Gulf States Key to EastMed Success

Recently, the four countries of Israel, Cyprus, Greece and Italy have signed agreements regarding the construction of a huge pipeline that will carry gas from the Eastern Mediterranean to Europe.

Although it is debatable if this project is economically viable on its own right, there other other aspects of this pipeline that can help put Israel into an important position in the Middle East.

With regards to Israel’s own potential as a significant supplier to Europe, the numbers are hard to add up. Simply put, Israel has an estimated total of 900 bcm of gas reserves, and with an export ratio of 40%, that equals only 360 bcm for export. Seeing as 100 bcm has already been signed for Egypt and Jordan, this leaves only 250 bcm for Europe. Cyprus’ entire reserves is much smaller at around 120bcm, whilst Europe’s demand is around 600 bcm, each year. As the EastMed is projected to carry around 10-20 bcm a year, the 250 bcm would be gone in just 10-15 years.

Considering that the pipeline will take around 7 years to be built (best case scenario), is it really worth it for something that will last less than twice its build time?  It’s also worth noting that by the time the EastMed is online, Europe will be awash with more gas from the Nord Stream 2 pipeline which is already under construction by Russia, and which is expected to lower gas prices significantly on the continent. This will make it harder for Israeli gas to be competitive and a real alternative in the market. On the other hand, the sale of that gas may still justify the cost of the pipeline with a handsome profit.

However, if Israel can shore up more significant supplies on its side of the Mediterranean, then the pipeline can turn into a sustainable, long term and prosperous venture for Israel. The reason for this is because Israel will have built for itself an underwater superhighway to Europe, opening up Europe’s booming natural gas industry to the doorstep of the Middle East.

For a long time, the Middle East has been locked out of Europe because it uses a pipeline system that doesnt reach to the Middle East, and Liquified Natural Gas (LNG) which can be shipped is more expensive and not as competitive in Europe. Plans have been drawn up in the past to connect the European continent to the resources rich countries in the Middle East, with the Nubucco Pipeline being the main one going from the Shah Deniz gas field in Azerbaijan theough Turkey to Europe, however they have all failed.

If Israel does manage to pull off their pipeline,  in theory it would be a compelling case for Gulf countries, rich in resources such as Saudi, UAE and Qatar to connect themselves to this pipeline in order to access the the valuable European market.

This can also explain the interest of the EU in this project, despite Israel not having so much gas as to properly diversify from their Russian supplies, as perhaps they see it as a new Nabucco, an opportunity to develop the south eastern gas corridor through other countries linking on to it eventually.

What comes out is that although the economic case of building the EastMed pipeline on the basis of Israel and Cyprus’s reserves alone is debatable, if amid the warming ties between Israel and the Gulf states an understanding can be achieved over the next years, then it could well turn the EastMed from being a pipe dream, into a real game changer for Europe as well as the Middle East. And the pipeline would need to be a lot larger than just 10-20 bcm per year.

About the Author
Ber Cowen is a Business Analyst with a leading multinational retailer in Melbourne Australia, and has a Master of Business (Supply Chain) from Monash University.