Southeastern Mediterranean Hydrocarbons

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The (a) confirmation of significant quantities of hydrocarbons in Cyprus, (b) the scientific estimates of equally significant quantities in the south and southwest of the Greek island of Crete and (c) the officially declared increased cooperation between Cyprus, Israel and Greece to jointly exploit their hydrocarbon deposits may prove to be a tremendous opportunity not only for Cyprus, Greece and Israel but for the EU as a whole. World renowned scientists claim that the hydrocarbon deposits that lie south and southwest of the island of Crete are huge; and maybe bigger than those in the Levantine Basin; they dare to state that within the EEZ of Greece there may be as much as 51 tcm of natural gas! Could this lead into the making of a new energy corridor for the EU? Shouldn’t the EU be more actively involved in the efforts of its member countries, Greece and Cyprus? Isn’t this for the EU a project of Pan-European interest thus include it in its energy policy, coordinate and assist with technical knowhow but also with political leverage and other? As critical year 2020 is around the corner, aren’t the already scientific interpretations important enough to accelerate the EU think tanks and policy institutes view on the whole issue?

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Southeastern Mediterranean Hydrocarbons A new Energy Corridor for the EU? April 2012 Author: Harris A. Samaras

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Copyright © 2012 Pytheas Limited

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C ontents F orward 4 T he Golden Age of Natural Gas 5 E U and Natural Gas 6 I ntroduction 8 I mports (and Pipelines) to Europe 9 S olution to EU NG Shortage 14 S E Mediterranean NG Exploitation 17 T he East Med Pipeline? 20 S cenario Optimum 23 S cenario Optimum Chart 25 N ew Natural Gas Map Europe 26 T he Geopolitical Dimension 27 C hallenging Considerations 30 T he EU Role and its Importance 32 C onclusion 34 Appendix I – G as Map Europe 37 Appendix II – M iddle East, Oil & Gas pipelines 38 Appendix III – W orld Oil & Gas Reserves 39 Appendix IV – W orld Oil & Gas Production 40 Appendix V – W orld Oil & Gas Consumption 41 Appendix VI – F uel Prices 42 Appendix VII – E U Energy Dependence 43 Appendix VIII – P hysiography of the East Med 44 Appendix IX – M editerranean Gas Plants 45 Appendix X – E ast Med Energy Developments 46 Appendix XI – E nergy Biggest Companies 47 Appendix XII – S ources 48 Appendix XIII – A bout the Author 50 Appendix XIV – A bout Pytheas 52

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F orward The (a) confirmation of significant quantities of hydrocarbons in Cyprus, (b) the scientific estimates of equally significant quantities in the south and southwest of the Greek island of Crete and (c) the officially declared increased cooperation between Cyprus, Israel and Greece to jointly exploit their hydrocarbon deposits may prove to be a tremendous opportunity not only for Cyprus, Greece and Israel but for the EU as a whole. Combined sources from qualified institutions (i.e., The U.S. Geological Survey, BEICIP/FRANLAB, the Institut Français du Pétrole ) and entities of science (i.e., Paper by Bruneton , Konofagos and Foscolos titled “Cretan Gas Fields – A new perspective for Greece’s hydrocarbon resources”) estimate that the Levantine Basin, the Nile Delta Cone, the Eratosthenes Continental Block, the Herodotus Basin and the Mediterranean Ridge, may hold more than 50 trillion cubic meters (tcm) of natural gas. Could this lead into the making of a new energy corridor for the EU? Can Cyprus and Greece become a guaranteed primary gas source and transit route to the EU? Cyprus & Crete, a guaranteed primary natural gas source and transit route to the EU, of the EU? 4

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T he Golden Age of Natural Gas The International Energy Agency (IEA) forecasts that by 2035: Global primary natural gas demand will amount to 5.1 tcm; An increase in production equivalent to about three times the current production of Russia will be required to simply meet the growth in gas demand; Cumulative investment in gas-supply infrastructure will be around €6.2 trillion; Trade between the main world regions will more than double, with the increase of around 620 bcm split evenly between pipeline gas and LNG; Natural gas production will increase significantly in all regions except Europe. Gas-supply infrastructure by 2035 is expected to reach €6.2 trillion World energy demand by fuel Source: International Energy Agency 5

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E U and Natural Gas According to Eurogas the share of natural gas in the EU is expected to reach 30% of the primary energy consumption in 2030 while demand for the same period will increase by 43%. D omestic production however will decrease. At end-2010, European production accounted for 59% of supplies to EU gas markets and is expected to drop to a third by 2020 and to a further quarter by 2030. By 2015 a substantial gap emerges between demand and supply coming from European production or imported from outside Europe. The European gas industry must focus its gas procurement especially for the period after 2015. EU-27, Natural Gas demand outlook by sector Source: Eurogas EU-27 Natural Gas demand in 2030 will increase by 43% Sector (Mtoe) 2010 2015 2020 2025 2030 Commercial & Residential 180 187 191 193 194 Industry 128 137 145 150 156 Power generation 158 181 209 226 239 Others 493 535 578 603 625 Total 959 1,040 1,123 1,172 1,214 6

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E U and Natural Gas For the depending on imports European natural gas industry, the sufficient gas reserves available in the medium to long run are in countries which are NOT so accessible in terms of transmission distances, or exist in fields that are increasingly difficult to develop (with the consequence of rising production and transport costs). Taking into account the growing gas demand worldwide and the decreasing indigenous production in Europe, it will require huge efforts and substantial investments of the suppliers to mobilize this gas in time. Besides, when assessing supply options, it has to be kept in mind that competition for supply will become far stiffer especially from North America and the emerging economies of South-East Asia. EU-27, Import dependency from outside Europe Source: Eurogas EU competition for Natural Gas supply will become far stiffer in the medium run 7

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I ntroduction The vulnerability of the EU to energy supply risks is a fact but this may be no more. If the most conservative data is taken into account in regard to the natural gas reserves discovered and estimated to exist within the exclusive economic zones (EEZs) of Greece and Cyprus but also within the immediate region to the west and south and southeast of Cyprus in the Eastern Mediterranean, for the first time ever in European energy history, the EU may be guaranteed an uninterrupted supply of a traditional energy source. The latest valid scientific estimates of the existence of huge hydrocarbon deposits south and southwest of the island of Crete complete the puzzle of a new East Mediterranean energy corridor to Europe and make the discussion of an Israel-Cyprus-Greece pipeline to mainland Europe, the East Med pipeline, more current than ever. Especially when critical year 2020 for the EU is around the corner... 8 Location of mud flow volcanoes in the, subduction zone (and the Aegean Volcanic Arc), Nile Cone and EEZ of Cyprus indicate significant NG deposits. Source: Bruneton , Konofagos , Foscolos, 2012 modified after Dimitov , 2002 Eastern Mediterranean – Mud flow volcanoes and anticipated hydrocarbon deposits

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I mports (and Pipelines) to Europe Natural gas in Europe is provided from indigenous sources and from pipeline and LNG imports. The main sources of indigenous supplies are concentrated at its northwestern part, mainly in the UK and the Netherlands. About 55% of Europe's primary energy is imported and roughly 2/3 of the NG supply in the EU comes from imports. The bulk of imports come from Russia, Norway and Algeria. Russia holds the largest share of EU’s natural gas imports, with annual gas volumes exceeding 100 bcm p.a. for the period 2007 to 2010. Although the volume of NG imports from Russia has not changed substantially, its share of imports has fallen over the past decade. Russian gas is exported to Europe through pipelines via Ukraine (127 bcm capacity) and Belarus (28 bcm capacity). The state-owned gas company Gazprom has a monopoly on gas exports from Russia with sales of 156 bcm of natural gas to the EU-27. 9 Source: Eurostat EU-27, Natural Gas Imports (%)

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I mports (and Pipelines) to Europe Norway with an annual production of 90 bcm is the second largest supplier of NG to continental Europe; almost all of its gas export is directed to the EU market. Indigenous production in the EU-27 mainly comes from the Netherlands and the UK. Natural Gas imports from North Africa are made through Italy and Spain with a connection between Algeria and Spain, and two connections from Libya and Algeria to Italy. Algeria’s exports to Europe by the newly completed Medgaz pipeline (8 bcm per annum) to Spain; the 8 bcm per annum Galsi pipeline via Sardinia to Italy is expected to be completed within 2014. The Trans-Mediterranean pipeline (Algeria to Italy via Tunisia and Sicily) is operational since 2008 (with a capacity of 6.5 bcm per annum). 10 NG pipelines across the Sahara and the Mediterranean Source: Wikipedia Modified by: SWLS North Sea NG pipelines to EU-27 Source: NPD

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I mports (and Pipelines) to Europe The Nord Stream pipeline through the Baltic Sea (and through the waters of five countries) is the most direct connection between Russia and the EU. Line 1 inaugurated end-2011 has the capacity to deliver up to 27.5 bcm per annum. When Line 2 is completed (expected towards end-2012), the twin pipelines will have the capacity to transport an annual combined total of about 55 bcm. The planned to commence in 2013 South Stream pipeline, form Russia to Bulgaria across the Black Sea and then to split towards Central Europe and Italy via Greece is expected to have a throughput capacity of up to 63 bcm. The Nabucco pipeline (25 bcm capacity), is designed to transport natural gas from the Caspian Sea and later the Middle East via Turkey to Europe (to Bulgaria, Romania, Hungary and Austria). The main supplier is expected to be Iraq with potential supplies from 11 Source: Gazprom Major Russian NG pipelines to Europe

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I mports (and Pipelines) to Europe Azerbaijan, Turkmenistan and Egypt. There are doubts concerning the viability of supplies. Also the changed political situation, regional volatility and competing projects make the viability of the project doubtful. Most importantly the dependence on politically volatile and unpredictable Turkey, an ally to Iran and a doubtful to the EU ally are a source of on going controversies and considerations. Part of the EU-27 gas imports is covered by LNG shipments. LNG import capacity is unevenly distributed across the EU with the majority of it accumulated in a handful of countries. At end-2011, twenty one LNG terminals were in operation in Europe with a total nameplate capacity of 182 bcm; twelve of these terminals have been brought into service in the last decade. Currently, four additional LNG terminals are under construction in Spain (El Musel , Gijon), Italy ( Brindisi and Livorno) and Poland ( Świnoujście ). These stations are scheduled to add a further 15 bcm to EU’s import 12 Source: Wikipedia The Nabucco and South Stream pipelines to Europe

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I mports (and Pipelines) to Europe capacity by mid-2013 to 2014. Amongst the EU member-states, the United Kingdom and Germany are the largest consumers of natural gas, followed by Italy, France, Netherlands, Poland and Spain. Origin of NG imports across the member states varies. Germany, imports the vast majority of its gas volumes from Russia as do also most of the EU member states of Eastern Europe. France and Italy, however, have developed a rather extensive network that allows diversified gas inflows from Norway, Russia, Algeria and the Netherlands. The UK mostly imports from Norway and the Netherlands whereas Spain imports most of its natural gas from Algeria followed by Qatar, Egypt and other. 13 Note: Provisional data for 2010. Total EU-27 Consumption for 2010 and 2009 was 491.5 mtoe and 460.4 mtoe respectively, an increase of 6.8% Source: Eurostat EU-27, Gross Inland Consumption (million toe)

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S olution to EU NG shortage The annual NG consumption of the EU amounts to about 500 bcm. Almost half of it is imported from Russia, 160 bcm from Algeria and 90 bcm from Libya. By 2020 the demand for natural gas in Europe will increase by another 225 bcm. The total energy deficit (Oil & Gas) of the EU will therefore reach 845 bcm. These EU requirements for NG can neither be satisfied by Russia – which has 44 tcm of NG resources and an annual production of 600 bcm – as 2/3 of its reserves and production are allocated for domestic uses, nor by Algeria and Libya as their reserves amount to only 6.2 tcm. According to the USGS, besides the NG deposits already discovered in Egypt and Israel (~3 tcm), the deposits that lie in the EEZs of Cyprus, Israel and Egypt alone are conservatively estimated to another 10.8 tcm. This brings the total of proven and potential reserves to 13.8 tcm, 14 Eastern Mediterranean – Geotectonic features Source: Papanicolaou et. al., 2004 Modified by: Soil, Water & Life Solutions

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S olution to EU NG shortage an amount that is almost 12 times more NG than what Europe expects to receive via the Nabucco Pipeline (1.2 tcm). If 3 tcm is generously subtracted in order to satisfy the domestic needs of Cyprus, Israel and Egypt over the next 30 years, the remaining amount of 10.8 tcm could satisfy the EU’s energy needs by 2020 for 35 years! Bruneton , Konofagos and Foscolos in their paper of March 2012 with the title “Cretan Gas Fields – A new perspective for Greece’s hydrocarbons” claim that the hydrocarbon deposits that lie south and southwest of the island of Crete are huge; and maybe bigger than those in the Levantine Basin. The valid authors dare to state that within the EEZ of Greece there may be as much as 51 tcm of natural gas! If Bruneton , Konofagos and Foscolos are correct with their scientific interpretations and estimates and if for the sake of 15 Scientists, Bruneton , Konofagos and Foscolos, claim that there may be as much as 51 tcm of natural gas within Greece’s EEZ!

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S olution to EU NG shortage argument only half of those are taken into consideration as “exploitable”, the say 25 tcm of Greece and the aforementioned 10.8 tcm that lie within the EEZs of Cyprus, Israel and Egypt, (note that the amounts required to satisfy domestic needs have been generously subtracted), a total of 35.8 tcm could satisfy the EU’s energy needs by 2020 for 120 years! Valid questions arise over and above the several scientific, engineering, economic and geopolitical ones: Shouldn’t the EU be more actively involved in the efforts of its member countries, Greece and Cyprus? Isn’t this for the EU a project of Pan-European interest thus include it in its energy policy, coordinate and assist with technical knowhow but also with political leverage and other? As critical year 2020 is around the corner, aren’t the already scientific interpretations important enough to accelerate the EU think tanks and policy institutes view on the whole issue? 16 The scientifically estimated and confirmed deposits that lie within the EEZs of Greece, Cyprus, Israel and Egypt satisfy EU’s energy needs by 2020 for at least 120 years!

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S E Mediterranean NG Exploitation Although too early to deduct a final conclusion since, (a) Greece has not yet performed relevant seismic surveys in the offshore areas around Crete and South Aegean Sea, (b) Greece has not yet commenced exploration in neither the Cretan nor Libyan Seas, and (c) Cyprus has not yet completed its hydrocarbon exploration activities, the following circumstances should be considered for the exploitation of the natural gas deposits in the Southeastern Mediterranean: Should natural gas be exported out of Cyprus after liquefaction? And what about Cretan and Israeli natural gas? Although LNG may not be a perfect solution it offers market flexibility and potential shipment to markets where prices are higher and it is considered a less risky method for monetizing large amounts of natural gas. However, over and above the major upfront cost for the construction of a liquefaction plant, LNG costs significantly more than piped gas. Furthermore, financiers of LNG investments may want to see a medium to long term commitment to buy if they are to break ground on a new project. And for any LNG plant to be truly profitable, it would need double the amount of gas currently known so far to exist in the Aphrodite gas field, and unless more gas is confirmed within the Cypriot EEZ or extra gas volumes from Israel are guaranteed such venture remains a question. In terms of the Cretan natural gas things are simpler as the choice can only be one, a pipeline system from Crete to 17

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S E Mediterranean NG Exploitation mainland Greece and then via Italy to the rest of Europe. With Israel though the puzzle is a bit more complicated especially after an Israeli inter-ministerial committee only recently released an interim report on energy policy which amongst other recommends that natural gas infrastructures for export should be located only in areas under Israeli control. The best option for Israel would be to participate in the construction of a liquefaction plant in Cyprus for both economic and security reasons. The Leviathan field is as close to Cyprus as it is to Israel and as Cyprus is an EU-member state Israel would benefit from preferential terms for importing into other EU countries as well as EU grants. Should natural gas be exported out of Cyprus via a pipeline? And what about Cretan and Israeli natural gas? One option would be the construction of a pipeline from Cyprus to Turkey and then to continental Europe. Although, by far the cheapest solution, Turkey’s continuing violation of international law and human rights in Cyprus makes such a venture unattainable. It would be impossible to convince the Greek-Cypriots to entrust their most valuable natural resources to a country that still illegally occupies almost 37% of their land despite the numerous UN Security Council, UN General Assembly and Council of Europe resolutions calling amongst other for Turkey’s withdrawal from Cyprus. 18

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S E Mediterranean NG Exploitation The other option would be to be sending the Cypriot gas via pipeline to Israel and feed into the Arab Gas pipeline which connects Egypt, Israel, Syria and Lebanon (projected in the future to be linked to Turkey). Over and above the increased pipeline security issues, the volatility in the region, at least at present times, forbids considering such option. Another option would be the construction of an Israel-Cyprus-Greece pipeline and then to Italy and to the rest of Europe, the East Med pipeline. A challenge that is feasible but costly and it can only be justly assessed when further exploration is concluded and additional natural gas deposits are confirmed. If however the scientifically estimated deposits are proven to exist, it is undoubtedly the best long term option and solution, not only for the countries involved bur the EU as well. A solution which will liberate the EU from its energy dependence on volatile or at period “hostile” countries as both the source and the transportation mean will be owned and controlled by EU-member countries alone. Needless to mention that it would strengthen Europe’s negotiating tools in the markets... Bearing in mind that a pipeline would anyhow have to be constructed from the Cretan gas fields to mainland Greece, the challenging part of such project would be the construction of the pipeline between Cyprus and Crete. An approximate stretch of 675 kilometers at depths of about 800 to 2000 meters. In the longer term, the East Med pipeline could accept feed from the Arab Gas pipeline, Iraqi and Arabian Gulf gas fields. 19

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T he East Med pipeline? As per the map across, points “A” in Cyprus and “H” in Israel represent the origination of the East Med pipeline system; at point “C”, the pipeline reaches Crete; “E”, mainland Greece and “F” exits Greece to Italy (“G”) and to the rest of Europe. At point “F”, the Pipeline could also connect with the planned South Stream one. The most costly part of the pipeline would be between the offshore points of “B” and “C”. The distance between the islands of Cyprus and Crete (points “B” to “C”) is about 675 kilometers and the depths within this distance vary from 800 to about 2000 meters. The depth of 3000 meters could be avoided if the pipeline bypasses the Herodotus Abyssal Plain which in certain places is about or exceeds 3000 meters. The total map distance between “A” to “G” + “B” to “H” is about 1880 km. Approximately, 330 km of the pipeline lies within the EEZ of Cyprus, 1250 km within Greece’s (approx. 635 km onshore), 80 km within Italy’s and 220 km within Israel’s. 20 The East Med pipeline route? Source: Pytheas Limited; Soil Water & Life Solutions

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T he East Med pipeline? There is no doubt that the trilateral pact between Israel, Cyprus and Greece will play a key role for the energy security of the EU and the energy transportation to Europe. It will provide a third alternative energy corridor to the monopolizing by Russia, Nord and planned South Stream corridors (and pipelines). But what about the cost of the East Med pipeline? Roughly, the construction cost of a pair of 32” pipelines from Cyprus to Crete at depths of around 2000 meters is likely to be around $25 million per kilometer and to reach a 1 tcf p.a. (or about 28 bcm p.a.) capacity, the estimated capital cost for pipelines from Cyprus to Crete would be around US$20 billion. A significant amount but not prohibitive if the estimated deposits of a lot more than 50 tcm do exist... 21 The East Med pipeline will play a key role for EU energy security and an alternative to Russian-sourced Nord and South Stream pipelines

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Source: IFRI Modified by: Soil, Water & Life Solutions 22 The East Med pipeline provides a third energy corridor for the EU and eliminates the need for the under-sourced Nabucco pipeline T he East Med pipeline?

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S cenario Optimum Up until more hydrocarbons are confirmed in Cyprus and Greece, Cyprus will have to move swiftly with the construction and commissioning of the LNG onshore facilities, i.e. terminal, storage and liquefaction plant. Also pipelines connecting the Aphrodite gas field and Israeli ones with the terminal have to be designed and laid. Up until the liquefaction pant is constructed, the export of the Eastern Mediterranean NG surplus can by facilitated via compressed natural gas vessels (CNG) loading directly from the offshore field floating production systems to EU ports. Roughly, all-in costs of shipping including capital costs would be around $3/ MMBtu when average current market prices to European end users are $9/ MMBtu . In the short- to medium-term and after the liquefaction plant is operational, NG can be transported to the EU via the more efficient 23 The East Med NG – Scenario Optimum Source: Pytheas Limited; Soil Water & Life Solutions

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S cenario Optimum LNG vessels (CNG’s volumetric energy density is estimated to be 42% of LNG’s). In the long-term, following further offshore discoveries in the region, the building of a pipeline system to transport natural gas from Israel and Cyprus to the island of Crete (Greece) and then to mainland Greece and Italy into the European natural gas network makes only sense. Provided that the scientific estimates are proved to be correct the East Med pipeline could provide energy security for the EU for more than a century. In the longer term, natural gas from Iraq, Iran, Saudi Arabia and Qatar and even from the Caspian Sea could only make sense to connect to the East Med pipeline when the political environment allows... From CNG to LNG and pipeline..., the East Med pipeline seems to make only sense! 24

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S cenario Optimum Chart 25 The East Med NG deposits, an alternative energy corridor to the EU

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N ew Natural Gas Map Europe A new natural gas map for Europe is on the making! 26

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T he Geopolitical Dimension The necessity for European energy security but also the findings of significant hydrocarbon deposits in the Southeastern Mediterranean have brought attention to the strategic significance of Southeastern Europe as a source and transport hub of natural gas, a third alternative energy corridor, and a catalyst not only for EU energy security but also for regional stability. To meet increasing natural gas demand and reduce energy dependency on Russia, the EU must promote the realization of projects contributing to the diversification of natural gas supply; in parallel improve Europe’s relationship with Russia by diversifying its import routes, two targets that are not necessarily mutually exclusive. The Southeastern Mediterranean hydrocarbons from the geopolitical point of view “implicate” Cyprus, Greece and Turkey, Israel and Lebanon but also Egypt, Syria, the EU, NATO, the US, Russia, China and the UK; Asian, Middle Eastern and African natural gas producing countries. They also “implicate” the world’s biggest and smaller energy companies, their aspirations for a piece of the action but also the threat and competition faced by the South Eastern Mediterranean hydrocarbons vis-à-vis planned projects of theirs; their influence on governments and politicians... And then there is international law, could it prevail? Will Israel and Lebanon manage to put aside their differences and cooperate for the real benefit of their people or would these most valuable hydrocarbons be the cause of more tension? Will the international community succeed to silence Turkey’s war threats against Israel and Cyprus and insubstantial 27

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T he Geopolitical Dimension and against international law demands and arguments? Would a termination of the Nabucco pipeline, which will vastly diminish the geopolitical importance of Turkey as an energy hub, “force” Turkey to escalate its threats towards Israel and Cyprus to the extent of an armed conflict? Would the trilateral pact between Israel, Cyprus and Greece be considered a threat by Turkey or others and what will their response be? Should Turkey be invited to participate in the East Med pipeline if it recognizes the Republic of Cyprus and honors the UN and EU Security Council’s resolutions to withdraw its troops from the occupied by Turkey part of Cyprus? What about the Greece-Turkey and Israel-Lebanon EEZ delimitation? Will international law and sense prevail? What about the Turkish-Cypriot community? Will the finding of the hydrocarbons act as a catalyst and bridge to abandon 28 Will the Southeastern Mediterranean hydrocarbons act as a catalyst for regional stability or one for more controversy?

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T he Geopolitical Dimension illegal and insubstantial arguments or would the Turkish-Cypriots remain “slaves” of Turkey’s “Ottoman-like” foreign policy? Would Arab nations (and especially those that are natural gas producers that could eventually contribute with feeding the pipeline with fuel) participate in an East Med pipeline when Israel is a founding partner? What about the security of the envisaged pipelines and their protection from terrorist activities? How will the Southeastern Mediterranean hydrocarbons and the East Med pipeline change the geopolitical balance in the immediate and not only region? No doubt, the geopolitical dimension of the Southeastern Mediterranean hydrocarbons is complex, a fuel that could stabilize the troublesome Eastern Mediterranean region and enhance prosperity but could also fuel more tensions and controversy... 29 The Southeastern Mediterranean hydrocarbons are bound to change the geopolitical balance in the immediate region and not only!

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C hallenging considerations Complex challenges lie ahead for Israel, Cyprus and Greece but also for the EU. Challenges and considerations that will soon be shared by Lebanon as well and in the longer term Syria: Is a natural gas liquefaction plant too expensive an option for Cyprus? Would Israel partner with Cyprus on constructing an LNG plant on Cyprus soil? Will the recent announcement by an Israeli inter-ministerial committee recommending that natural gas infrastructures for export should be located only in areas under Israeli control be adhered to or adopted by the Government of Israel? Should the natural gas liquefaction plant be considered at all or should Cyprus and Israel consider only the pipeline solution to Crete and mainland Europe? Up until the natural gas liquefaction plant is constructed or pipeline to mainland Europe is laid, is CNG transportation a feasible option? Could CNG transportation be a long-term solution? Is the installation of the pipeline from Cyprus to Crete feasible, or the water depth and the underwater terrain forbid such a task? How long would such a task take? How does Turkey’s view of the delimitation of its EEZ affect the Pipeline? Should the East Med pipeline partners be forced to choose an alternative and maybe more expensive route? What should the role of the international community and the EU be on this matter? Are they well informed? Are the EU and its citizens well informed of the immense benefits that such a project would bring to them and its importance for a guaranteed primary NG source for the EU? What should be further done to inform them accordingly? 30

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C hallenging considerations Would the trilateral pact of Israel, Cyprus and Greece alone be in the position to safeguard the valuable pipeline from terrorist activities? What kind and other alliances should be sought? Have Israel, Cyprus, Greece and the EU prepared for predictable and quantifiable crises or unexpected and unwelcome events? Is a crisis management or a contingency plan in place? Should a pipeline running from Eastern Mediterranean gas fields on to Turkey and then to the proposed Nabucco pipeline or other be an EU consideration at all? Is granting companies of Russian interests gas concessions for Cyprus and the EU a wise decision? If yes, how could Cyprus’, Greece’s and the EU’s interests be safeguarded? What about the oil deposits (when for example Aphrodite gas field or Block 12 alone in the Cyprus EEZ is estimated to have a huge 3.7 billion barrels)? What is the infrastructure required? What would the economic impact of a successful exploitation of the Southeastern Mediterranean hydrocarbons for Israel, Cyprus and Greece be? What other business opportunities are created for the countries involved and the business world in general? Could a form of a JV be structured between Israel, Cyprus, Greece and the EU for the exploitation of the hydrocarbons in the Southeastern Mediterranean? What the role of the EU should be on the whole matter? 31

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As the EU is becoming increasingly dependent on imported hydrocarbons the vast majority of its member states are largely or completely dependent on a single natural gas supplier. Moreover, the EU is becoming increasingly exposed to the effects of price volatility and price rises on international energy markets and their consequences of the progressive concentration of hydrocarbon reserves in few hands. It therefore remains important for the EU to promote diversity with regard to source, supplier, transport route and transport method. Projects should be developed to bring natural gas from new regions, to set up new gas hubs in South and South Eastern Europe, to make better use and limit the currently expensive need of strategic storage possibilities (the considerable planned new investments in new storage and pipeline capacity that would be needed to ensure a higher degree of security will have to be balanced against the costs this will imply for the consumers), and to facilitate the construction of new liquid natural gas terminals. To limit EU's external vulnerability to imported hydrocarbons, and promote growth and jobs, thereby providing secure and affordable energy to consumers, Europe has to transform itself into a highly energy efficient and low CO 2 energy economy (thus limiting the use of oil and increase the use of NG which is cleaner, leading to lower emissions of greenhouse gases and local pollutants), igniting a new industrial revolution, accelerating the change to low carbon growth and, over a reasonable period 32 T he EU Role and its Importance

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time, dramatically increasing the amount of local, low emission energy that Europe produces and uses. The challenge is to do it in a way that maximizes the potential competitiveness gains for Europe, and limits the potential costs. The S.E. Mediterranean hydrocarbons provide a solution to all of the above! Without this Project, the EU’s objectives in other areas, including the Lisbon Strategy for growth and jobs and the Millennium Development Goals, will also be more difficult to achieve... The significance of the Southeastern Mediterranean hydrocarbons for the EU as a third corridor is beyond doubt. What is different about this particular corridor, over and above its huge hydrocarbon deposits, is that Greece and Cyprus are EU-member states and Israel an honest and trustworthy ally. For the first time ever in European energy history, the EU is guaranteed an uninterrupted supply of a traditional energy source of a vast magnitude and potential! Europe is confronted with a unique challenge and a remarkable opportunity and the need for EU action is stronger than ever: The EU should upgrade its role and involvement in the hydrocarbon efforts of Cyprus, Greece and Israel, to assist and ensure that an appropriate framework and solid plan are in place so that exploitation commences as quickly as possible. The EU should use its regional and global leverage to ensure that geopolitical challenges are resolved within international law and that the S.E. Mediterranean hydrocarbons become a tool for reconciliation and regional stability. The South Eastern Mediterranean corridor should be included in the EU’s Energy Policy and dealt as such. 33 T he EU Role and its Importance

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C onclusion The vulnerability of the EU to energy supply risks is a fact but this can be no more. If the 51 tcm of natural gas that scientists Bruneton , Konofagos and Foscolos estimate to lie within the EEZ of Greece, and the significant other that lie within the EEZs of Cyprus and Israel, are taken into account, for the first time ever in European energy history, the EU is guaranteed an uninterrupted supply of a traditional energy source. The estimates of reserves in the South Eastern Mediterranean can satisfy EU’s natural gas requirements by 2020 for more than a century, maybe two. What makes these findings a remarkable opportunity for the EU is that Greece and Cyprus are EU-member states and Israel an honest and trustworthy ally. A third energy corridor for the EU of the EU: The EU will no longer be a hostage to fluctuating market prices of sources that are exogenous and to other countries that may also be volatile or even against its own interests. Additionally, the related derived opportunities created in terms of EU potential competitiveness gains, EU growth and jobs and investment momentum are immense. The challenge ahead for the EU is to manage these new variables in the equation of the Southeastern Mediterranean region with ultimate responsibility and Europeanism so as to guarantee and improve the prospects, economic and social, of its citizens. 34

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C onclusion Moreover, these hydrocarbon discoveries are bound to serve as a catalyst toward greater cooperation amongst the participant countries. The joint exploitation between these countries and the launching of joint projects has the potential to change the whole political and economic scene of the entire region to the better. The different phases of the Project, further surveying and exploration, exploitation through CNG, LNG and the East Med pipeline, require joint and parallel coordination and action between Israel, Cyprus, Greece and the EU. The challenges are ample, engineering and construction related, management and time related, economic and geopolitical. Will the European Union seize this opportunity for a guaranteed energy source supply of immense magnitude and potential? 35 Will the gas-starved EU seize this opportunity for a guaranteed energy source supply?

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I. M ap Gas Europe Europe – Proposed priority axes for natural gas pipelines by INOGATE (Year 2003) 37

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II. M ap Oil & Gas Middle East Middle East – Oil & Gas Pipelines by the International Energy Agency 38

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III. W orld Oil & Gas Reserves Proved Natural Gas Reserves (tcm) Proved Oil Reserves (‘000 million barrels) Oil & Gas-starved EU has the least reserves! 39 Source: British Petroleum Source: British Petroleum

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IV. W orld Oil & Gas Production The EU has the lowest Oil & Gas Production 40 Natural Gas Production (bcm) Source: British Petroleum Source: British Petroleum Oil Production (Million tonnes)

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V. W orld Consumption Natural Gas Consumption (bcm) The EU is amongst the significant Oil & Gas Consumers 41 Source: British Petroleum Oil Consumption (Million tonnes) Source: British Petroleum

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VI. F uel Prices Fuel Prices (USD per million Btu) German NG import price is significantly higher than that of the UK, US and Canada 42 Source: BAFA, Heren Energy Ltd., Energy Intelligence Group Note: Japan = Japan LNG CIF; German = Average German Import Price CIF; UK = Heren NBP Index; US = Henry Hub; Canada = Alberta; OECD = Crude oil CIF OECD countries

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VII. E U Energy Dependence EU Energy Dependence (%) The energy dependence of the EU to especially natural gas will further increase after the recent nuclear accident in Japan 43 Source: Eurostat Note Energy dependency shows the extent to which an economy relies upon imports in order to meet its energy needs. The indicator is calculated as net imports divided by the sum of gross inland energy consumption plus bunkers.

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VIII. P hysiography of the East Med The Herodotus Abyssal Plain has the deepest waters and should be avoided by the East Med pipeline 44 Source: Ifremer -CIESM

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IX. M editerranean Gas Plants Liquefaction and regasification plants in the Mediterranean are limited to a small number of countries 45 Source: GIIGNL (The LNG Industry, 2010) Modified by: Soil, Water & Life Solutions

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X. E ast Med Energy Developments Significant hydrocarbon deposits in the Cretan Gas Fields complete EU’s energy puzzle 46 Source: Pytheas; Soil, Water & Life Solutions

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XI. E nergy Biggest Companies Global Energy Company Top 10 Rankings 2011 47 Source: Platts, Standard & Poor’s Note: Company data as 6 January 2011 The top 10 energy company rankings are dominated by Oil & Gas giants combining $178.9 of profits

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S ources (Alphabetically) Annales Geophysicae – High resolution nested model for the Cyprus, NE Levantine Basin, eastern Mediterranean Sea: Implementation and climatological runs Bruneton , Konofagos , Foscolos – Cretan Gas Fields: A new perspective for Greece’s hydrocarbon resources Bruneton , Konofagos , Foscolos – The importance of Eastern Mediterranean gas fields for Greece and the EU BP – Statistical Review of World Energy, June 2011 CGGVeritas – Regional seismic interpretation of the hydrocarbon prospectivity of offshore Syria CSA International – EIA for exploratory drilling Block 12, Offshore Cyprus ELIAMEP – A strategic challenge: The role of Greece in Europe’s southern gas corridor ELIAMEP – Consolidating the energy policy of Israel ELIAMEP – Natural gas corridors in Southeastern Europe and European energy security Eurogas – Natural Gas demand and supply: Long term outlook to 2030 Eurogas – Pipeline to the future Eurogas – The role of natural gas in a sustainable energy market FEIR – Greece as Europe’s energy highway GIIGNL – The LNG Industry in 2010 IEA – World Energy Outlook 2011 JGlobes – The status of hydrocarbon exploration in Cyprus IFRI – Oil and gas delivery to Europe: An overview of existing and planned infrastructures National Science Foundation – Optimal design of offshore natural gas pipeline systems Naval Research Laboratory – Digital Bathymetry Data Base 2 PT Online – Israel’s Gas Bonanza Noble Energy – Press release on Block 12 OGP – Petroleum industry guidelines for reporting greenhouse gas emissions PGS – The Levantine Basin draws attention to upcoming license rounds in Cyprus and Lebanon PGS – Eastern Mediterranean megaproject Pytheas – Cyprus: Finally, energy security for the EU in the pipeline? Pytheas – Cyprus hydrocarbons: A presentation Pytheas – Investing in Cyprus, an EU bridge to the world of business 48

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S ources (Alphabetically) United Nations – UN Convention on the Law of the Sea of 10 December 1982 USGS – Assessment of undiscovered oil and gas resources of the Levant Basin Province, Eastern Mediterranean Woodrow Wilson Center – Cyprus in the Eastern Mediterranean: Strategic location, strategic opportunities World Energy Council – 2010 survey of energy resources World Energy Council – Roadmap towards a competitive European energy market World Energy Council – World energy insight 2011 Regional Science Inquiry Journal – Geopolitics of energy in the Kastelorizo , Cyprus, Middle East complex Republic of Cyprus Ministry of Commerce, Industry and Tourism – Petroleum systems offshore Cyprus Spectrum – East Mediterranean 2D multi-client seismic data The Begin-Sadat Center for Strategic Studies – Eurasian energy and Israel’s choices The Geophysical Institute of Israel – The Levant Basin offshore Israel Tscherning , Arabelos – Gravity field mapping from satellite altimetry, sea gravimetry and bathymetry of the Eastern Mediterranean UACES – The pipeline diplomacy: The Greek case in the East Mediterranean energy corridors 49

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T he Author An Economist and presently the Chairman & CEO of Pytheas, Harris has also worked with the Bank of America Group, Thomson Financial BankWatch, and Moody’s Investors Service. His expertise lies primarily in the areas of investment and corporate banking and corporate restructuring, private equity and finance, risk management and business development. His research and extensive publications in these areas range across practice rather than theory, economic and business thought, entrepreneurship and geopolitics. He has been an adviser to various governments, central banks, financial institutions, and other corporates and has been a member of the board of directors of multinational organizations. Harris’ extensive and in depth knowledge of the emerging markets of Central-Eastern Europe, MENA, Gulf, and Africa is complimented by his diverse expertise in industries such are Banking, Real Estate & Construction, Hospitality, Minerals & Mining, Agriculture, Fisheries, Environment & Alternative Energy Sources, Energy, Satellite Telecommunications and Shipping. Harris A. Samaras 50

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A bout Pytheas Like Pytheas, the ancient Greek explorer, scientist and businessman we provide access to markets inviting our partners to wander the paths and explore the places with a partner that possesses, knowledge of prevailing market dynamics, thorough industry expertise, and above all keen awareness of geographic idiosyncrasies… Pytheas is an organization with global outlook, offering a wide range of sophisticated financial services to companies, governments, institutions, and individuals. Considered as one of the world's premier organizations in providing access to emerging financial markets and economies in transition, Pytheas services range from advising on corporate strategy and structure to raising equity and debt capital and managing complex investment portfolios. Pytheas' investment management capabilities are among the best in the industry, offering a wide range of investment products and solutions for the investment issues faced by our clients throughout the world. 52

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P ytheas Main Services Capital Raising Emerging Markets Research Strategic Advisory Investment Management Business Development Distress Management Risk Management Credit Rating Guidance Investment Banking Advisory Corporate Finance M&A Real Estate Private Credit Equity Finance Minerals & Mining 53

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P ytheas – Company Pulse Visit Pytheas Company Pulse 54

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P ytheas Investors Service The Pytheas Investors Service was established as a vehicle for capital and investment to advise Pytheas’ clients on how to shape tomorrow’s business global map – to be a catalyst for growth, development and diversification by better positioning Pytheas’ clients in the global markets and in their quest for excellence. In close cooperation with the rest of Pytheas’ professional network, it assists and guides clients to clearly identify and establish appropriate investment opportunities through in-depth research and analysis of the world's equities, industries, and markets. Product experts, country specialists and industry analysts work in close unison and pool their talent to design, recommend, and, when appropriate, customize and fine-tune investment strategies that clients can act on in keeping with their portfolio preferences and imperatives. The breadth and quality of Pytheas' fundamental research and strategic advice, combined with its in-depth industry knowledge and geographic specialization, offer investor clients a wealth of information to evaluate and prioritize their investment decisions. 55

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www.pytheas.net 56

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Copyright © 2012 Pytheas Limited Disclaimer The above notes have been compiled to assist you; however, actions taken as a result of this document are at the discretion of the reader and not PYTHEAS or Harris A. Samaras. Disclaimer The above notes have been compiled to assist you; however, actions taken as a result of this document are at the discretion of the reader and not PYTHEAS or Harris A. Samaras. All rights reserved. The material in this publication may not be copied, stored or transmitted without the prior permission of the publishers. Short extracts may be quoted, provided the source is fully acknowledged. Disclaimer The above notes have been compiled to assist you; however, actions taken as a result of this document are at the discretion of the reader and not PYTHEAS or Harris A. Samaras. All rights reserved. The material in this publication may not be copied, stored or transmitted without the prior permission of the publishers. Short extracts may be quoted, provided the source is fully acknowledged. All rights reserved. The material in this publication may not be copied, stored or transmitted without the prior permission of the publishers. Short extracts may be quoted, provided the source is fully acknowledged.

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