Thursday, February 28, 2013

Redrawing of the geopolitics of the eastern Mediterranean region...

Redrawing of the geopolitics of the eastern Mediterranean region...

There was a bygone era that ended a little over four years ago when it used to be said that the Kremlin used energy as a "geopolitical tool". The threat perception propagated by cold warriors in the United States principally aimed at cautioning Europe against its rising energy dependency on Russian supplies.

Moscow was credited with the capacity to influence Western European policies with a hidden agenda to sabotage the trans-Atlantic partnership.

Meanwhile, unnoticed or unspoken, the geopolitics of energy has been transforming. The president in the White House, Barack Obama, has not wasted his breath over the Caspian energy content below rivalries. He has no special romance with Big Oil, unlike his predecessor in the Oval Office.

Ambassador Richard Morningstar, the United States special envoy on the Caspian, has quietly left the center stage and the "market" is slowly taking over. If Europe's energy business with Russia holds uncertain prospects today, it is more due to economic reasons than a messianic drive to diversify its sources of imports.

The Bill Clinton era in the geopolitics of Caspian energy, which ran through the George W Bush presidency, imbued with a great sense of rivalry over Russia's status as an energy powerhouse, is giving way. That is one of the messages to be pulled out from the announcement on Tuesday in Moscow that a subsidiary of the Russian energy giant Gazprom has signed a 20-year deal with Levant LNG Marketing Corp. for Israel's Tamar offshore gas field in the Mediterranean.

Russia looks east...
Without doubt, the Tamar deal rewrites the ABC of the geopolitics of energy security. But, first of all, what are the facts on the ground?

Tamar is one of two large offshore gas fields in Israel off the coast of the port city of Haifa - the other one being Leviathan. The Tamar gas field reserves are estimated at around 270 billion cubic meters (while the potential of the Leviathan is estimated at around 450 bcm.)

The Tamar floating LNG project (FLNG), which is expected to be commissioned in 2017, is one of the first of its kind anywhere in the world and would liquefy gas from Israel's Tamar and smaller Dalit fields at a floating liquefaction vessel at rate of 3 million tons per annum, which equated to 84 bcm of gas over the 20-year period of Gazprom's deal, roughly 30% of Tamar's estimated reserves.

The deal envisages that Gazprom will provide financial support to develop the FLNG project by way of an equity investment or financing, which is expected to be significant.

The deal allows Gazprom to exclusively purchase the LNG from the Tamar project, meaning an expansion of the Russian company's LNG exports and trading portfolio. A senior Gazprom official has been quoted as saying,
This is an important milestone for strengthening Gazprom's position in the global LNG market. We are confident that the deal will not only help strengthen and diversify Gazprom's LNG portfolio, but also help… build on our success in the Asia-Pacific region, where we have recently closed long and medium-term deals with numerous counterparts in India and North East Asia.
According to the International Gas Union, Russia was ranked as the world's eighth-biggest LNG exporter in 2011. Clearly, the deal is a major step forward in strengthening Gazprom's hand in the booming Asian LNG market. President Vladimir Putin exhorted only last week that Russia should make increased efforts in LNG to diversify its gas exports, which are focused on the weak European market.

The deal enables Gazprom (which is the world's biggest conventional gas producer) to export directly to the highly priced markets in Japan, South Korea, China and India that are not accessible via pipelines. In October, Gazprom signed a 20-year deal with India's GAIL to supply 2.5 million metric tons of LNG annually with deliveries beginning in 2019.

At the moment Russia has only export LNG plant (Sakhalin -2 where Gazprom operates with Royal Dutch Shell and Mitsui), which mainly supplies South Korea and India. Gazprom announced last week that it has a decision to build an LNG plant in Vladivostok in the Russian Far East to supply the Asia-Pacific region.

By the way, the deal on Tuesday also comes at critical time when Gazprom appears to be battling for its traditional monopoly on Russian gas exports with powerful rival business interests working in the Byzantine corridors of power in the Kremlin, who also claim the rights to export LNG.

However, the real significance of the deal lies in the redrawing of the geopolitics of the eastern Mediterranean region, which also happens to be currently in the cusp of the Arab Spring. The Tamar project is being implemented by a consortium dominated by Israeli companies - Delek Drilling, Avner Oil Exploration, Isramco Negev-2 and Dor Gas - in which the US oil major Noble has a 36% holding. (Noble holds a 39.7% interest in Leviathan as well.) That is to say, both Tamar and Leviathan are essentially US-Israeli ventures and Gazprom's deal could not have been forthcoming without an okay from the American and Israeli partners.

Now, Gazprom has also been eyeing participation in Israel's Leviathan gas fields. The Leviathan is expected to go online in 2016. Herein hangs a tale. Evidently, Russian President Vladimir Putin had big thoughts on his mind when he made Israel one of his first destinations for foreign visits in June soon after returning to the Kremlin in the last presidential election.

Put differently, the June visit underscored how Israel's discovery of the major gas fields in the eastern Mediterranean amounts to a tectonic shift in the geopolitics of the region. Moscow sees a big window of opportunity insofar as the Leviathan extends into Cyprus' southern waters. Noble Energy, which made the Israeli strikes, is also the lead player in the exploration off Cyprus and has already struck an estimated reserves of 7 tcf in the Aphrodite field, which is just 25 miles (40 kilometers) west of Leviathan. Indeed, the need arises for Israel and Cyprus to pool their efforts.

This has triggered a spate of high visits between the two countries, which also, interestingly, have one other thing in common - strained relations with Turkey. Ankara used to be Israel's strategic ally until two years ago when they drifted apart as Turkey's Islamist leadership regarded it expedient to put a distance with Tel Aviv so as to burnish its credentials as the "model" for the countries of the new Middle East emerging out of the Arab Spring.

Unsurprisingly, Turkey is furious that Israel is teaming up with its implacable enemies - Cyprus and by association Greece and has threatened to use military force to stop the drilling off southern Cyprus. Ankara also has a problem with Russia's energy exports in general, having ambitions of its own as the main energy hub between the west and the east.

A holistic picture...
Enter Russia. Russo-Turkish ties are passing through trying times in the recent period, while historically, Russia has close ties with Cyprus and Greece which follow the Orthodox faith.

Meanwhile, in recent years, Russian companies have also made major interests in Cyprus. It is a measure of the growing Russian stakes in the Cyprus economy - as well as Nicosia's benign perceptions of the Russian patronage - that Putin offered that country a $3.5 billion loan in 2010 to bolster its banking sector.

With the Cypriot economy suffering the effects of the economic meltdown in Greece, Nicosia has approached the Kremlin for another bailout to the tune of $5 billion. Moscow is brooding. Putin has offered that Russia could join any European Union bailout plan for Cyprus.

Moscow factors in that the gas discoveries have catapulted Cyprus from a mere Mediterranean backwater and tax haven for street-smart Russian businessmen into a potential regional energy power. The expert opinion is that Cyprus sits on gas reserves that could last for two centuries at its current level of consumption.

Moreover, Russia cannot afford to let Israel and Cyprus join hands to develop ties to begin exporting gas to the European market, as that would cut into Gazprom's traditional business as Europe's key supplier. Israel's maritime zone abuts that of Cyprus and the Leviathan extends into Cyprus' southern waters and there are plans to combine the Israeli and Cypriot exports to Europe via Greece. Given its strong ties with Cyprus and the rising influence of the "Russian lobby" in Israeli politics, Moscow is maneuvering into a position to handle a big chunk of the gas exports that might originate from the Leviathan fields.

Actually, Moscow has a holistic picture of the energy map of the eastern Mediterranean. Its recent moves to foster ties with Lebanon and its entrenched stance on Syria can be seen partly at least in this light. Russia invited the Lebanese president Michel Suleiman to Moscow in late January.

The 3-D seismic surveys have shown that Lebanon probably has major gas fields within its maritime economic zone, which could even be bigger than the potential in offshore Cyprus. Syria lies along the same offshore strata, too. Suffice to say, the US Geological Survey estimates that the Levant Basin (which runs from Syria through the waters of Lebanon, Israel, Cyprus, the Gaza Strip and Egypt) contains 122 trillion cubic feet of gas and some 1.7 billion barrels of oil.

A 'de-ideologized' return...
It is no big secret that the Levant's conflict politics intersect with global energy strategies. Israel wouldn't want its export opportunities limited by Russia since Tamar and Leviathan offer a one-in-a-million chance for it to cultivate friendships and break out of its isolation. But the Tamar deal shows that Israel can be very pragmatic if the right mix of quid pro quo is forthcoming from Moscow.

What that Russian quid pro could be, time will tell. The Israeli government is yet to give approval to the Gazprom's Tamar deal. Meanwhile, Israeli press has reported that the criteria for foreign investment in the Leviathan gas field - qualifications in natural gas development, liquefied natural gas processing, etc. - suspiciously suggest that Gazprom is set to take a stake in the project.

A rough estimation would be that Israel would need more than $10 billion worth of export infrastructure alone. No wonder, rumors of a Gazprom acquisition refuse to die down.

To be sure, the Israelis will bargain an optimal deal, and that will most certainly include political elements. Israel has made no bones about its keenness to whittle down Russia's strategic ties with Iran, especially its arms sales. Israel would hope that Russia facilitates a smooth enough "regime change" in Syria for a shift that doesn't destabilize the region to its disadvantage.

On balance, however, it seems increasingly difficult to keep Russia out of the energy reserves of the Eastern Mediterranean, especially if the plan is to construct a liquefaction facility in Cyprus that would process and export the gas received from Israeli Leviathan and Cypriote Aphrodite - which is what Noble Energy has called for.

Russia's biggest advantage is that it is uniquely placed navigate its way around in the choppy waters of the Eastern Mediterranean, which is strewn with disputes over maritime borders and exclusive economic zones - involving Greece and Turkey, Israel and Lebanon, Cyprus and Turkey, and lately Syria and Turkey.

Post-Soviet Russia's "de-ideologized return" to the Middle East in a matrix where all that is permanent are its interests and all else is ephemeral and negotiable is beginning to show results as the Tamar deal dramatically testifies. After all, it is no small matter to foster friendships with Israel on the one hand and Iran, Syria and Lebanon on the other, with Cyprus and Greece on the one hand and Turkey on the other - and make almost all of them feel special about their Russia connection...With Vlad Putin Moscow casts wide net in Mediterranean...
Ambassador M K Bhadrakumar.

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