Monday, January 16, 2017

A note on Turkey-Israel Gas Pipeline Project

The first phase of the Leviathan field development involves an initial investment of $4 billion to produce 12 bcm of gas per year for Israel’s domestic customers and nearby markets in Jordan and Palestine. Currently the Leviathan partners are working towards raising the necessary funds for development of the field. A second phase to expand production to 21 bcm at a cost of $2.5 billion will depend on potential export deals with other market. Talks are already underway with potential buyers in those markets. This means that the production from the second phase is enough to fill a pipeline to Europe.

Two options are considered to export gas to Europe by pipeline:

One is via an undersea pipeline from the Leviathan field to Turkey's southern Mediterranean coast. An initial cost estimate of the pipeline is $2 billion by the Turkish companies dealing with the project. Once the pipeline reaches Turkey gas can either be sold to Turkish market or be sent to Europe (either by connecting to the BOTAS pipelines or to TANAP).

The other project is building a pipeline (the East Mediterranean Gas Pipeline) that would transport gas from the Leviathan and Aphrodite fields to Cyprus itself and Greece. Then, it would link up to Italy. A study conducted by IGI-Poseidon for the European Commission estimated the cost at $5.7 billion. The project is already included in the list of European projects of common interests. Senior government officials of Israel, Cyprus and Greece will hold talks in the near future with the EC to promote this project. Additional gas discoveries in Israeli and Cypriot waters will make this project attractive.

Both projects have advantages and disadvantages, as well as numerous political, technical, financial, commercial challenges. This is why it would be incorrect to say one pipeline is more feasible than the other just by looking at the construction cost. Having said that one should not forget that in pipeline business politics often comes before economics.

Consider the Israel-Turkey pipeline. It has to cross the unilaterally declared Exclusive Economic Zone of GKRY. The pipeline project has to fulfil the Submarine Pipelines Regulations of GKRY. This means a license to be granted for laying, construction, operation of the pipeline from the relevant GKRY authority; conformity with the Geological Surveys Law of GKRY and the Convention for the Protection of the Mediterranean Sea against Pollution and Related Protocols; and an environmental approval. GKRY may reject the application or terminate the license for many reasons, including national security and/or public interest. It may impose terms and conditions into the license. This means that any political friction with Turkey may have impact on the destiny of the pipeline. This is why resolving the Cyprus problem has utmost importance. However, one should also not forget that although resolving the Cyprus problem is a necessary, it is not a sufficient condition for the future of the pipeline.

Seen especially from that angle, constructing the Israeli-Turkey pipeline would require long term commitments and guarantees. No private company or a consortium of private companies would be willing to assume all those risks alone. This is why the involvement of a state-owned company seems to be best bet for its possible realization.

Moreover, pipeline should be commercially viable in order to be realized. This means the gas it will carry has to find a market and be competitively priced. I have big doubts that Turkey or Europe will need additional gas, say 10 bcm, in the future, and that the terms of gas sales through those two pipelines, including the price, can be competitive in the Turkish or in European market. Besides, neither the East-Med pipeline project nor Israel-Turkey pipeline project can compete with Russian gas in the Turkish and European markets.


The reaction of Russia to both pipelines will likely depend on the future of the Nord Stream-2 and Turk Stream pipeline projects. If the second string of Turk Stream goes ahead, Russia may try to prevent their realization. However, if Russia somehow gets involved in Cypriot or Israeli gas sector things would look different.