Ukraine Crisis Spurs East Mediterranean Gas Hopes

Europe's scramble for alternatives to Russian fuel as the crisis over energy transit state Ukraine rages has revived hopes that East Mediterranean gas can be shipped into the European Union.

Policymakers have even gone as far as to hope new gas routes could help to end years of bitter feuding over a divided Cyprus and galvanise some of Europe's most economically weak countries.

EU energy ministers meeting in Athens on Thursday and Friday will debate shipment routes for East Mediterranean gas as one of the options ahead of an EU summit next month, when the European Commission will submit an analysis of the issue.

"The geopolitical instability underlines the need for an all-European solution to bring gas from Israel and Cyprus to western Europe," an industry source involved in negotiations with Russia told Reuters, adding that Turkey should be included.

"That would create a win-win situation that would also improve the prospects for a peace settlement in Cyprus."

Some estimates suggest natural gas trapped in the sea area between EU member Cyprus and Israel could meet Europe's gas demand for at least seven years. But political tension and territorial disputes, plus the challenge of deep and seismically active waters, mean developing reserves is difficult and costly.

Cyprus downsized initial discovery estimates and drillers said more gas would have to be found to justify necessary investment.

Analysts say, however, the crisis over Ukraine has transformed the assessment of risk.

"The energy security scenario is completely changed and none can exclude that more expensive investments will be done in the light of energy security, more than on return of investments," said Pasquale De Micco, a national expert from the European Parliament's policy department.

For Italy and Greece, the potential benefits are compelling as they seek to become energy hubs. Italy, together with Germany, is one of Russia's biggest gas customers, while Greece is desperate to lower its fuel import bill.

Both are already gaining from the TAP project, a pipeline to ship Azeri gas to the EU via Greece and Italy by around the end of the decade. In Greece, it is creating an estimated 2,000 direct and 10,000 indirect jobs during the construction phase.

Gateway to Europe
Greece sees itself as the gateway to Europe for gas from the Caspian Sea, the Middle East and southern Mediterranean and in March launched an international tender for a feasibility study into a pipeline from Israel and Cyprus.

With two other schemes, the Israel-Cyprus-Greece link would form an East Mediterranean supply corridor. The other two are a gas-generated electricity grid linking Israel, Cyprus and Greece and a liquefied natural gas (LNGLF) (LNG) storage terminal in Cyprus.

All three are on an EU list of 248 priority projects, entitled to EU funding and accelerated planning permission.

TAP, selected last year to ship Azeri gas from the Turkish border, then via Greece and Italy - a route known as the Southern Corridor - is another EU priority project.

In contrast, the rival South Stream, which would ship Russian gas to Austria while bypassing Ukraine, is not and the European Commission says it breaches EU competition law.

While some analysts note the ongoing tensions between Turkey and Cyprus over gas exploration, others focus on the tentative signs of a rapprochement between Turkey and Israel, which would make a cheaper route into Turkey possible.

Europe, meanwhile, has keen competitors for the gas.

"Yes there's interest there (in Europe), but we've also got tremendous interest from our customers in the (Middle East) region," said Chuck Davidson, chief executive of Noble Energy (NBL) , which operates the Leviathan field off the coast of Israel.

TAP says only that its capacity can be doubled to 20 bcm, meaning it could take East Mediterranean gas if it is available.

Just as there are competing markets for East Mediterranean gas, a new supply route could inflame other rivalries.

The plan to ship Azeri gas into the EU via the Southern Corridor route has helped to drive development of Russia's giant South Stream to carry Russian gas into the European Union.

Similarly, Moscow is unlikely to sit idly by while Europe develops an East Mediterranean corridor.

"Russia wants to dominate the East Mediterranean gas market to safeguard its dominant position in Europe," de Micco said.

(By Barbara Lewis and Harry Papachristou, Additional reporting by Henning Gloystein in London and Stephen Jewkes in Milan)