Goliath Gas Field Development the Situation Last Month

To: Secretary of State, Hilary Clinton Re: Goliath Gas Field Development The Situation Last month, a joint U.S.-Israeli venture discovered a large deep sea natural gas field approximately 100 miles off the Israeli/Lebanese coast. Dubbed “Goliath,” it is estimated to contain 31 trillion cubic feet (TcF) of natural gas and 850 million barrels of oil – enough to secure Israel’s energy future and upend the geopolitics of energy in the Eastern Mediterranean. The challenge, however, is that a portion of the Goliath field falls into waters disputed between Israel and Lebanon and may also extend into Cypriot waters – bringing the Turkish Republic of Northern Cyprus (TRNC) and Turkey into the picture. Each of these four parties – Israel, Lebanon, Cyprus, and Turkey – has requested U.S. assistance with the situation. It should also be noted that an American oil and gas company, Noble Energy, discovered Goliath under contract by Israel and has commercial assets and personnel in the region. Reaching an arrangement that meets core interests of key stakeholders, including the United States, will be critical to accessing the gas and oil in Goliath, and to reaching long-term accommodation between the parties. Summary of Proposed Strategy The US State Department should encourage Israel, Cyprus, Turkey and Lebanon to engage in a joint development of the Goliath gas field. These nations would contribute equity stakes to the venture, and their representatives allotted Board positions. In turn, the national governments would receive dividends from the venture. Given its leadership in discovering Goliath and its strong negotiating position, Israel will receive the largest stake. Noble Energy would manage the operations of the consortium as well as contribute additional financing. Should the United States desire greater policy sway over the consortium, it may also consider providing financing through the Export-Import Bank. A joint venture will meet all stakeholders’ interests better than their available alternatives – saliently, it provides a more secure, lower-cost natural gas export option for Israel, while enhancing energy security and generating foreign exchange for Lebanon, Cyprus, and Turkey. Moreover, such an agreement can lay the groundwork for future development of oil and gas fields in the Levant Basin. Lastly, participating governments, and particularly Israel, should consider streaming profits from the venture into clean energy development. Joint development of the field can realize American interests, including: Enhanced stability in the Middle East, due to resource-based and economic interdependence, thereby promoting Israeli security while maintaining other alliances; Marginalization of Hezbollah and Iran; A strong business opportunity for Noble Energy to serve as a contractor and financier; The ‘Business-as-Usual’ Scenario Israel possesses the financial capacity to develop the Goliath gas field and could hire a company such as Noble Energy to provide necessary technical capacity. Although Goliath lies under disputed waters, Israel has the military might to press its claim. As a consequence of these three factors, Israel could choose to develop the Goliath field on its own. Israel has considered establishing an undersea pipeline to Greece to export to European markets. These decisions could provoke retaliation from Hezbollah and would likely cause further deterioration of relations with Turkey. Similarly, if Cyprus—increasingly aligned with Israel—were to continue exploration activities and begin extracting natural gas without any resolution in the status of TRNC, Turkey would likely threaten forceful interdiction of Cypriot extractive activities. All of this is to say that the various stakeholders, if focused on short-term, narrowly-defined interests, would replicate the non-cooperative behavior that has largely defined inter-state relations among these parties, perpetuating the existing cycle of antagonism. The East China Sea “Principled Consensus” – A Model for Joint Development The proposed Goliath joint venture mirrors the joint gas development agreement reached by China and Japan to facilitate gas development in the East China Sea (ECS). The countries faced particular tensions when the Chinese National Offshore Oil Company (CNOOC) began developing hydrocarbon resources in contested waters.i However, in 2008, the countries arrived at the "principled consensus", establishing a “joint development zone” (see Exhibit 1) in which Japan may finance CNOOC ventures and share in profits. Notably, the consensus explicitly forewent defining maritime boundaries, allowing for joint development without settling these broader differences.ii Nevertheless, the formal adoption of the principled consensus in a bilateral treaty has stalled, due to ongoing jockeying for expanded maritime territory.iii The East China Sea case illustrates the potential for rival nations to establish joint development principles, but also suggests the difficulty of sustaining such partnership through recurrent political contests. Encouragingly, two differences between these cases suggest that the Goliath partners might have greater incentive to cooperate. First, dividing China and Japan's ECS hydrocarbon resources is largely a zero-sum proposition; whatever one receives, the other forgoes.iv In contrast, mutual cooperation around Goliath stands to realize significant strategic benefits in terms of enhanced energy security for all parties. Economically, Israel avoids the costs of Liquefied Natural Gas (LNG) conversion or undersea pipelines and all participating countries secure cheap and reliable natural gas supplies and generate foreign exchange thanks to their stakes in the joint development venture. Stakeholder Interests Taking account of the interests of all relevant stakeholders when crafting a policy around development of the Goliath gas field is critical for promoting American interests. Only a policy that significantly advances the interests of key stakeholders, particularly those who can impede or sabotage the policy objective, can create the buy-in and reciprocity needed for long-term success. A map of stakeholders’ relevant interests is provided in Exhibit 2. Short Term – Calm the Situation In order to head off the scenario described above, the U.S. State Department should approach counterparts in the Israeli government to propose an alternate approach to developing the Goliath field that could meet a broader array of Israeli interests. The State Department can convince the Israelis to delay the next phase of the Goliath development in order to carefully weigh the merits of the State Department’s proposal. The Israeli stay would preclude a negative response from the other parties, particularly Lebanon and Turkey, and would buy some time and allow the State Department to approach the other key stakeholders. In order to engender trust among skeptical stakeholders, the State Department would assure the parties that the United States would play a role in facilitating the process of negotiating the terms of the joint development venture. Once tentative interest in the proposal has been expressed by all stakeholders, the State Department would convene a negotiated process to define the terms of the joint development venture amongst representatives from stakeholder countries and Noble Energy. Medium Term – Joint Development Venture A joint development venture (JDV) will allow cooperative development of Goliath. Each nation would own equity stakes in the venture, and be allotted Board positions. In turn, the national governments would receive dividends from the venture. The nations should waive royalty payments, given the public nature of the development and to avoid conflict over territorial claims. Noble Energy would manage the operations of the consortium and contribute additional financing. Critically, this proposal avoids defining each country’s EEZ and resolving the political division of Cyprus. Interests in joint-venture The creation of a joint development venture (JDV) to cooperatively develop the Goliath natural gas field would create the most shared value for the stakeholders while providing each individual stakeholder with greater value than it would realize in its next-best alternative. Key Israeli interests served by JDV: Achieve energy security (plentiful gas supply supplants uncertain Egyptian supply); Reduce risk of attack on gas infrastructure by Hezbollah; Enhance strategic security through greater economic and resource interdependence; Greater economic benefit due to cost savings over LNG or undersea pipeline to Greece. Best alternative: develop Goliath for domestic use and ship to Europe or Asia via LNG or undersea pipeline, both very costly propositions. Key Turkish interests served by JDV: Enhance energy security due to shipments through completed Arab Gas Pipeline; Enhance regional political and diplomatic influence through participation in key venture, early stake in Mediterranean hydrocarbon development, and conduit for European gas supply through completed Nabucco pipeline. Best alternative: Threaten Cyprus with forceful obstruction of its offshore development. Key Lebanese interests served by JDV: Enhance energy security due to shipments through Arab Gas Pipeline; Foreign exchange revenues through equity stake and royalties; Marginalize Hezbollah through improved functioning of state; Entry into hydrocarbon development. Best alternative: Solicit assistance from Iran to explore and develop offshore gas resources.v Key

Load more