With European finance ministers meeting in mid-September, Spanish bank recapitalisation taking place, the Troika's report on Greece forthcoming in October and a possible onset of a global recession and economic slowdown because of the Eurozone's debt crisis — one would think there’s little to be positive about.
Even the future of Saudi Arabia, the world largest oil exporter is in question. In a report this month, Citigroup said the kingdom could become an oil importer by 2030 if the country's oil consumption grows in line with peak power demand.
For other countries the story is taking a different shape. If you’re Cyprus, Israel or Lebanon things look pretty good. As the rest of the world focused on the global credit crisis and its reverberations over the past four years, Israel and Cyprus, who import most of their energy needs, appear to have struck gold.
In 2009, Israel discovered what is known as the Tamar field in the Mediterranean Sea, which has 10 trillion cubic feet (tcf) of natural gas. Then, a year later, it discovered the Leviathan gas field, the largest discovery of its kind for a decade, but nowhere near the world’s biggest gas field, which is shared by Qatar and Iran. Then, last year, two new offshore natural gas fields, Sarah and Mira, were also discovered, by an Israeli company.
Houston-based Noble Energy Inc, which is helping Israel with its oil and gas exploration, also made a major gas discovery last year offshore Cyprus known as Block 12, estimated to have 7 tcf of gas.
In its first study in 2010 of the Levant Basin, the offshore Mediterranean region which stretches from the north of Egypt to the north of Lebanon and south of Cyprus, the US Geological Survey estimates the area has about 122 tcf of undiscovered, technically recoverable natural gas and holds 1.7bn barrels of undiscovered technically recoverable oil.
While Israel and Cyprus move forward, Lebanon lags behind. As has traditionally been the case with Lebanon, progress on any issue hinges on political consensus among its various political factions. Political bickering along sectarian and regional lines has been the norm since the end of a 15-year civil war in 1990.
Though the country’s parliament passed legislation that was supposed to pave the way for the exploration licences, Lebanon is still at the stage of carrying out seismic surveys of its territorial waters to collect data. If the government and politicians get their act together, tenders could start at the end of this year or early next year, although any extraction or production is unlikely to take place before five to eight years, according to analysts and industry experts.
“Lack of democracy and transparency, corruption, mediocre leadership, combine to structurally transform an apparent economic blessing into a tool of cronyism and authoritarianism,” says Chibli Mallat, a Lebanese lawyer and currently a visiting professor at Yale Law School.
Article continued on next page
Still, despite the Achilles heel of protracted Lebanese politics, the offshore potential has increased in the eyes of multinationals following the discoveries near Cyprus and upcoming commercial production in Israel.
“This is very significant, but there are many ifs,” says Nassib Ghobril, chief economist of Byblos Bank. “If the political obstacles are overcome, and if they start exploration and find enough quantities, and if they manage to extract them and sell them at commercial rates this is a major game changer for Lebanon.”
Assuming that Lebanon's discoveries are sizeable, the money would help the country to retire gradually part of its public debt. It would also enable the country to slowly stop importing all of its energy needs, as it does now, and help reduce its import bill. That would then lower its trade deficit and in turn improve the balance of payments.
Lebanon's public debt, among the highest in the world, reached $55.5bn at the end of June this year, according to the Association of Banks in Lebanon. The country amassed the debt in the reconstruction phase following the end of civil war in 1990 and a month-long conflict with Israel in 2006.
The debt-to-GDP ratio has declined to 136.2 percent in 2011 from about 180 percent in 2006 and Prime Minister Najib Mikati, who says he wants reduce the ratio to 100 percent of GDP over the coming five years, has tabled the idea of establishing a sovereign wealth fund to invest any potential revenue from oil and gas production in the future.
The prospect of such a revenue stream could also enable Lebanon to shift domestic usage towards natural gas from diesel consumption, which would help reduce the import bill and also lower the burden of subsidising the state electricity company by as much as $1.5bn a year. Lebanon's oil import bill reached $2.9bn, one third of the country's total import bill $9.2bn in the first five months of the year.
“It’s a major game changer if things become concrete and there are enough quantities,” Ghobril says.
Meanwhile Israel, which has blocked development of two gas fields off the Gaza Strip’s territorial waters with a an estimated 1.4 tcf, is rapidly moving towards commercialising resources, with gas from the offshore Tamar field expected by 2013, according to Business Monitor International, which estimates the Jewish state could become a net exporter of natural gas by 2017.
Just as the discoveries bring promising news for these countries, the prospect of new-found wealth is contentious. For Lebanon and Israel, two countries that have been at conflict with one another on and off over the past 40 years, the absence of delineated maritime borders between the two states raises the prospect of a potential conflict in the future. Lebanon contests claims by Israel, which, it says, fall within its waters, and Hezbollah, the Shi’a movement that went to war with the Jewish state in 2006, has accused Israel of stealing Lebanese resources.
“The potential for a conflict over Eastern Mediterranean is a real possibility,” says Theodore Karasik, director of research at the Institute for Near East and Gulf Military Analysis in Dubai. “The topographical area is rich in energy and contested land and sea rights.”
Article continued on next page
Though the disputed maritime borders with Israel complicate matters and constitute an obstacle to the long-term development of the industry, early licensing rounds by Lebanon are unlikely to include the blocs in the disputed area, says Ghobril.
There is no doubt that these discoveries have the potential to contribute to the economic development of all three countries. One only needs to look at the impact gas discoveries have had on Qatar, which has the world’s third largest natural gas reserves after Iran and Russia.
The Qatari North Field contains about 910 tcf, which accounts for 14 percent of worldwide natural gas reserves. Today, the small Gulf state, home to second-largest airline in the Gulf and one of the fastest-growing globally, has become the world’s largest exporter of liquefied natural gas. Its economy grew 18.8 percent last year.
To put things into perspective, both of Israel’s findings, along with smaller-sized ones, represent as much as $240bn for the Jewish state’s economy, according to Bloomberg estimates. Others put the value at more conservative estimates of about $140bn.
“It’s pretty significant for Israel because it has such a small domestic market; it’s a game changer in terms of its energy supply,” says Peter Kiernan, energy analyst at the Economist Intelligence Unit.
Prior to the Arab Spring that toppled president Hosni Mubarak, Israel relied on Egypt to supply it with 40 percent of its gas used to generate electricity through a pipeline. That pipeline came under multiple attacks from militants causing disruptions throughout the last year and half and the operation came to a halt as the power structure in Egypt changed. With the developments of these fields, Israel would no longer need to rely on imported Egyptian gas, Kiernan says.
In fact according to Noble, the Jewish state could potentially become a natural gas exporter in the future.
For Cyprus the initial findings may represent a panacea in the long term to an ailing economy at the moment that has been exposed to the Greek debt crisis and is set to witness a 2 percent contraction this year compared with 0.5 percent growth last year, says Fiona Mullen, director at Sapienta Economics Ltd, an economic research consultancy in Cyprus.
Cypriot banks lost about $4 billion buying Greek government notes, and have a 22 billion euro exposure from lending to the private sector in Greece. That's a problem which becomes a lot worse if Greece leaves the euro. If the country doesn't leave the euro and hobbles along for many years, it will essentially affect Cypriot bank profits in the long run, as well as their capital.
Article continued on next page
Yet based on today's gas prices in Europe, after domestic consumption, the discoveries off the island’s coast should be worth about $75bn, says Mullen. That figure excludes spending on LNG plants, pipelines, and the cost of operational wells.
“Economically, it’s good for Cyprus because Israel made such big finds. Then there was the find in the Cyprus block, which has probably increased interest for the second licensing round which was launched in February of this year,” Mullen says.
Cyprus saw 15 companies bid in May, a number that would have been larger had Turkey not warned companies from doing business with the Greek part of the island.
The discoveries and the potential they represent for the island's economic future have changed the dynamics of Cyprus' relations with the region.
“The Greek republic of Cyprus has always tried to keep an equal distance between the Arabs and the Israelis, but now they clearly have an incentive to cooperate with the Israelis,” Mullen says. “Relations have never been closer between Cyprus and Israel than they are now.”
The fallout between Israel and Turkey over the month-long war by the Jewish state in the Gaza Strip in 2008 and the killing in 2010 of nine Turkish activists on an aid flotilla headed to the Palestinian territory in has fostered closer relations between Israel and the Greek republic, which has been divided since a Turkish invasion of the island in 1974.
Cyprus and Israel talk of possibly constructing liquefied natural gas (LNG) terminals or a pipeline to transmit gas, while Turkey argues nothing can take place until there is a political solution to the division of the island. Given the status quo, only the southern Greek part of the country stands to benefit from any gas revenues while the northern Turkish part will lose out.
In May this year, Turkey scrambled two F-16 fighter jets to chase away an Israeli plane that violated the airspace of Turkish-held northern Cyprus.
Even if Cyprus goes down the route of building an LNG plant, that would cost as much as 8 bn euros to construct, according to Mullen, while subsea testing costs about $350m, the Cyprus Mail reported last month.
Costs increase as drilling becomes deeper, which also presents logistical challenges that come with the water and geological depth, like rising pressure, and temperature which might make oil and gas production more difficult.
Reaping the benefits, AND monetising the production, would probably be no sooner than five to eight years. That’s about the same amount of time it would take Lebanon to also realise any revenue if its discoveries have commercial viability.
“The Leviathan is so big that it changes the energy balance,” says Samuel Ciszuk, a global oil supply consultant at KBC Advanced Technologies. “When you talk about the size, and it's not in a very inaccessible part of the world in geological terms, it makes it very unlikely that anybody would find these discoveries uncommercial.”
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.