Matthew Bryza: The deterioration of relations with Russia became a catalyst for rapprochement between Turkey and Israel

The test for the Turkish-Israeli relations will be a period when the Turkish-Russian relations will have a less tense

Baku. 30 December. REPORT.AZ/ The warming relations between Israel and Turkey has yet to materialise into a comprehensive diplomatic normalisation agreement. That end may take some time more. Meanwhile businessmen, advisers, academics and others, are trying to figure out how natural gas diplomacy would evolve in the East Med and what effects it will have on regional geopolitics and natural gas supply to Turkey, the biggest customer in the region.

Report informs, to shed some extra light on the changing situation, Natural Gas Europe talked to Matthew Bryza, a former American diplomat and a former American ambassador to Azerbaijan who is currently a board member at Turcas Petrol, one of Turkey's biggest energy companies. He also serves as a senior fellow at the Atlantic Council in Washington, DC.

Mr. Bryza has extensive Eastern European and Eurasian experience from more than 25 years' activity in these areas as an American diplomat. He served as an American diplomat in Poland and in Russia, later joined the United States National Security Council as director for Europe and Eurasia, and then became Deputy Assistant Secretary of State for Europe and Eurasian affairs. In that role, he was involved with American efforts to advance peaceful solutions to various violent clashes that resulted from the disintegration of the USSR in Eurasia. With such extensive experience, combined with his current job as a board member in Turcas, one of Turkey's prominent energy companies, Ambassador Bryza is well qualified in the political as well as commercial sides of the natural gas industry in the Eastern Mediterranean.

Natural Gas Europe presented Mr. Bryza with questions concerning political developments in the region as well as questions concerning the possibility of Israeli-Turkish gas deals.

"The chances of reconciliation between Israel and Turkey are good, because it is in the strategic and economic interests of both countries to restore basic diplomatic relations. Russia’s recent belligerence toward Turkey and other NATO allies were the immediate catalyst of Israel and Turkey turning back toward each other. Thus, the test for Turkey and Israel will come when Turkey-Russia relations become less tense. Despite his harsh rhetoric, President Putin [off Russia] appears to be stepping back after a Turkish F-16 shot down a Russian Su-24 inside Turkish airspace last month, as reflected in his new-found conciliatory attitude toward the international community with respect to Syria. So, the key question is whether Turkey will continue to seek reconciliation with Israel even when Russia calms down, and I believe the answer is yes", former US diplomat said.

"Gas supply from Israel to Turkey is not critical in the short run, since there is no chance Russia will cut off gas flows to Turkey. Indeed, Turkey is Gazprom’s second largest market after Germany, and one for which there is growing competition, which concerns Gazprom. Over the next 4 to 6 years, on the other hand, Eastern Mediterranean gas can play an increasingly important role in Turkey’s effort to diversify its supplies of natural gas away from a very expensive Russian supplier", he added.

"In the near-term, I believe Turkish companies will be willing to buy 8 to 10 bcm [billion cubic metres] of Eastern Mediterranean natural gas for consumption within Turkey. All of that 8 to 10 bcm would be consumed within Turkey, whose natural gas market will expand in coming years. Once Turkish demand is satisfied, additional volumes of Israeli, as well as Cypriot and perhaps Egyptian gas, could be exported to the EU via Turkey. The commercial structure of possible sales of Israeli gas to EU member states remains to be determined, and will likely depend on the pattern of commercial cooperation that Turkish and Israeli firms develop in the near-term in gas exports to Turkey", Mr Bryza added.

"Given the likelihood that transportation costs will be netted out of the gas sales price that Israeli producers would receive, it would be most commercially attractive for Israeli gas to target the closest possible EU markets, which would indeed be Greece and Bulgaria. On the other hand, swaps of natural gas could theoretically enable Israeli suppliers to reach more distant markets.The 450-km pipeline from Leviathan would be financed from natural gas sales, as part of a commercial deal, most likely on the basis of project financing. It is not possible at this time to determine what the price of natural gas would be at the wellhead. That price will be the subject of commercial negotiations of a gas sales/purchase agreement and defined by a mutually agreed pricing formula. That formula will likely be related to prices at a European natural gas trading hub, but adjusted to localised prices from other suppliers to Turkey, namely, Russia, Azerbaijan, and Iran. It is also too early to determine the costs of transmission, as these will be determined by the costs of construction and operation of the sub-sea pipeline. Such figures will require a more detailed feasibility study, followed by detailed engineering. But, these costs must be low enough to make sales to Turkey commercially attractive to both the companies developing Leviathan and to Israel. Otherwise, the pipeline will never be built.

It would be inappropriate for me to comment on possible interests of any Turkish–or American, for that matter–company in buying into Leviathan’s upstream development. What I can say, however, is that if all the factors describe above come together and exports of Leviathan’s gas becomes commercially attractive, many energy companies, as well as private equity funds, will be interested in investing. I don't see any particularly difficult obstacle to Israel and Cyprus reaching a unitisation agreement for the entire geological structure in which both the Leviathan and Aphrodite fields lie, provided both countries continue to show the good will toward each other that has been present over the past year or so. Having the same private companies, Delek and Noble, as lead investors and developers of both of these fields should help smooth the way, unless, of course, anti-trust concerns in Israel return to Israel's political agenda.

Comprehensive settlement of the Cyprus Question, or at least a major political breakthrough in the negotiating process, is required for an Israel-Turkey gas pipeline to attract necessary financing, since no major bank or private equity fund is likely to press ahead with such a big project against the expressed will of an EU member state like Cyprus. I do believe a major breakthrough in Cyprus negotiations is possible during the first half of 2016. Many of the most contentious issues that obstructed progress while I served as the U.S. mediator of Cyprus talks a decade ago appear to be resolved. That said, several difficult issues remain, any of which could derail the negotiating process.

The structure of Israeli-Turkey gas sales/purchase contracts will be determined by commercial negotiations. I would anticipate that the commercial parties developing the project in both countries will search for a market-based pricing system, which means one that is de-linked from the price of Brent crude, and which is based on pricing at one of northwest Europe's highly liquid trading hubs, but perhaps adjusted to local prices in Turkey, which currently are a blend of relatively expensive gas from Russia and Iran and relatively cheaper gas from Azerbaijan. Northwest Europe's gas trading hubs are not influenced by the Brent price, and are determined by the market forces of supply and demand that play out in the form of competition from a range of suppliers. Russia's Gazprom is one such supplier. And so is Norway's Statoil, as well as a wide range of other gas producers in the North Sea as well as from further afield in the form of LNG.

I would prefer not to comment on the interests of other Turkish companies. What I can say is that Turcas has been working with several Turkish as well as European companies to form a consortium of buyers. BOTAS would of course be involved at some point, but perhaps at a later stage, after negotiations among private companies have defined the project's basic commercial and financial parameters", he summed up.

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