Tuesday, November 22, 2016

A risk associated with investment in the Eastern Mediterranean Levant Basin

I spent a lot of time yesterday viewing this congressional hearing about the Eastern Mediterranean Levant Basin.  The discussion here is about the Leviathan and other fields in the Eastern Med, where Cyprus and Israelis interests converge rapidly.  There is a very forceful case for Israeli energy security from exploitation of the Leviathan deposit.

I am very happy to see Israel become energy independent, but there are a few things to consider

1) Exploitation of Leviathan will be expensive. I feel it will be difficult for Israel to raise money for the exploitation. Israel could finance this with support from our government (and others) but it will be difficult to attract investors without the promise of accessing larger market. The most proximate large market is Europe.

2) That is where I think things will get nasty. I don't Russia will approve of Israeli plans to become a natural gas supplier to Europe. The Turks for their part will want a cut on all things Cypriot and that is something the Cypriots will find unacceptable.

3) The actual field is spread across the economic zone of a several nations with a history of hostility towards Israel. If actual exploitation begins, it will likely be marred by violent attempts to physically control the space. [see here]

So quite frankly even from the USG perspective - this is a very high risk investment that will need risk management at a very high level.

Some work has been done towards mitigating the risks, specifically Gazprom has been given a role in the development of the field. I am a little surprised by this development, but perhaps Moscow Center feels that an unproven unextracted gas field is not a real threat to an established pipeline pumping gas every second into German production centers.

The Turkish aspirations are likely to be resolved similarly. Again the Turkish deep staters will probably think similarly to the Russians - an actual pipeline (BTC) is very different from an unproven unextracted gas field in the middle of the sea.

I am told that Prime Minister Netanyahu attempted to get this kind of support from President Obama but I gather things were not very good between them.  Perhaps the President Trump might be more responsive - from what I hear he is a great fan of PM Netanyahu and they share a common friend with very deep pockets, Sheldon Adelson.

I support any investment in regional security as long as the risks are clearly spelled out and explained to all stakeholders.

It is not clear to me how the Russophiles (a lot of who are openly anti-Semitic) will sit well with supporting an Israel friendly initiative that poses a threat to Russia's dominance over the natural gas markets in Europe.

This looks like a massive faultline here and though it appears things have been papered over for now, it isn't clear to me that this won't open up. That risk is quite serious (even if it is a low probability event), and given how much money has to put into this upfront - it cannot be ignored.

That said - if the US can help the Israelis secure their national energy sources, then there will be significant progress in regional stability.

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