A viable alternative to the EastMed Gas Pipeline?

The several discoveries in the Eastern Mediterranean give the EU the alternative that it is looking for to reduce its gas reliance on Russia. Huge discoveries have been made offshore Egypt, Israel and Cyprus. Collectively, they may justify a pipeline from the East Med to Italy via Greece and on to the rest of Europe. This pipeline was called the “EastMed Pipeline”. An intergovernmental agreement was signed on January 2, 2020, in Athens between Greece, Cyprus and Israel, which regulates various issues among the countries concerned, such as maritime jurisdictions, environmental and security issues. It also established a joint working group to monitor and follow-up the project planning and development. 

The project, financially and politically supported by the European Commission, proposes to transport 8-16 billion cubic meters annually of natural gas through a pipeline – almost 2,000 kilometers long and with depths in some locations exceeding 2,500 meters – across the Mediterranean. With a cost exceeding €6 billion, the pipeline would transport in the first stage Israeli and Cypriot gas and offers the European Union a good alternative to Russian gas.

However, the financial viability of such a project is a main concern, as it could prevent private companies from supporting it alongside the EU. The high construction cost of the pipeline, which will be reflected in the price of the delivered gas, could be a deal breaker for the project. The only chance to make it feasible would be the acceptance of the importing countries to pay a security premium on their current gas prices from Russia. But this would be tricky for Europe as it is committed to upholding free trade principles, which includes fostering competition through open markets. It is therefore doubtful that Europe could accept paying a premium for its gas.

At the end of the day, it is companies, not governments, who are going to build and finance this pipeline. Therefore, it must be lucrative for it to materialize.  Reaching a consensus among EU countries on a non-viable project will be very difficult and probably impossible.

Moreover, the pipeline has to cross ultra-deep water depths between Cyprus and Crete which makes it technically challenging and increases its construction and maintenance risk.

Based on the above difficulties, other export alternatives were looked for and were finally found by Egypt.

On November 10, 2020, the Egyptian President Abdel Fattah Al Sisi paid an official visit to Athens on the head of a ministerial delegation.

During the visit, Mr. Al Sisi presented to the Greek Prime Minister Mr. Kyriakos Mitsotakis the interesting idea of modifying the route of the EastMed Pipeline, wherein it starts from the giant Leviathan field in Israel and then, instead of going to Cyprus, heads to Egypt. From there the pipeline will continue onshore – and no longer offshore in the high depths of the Eastern Mediterranean – to the Egypt-Libyan border and then ascend to Crete.

This alternative route although not very favorable to the Cypriot side – as it will seriously change many of the existing balances in the region – both politically and economically, solves the continuous complications that Turkey is causing to jeopardize the EastMed Pipeline since the talks about materializing such project started. In the end effect, Ankara is interested that the pipeline passes in its territories to reach Europe, hence, charging transit fees and using partly the East Med gas. At the same time, the Turkish position in the region will be strengthen strategically and politically.

On the other hand, Cyprus can still benefit from the alternative route to supply its gas to Europe as already a pipeline from Aphrodite field to Egypt is planned and approved by both parliaments, Egyptian and Cypriot. 

Furthermore, with the US Oil Major Chevron acquiring Noble Energy making the company the major gas producer in Israel and ready to finance an offshore gas pipeline to Egypt, financing of the project begins to flow and oil and gas companies, which generally make such projects succeed, will be encouraged to participate in the new project.

As this alternative looks technically feasible and easier to be materialized, work on its financial viability remains to be done. As Egypt has big gas discoveries so far, among them Zohr gas field which is the biggest in the Mediterranean Sea with 30 TCF of reserves, this adds volume of gas to be pumped into the pipeline making it more viable than originally planned. In addition, that the Italian oil major ENI is the biggest player among the companies producing in Egypt, enhances further Italy’s interest in the project. ENI could sell its produced Egyptian gas in its core market.

Through all this, and with Egypt playing a big role in establishing and hosting the East Med Gas Forum (EMGF), a regional organization with seven founding members (Egypt, Greece, Israel, Jordan, Cyprus, Italy and the Palestinian Authority), and three parties participating as observers (United States, European Union and United Arab Emirates), while other countries like France applied to become member, the new pipeline proposal is politically well-supported.

The organization’s purpose is to serve as a market platform for natural gas producers, consumers, and transit countries in the region, to develop existing resources and the infrastructure for potential exploitation and commercialization, in addition to regulating gas policies that protect the rights of member states and strengthen cooperation among them.  

Author: Abboud Zahr, Oil & Gas Specialist