Gazprom Goes to the Middle East

The Russian gas giant is trying to get into the Eastern Mediterranean's promising energy market.

There is no question that Russia is making a play for natural gas in the Levant basin. Between the overt ambitions of President Vladimir Putin’s government, state-owned energy giant Gazprom, and private companies, a concerted effort to establish a strategic commercial edge in the developing Israeli, Lebanese and Cypriot markets is underway. So far, the approach has produced relatively few gains for Russia, but local governments and the companies operating in them must vigilantly monitor and, if needed, seek to curb Moscow’s ambitions.

The Levant basin, which according to the U.S. Geological Survey contains an estimated 1.7 billion barrels of recoverable oil and 122 trillion cubic feet of recoverable gas, is an attractive financial and geopolitical prospect for Russia. Some experts estimate Lebanon’s natural gas reserves to be worth between $300 billion and $700 billion, while Israel’s are valued at $280 billion. Cypriot energy minister Yiorgos Lakkotrypis claims his country’s offshore Aphrodite field alone has a gross value of “approximately $50 billion,” and companies are actively exploring for more gas offshore the island.

Furthermore, while Europe is Gazprom’s biggest export customer, it is becoming less lucrative. European demand is stagnating, and countries are diversifying their natural gas supplies to reduce dependence on the company notorious for its stranglehold on foreign markets. The European Union, in fact, is set to charge Gazprom with “abusing its dominant position in central and eastern Europe” following an aggressive antitrust investigation, which could result in a fine of up to $15 billion. Europe’s increasing inhospitality, in addition to the potential for American liquefied natural gas (LNG) exports and China’s campaign to open its growing domestic market to a wide range of international producers, is forcing Gazprom to find new sources of revenue.

Geopolitically, Russia wants to be involved in eastern Mediterranean gas to maintain its interests and protect assets. Lebanese gas could help improve access to markets, because it would likely be processed at an LNG facility in Cyprus and exported from there. Israeli gas has the same potential, and the Supreme Court’s decision to uphold the cabinet’s allocation of 40 percent of the country’s reserves for export means that Russia needs to act now if it wants a piece of the pie.

Russia’s interest in Cypriot gas, on the other hand, is more complicated. First, Cyprus has been a tax haven for Russia’s oligarchs for several years, in addition to serving as a backdoor to Europe, since “anyone spending a minimum of €300,000 on property is granted permanent residency.” This cash flow is so integral to the Cypriot economy that Russian money “accounted for up to €20 billion of the €35 billion of foreign money in Cypriot banks” at the end of the first trimester of 2013.

Second, Russia uses Cyprus to check Turkey’s rising power, particularly its desire to become an energy hub for transporting non-Russian gas to Europe. Cyprus and Russia formed close defense ties in the 1990s, and Moscow rejects Ankara’s claim to North Cyprus in the conflict over the island. Ankara and Nicosia have yet to delineate a maritime boundary, so Turkish attempts to explore for gas in offshore areas it claims for North Cyprus could result in fiscal losses for Greek Cyprus, which is trying to use its gas reserves to keep people from taking their foreign money elsewhere. Because “Moscow cannot allow Cyprus to go under without incurring serious domestic losses,” it has gone as far raising the stakes. In 2011, when Turkey threatened to attack Cyprus if it allowed Noble Energy to drill in the disputed Block 12 as per a concession granted by the government in Nicosia, Russia responded by dispatching “an aircraft carrier with fighter planes, and at least one submarine” to the island.