Two practical proposals to solve eastern Mediterranean energy and boundary disputes

east mediterranien

The eastern Mediterranean has become the “eye of a geopolitical storm,” as I described in a recent article explaining how territorial sovereignty disputes once confined to Greece, Cyprus, and Turkey have spiraled into a broader multinational conflict. Driving the region’s escalating geopolitical crisis has been the development of the eastern Mediterranean’s offshore natural gas resources, drawing the Republic of Turkey and the European Union into a dangerous adversarial relationship. But nothing about this unfolding crisis was inevitable. On the contrary, the eastern Mediterranean’s energy resources can promote greater regional cooperation and do so in a commercially profitable way. Additionally, underlying maritime boundary disputes can be resolved in an equitable manner. In this article, I suggest specific proposals for how to accomplish both through a virtual energy trading hub for the distribution of eastern Mediterranean energy and by citing a legal precedent from a parallel case in the Bay of Bengal that can serve as the basis for a fair and lasting solution to maritime policy disputes.

A brief overview of the conflict’s key elements

In the Heinrich Böll Stiftung’s dossierTroubled Waters – The Conflict in the eastern Mediterranean Sea”, which entails this article, several authors have examined various aspects of the eastern Mediterranean conflict. In this brief overview, I highlight key elements of the conflict that could be helpful for understanding my proposed solutions. The transformation of eastern Mediterranean geopolitics over the past five years has been driven by the development of the region’s offshore natural gas resources, starting with the game-changing August 2015 discovery of the massive Zohr natural gas field off the coast of Egypt by the Italian energy giant Eni. Also the lead operator in  Cyprus’ natural gas development and the lead stakeholder in one of Egypt’s two liquefaction plants, Eni began promoting a plan to pool Cypriot, Egyptian, and Israeli gas and use Egypt’s liquefaction facilities to cost-effectively market the region’s gas to Europe as liquified natural gas (LNG). Commercially sensible, the plan was a geopolitical time bomb as it excluded Turkey from the marketing of eastern Mediterranean gas. Ankara also objected to the ongoing exclusion of Turkish Cypriots in the northern half of the ethnically divided island from the development of Cyprus’ offshore natural gas despite being the legal co-owners of Cyprus’ natural resources.

Finding no diplomatic recourse as new gas discoveries in Cyprus accelerated the implementation of the Egypt-based LNG marketing scheme in 2018, Turkey opted for gunboat diplomacy to express its displeasure. Turkey began its coercive foreign policy posture with a February 2018 naval action to block an Eni drill ship from reaching its intended drill site in Cypriot waters, forcing the company to withdraw the vessel. Turkey then sent four of its own exploration and drill ships, with naval escorts, to disputed waters around Cyprus throughout 2018 and 2019.

Contrary to Ankara’s desired outcome, the actions pushed Cyprus, Egypt, Israel and Greece into closer cooperation. Turkey became even more constrained in its ability to defend its interests by a common front composed of the region’s current natural gas producers and Greece. The alignment created a set of interlinked security partnerships that have been increasingly supported by Italy, France, and the United States, each of whom has significant economic investments in eastern Mediterranean gas. This multinational cooperation was formalized with the 2020 inauguration of the eastern Mediterranean Gas Forum (EMGF), an organization for developing regional natural gas founded by Italy, Egypt, Greece, Cyprus, Israel, the Palestinian Authority, and Jordan. France has applied for membership in the Cairo-headquartered EMGF and the U.S. is seeking observer member status while Turkey remains excluded from the so-called OPEC of eastern Mediterranean gas.

 Confronting an alignment of European and Middle Eastern actors, Turkey believes its future political and economic influence across the entire Mediterranean region is at stake. After two years of gunboat diplomacy around Cyprus’s waters, Turkey pushed the envelope further in early August 2020 by extending its tactics against NATO allied member Greece. Ankara sent an exploration vessel, escorted by five naval warships, to contested waters near the Greek island of Kastellorizo, which is at the heart of the Greece-Turkey maritime boundary dispute.

In 2018, when Ankara began its eastern Mediterranean gunboat diplomacy, the European Council voted to freeze negotiations for Turkey’s EU membership and suspended work on modernizing Turkey’s Customs Union with the bloc. Without having addressed Turkey’s exclusion from eastern Mediterranean gas development or the basic maritime boundary disputes at the root of the conflict, the European Council finds itself two years later facing a decision on whether to sanction Turkey, an event EU foreign policy chief Josep Borrell described as a watershed moment in history of our relations with Turkey.” While the application of severe sanctions is highly unlikely, Turkey’s estrangement from Europe as well as from its eastern Mediterranean neighbors will deepen.

The trend toward escalation can only be reversed through real solutions addressing the fundamental issues: the distribution of eastern Mediterranean energy and the maritime boundary disputes. My two proposals, described below, do just that. The proposal to create a virtual trading hub for the eastern Mediterranean’s natural gas can jump start regional cooperation across conflict lines (and even promote the eastern Mediterranean’s shift to green energy in the process). My proposal to use the legal precedent from the parallel maritime boundary dispute in the Bay of Bengal as the starting point for negotiations between Greece and Turkey can serve as the springboard for a comprehensive maritime boundary settlement. By pursuing the virtual hub solution concurrently with boundary negotiations, no grievance will be left unaddressed that could derail negotiations. The synergy created from pursuing both proposals could generate the necessary momentum to pivot the parties towards a solution.

How a virtual trading hub can energize eastern Mediterranean cooperation

Marketing Eastern Mediterranean energy through a virtual trading hub—natural gas as well the electricity generated from it—can provide strong stakeholder interest in regional cooperation across the current lines of conflict. Based on solid energy economics, it is a win-win solution that earns the most revenue for the countries of the region while providing a lucrative role for Turkey in the marketing of eastern Mediterranean energy.

            It is a solution that can be implemented immediately, as nothing about the virtual hub would impact any side’s sovereignty claims in the eastern Mediterranean region. This approach creates the possibility for North Cyprus and South Cyprus to cooperate in development of the island’s energy resources even prior to the adoption of a settlement by providing a mechanism for Turkish Cypriots to engage in joint energy development and revenue-sharing mechanisms.

            Furthermore, by including power trading, the energy trading hub would transform the eastern Mediterranean into a leader in promoting the transition to clean energy resources. Establishing a market area that connects Africa and the Middle East to Europe, the power trading component of the hub will incentivize the rapid development of power generation from renewable energy resources (RES) in all the countries of the eastern Mediterranean basin—hastening a wider transition from natural gas to renewables.

The most commercially viable approach

Treating at least part of the eastern Mediterranean’s gas as a regional commodity where supply can rationally meet demand would bring the best prices for both supplier and consumer nations. The virtual natural gas trading hub would involve a trading platform that would represent a regional market zone of the entire Mediterranean basin. It would function similarly to highly successful, nation-based virtual hubs like the UK’s National Balancing Point (NBP), but at a Mediterranean-wide level.

All eastern Mediterranean gas within the virtual hub could be traded regardless of its actual physical location, as the virtual hub represents all entry and exit points in the market area of the basin. Without a specific ‘location,’ eastern Mediterranean gas sold in a Mediterranean-wide virtual hub can have greater market depth and liquidity than any physical hub located within the region. This would earn the most revenue for eastern Mediterranean countries while also providing the lowest price for consumers. I will explain the reasons why this is the case.

A physical hub is akin to being a monopoly for the distribution of natural gas, providing economic benefits and geopolitical clout to the country in which the physical hub resides. For this reason, the establishment of a natural physical hub, or even the attempt to do so, can be a source of conflict in the eastern Mediterranean.

In the classic example of a physical hub, pipelines from various countries meet in one location that serves as the point of sale where the price is determined for all contracts. This is roughly analogous to a manufacturer of a highly sought product being allowed to sell that product only to one specific store from which all consumers then have to buy the product. Even though the manufacturer’s product is in high demand, the manufacturer receives a relatively low price from the store owner because the company has no other option but to sell its product to that one store. The store, on the other hand, earns high profits from the highly sought-after product because it is the sole outlet at which consumers can purchase it.

The virtual hub in this analogy would be as if the manufacturer had the option to sell the high demand product to various stores throughout the country. The producer would earn more because there would be more wholesale buyers competing to buy the product. The end-user consumers would also pay less because they would have more options from where they could purchase the product. And, in my virtual hub approach, the manufacturer could sell the high demand product in an even greater number of stores in multiple countries across the entire Mediterranean region.

Unlike my simple analogy, the marketing of natural gas involves the trading of contracts, often several times, before the end-buyer takes delivery of an actual quantity of physical gas. By increasing the flexibility and ease of trading, a virtual trading platform will encourage a desperately needed flow of investments into the upstream development of small producers in the eastern Mediterranean. By dramatically increasing the volume of gas traded, the virtual hub creates economic synergy that would bring greater prosperity to all countries in the region.

LNG is part of the solution

In 2016, when Eni’s promotion of the Egypt-based LNG scheme gained momentum, expert consensus had already predicted that LNG would become the dominant form of traded gas by 2035. By 2019, LNG was forecasted to overtake inter-regional pipeline shipments as soon as the late 2020s. Even in Turkey from January-June 2019, pipeline gas imports fell by 22.8 percent while LNG imports grew 44.8 percent, a testament to the advantageous flexibility of LNG trading over the 20-25 year contracts typically used for gas transported by pipeline.

In the virtual trading hub approach, the delivery of LNG cargos would take place regionally making the most efficient use of the existing facilities across the Eastern Mediterranean by crossing geo-political divides. For example: Although Egypt has two major liquefaction plants, it lacks adequate storage facilities whereas Turkey, traditionally oversupplied with LNG and electricity, has underutilized gas storage facilities. By incorporating Turkey into the regional marketing and delivery mechanisms, the market will function the most effectively and replace geo-political antagonisms with stakeholder cooperation.

How does the virtual hub work?

The virtual exchange is not intended to replace any existing or planned project by Turkey, Egypt, or any other country, rather it will augment the effectiveness of such projects by serving as the most efficient pricing platform and creating a regional benchmark price. The virtual trading energy exchange would be its own neutral entity serving as a counter-party to all parties. As is the practice in energy contracts, arbitration could be under the jurisdiction of the International Commercial Court in Stockholm. The hub does not belong to any one country, but all countries participate in it and benefit economically from it.

Different ownership models can be employed. One approach could see ownership shares in the exchange being open to market participants as well as the major trading exchanges of the Mediterranean region. This model has proven successful for Turkey’s national Energy Exchange Istanbul managed by EPİAŞ, which began with private market participants collectively owning a 40 percent stake and the Istanbul Stock Exchange owning a 30 percent share, while the remaining 30 percent stake was held by Turkey’s state-owned transmission company.

Within this approach, one option would be to allocate ownership shares to the trading exchanges of the four major eastern Mediterranean energy actors plus Cyprus when a reunification settlement has been agreed upon. For example, a 15 percent ownership stake can be granted to exchanges in Turkey, Greece, Egypt and Israel. A 15 percent share would be held in reserve to be granted to an exchange in Cyprus only after a reunification settlement has been implemented—introducing an element of conditionality to incentivize Cypriots to develop cooperation.

The remaining 25 percent would be open to private market players such as Turcas and Zorlu, and their counterparts in other countries in the Mediterranean region. Likewise, state-owned players such as BOTAŞ and its regional counterparts could similarly participate.

The Cyprus peace dividend: How a virtual hub can promote solutions

            Being non-physical and not tied to a particular geographic location, a virtual gas trading hub opens many possibilities to enable cooperation among countries with conflicting geographic and political claims without impacting those claims—it allows countries to safely put those claims to the side. In the case of Cyprus, the internationally-recognized government of the Republic of Cyprus does not recognize the Turkish Republic of North Cyprus while the government in North Cyprus and its powerful Turkish backer do not recognize the government in South Cyprus. The virtual gas trading hub provides both sides a way out of this impasse through cooperation in natural gas development before a general settlement regarding the re-unification of Cyprus on a bi-zonal basis is implemented. Indeed, joint cooperation in the development of the island’s energy resources would go a long way toward promoting the realization of a settlement agreement in Cyprus.

            A virtual trading hub would impose transparency on the Cypriot gas market, which is necessary for facilitating a revenue-sharing agreement that is an essential component of all re-unification plans, as the estimated cost for implementing a settlement ranges upwards of $25 billion.

The joint revenue from the virtual hub can be put into something akin to a sovereign wealth fund jointly managed by North and South Cypriots with an international supervisory board composed of Cyprus’ three guarantor states—Turkey, Greece, and the United Kingdom, as well as other relevant parties. The fund could allocate certain percentages of revenue to a negotiated list on additional joint development projects.

As an important step toward the joint management of development fund, the operational management of the virtual trading hub’s exchange, or at least part of it, should be reserved for North Cypriots and South Cypriots. The exchange’s offices and computer servers could be located in Cyprus’ neutral zone in Nicosia and jointly managed by North and South Cypriots as a confidence building mechanism. Cultivating self-sufficiency in expertise about the legal, financial, and engineering aspects of natural gas development and distribution among North Cypriots would reduce their dependence on outside parties and make them a better and more capable partner for South Cyprus.

The process should start with the creation of a working group composed of North Cypriots and South Cypriots. Both sides of the island have business organizations that were established before Cyprus gained independence in 1960. As such, a working group can be established under the joint auspices of these organizations without affecting sovereignty claims by either side. The working group could then oversee the partial management of the virtual gas exchange and then expand to jointly manage the development fund and future development projects in various sectors. Once the virtual trading hub is operating, both sides would become stakeholders in continuing and expanding their cooperation to develop Cyprus’ natural gas exploration and production projects.

An electricity trading hub can power the eastern Mediterranean’s energy transition

The virtual exchange would trade both natural gas and electricity as these two commodities are closely linked. In certain instances, it may be more cost-effective for a gas-supplying country or a group of supplier countries to generate electricity from natural gas locally and then transmit the electricity via undersea cables and grid connections to markets around the Mediterranean basin.

One prominent example of this approach is the Euro-Asia interconnector linking the grids of Israel, Cyprus, Crete, and mainland Greece via a subsea cable with a 2 GW transmission capacity. In 2019, Egypt signed an agreement to create the Euro-Africa interconnector, a similar 2 GW electricity interconnection linking Egypt to Cyprus, Crete and Mainland Greece. Turkey already has a comparable interconnection with Greece. Additionally, Egypt is interconnected with the Arab Gulf states via Saudi Arabia as well as the Maghreb states, all of whom are in the process of developing considerable power generation capacities from RES.

By promoting electricity trading between the EU, the Middle East and North Africa (MENA), the virtual exchange also constitutes an important bridge to the eventual widespread marketing of electricity generated in the Mediterranean and MENA regions from solar power and RES. Egypt, for example, already has 10 GW surplus power generation capacity thanks, in part, to massive 1.8 GW Benban solar park and additional facilities that generate power from other RES. Egypt aims to create 61 GW of installed capacity from RES by 2035. Turkey already has about 42 GW of installed capacity from RES, most of which is hydro-electric power. Turkey plans build an additional 11 GW from solar power and 10 GW from wind power.

The most commercially efficient approach to developing and marketing the Eastern Mediterranean’s natural gas is also the approach that creates the widest stakeholder interests in regional cooperation. A virtual exchange can advance actual peace in the Eastern Mediterranean.

How the Bay of Bengal precedent can serve as the basis of a maritime boundary settlement

While the Bay of Bengal may seem rather remote from the eastern Mediterranean, both maritime regions are rich in offshore natural gas resources with similar high-stakes geopolitics involving regional and global powers jockeying for position. The resolution of an analogous maritime dispute between the adjacent states of Bangladesh and Myanmar points to a solution for Greece and Turkey’s protracted disagreement over the maritime jurisdiction created by the island of Kastellerizo.

Bangladesh’s most southern point is the small island of St. Martin’s about 9 km from the southernmost point on Bangladesh’s eastern shore. A 36 square km island of about 5,000 inhabitants, St. Martin’s receives over 3,000 visitors daily in the tourist season on account of its coral reef and beaches. The island also happens to lie 8 km west of the coast of Myanmar. St. Martin’s presence as Bangladeshi territory impacts the drawing of the maritime boundary lines, severely boxing in Myanmar.

Kastellorizo is the eastern Mediterranean’s equivalent of St. Martin’s Island. Under Greek sovereignty, Kastellorizo is located 126 km east of Rhodes but less than 2 km off Turkey’s coast. Even smaller than St. Martin’s Island, Kastellorizo’s 9.2 square km is home to no more than 500 persons, but similarly boxes in Turkey’s coastline. Generating a maritime jurisdiction up to 4,000 times its actual size depending on how the lines are drawn, the use of Kastellorizo for maritime boundary delimitation is particularly contentious for Turkey, as Turkey’s President Recep Tayyip Erdoğan declared after deploying Turkey’s exploration ship and its naval escort, “We cannot allow [nations] to ignore a big country like Turkey and try to imprison us to our shores.”

The dispute between Bangladesh and Myanmar was brought before the International Tribunal of the Law of the Sea, which rendered its judgment on March 14, 2012. The tribunal rejected Myanmar’s argument, which followed similar lines as Turkey’s longstanding contention that none of Greece’s islands generate a continental shelf nor an exclusive economic zone (EEZ) that provides sovereign rights over offshore energy. The tribunal held that St. Martin’s was a proper inhabited island that could sustain economic life and therefore met the standard of article 121 of the United Nations Convention on the Law of the Sea (UNCLOS) for generating a continental shelf and EEZ.

However, similar to Kastellorizo, the tiny St. Martin’s generates a 13,000 square km maritime area for Bangladesh at Myanmar’s expense. Taking this into account, the Tribunal ruled the use of St. Martin’s Island in drawing maritime boundary lines “would cause an unwarranted distortion” in the seaward projection from Myanmar’s coast. On the principle of equity, the Tribunal ruled the island should have no effect on drawing the delimitation of the continental shelf or EEZ.

The ruling in the Bangladesh-Myanmar case points to an equitable endgame for Greece and Turkey. Following the Bay of Bengal precedent, Kastellorizo would not be used in drawing maritime lines, thereby providing Turkey with a more reasonably-sized exclusive economic zone and continental shelf. At the same time, UNCLOS’s Article 121 would still apply to Greece’s larger islands in the region. Once accepting this solution for the small island of Kastellorizo and large islands like Crete, intermediate-sized islands could be given a proportional EEZ, such as the two-third maritime delimitation suggested in another article in this dossier.

For Greece and Turkey to jointly bring the case of Kastellorizo to the Tribunal, Ankara would need to become a UNCLOS signatory. But Turkey does not have to formally recognize the authority of UNCLOS for this solution to work. Ankara and Athens can engage in direct negotiations based on the likely outcome of a Tribunal hearing using the St. Martin’s Island precedent.

The synergy of eastern Mediterranean solutions

Both Athens and Ankara must find a path forward by which they can step back from their maximal demands. Pursuing solutions to both the marketing of eastern Mediterranean energy and the maritime boundary dispute concurrently prevents one issue from negatively impacting the other. Progress toward establishing a virtual trading hub for eastern Mediterranean energy that provides meaningful and profitable roles for Turkish Cypriots and Turkey would create stakeholder interest in regional cooperation that would also transfer over to boundary negotiations between Turkey and Greece. By creating progress in resolving Turkey and Greece’s maritime boundary dispute based on the Bay of Bengal precedent, the ripple effect would reinvigorate stalled negotiations on a Cyprus settlement. The synergy generated from concurrently pursuing a virtual energy trading hub and boundary negotiations based on the Bay of Bengal precedent could create enough political momentum to turn the tide in eastern Mediterranean relations.