Nick Butler: Russia Advances Into The Mediterranean

  • Date: 30/12/13
  • Nick Butler, Financial Times

Vladimir Putin has finished the year in style, consolidating Russian control in Ukraine and winning easy brownie points for the release of controversial prisoners including the oil oligarch Mikhail Khodorkovsky and two female members of the punk band Pussy Riot. The Russian president has also, in a move easily missed in the middle of Christmas, extended Russia’s position in one of the world’s most interesting new oil and gas regions – the Levant basin in the eastern Mediterranean.

On Christmas Day the Russian company Soyuzneftegaz signed a $90m deal which gives it exclusive exploration rights over 850 square miles of Syrian territorial waters for 25 years. The deal not only confirms Syria’s role as the southern outpost of the new Russian empire. It also puts Russia at the heart of the Levant basin – the partially explored gas (and perhaps oil) province that runs up the coast from Egypt and the Sinai peninsula in the south, via offshore Gaza, Israel and Lebanon to Cyprus, Syria and Turkey in the north.

The first rough estimates published by the US Geological Survey some years ago suggest the basin as a whole might hold some 120tn cubic feet of gas. Many geologists think that is an underestimate and hold great hopes for the areas offshore from mainland Lebanon and Syria. In truth it is far too early to tell. Little drilling has so far taken place other than in Israeli waters.

Syria of course needs the investment and few have done more than Mr Putin to keep Bashar al-Assad in power. But the deal is about much more than Syria itself. The investment gives Russia the potential to lead the development of the whole province and to manage the use of the gas and the pace and destination of any exports.

So far across the basin one giant field has been found – Leviathan which holds according to various published estimates between 15 and 19 tcf of gas. It is five years since Leviathan was discovered but it remains undeveloped and the reserve numbers and development costs remain vague. A few smaller fields have been found offshore Israel and one off Cyprus. One undeveloped field sits offshore Gaza.

The exploration and development of each part of the basin remains constrained by the politics and the contested geography of the region. The Lebanese are at odds with the Israelis and contest even the boundaries of the Leviathan field. The Turks will not tolerate any activity which suggests that Cyprus is an independent sovereign state. Syria is in a state of civil war.

No wonder that all the major western companies have studiously avoided the area. Even the Australian company Woodside – by far the largest and most experienced of those present – is now wondering whether its option to buy up to 30 per cent of Leviathan is worth anything in the absence of a clear path to development.

There has long been talk of a major liquefied natural gas facility to take gas from across the basin to the world market but that looks fanciful in the absence of a proper estimate of the resource base. No one is likely to invest the $8bn-$10bn required to build such a facility before the cost numbers are clear. The European gas market is saturated and given the lengthy journey times east Mediterranean gas will have to be cheap if it is going to penetrate the markets of east Asia. Piping the gas to Turkey or Egypt would be cheaper but to take such an option is to make a bet on the uncertain politics of both countries.

Russia’s involvement could change the game. In the absence of a viable alternative all the parties involved might settle for allowing Russian companies to manage the development process across the basin.

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