The Lebanon, Natural Gas And Local Political Equilibria

By Giancarlo Elia Valori*

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As can be easily foreseen, the huge amount of natural gas that is being discovered throughout the East Mediterranean region is bound to quickly change the whole economic, strategic and military system of the Middle East.

As well as the links between the Greater Middle East and the European Union.

While, before the discoveries of the East Mediterranean region, the primary theme was the network of contacts between the EU West and the Arab-Islamic universe, currently these productive transformations change the internal relations among traditionally producing countries and place Israel in a new economic context, thus making the EU countries enter this new maritime production system as full members.

Hence it is by no mere coincidence that the first East Mediterranean Gas Forum (EMGS) was organized in Cairo last January.

The Forum participants included Egypt, Italy, the European Union, Cyprus, Greece, Jordan and the Palestinian National Authority.

However, it also included Israel and this is certainly a fact not to be overlooked.

The logic of the meeting, however, is to create – in the short term – a politically and productively cohesive group, capable of maximizing the financial and political effects of this great operation and also avoiding competitive policies by other neighbouring gas areas.

First and foremost the Persian Gulf, but also the coastal areas of the Horn of Africa and the possible exploration areas off the Yemeni coast.

The Conference was sponsored by Schlumberger and Deloitte and hosted by World Oil, Gas Processing& LNG, Hydrocarbon Processing, Petroleum Economist, Pipeline & Gas Journal and, finally, by Underground Construction.

As can be easily imagined, also the large European and North American companies of the sector were present.

It should be noted that, this year, the Forum has also been slightly brought forward, for obvious reasons of strong political and productive needs.

Two countries, namely Syria and the Lebanon, did not participate and over the last few years they have started to exploit their offshore deposits in an autonomous way.

Obviously Syria will primarily support the Russian and Iranian networks towards Central Asia and China, while the Lebanon will use its offshore deposits, which are largely independent from neighboring countries, so as to revive its economy.

Zohr, the great Egyptian gas field, was discovered in 2015. In the future, however, Egypt also wants to become the hub for all the natural gas passages in the region, both to the EU and to the rest of the world.

The Israeli Leviathan and Karish gas fields have already started production, despite some tensions between the private technical and financial managers and the State of Israel, which wants a different use of a part of extractions.

If Israel’s gas transits through the Balkan line to Vienna, or through the Greek-Albanian network and Italy, it will anyway be fundamental for the European economy and its strategic equilibria.

In all likelihood, Israel’s gas will be even more decisive in the first operational version of the Southern Corridor – the one we have called “Viennese” – than in the Greek-Italian one.

As already mentioned, the Lebanon will mainly play the game against the Israeli gas, for both political and eminently economic reasons.

So far the Lebanon has indicated two Exploration and Production Agreements (EPAs) to a consortium led by Total, with the participation of ENI and Novatek, while Norway and the Lebanon are still collaborating for technical and legal issues through the oil for development program, which will last until 2020.

The Lebanon, however, has also completed its LNG import network for domestic electricity production, a primary problem for the country.

There are also several contracts expiring or to be renewed in the small, but very important market of Lebanese gas.

Political factionalism and the many overt and covert alliances of the Lebanon do not allow to have a homogeneous market of its natural gas.

With specific reference to Cyprus, ENI has discovered Block 6, with the wide Calypso deposit inside, while Exxon-Mobil still “drills” Block 10.

It should be recalled that Turkey has recently blocked the SAIPEM 12000 drillship just a few days after Block 3 was discovered. Turkey, however, has not behaved in the same way with Exxon-Mobil Block 10, in which it does not currently show any direct interest.

The problem is well known: Turkey believes that every exploration and processing-selling activity of all Cypriot gas should benefit both island’s communities and hence not only the Greek one.

The Cypriot government is dealing with Total for Block 11 and with ENI and Total for Block 6, but its real big problem is Aphrodite, the gas field that should be connected to Egypt with a pipeline enabling Egypt to liquefy and transport gas to end markets.

Meanwhile Israel has already started production in 70% of its Leviathan fields, while the Karish and Tamimgas fields have been fully financed and are now operational.

Egypt’s Parliament has also voted for the creation of a new national natural gas Authority and already receives the LNG extracted by ENI in Zahr.

Hence currently the interests of the various gas producing countries tend to coincide and the Conference about which we are talking is very similar to the creation of what in the past – when economy still existed – was called “cartel”.

A cartel that depends, however, on the future distribution networks in Europe, as well as on the possible choice of some players to play the very “American-style” game of shale gas, and on the moves of the Russian Federation, which is entering this market in many regions. A cartel that finally also depends on the reactions of the Iran-Qatar axis and, hence, of the Saudi system that organizes the Emirates’ natural gas.

A very interesting fact was the request made by all participants to create an international gas organization in the region.

A new OPEC of natural gas?

Too early to say, but the idea is still in the minds of many Forum participants.

According to many Chinese analysts, this is highly probable.

It is worth recalling that currently the Forum countries already account for 87% of all the East Mediterranean’s natural gas.

Furthermore, the logic of opening to private investment and the “mutual benefit” criterion make this new gas OPEC a powerful attraction for all the new producing countries, which will not fail to join this network in the future.

Apart from geopolitical assessments and considerations which, however, are not currently clear yet.

Neither Israel nor Palestine can export their gas without passing through Egypt. Hence, in the coming years, the reasons for achieving a lasting peace will be much stronger than usual.

Unless, as someone predicts, we are faced with a very technological and utterly ubiquitous terrorism 2.0, which could take the form of the old Palestinian or “global” jihad or, possibly, of a mass anarchic-populist rebellion, but especially in the West.

Not to mention the new relationship between Palestine and Arab or Islamic countries, which would be changed radically by the new financial autonomy of the Palestinian world.

What are the challenges that the Forum countries must face to become stable producers in such an important and geopolitically sensitive market?

A market that tends to saturation, above all because of the structural economic crisis of Western markets.

Firstly, all deposits are in deep water and offshore, which makes extraction much more expensive than usual.

We are not talking about the cost of the North American shale gas, but we are not far off.

In the minds of many Middle East decision-makers, this linkage to the US and Canadian cost cycle can be very dangerous.

This could also force some competitors, outside the East Mediterranean region, to play the geopolitical and military card of the stable price increase, so as to temporarily taking the Eastern marine deposits off the market.

The geopolitical effects are hard to imagine.

Furthermore the infrastructure to put these huge resources on the market is extremely expensive and still very scarcely developed and will probably carry a very high and currently unpredictable geopolitical risk.

In fact, the standard geopolitical risks are well-known: the war in Syria; terrorism, which would certainly find a new area of action; the ambiguity of a vacuous and aimless Europe, which does not yet know what energy it wants to use in the future, undecided between the rhapsodic purchases of US shale gas and the strong tensions between France and Germany on the Nord Stream 2 gas pipeline, with the related recent agreement on the European Directive for gas pipelines (which regards Ukraine).

The Aachen agreement, although certainly being the basis of future links between France and Germany, clashes with the short and medium-term interests of two EU countries that have different energy networks, based on different geopolitics.

Moreover France and Germany are anyway thwarting the EU common energy policy, with the very recent stop of the South Transit East Pyrenees (STEP) between France and Spain.

It is well-known that Spain is currently the country with the highest re-gasification potential in Europe and France plans to fully exploit the already existing networks on its own.

The more energy prices are competitive at the EU edges, the fewer incentives exist for a common energy policy.

Moreover, on the basis of practical calculations, it can be inferred – with some degree of accuracy – that the political risk, combined with structurally high and not yet competitive extraction costs, has left 36% of East Mediterranean’s gas potential still unexplored and untapped.

However, the structure of the East Mediterranean Gas Forum, which is already based in Cairo, will be open to everybody including European countries, which could thus escape the grip of a “German-style” energy policy – the last and definitive phase of Southern Europe’s exclusion from the EU centres of power.

For the time being Turkey will not be part of the EMGF.

And it is by no mere coincidence that also the Lebanon will not be a member.

The reason is simple. There are very old tensions between Turkey and Cyprus but, as early as 2003, Turkey has denounced the agreements on maritime borders signed by Cyprus, considering that, according to Turkey, Cyprus – as EU Member State – cannot represent the two local communities, namely the Greek and the Turkish ones, and hence has no full international legal capacity.

Secondly, Turkey believes that Cyprus’ autonomy in defining its Special Economic Zones should be reduced significantly.

Moreover Turkey still thinks that also the current Cypriot Economic Zones are often in areas which are de facto in Turkish waters.

Hence, as early as 2008, Turkey has been rejecting all oil exploration activities in Cyprus and its disputed waters.

Furthermore Turkey intends to promote only its own exploration activities, always in the maritime area attributed to Cyprus.

Turkey’s relations with Greece are certainly not performing better. For years Erdogan has been claiming many Greek islands in the Aegean Sea. Not to mention the air crash, caused by an attack of Turkish fighters, which cost the life of a Greek pilot in April 2018.

As early as his visit to Greece in 2017, Erdogan has been constantly calling for the reform of the 1923 Treaty of Lausanne.

This refers to Turkey’s taking possession of the border areas with Greece that – according to the long-standing Turkish polemic in this regard -were “taken away” by Westerners to be given to Greece.

Erdogan strongly argues against Greece’s right of oil and gas extraction in certain sea areas, again on the border between the two countries, albeit outside the Cypriot region, that he believes are part of a new finally legitimate border between Turkey and the Greek islands.

Turkey does not even agree on the current relations between Greece and Libya, given that Turkey repeatedly argues with Greece for its direct oil operations on the Libyan continental shelf, which it believes it can claim for a greater share.

However, there is also a further dispute between Turkey and Egypt.

Erdogan, in fact, has never fully accepted the coup of the Egyptian military services that in 2013 – in eleven days only -overthrew Mohammed Morsi and his Muslim Brotherhood’s government in Cairo.

Moreover, at the time, Erdogan -who has still many links with the Ikhwan – even asked the UN Security Council to impose specific sanctions on Egypt and its internal operations against a government that certainly toppled Morsi’s democratically elected government, which anyway resulted from a great but obscure media, political and strategic operation, namely the Arab springs.

It is worth recalling that a deputy-director of CIA, Michael Morell, wrote in one of his memoirs, that the “Arab springs” were orchestrated and engineered by the Agency to foster popular uprisings “against Al Qaeda”.

The results of this crazy reasoning is before us to be seen. Erdogan, however, does not give up and often demands the release of all political prisoners held in Egyptian jails.

Yet the tension of this true mad card of the East Mediterranean region, namely Turkey, mounts even with Israel, which was once its best ally throughout the Middle East, when Turkey still was the heir of the old “secular” Republic of Atatűrk, with the young Turks who trained to seize power in the many Lodges of the Grand Orient of Italy scattered throughout the Ottoman Empire.

We can also recall the tension between Israel and Turkey during the Operation “Cast Lead” of 2008-2009 or the issue of the Marmara ships in 2010.

The situation between the two countries has never returned to normalcy, despite Israel’s apologies to Turkey, quickly organized by the United States in 2013 and the subsequent normalization of 2016, partly justified by the new energy scenario emerging in the East Mediterranean region.

Then there was the expulsion of the Israeli Ambassador from Ankara in 2018and Erdogan accusing Israel of “genocide”. Finally the choice, which Turkey considers strongly prompted and desired by Israel, to move the US Embassy to Jerusalem.

Hence, on the one hand, the East Mediterranean’s oil and gas extraction requires a very high degree of collaboration between all the parties involved, while, on the other, it is the exactly the new Eastern wealth to create new rifts and fuel old tensions.

In fact the perception of an “aggressive” Turkish behavior is currently extremely widespread among all the participants in the Cairo Forum (but obviously not in Italy).

This tension, however, also affects the Lebanon, where many leaders still believe that the Forum is primarily targeted against their country.

In short, especially with this new and recent government led by Saad Hariri, the Lebanon believes it can manage, on its own, to effectively extract and monetize its maritime gas resources.

In fact, some Ministers of this Hariri-Hezbollah’s government maintain that the Lebanon could be connected to Europe through Northern Turkey (and this is another temptation for Turkey) via the Arab Gas Pipeline, although obviously, the expansion of this network with the pipeline in Syria is to be completed yet.

However, there would also be the line through Egypt, again using the Arab Gas Pipeline.

In short, the Lebanon thinks it has been thrown out, but it will soon realize that there is the possibility – also and especially with a Forum in which there is also Israel – to use at best and, above all, soon the distribution systems put in place by the Forum.

*About the author: Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France.”

Source: This article was published by Modern Diplomacy