Gazprom Goes to the Middle East
The Russian gas giant is trying to get into the Eastern Mediterranean's promising energy market.
There is no question that Russia is making a play for natural gas in the Levant basin. Between the overt ambitions of President Vladimir Putin’s government, state-owned energy giant Gazprom, and private companies, a concerted effort to establish a strategic commercial edge in the developing Israeli, Lebanese and Cypriot markets is underway. So far, the approach has produced relatively few gains for Russia, but local governments and the companies operating in them must vigilantly monitor and, if needed, seek to curb Moscow’s ambitions.
The Levant basin, which according to the U.S. Geological Survey contains an estimated 1.7 billion barrels of recoverable oil and 122 trillion cubic feet of recoverable gas, is an attractive financial and geopolitical prospect for Russia. Some experts estimate Lebanon’s natural gas reserves to be worth between $300 billion and $700 billion, while Israel’s are valued at $280 billion. Cypriot energy minister Yiorgos Lakkotrypis claims his country’s offshore Aphrodite field alone has a gross value of “approximately $50 billion,” and companies are actively exploring for more gas offshore the island.
Furthermore, while Europe is Gazprom’s biggest export customer, it is becoming less lucrative. European demand is stagnating, and countries are diversifying their natural gas supplies to reduce dependence on the company notorious for its stranglehold on foreign markets. The European Union, in fact, is set to charge Gazprom with “abusing its dominant position in central and eastern Europe” following an aggressive antitrust investigation, which could result in a fine of up to $15 billion. Europe’s increasing inhospitality, in addition to the potential for American liquefied natural gas (LNG) exports and China’s campaign to open its growing domestic market to a wide range of international producers, is forcing Gazprom to find new sources of revenue.
Geopolitically, Russia wants to be involved in eastern Mediterranean gas to maintain its interests and protect assets. Lebanese gas could help improve access to markets, because it would likely be processed at an LNG facility in Cyprus and exported from there. Israeli gas has the same potential, and the Supreme Court’s decision to uphold the cabinet’s allocation of 40 percent of the country’s reserves for export means that Russia needs to act now if it wants a piece of the pie.
Russia’s interest in Cypriot gas, on the other hand, is more complicated. First, Cyprus has been a tax haven for Russia’s oligarchs for several years, in addition to serving as a backdoor to Europe, since “anyone spending a minimum of €300,000 on property is granted permanent residency.” This cash flow is so integral to the Cypriot economy that Russian money “accounted for up to €20 billion of the €35 billion of foreign money in Cypriot banks” at the end of the first trimester of 2013.
Second, Russia uses Cyprus to check Turkey’s rising power, particularly its desire to become an energy hub for transporting non-Russian gas to Europe. Cyprus and Russia formed close defense ties in the 1990s, and Moscow rejects Ankara’s claim to North Cyprus in the conflict over the island. Ankara and Nicosia have yet to delineate a maritime boundary, so Turkish attempts to explore for gas in offshore areas it claims for North Cyprus could result in fiscal losses for Greek Cyprus, which is trying to use its gas reserves to keep people from taking their foreign money elsewhere. Because “Moscow cannot allow Cyprus to go under without incurring serious domestic losses,” it has gone as far raising the stakes. In 2011, when Turkey threatened to attack Cyprus if it allowed Noble Energy to drill in the disputed Block 12 as per a concession granted by the government in Nicosia, Russia responded by dispatching “an aircraft carrier with fighter planes, and at least one submarine” to the island.
Unfortunately for Russia, its interests in the Levant basin have not proven to be directly proportional to its success. Cyprus, for one, rejected Gazprom’s offer to bail out its economy in exchange for gas exploration rights in March. Novatek, Russia’s largest independent natural gas producer, was leading a consortium to develop one of the Cypriot blocks with France’s Total and Gazprom-owned GPB Global Resources, but those negotiations collapsed in December 2012. The only way left for Russia to get its hands on Cypriot gas is via getting involved in its supply—either through providing expertise in the construction of an Israel-Cyprus pipeline, or buying LNG “from a plant built either in Cyprus, Crete, or Israel.”
While Moscow gained a modest foothold in Lebanon by signing a memorandum of understanding on energy cooperation with Beirut in October, the reach of Russian companies remains unclear. Novatek, majority state-owned oil company Rosneft, and public Lukoil have been prequalified for the first license round, whose exploration blocs will be auctioned on January 10. However, they will be competing against tens of other international companies for the tender, and only as non-operators with a minority stake in the consortium.
As for Israel, a Gazprom delegation discussed partnership options for the country’s offshore Leviathan field during talks with local energy players in 2011, and the company allegedly had plans to set up a subsidiary in the country focused on drilling and gas transmission. Gazprom also submitted the highest offer for a 30-percent stake in Leviathan in 2012, but was denied. Finally, in February it signed a letter of intent with the partners in the consortium for the Tamar field to finance an offshore LNG facility and sell the product for 20 years. Meanwhile, the recent confirmation that the Israeli government is talking to Moscow about the development of Israel’s natural gas fields does renew cause for Russian optimism in general.
Cyprus, Lebanon, and Israel have so far shown a reluctance to let Russia become too involved in their natural gas sectors. The only operator agreement a Russian company has is with the Tamar consortium, but it is nonbinding and actual plans have not yet materialized. However, this will not deter Russian players from continuing to make moves in the region, and if Levant basin countries are not careful, they may end up getting more than they bargained for.
Allison Good is a freelance writer and analyst currently based in Jerusalem. Follow her on Twitter @Allison_Good1.
Image: Flickr/Steve Jurvetson. CC BY 2.0.