Gas for Peace

A virtual gas hub could create real cooperation in the Eastern Mediterranean.

The drill ship Ensco DS-7 in Limassol, Cyprus, on Feb. 28.
The drill ship Ensco DS-7 in Limassol, Cyprus, on Feb. 28. Athanasios Gioumpasis/Getty Images

The strategic equilibrium that has kept the Eastern Mediterranean relatively calm for the past few years may be about to tip. On May 3, Turkey announced that it would commence natural gas drilling operations off the southern coast of Cyprus, in the exclusive economic zone claimed by the internationally recognized government in Greek-dominated south Cyprus. Ankara argues that it is defending the rights of Turkish Cypriots in the northern half of the ethnically divided island who are the legal co-owners of the island’s natural gas but are precluded from participating in its development. On May 12, Turkey doubled down and announced that it would send a second drill ship into Cypriot waters.

Turkey’s brinkmanship comes in response to attempts by Egypt, Greece, Cyprus, and Israel to create a regional energy architecture that will exclude Turkey from the marketing of Eastern Mediterranean natural gas. For example, in 2017 and early 2018, Egypt and Cyprus were in talks about a deal to sell gas from the Eastern Mediterranean to Europe using Egypt’s liquified natural gas plants—which would ensure that the region’s offshore gas bypasses Turkey’s pipelines en route to European Union markets. In February 2018, the Italian energy giant Eni, which in 2015 had discovered Egypt’s massive Zohr natural gas field adjacent to Cypriot territorial waters, announced a significant gas find in Cyprus’s nearby Calypso field.

Feeling boxed in, the Turkish navy soon blocked Eni’s drill ship before it could reach its intended drill site in Cypriot waters, forcing the company to withdraw the vessel. But the action pushed Nicosia even closer to Cairo, with Cyprus agreeing to supply Cypriot gas to Egypt’s liquefied natural gas plants for export. After Cyprus inked that agreement, Israel, which had previously been considering an Israel-Turkey undersea gas pipeline, followed suit and contracted to sell its gas to Egypt as well.

The latest escalation in this sparring is worrying. Further provocation from any side could result in armed conflict in the region, which is caught in a tangled web of territorial disputes and regional rivalries.

But disaster can be averted if all sides are given a way to prosper from the region’s natural gas bounty. In particular, the sides can come together if natural gas and the electricity generated from it are treated as regional commodities traded through a virtual hub managed jointly out of Cyprus’s neutral zone.

Unlike a physical hub, located where several pipelines meet and where the parties are required to conduct point-to-point transactions in which the same quantity of gas that was put into the system at one point has to be taken out at that predetermined physical location, a virtual hub allows buyers and sellers to book different quantities for entry and exit into the system without a predetermined destination—the virtual hub represents all entry and exit points in the market area. This kind of hub (akin to the highly successful United Kingdom-based National Balancing Point), which is more flexible and makes trading easier, is exactly what is needed develop a regional hub where countries are hesitant to physically link their infrastructures and their export markets.

The benefits of treating natural gas as a joint regional commodity are manifold. By pooling supplies in the region, each nation will receive a better price for its gas. The virtual trading hub would also impose transparency on the gas markets in the region by being its own independent, neutral entity under the jurisdiction of Swiss law, British law, or the International Commercial Court in Stockholm, as is the practice in energy trading contracts. The openness would help reduce corruption and facilitate a revenue-sharing agreement for natural gas, which is an essential component for every plan for the reunification of Cyprus.

Creating the virtual trading exchange in Cyprus’s neutral zone could add momentum to the reunification process in other ways as well. The offices and computer servers located there could be jointly managed by northern and southern Cypriots as a confidence building mechanism. Once the exchange is up and running, both sides will become stakeholders in the peaceful development of Cyprus’s natural gas exploration and production.

The benefits would expand well beyond Cyprus. The trading of contracts could be conducted, at least in part, through Turkey’s Energy Exchange Istanbul, which is managed by EPIAS. A leading institution of its kind in the Eastern Mediterranean, EPIAS is at the forefront of liberalizing Turkey’s energy market and has established an excellent track record in operating an electricity trading market, ensuring transparent and reliable market conditions and equal access for all market participants.

By linking the platform to Turkey’s Energy Exchange Istanbul as well as to exchanges in Alexandria, Athens, Cairo, Tel Aviv, and elsewhere in the region, the virtual hub will maximize the liquidity of Eastern Mediterranean energy market and create incentives for cross-border cooperation. The virtual exchange is not intended to replace any existing or planned project, but rather to augment the effectiveness of such projects by serving as the region’s best platform for price discovery.

Additionally, treating the region’s natural gas as a joint commodity would make the most efficient use of the existing facilities across the Eastern Mediterranean. For example, although Egypt has two major liquefaction plants, it lacks adequate storage facilities. Turkey has plenty. Joining those infrastructures makes far more sense than building duplicate facilities in several countries.

There are further geopolitical benefits of the virtual exchange: The virtual trading hub could help develop Gaza’s natural gas production by providing Gaza with an outlet for exports that would not depend on satisfying Egyptian and Israeli interests. And thanks to the transparency imposed by a virtual trading hub, the government in Gaza is more likely to put revenues from gas exports toward the improvement of the lives of Gaza’s inhabitants.

Similarly, regional marketing and the virtual trading hub could help Israel and Lebanon overcome their dispute over their maritime borders by providing a mechanism for joint revenue-sharing in fields in the disputed region. And, eventually, the virtual hub could attract the needed private investment for the exploration and development of Syria’s as yet untapped offshore natural gas. Those sales could then help fund the country’s post-civil war reconstruction.

By promoting electricity trading between the EU and the Middle East, the virtual exchange also constitutes and important bridge to the eventual widespread marketing of electricity to Europe generated in the Middle East and North Africa from solar power.

Finally, the virtual exchange would create business opportunities in the fields of liquefied natural gas, technological services, and financial services for local companies and for foreign firms from Russia and the EU that already heavily involved in Eastern Mediterranean energy.

The most commercially efficient approach to developing and marketing the Eastern Mediterranean’s natural gas is also the approach that could most promote regional cooperation: A virtual exchange can create actual peace in the Eastern Mediterranean.

Michaël Tanchum is a professor at the University of Navarra in Spain. Twitter: @michaeltanchum

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