and air strikes and also especially military threats to this platform, which again I mentioned 20 kilometer offshore Gaza with Scuds, with Qassam, with – (inaudible) – threats, that the Israeli navy and Israeli air force will need to protect this most strategic point, location, for many years, basically devoting one if not two antimissile missiles just to defend this strategic location.

So with all the benefits of gas, there is also an energy security risk, which I think is a national security risk for the next five, six years until additional entry point to the nation from the Tamar field, possibly to the northern part of the country, and the diversification of gas will occur.

Same stance for Cyprus. With Cyprus, Noble Energy and their partners, Delek, a year ago, about a year ago, discovered the Aphrodite field just north to the Leviathan field. This is already in the Cypriot Exclusive Economic Zone. And Cyprus is going quickly, hopefully, to develop their energy plant in Vasilikos near Limassol, aiming at exporting gas to the international markets.

Also, as my friend Harry from DEPA will probably expand and discuss the possibility of a pipeline from Israeli fields – (inaudible) – especially from the – (inaudible) – or offshore Cypriot fields, Cyprus create main line, Greece and Europe. This is another option to export the gas.

Other options for Israel are LNG project, an onshore LNG project of two or three trains possibility in the Mediterranean town of Ashkelon or in Eilat on top of the Red Sea. And with aiming the markets in East Asia, this could be a major energy project of two to three trains, 10 (million) to 15 million tons of LNG.

That is about 14 to 20 BCM a year, although a high priority for the Israeli government because not only exporting gas, would create also job creation and multiplier effect. So not only 60 percent revenues to the government from the profits of gas sales but also especially those important benefits.

I think that – and the NIMBY, not in my backyard, and the major opposition from the public might prevent establishing such a project, promoting such a project. We’ll see. Another option is FLNG, the new technology of floating LNG. A lot of you are not familiar. New technologies are huge ships like the major airplane carriers, which are anchored above basically the offshore fields or nearby, and the gas is treated and liquefied on those ships where energy tankers take the gas.

The first project by – (inaudible) – Shell is under construction for – (inaudible) – in Australia, and a few projects are ongoing. I personally believe very much in this technology, and I think that in seven-to-10 years’ time we’ll see a few of them also offshore Israel.

So there are a few options, and the major discussions taking place in Israel these days vis-à-vis energy policy is how much gas to devote for export, how much gas to leave for domestic consumption? The debate is postponed until after the elections.

We are a government committee and we facilitate in this respect, advising. The government decides but the cabinet should approve that policy and will debate in the parliament, the Knesset, as well, whether to allow 25, 30 years of reserves for domestic use and the rest to export or to maintain reserves for domestic use for a longer time – a major public debate.

So last remarks is the potential for regional cooperation in the field of natural gas utilization in the region. Israel, Cyprus, Greece, possibly future discoveries offshore Lebanon. The Lebanese are lagging behind, but next year I think they’ll publish their – (inaudible) – and they’re doing the assessment work and so on.

So there is a potential for regional cooperation. Unfortunately, Turkey’s policy in the past year especially vis-à-vis Cyprus and also the disengagement from the very close alliance with Israel and Turkey in the past two decades – there is one cabinet decision to disengage those relations and to escalate the relations – are not contributing to – the Turkish energy minister said yesterday, we should utilize natural gas and the hydrocarbon resource to enhance regional cooperation.

In this respect, it is not benefiting the region, especially Cyprus. And I think, according to my vision and others, basically that those discoveries offshore Cyprus can also benefit the Northern Cyprus, especially the hundreds of thousands of Turkish settlers in the region and Turkey as a whole. Turkey should play a much more constructive role.

Of course I understand that the Turkish advance policies much beyond energy and economic development in this region, but eventually, in the long run, I hope that the relations will – to Israel and Turkey and hopefully eventually Turkey and Cyprus – will become much better and enhanced for the future benefits of all nations. Thank you.

MS. COOLIDGE: Thank you, Dr. Mor.

Mr. Sachinis?

HARRY SACHINIS: Thank you. I’m very pleased to be speaking here. And I see ambassadors, CEOs, so I’m very pleased to see the interest on this subject.

I just want to continue with what Amit just said, that we all hope for peace and prosperity in this region, but let me use the word “prosperity” because I think that brings us to the first premise of what I want to talk about, which is I think we should all be happy that there is gas in our area, and that there is more gas in our area, because the more gas there is, there is more gas-to-gas competition.

And that means that there will be lower prices. And lower prices, as long as there’s extra gas in the region, means that this region is going to become more competitive. And I think this is going to be good for the countries and the people of the whole region.

So the question then becomes, how do we take that gas and bring it out to the market, and maybe, so that we can have this gas-to-gas competition, how we can try to keep it in the region, because if it goes far away to Asia and whatever, maybe we will miss some of that opportunity. So these are some of the things that I want to talk about, and I’ll talk about them very briefly.

So first of all, in terms of where do we see demand and what is happening with demand in the region, no one can predict demand. No one knows what is going to happen. Things change day by day. I mean, in the region we’ve had also – Romania we’ve had new finds. We have now, yesterday, South Stream announcing that it’s going to bring gas – maybe it is the same gas, but still it’s going to bring gas to Southeastern Europe.

We have – because if you look at the whole market and not just the region, if you go even to Asia you have Eastern Africa and, off of Mozambique, new gas. You have Australia LNG. No one can really predict what is going to happen to demand, especially if you look down the path for about 30 years, which is the normal lifetime of a project like this.

So the thing is that someone has to make decisions, and make quick decisions, to take advantage of the opportunity. And decisions in this region unfortunately take a long time. And I see some people – I see Mr. Vali Aleskarov (ph) here. He probably has been trying to open up the Southern Corridor for I don’t know how many years now and bring gas to Europe – 15 years, more than that.

Or he’s trying to negotiate – you know, Azerbaijan is trying to negotiate with Turkey on the price revision, and the last time they did that it took four years. And now it has already taken two years. So we have to learn how to make faster decisions, because then I think we can be more productive. We can be more effective. We can bring better results to the region.

The fact is, though, that as we look at supply and demand within the uncertainty that I mentioned, it is a significant premise that the closer the gas stays, the better the networks are, so the better off the suppliers are and the less expensive the prices are for the buyers. So the question is, how can we keep the gas closer to the area?

Now, obviously these are decisions that the companies that are involved in the gas finds off Cyprus and off Israel, they’re going to make that decision together with the governments in that region. So the most important thing is for them to study all the options – Amit mentioned some of the options that exist there – and understand what these options are and evaluate the risks and figure out what the best option is.

We looked at one of these options, and actually we looked at it by accident because people started talking about mountains that existed between Cyprus and Greece, and the impossibility of a pipeline being laid in that part of the world and so on. So we started looking to see what exactly is happening there.

So we assigned the project to an international company, JP Kenny. They are one of the two experts on offshore pipelines. And basically the result is straightforward. It basically says that a pipeline can be constructed. It is doable. And the interesting thing that they also found is that the cost is reasonable. And what “reasonable” means is that it is less expensive than an LNG or an FNLG. And also, as test of reasonableness, that the cost is similar if not less than the cost of bringing gas from Azerbaijan to the same points in Europe.

So basically you have a feasibility study that says that option too is a plausible option and it is both technically and economically feasible. But it’s not for us to decide. It is for the countries and the companies that want to export that gas and to make sure that they know that this option is available to them as well.

So we do believe, though, also that Southeastern Europe is a good market. We have done also a marketing study to see the alternatives of whether gas from this region could go to Asia and they could get a better price there. Obviously we all know the big diversity of prices between the U.S., Europe and Asia.

In the U.S. you have the $3 per million BTU price. In Europe – and unfortunately, in Turkey and Greece we’re suffering from high prices, higher than the rest of Europe. We’re looking at about 12 (dollars) to $13 per million BTU here in this region, which is quite expensive. And it goes back to my first point, that we want to make sure there’s more gas so we can drive prices down. And then you have Asia, that is 17 (dollars) to $18 per million BTU. Obviously eventually we see these prices converging.

So we believe that there is a market in Europe. Who knows how that market will evolve in the next 30 years? There is uncertainty, as I mentioned earlier. You have photovoltaics in Italy bringing gas demand down. You have the economic crisis. But you cannot look at the last two years or the next two years to have a view of what may happen in the next 30 years.

So basically there are options. I think the most important thing is for all of us to work together to ensure that that gas becomes available in the region, because we have to look at the primary effect, and the primary effect is more gas means lower prices, which is something that the region needs.

MS. COOLIDGE: Thank you, Mr. Sachinis.

Mr. Pope?

HUGH POPE: Thank you very much.

It feels odd addressing an oil-people’s conference – an oil-and-gas-people’s conference from an NGO’s perspective, but we’ve had a very close look at the Cyprus angle on the Eastern Med. gas in the hope that somehow the discovery of this gas could propel a settlement of the Cyprus problem, which has been one of the huge blockages in this region for so long. And it seemed like a new element that offered some hope.

But I have to say that, having done that investigation, I have many more questions than answers. And also I have to say that I absolutely agree with my colleague that the length of time that this is all going to take seems to me considerable.

I’d just like to raise – the first question is, first of all, how much gas has actually been found off Cyprus? I mean, there’s been just one hole drilled in the seabed, which has found gas, and possibly 7 trillion cubic feet, but also possibly 1 trillion cubic feet, or 15 (trillion). No one knows until the second hole is drilled, so we’re still discussing something quite possible. Obviously there are other potentially very big fields elsewhere, the other 13 blocks that were given out, but I’d just like to underline that we don’t know how much is there yet.

The companies involved are small so far. Noble Energy is not a big, well-funded company, and it made quite substantial losses recently. And even in Israel there are question marks about how big and how long the companies can – do not know how much they can afford to spend themselves on getting the gas out.

And as Harry pointed out, the value of the gas, we don’t know what the long-term price is going to be, how much money is going to be available to exploit these quite deep fields. And certainly if we get into very expensive transport solutions, then is it really going to be viable?

On the other side, at least in Cyprus, there’s a huge need for this gas to work out. Cyprus is in a dreadful economic state. Ever since the power station was blown up by a nearby weapons stash, held as it went on its way to Syria, and knocked out half its power supply, Cyprus has been in an economic tailspin.

And to just give you one figure that gives you an idea of how big that problem is, Cyprus banks have lent something like 120 percent of their GDP, the whole national product, to Greek private and public entities. This is money which they don’t know whether they’re going to get back. And Cypriot bonds are a junk status. The budget deficit is out of – is not out of control but things are looking pretty dire in Cyprus.

They need a new story. And of course they have wrapped themselves around the gas story, but to me it’s questionable how soon that that can help Cyprus. They need something quickly, I would say.

So let’s say that there is some gas – there is a good amount of gas there. What can be done with it? As my fellow panelists have said, there are three options. There’s LNG plants on Cyprus or in Israel, there’s the floating LNG plants possibly in the fields, and there is the question of pipelines.

On the LNG, the current amount of gas appears to be only enough for one train if it’s going to be on Cyprus. And I know that there’s a lot of talk of making the gas in Aphrodite field on the Cyprus side and the Tamar and other fields in Israel a joint development, but I would just underline that never in the history of hydrocarbon development has any country ever allowed another country to process its key natural resource. So I just don’t see it happening. I think Cyprus is going to bring its gas on to Cyprus and Israel is going to bring its gas to Israel.

And that means that Cyprus is going to have to make do with the amount of gas it finds in Aphrodite, and currently that’s enough apparently for just one LNG train, which is not, as far as the experts we’ve talked to, a really good idea even if you can afford an LNG train, which, by the way, would cost Cyprus another half of is annual GDP to construct if it could find the money.

Floating LNG will be quite expensive, and if it was to be jointly done with the Israeli side – I will bow to people who know the market better, but you come into very, very difficult Israeli taxation questions, for at least as far as Cyprus is concerned, and I think in Israel as well.

So those two, LNG, FNLG, it’s possible, but it’s really difficult. And LNG of course also makes you subject to the world LNG price, which, as Jennifer pointed out, we don’t know where that’s going. It’s probably going to go down.

So pipelines, I agree. People have looked at the Greece pipeline but it’s going to be long and expensive. I agree, it could be about the same price as a pipeline from Azerbaijan, but as you pointed out, a closer solution would be much cheaper. There was of course the possibility of sending the gas through Israel to the Arab pipeline and everything, but I think that would be completely dreamland.

And then we come to Turkey. Now, a pipeline from Aphrodite to Turkey would be one-tenth of the cost of any other pipeline. It would have instantaneously a market. There are Turkish power producers who are right on the coast there that would snap up that gas immediately if it was available.

Just one problem, a problem that has been cursing the region for the last 30 years, which is the Cyprus problem. And to be honest with you, if it’s a question of saving Cyprus economically, normalization of relations between Turkey and Cyprus is the best economic medicine for Cyprus. If we take the Greek-Turkey example – they normalized in 1999 – huge advances in trade, investment, mutual cooperation. It’s been an immensely positive process.

And if only Turkey and the Greek Cypriots could get over their mutual – it’s almost a blood feud, then that would be the first thing that would help. And also it would make possible this pipeline. But here again I have to just say, there is no sign of any progress on the Cyprus problem. It’s stuck. The talks went through their fourth round between 2008 and about six months ago, trying to work out a very loose formula of bicameral, bizonal federation under the U.N. This is the fourth round of talks since the 1970s. It got nowhere, and there’s no sign of it going anywhere soon.

And to be honest with you, as far as Turkey is concerned, even though it would benefit from this gas, as far as I can see the Turkish government is focused on finding its own gas in the Bay of Iskenderun in its own territorial waters. They’re working with Shell, and that is the hope. No one in Ankara is paying any attention to the Cyprus problem or solving the Cyprus problem, and especially since that’s very closely linked to the EU-Turkey relationship.

The Turkish prime minister, in recent weeks, has basically made statements saying that Turkey is no longer interested in its EU process, which is extremely disturbing for those of us who want Turkey to continue its integration with Europe. But since Cyprus and the EU-Turkey relationship are all welded together in an iron triangle, which rises and falls together, I’m afraid it’s sort of at a low point at the moment.

I think that the Cyprus problem is like a chess game where the two sides have managed to box each other in where they can make three moves each but neither side can knock the other one out. And if you like, the arrival of this huge gas potential, which could absolutely help everyone in the region, all it’s done is to add a third dimension to the chess problem. So now we’re moving in three dimensions and it’s still stuck, I’m afraid.

MS. COOLIDGE: Thank you.

While the rest of you are contemplating your questions, I’ve got one that I would like to put to any of our panelists right now.

There are significant boundary issues between the countries in the Eastern Med. And I would like to ask, one, how will those be resolved? And also there is – the different legal regimes in the three countries are at different stages of development, and so it strikes me that those need to be introduced in some areas, some countries, and in others need to be significantly tightened up.

And so I would like to ask our panelists about their opinions on the boundary issues and the legal regimes, and the timelines for those.

MR. MOR: Maybe I’ll start.

Indeed there are four, I would say, major disputes over maritime borders in the Eastern Mediterranean. The two largest of them, the major disputes, are between Turkey and Cyprus, and Turkey and Greece. And they cover most of the Mideastern Mediterranean, which impinge especially on the Cypriot natural gas developments.

Turkey just announced a week, 10 days ago to oppose sanctions on international companies like ENI, Total and others, which received exploration rights just two weeks ago offshore Cyprus, if they’ll continue their activity offshore Cyprus. So this is a consideration. Cyprus will maintain their activity, their exploration developments and so on.

And I also believe that those internationalists, especially European and other – including, by the way, subsidiary of Gazprom. So I don’t think that Turkey will eventually exercise such sanctions – my own opinion – but this exists. So the Turkish-Greek – maybe my friend Harry can relate to that.

There is also a small – not a very small technical dispute between Israel and Lebanon only over less than 1,000 kilometer squares. Basically I truly think that an addition to this dispute might be utilized, and was utilized already by the Hezbollah and others in Lebanon to make some political gains very quietly by third parties’ negotiation and not direct negotiations between the parties.

I think that this issue eventually will be resolved and it is not affecting Israel’s exploration rights. And maybe it will impinge on Lebanon’s basically, I would say, efforts to attract international companies. I think that the international companies will come to Lebanon. But these are relatively small disputes.

One very good example how to settle such disputes, there is a natural gas field which was discovered just on the maritime border between Israel and the Palestinian Authority just between Ashkelon and Gaza offshore, the small field, north field. British Gas, which found, back more than a decade, the Gaza Marine field, which, again was still not developed offshore Gaza.

But there was another small field, the north field, and the decision, basically agreement, took place between the parties that if this field is going to be developed in the future, it’s going to be a mutual development, Israeli and the Palestinians. Then British Gas – eventually this field is too small – small to develop. The northern part of that was developed by Noble Energy just last year, but not the mutual field.

So there are ways to go about that. Israel and Cyprus of course delineated their maritime economic zones. And no doubt that south to Aphrodite and north to Leviathan there are mutual discoveries or mutual fields which, if and when developed, will mutually be developed.

So I think that basically those disputes exist, especially Turkey and Cyprus, as you mentioned, and Turkey and Greece – if you can please, Harry, elaborate on that.

MS. COOLIDGE: I have one corollary to that. And just to note for the audience that Egypt, Lebanon, Cyprus and Greece are members of UNCLOS III, the law of the seas, and Turkey, Israel and Syria are not members. So I don’t know if you have any clarification with that in mind.

MR. MOR: Well, I mean, that’s a fact, so clarifications, you know, are not necessary. You just mentioned the fact.

The other fact that I want to mention is that Greece and Turkey have a very close relationship. I think that’s very positive for the region. And I think within the framework of that relationship the government and their foreign ministries will work to iron out any differences that may exist in the maritime borders or anything like that.

MR. POPE: If anyone is really interested in the details, you can find – we went to quite a lot of effort to get the maps out. On you can find – it’s called “Aphrodite’s Gift,” the repot, which shows how very big the differences are and how very difficult it will be to resolve.

And despite what Mr. Sachinis says about the Turkey-Greek relations, which are very good, Turkey and Greece have now met 52 times to discuss this in the last 10 years and they have not managed to solve it. And I personally believe that the Cyprus territorial water issue will not be solved without a Turkey-Greek agreement.

And if you are able to see this, this big line around Cyprus is what Cyprus thinks that it should control. And this big lump of the Mediterranean is what Greece thinks it should control. And this version here is what Turkey thinks it should control.

And one can, on the question of threats – by the way, I don’t think Turkey will ever actually fire a gun on this, but it doesn’t have to. I think that is quite effective in threatening sanctions and putting warships close to things. That’s normally enough to frighten people.

But any pipeline that was going to – obviously the pipeline is going to go first to Cyprus from Aphrodite field, which is very far south of Cyprus, you’ll notice. It will go up there and then across to Crete. That goes across a part that Turkey is determined will not be ceded to anyone else. And until the Aegean Sea problem is resolved between Turkey and Greece, I don’t think we’ll see a resolution of this one.

And we’ve also done a report on the Aegean Sea thing, and there’s no sign of anybody getting close to that. However, Cyprus has very widely managed to delimit most of its maritime borders with Lebanon and Israel and Egypt. And those, as far as anyone can see, are pretty solid.

And I would say that actually if anybody does find anything in places like the blocks that are not close to anything claimed by Turkey – if you want to look – most of the blocks of Cyprus are not claimed by Turkey. I would imagine that they would find a way to exploit them without coming into any direct conflict with Turkey. But it’s all interconnected and unfortunately no one seems to have the magic wand to make the problem go away.

MR. SACHINIS: I just wanted to make a clarification.

You can lay things at the bottom of the ocean. There are already telecommunication cables that connect Greece and Cyprus and Israel, and there are plans to also lay a cable for electricity. And that’s another way for, actually, Cyprus to export the value of the gas that is around Cyprus, because they can bring the gas and produce electricity on the island and then export the electricity to either Israel or to Greece or wherever.

So you do not need an EZ to be delineated in order to lay something at the bottom of the ocean or the sea.

MS. COOLIDGE: Thank you.

I understand we have microphones in the room now. I would like to open up – we have about 25 minutes that we can take questions from the floor. I still have a few more, but do we have questions right now pending? I’m sure we must.

All right, well, while you’re thinking about this, then I would like to continue on my line of questioning and asking our respondents to consider the development of Eastern Mediterranean gas in light of the current developments in the Southern Corridor.

As we know, there has been a decision to build the TANAP, Trans-Anatolian Pipeline, and by the end of June next year there will be a decision by SOCAR and its partners between Nabucco West and the Trans-Adriatic Pipeline.

I’ve already raised, in my opening remarks, the issue of European gas demand and the uncertainty in the global gas market, given developments in unconventional gas and the potential for exported LNG from the United States, and the timeline of uncertainty in Europe in the next two to three years vis-à-vis pricing, and the timeline of uncertainty in the global markets, especially the LNG market.

So I would like to ask the panelists to comment on the development – we’ve heard a lot about the challenges for development of Eastern Med. gas – piped gas, LNG, floating LNG – but I would like them to comment specifically on how we could see development of Eastern Med. gas in relation to the Southern Corridor, number one, and also in relation to the South Stream pipeline, which, as you know, yesterday the final FID was signed between Miller and Borisov in Bulgaria after about 10 days of signings in different countries.

So I would like to welcome your thoughts on where the Eastern Med. gas development fits into that larger picture.

MR. SACHINIS: It’s a very interesting question, and I think it is interesting to see that South Stream took the FID yesterday and they are moving forward, because I think that will make everyone else try to move faster. It’s a pity for the region, I think, that Shah Deniz has not moved earlier. It has taken too long for the Southern Corridor to open up, and it’s still taking time.

And I think there should have been earlier, faster commitments to some project, any project, for the gas to start flowing, because now discussions of, OK, let’s not do Nabucco; let’s to TANAP, and how much will TANAP cost, and who are going to participate in TANAP, and how does that get involved with the price of Azerbaijan to – (inaudible) – and who is going to buy the gas?

I mean, it cannot take 15 years for all that to happen. I mean, people miss out on an opportunity by doing that. And most of it is the region that misses out on this opportunity, the opportunity of more gas, the opportunity of lower prices. But I think now with South Stream saying, OK, let’s start the race, I think hopefully things will move on the Southern Corridor.

And the other interesting thing is timing of the gas from Cyprus and Israel. It all also depends on political decisions. When is Israel going to decide how much gas they’re going to export? There is gas there. We know that. And I think there is a lot of gas. The United States’ geological survey says that there’s actually even much more gas. Three times the gas that has already been discovered is available in the region.

So the interesting thing is, does Israel wait for the elections and post the elections to figure out how much they want to export? Do they decide that now? But if you are looking for a market that is somewhat limited, and if you think of the premise that the closer you take your gas to – the better it is for you because you get a higher net back, then you may actually indeed have a race between the gas from Azerbaijan and the gas from Israel and Cyprus, because if they were to make the decision today, that gas could be available into Europe by year 2018. And that’s around the time that gas from Azerbaijan is going to be available.

But my bet is that probably it will take longer for the politicians in those two counties to make their decision about when to export the gas and how much to export.

MR. MOR: I’ll elaborate a bit vis-à-vis Harry’s very good question.

As I mentioned, Israel is a democracy and it’s very important for a public debate to take place, should have been taken these days but the elections are scheduled in January so it will take another few months, possibly a year.

It’s a very important debate, all right? The democratic – as we had the major debate just three years ago vis-à-vis the taxation system, increasing the taxes for offshore hydrocarbon, basically sales from 25 percent to 60 percent, which is about the world average. It was a very lively democratic debate in the government representing the country. The people eventually decided to increase taxation on that. So we are expecting this debate.

But as mentioned, there is a major decision to take place. If export is going to be done via LNG – and I should also say not necessarily gas should be exported via LNG, or liquefied natural gas, for example, or the pipeline. A country can produce – and this is starting to be debated and we are working on a major study these days about that – can produce methanol with gas. We can produce ammonia and UA (ph) fertilizers with gas, and eventually down the road petrochemicals, and with much higher value added to the export of gas for both domestic consumption and for especially exports.

So here a government can play a bit with the prices of gas because offshore Israeli, or simply – (inaudible). Simply the government is starting to consider also possibly producing higher value like methanol and ammonia and UA from the gas and export the gas via those means.

So this is debated. Government could play with the prices of gas because it’s difficult to compete with very, very cheap gas in the Persian Gulf, in Qatar, in Abu Dhabi or in Saudi Arabia, and petrochemicals, methanol and so on, federalized production. Gas cost is 10 cents – not more than 70 cents per BTU, whereas the gas price in this region is much higher.

But governments can play – basically they can count the cost benefit, doing a cost benefit analysis through the nation and can facilitate in arranging prices in this respect. They hope that will be done. So a major decision.

If it’s going to be LNG, so the markets obviously – especially in the Far East, China, India and of course Japan, which possibly Fukushima is going to increase – still increasing its consumption of gas, of LNG, and Taiwan and Korea of course as well.

If the decision will be – and I think both decisions should be considered, two projects. To install a pipeline via Cyprus, Crete and Greece to Europe, I’m not so optimistic vis-à-vis the time table that it will take maybe 15 years or more. And basically we’re talking somewhere in the next decade. But also an LNG project will take at least a decade, FLNG possibly quicker.

So if we are talking on LNG, so the markets are not necessarily Europe. It’s a commodity in a way. And this LNG from Cyprus, Israel, on the European markets, will compete with other LNG sources. If it’s a pipeline of course dedicated – and possibly in the longer run this pipeline might materialize in addition to LNG project. So that’s the implication of our decision: Where are the markets, the Far East or Europe, if we are talking about a pipeline?

MR. POPE: Again I find myself agreeing completely with Mr. Sachinis here. I mean, this whole business is shining a bright, bright light on the inefficiency and the cost of the inefficiency of decision making in Turkey and in surrounding states. I mean, Turkey is stuck at the moment in a – it’s a medium-income, second-division developing country, and to get to the next level it has to start making strategies and plans and getting things done.

I mean, we’ve seen this. The current government has done perhaps more than any previous government with the most effective prime minister we’ve had, but we’ve seen the EU negotiations taken up to the top of the hill and now completely stagnant. The Cyprus issue was nearly solved but now it’s in a worse position than ever. The Armenian question was nearly dealt with but now it’s back in the drawer. The Kurdish question and the PKK, the PKK insurgency, these were, again, very nearly solved but now have become even worse. We’re back to the 1990s.

And I could go on making examples of things that Turkey has tried to solve in the last 10 years and has not solved. And the failure to get the most simple, direct solution, for instance on gas – as I said, one-tenth of the cost, a ready market, and even 5 billion cubic meters could go on to Greece through the existing Turkish system. Everybody would win, but the political system is not producing solutions for Turkey. And I think that it’s not just in Turkey. I think it’s nearby states too.

So I think, again, it’s going to be slow. Turkey is going to lose out. And Turkey is going to – Turkey wants to be in – I hope it wants to be in the first division of nations, but this constant delay is holding it back all the time.

MS. COOLIDGE: Thank you.

Great, we have a question at the floor here. Do we have a microphone from the back? The gentleman in the second row. Second row. Could you please identify –

Q: Thank you. Good morning. Mithat Rende, director general of multilateral economic affairs, Ministry of Foreign Affairs, Turkey.

We were invited a long time ago, when we started discussions on recent gas discoveries in the Mediterranean, to Rome. And it was a very useful forum organized by the National Defense University of Washington to discuss whether recent gas discoveries would further destabilize the situation in the Mediterranean and in the Middle East. It was a very useful discussion. And then we had many meetings and conferences. And, Mr. Pope, I appreciate very much the contribution he made to this discussion with his paper.

I would like to draw your attention to a last press release dated 3rd November by the Ministry of Foreign Affairs. And in press release the third paragraph reads as follows: “The Turkish Cypriots, like the Greek Cypriots, have equal and inherent rights over the natural resources located on the whole continental shelf of the island. Disregarding this reality and the continuation of unilateral and provocative activities by Greek Cypriots are not acceptable both to Turkey and” the Turkish Cypriots. So this is, as of today, the views.

And then it follows – it says, “The attention of the international oil companies had been repeatedly drawn as regards the adverse consequences that would be created by their activities in the disputed areas,” and that Turkey will not be – any company will not be allowed to take part in any new energy projects in Turkey if they are engaged in this disputed area. So this is the situation as of today. And there is no need to probably repeat that, but Turkish Cypriots have equal and inherent rights over the offshore resources of the island is the situation.

And finally, probably there is no need to repeat that the only solution to the gas in the Eastern Mediterranean is to lay a pipeline and connect to the Turkish grid, and from there to Europe. LNG has been discussed, but it’s so – commercially it’s not viable. And given the recent developments and the shale gas revolution, it’s highly unlikely that the Eastern Mediterranean gas can be commercially viable through an LNG system. There is no need to spend billions of dollars to establish LNG structures in the Mediterranean. Thank you.

MS. COOLIDGE: Thank you, Mr. Rende. I would like to add one further question for you, and to open to the panel. Just to clarify – could you bring the mic back up, please – just to clarify where Cypriot and Israeli gas is concerned, have I heard you correctly that the solution for both states, or is it the solution for the Cypriot gas, is to lay a pipeline into the Turkish mainland and the Turkish grid?

MITHAT RENDE: There is a need for a common solution. The Israelis, they will find the best way. And I’m sure there are many private companies which are already discussing this issue and trying to develop projects for the Israeli gas to reach the markets – to reach the markets.

And we should keep in mind that as of today, shale gas prices in the United States is about $3 per million BTU, while the same prices differ – the shale gas or gas prices differ a lot in Europe and in Japan.

So while the Israeli companies will definitely – together with their American partners will definitely find the best way, and we hope that relationship can be normalized and then the best solution can be found. But I don’t believe that the Israelis will end up spending $10 billion or $8 billion and building LNG terminals for their Leviathan or other structures.

And then, in the end, we hope – we do hope that there will be – we will reach a negotiated solution and that there will be a comprehensive settlement, and then we will be able to make use of the gas in the Eastern Mediterranean as a whole through a system which will be bankable and commercially viable. Thank you.

MS. COOLIDGE: Thank you.

MR. MOR: Thank you very much for your words.

I think both Turkish government, Israeli governments and Cypriot governments fully understand, and especially the Turks in this respect, that as long – as was discussed with you and others – the political situation between Cyprus and Turkey, and in the longer run, improvement. I do hope the relations between Israel and Turkey are resolved.

This option, which is the most economic option – and we ran a feasibility study a few years ago for Gazprom. Then the idea was to bring natural gas via Turkey, offshore Eastern Mediterranean to Israel. We did a feasibility study of that. At that time even LNG costs would be lower than this pipeline. But it makes so much sense economically.

But as mentioned – everybody understands – geopolitically it is not feasible in the foreseeable future, only when those geopolitical disputes – Cyprus, Turkey and basically – (inaudible) – of the relations between Israel and Turkey were enhanced.

And then just, we have to learn something from the various energy security or gas security threats which materialized in the past decade. Russia and Ukraine cut the flow of gas to Europe several times. Even Turkey lately cut the flow of gas to Greece due to domestic needs. Egypt and Israel – Egypt cut the flow of gas to Israel and Jordan.

So would one imagine that Israel and Cyprus would lay a pipeline via Turkey while the political risk is too high? So each country will, as you said very correctly, and I agree, will find its own course to export the gas.

MR. SACHINIS: I just want to repeat my first premise. The more gas that flows into the region, the better off everybody is. Let’s make sure that we make it easy for more gas to flow in the region. It will help all the countries in the region.

MS. COOLIDGE: I want to take another question from the floor in the front row here.

Q: Well, I would like to comment on –

MS. COOLIDGE: Please identify yourself.

Q: Friedbert Pflüger, Kings College London. I would like to go back to Mr. Pope, who basically made a strong criticism of Turkey not to settle conflicts around Turkey.

Well, a lot is true. Some I think is questionable. I think the progress on the Kurdish issue is enormous. Good relationship with the Kurds. So the PKK issue today is a side issue. And there’s a great relationship developing between Erbil and Ankara.

But I think the worst in this whole region, the worst development over the last years, you did not mention, and that is the cooling of the Turkish-Israeli relationship, which has been an enormously important stabilizing factor for the region for long. And if there is anything – one thing that has to be fixed first, then it is the deep confrontation we have seen between Israel and Turkey in the last two years to emerge.

Nobody says that Israel shouldn’t be criticized. There is a lot of reason for that. But to do it in the way the Turkish government has done this just, in my point of view, is too far, and it puts a big counterproductive movement to the region but also to Turkey itself. So I think that is a precondition for solving all this Mediterranean gas thing is that Turkey and Israel get to terms again.

The second point that I would like to mention is the EU. So we put a lot of blame to Turkey for the moment, but it has also a lot to do that the EU, as a player, is practically not visible anymore because it has to deal with its own problems. It cultivates its own garden – euro crisis and so on.

We need a much more active role of the European Union, again solving the Cyprus question, bringing forward their negotiations with Turkey. And if Turkey sees a real prospective becoming an EU member – not as a big vision but as a concrete possibility – then we will have a lot of chances to solve these enormously important questions of gas in the region.

So it’s the political framework – Turkey-Israel and EU-Turkey – which will make it much more easy to get use of this enormous richness of gas in the region.

MS. COOLIDGE: Thank you.

So as we wind up, I want to take one more question or comment – I see Mr. Rende, Ambassador Rende, with a question or comment there – and then I will open to a final very brief comment from our panelists so that we can maintain our time frame.

MR. RENDE: Sorry to ask for the floor again.

As regards Turkish-Israeli relations, I understand that it was discussed before my arrival. And I happened to be the contact person of Turkey when we dealt with the Mavi Marmara issue. And I also chaired the national commission, the Turkish national commission which prepared the report to be submitted to the U.N. panel on the issue of Mavi Marmara.

I honestly believe that Turkey did its part, and we did our best to convince the panel and the Israeli side that they should do their part and apologize and pay compensation so that we can normalize relations. And it took us about a year to work on the matter.

And unfortunately we could not convince the Israeli side that they should do their part. And the United Nations council on human rights, the Human Rights Council in Geneva, they also issued a very comprehensive report and also pushed Israel to officially apologize, and Israel decided not.

So it’s a problem that remains with us to be resolved, and I hope that the situation will change and then the two sides will get together and we will normalize relations. But it’s not fair to blame Turkey for what has happened. It’s not fair. The situation is quite complicated and we cannot simplify it.

And with respect to the situation in the island, I really do agree that the European Union did not do much, to say the least, to contribute to the resolution of this matter, which has been with us for over half a decade – half a century.

So let me also probably remind that the Turkish Petroleum, with its license that it got from the Turkish Cypriots, they will be also drilling in the areas which are overlapping and the concession blocks which were declared by the Turkish Cypriots. And they overlap with that of the Greek Cypriots blocks. And it’s likely that they will strike gas in the same areas, and it will make the situation more complicated. It’s another possibility. Thank you.

MS. COOLIDGE: Thank you.

I would like to give our panelists each a one-minute summary starting with you, moving to Harry, moving to Amit, and then I will give a final concluding remark. Microphone?

MR. POPE: I think we have ample – sorry – ample evidence that there isn’t currently a momentum towards solving the problems that have divided all the countries here in the East Mediterranean in a way that they could find a joint solution. And I really regret to say that I think that Turkey has chosen not to pursue its EU prospective, just as much as there has been cold water, yes, from the EU.

But Turkey is the applicant. Turkey needs the EU process. What we are enjoying in Istanbul today, this extraordinary economic growth, and especially visible in Istanbul, has been the result of the hard-done EU reform process of the early part of the 2000s, which has stopped around 2007, I would say, and has been unraveling since then.

And along with that has been the very unfortunate emotional approach to Israel. If anyone wants, I can cite four cases in which I believe Israel indeed made the Turkish relation worse than it had to be, that Israel chose to escalate it. But Turkey also behaved rashly and emotionally, and it has done so with all of its neighbors.

We had a situation three years ago where we had really almost zero problems in violence for Turkey. Now one can count eight neighbors and near-neighbors with which Turkey has conflictual relationships. Turkey has to get back to a more neutral approach, I agree, with Israel, with all the parties. That was the goal.

In 2008, Turkey was sitting in a wonderful position where it could fly everywhere in the region and be treated and talked to as a respected neutral player in the region, and with something of a strong multilateral approach. Turkey is now acting more as a lonely player, as a lone player. And I think in terms of developing the resources of the region and making sure that everyone gets more prosperous together, it has to get back to that position.

MR. SACHINIS: I have to agree with that position of moving faster. We should not give up on finding solutions. We should redouble our efforts in finding solutions. We should move faster. We should move faster on clearing the situation between Azerbaijan and Turkey and making sure that Shah Deniz gas flows through Turkey to Europe as soon as possible.

And we should make sure that we do not obstruct any new gas coming to the region. It is very important. We have to look long term. Gas can bring prosperity in more than one way.

MR. MOR: I am of course representing myself, not the Israeli government – business company and specializing in Middle East energy, and especially natural gas and so on.

I agree with the ambassador – Turkish ambassador vis-à-vis the need to resolve the Israeli-Turkish tension. I understand that high-level negotiations continue to take place. I also think that the Marmara issue was an excuse for the Erdoğan government to disengage from Israel. Had it not been the Marmara, it would be another. And I don’t judge or evaluate basically Turkey’s geopolitical consideration in this respect. It has a much higher view.

At the end of the day, I think that the two stable countries in the region are Turkey and Israel, thriving democracies and stable in a very fragile environment. And at the end, it might take two years, 10 years; the countries will enhance political relations, which of course will also be positive to the development of the hydrocarbons in the region. And I hope that Turkey and Northern Turkey will find oil and gas. If oil is found, it’s a new game changer.

Just one word that I would like to share with you, my vision and others in Israel. I do hope that in 20 years’ time more than 50 percent of our transportation fleet will run on gas. And there are four major technologies:

Already plug-in electric cars are introduced in Israel, and 70 percent of electricity in two years’ time is going to be produced from gas. So electric cars is natural gas-based, and eventually renewable energy – solar energy – to fuel our cars. Secondly is compressed natural gas technologies. Thirdly, this is methanol. I’m a great believer in methanol. Methanol is a liquid like gasoline that can be produced from natural gas, from methane gas, and can fuel our fleets with methanol. And lastly, gas to liquids producing a gasoline diesel and jet fuel from natural gas.

This is doable. It’s a very small country of entrepreneurs, and I think we can do it in 20 years’ time, most of our fleet, and same in the U.S. with the cheap gas. I think that this is a vision to our country, to the nation, and to the world eventually.

MS. COOLIDGE: Thank you. Thank you.

I want to thank all our panelists. I think we’ve had a very lively debate. I’d like to leave you with one thought, and that is what I tried to bring out at the beginning is that the global and European gas markets are going through a significant transition and a paradigm shift right now, with a lot of moving parts, interrelated parts, none of which are entirely pinned down.

And I’m referring to unconventional gas development; the LNG market and the future gas demand growth trajectory, especially in Europe; the pricing situation in Asia, Europe and the U.S. And that in itself is a huge question mark, or set of question marks.

And then I believe we add to this the potential, the significant potential, with Eastern Mediterranean gas, but with that also comes its own host of not only legislative issues, commercial and technical issues, but also geopolitical issues.

So we are putting in a whole new set of variables. And that, I believe, is why this question of how and when and to where Eastern Mediterranean gas will be produced and potentially exported will remain a set of questions for the foreseeable future.

But I think we’ve had an excellent panel. I want to thank all of you for coming. And we have a coffee break now. Thank you. (Applause.)


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