Geopolitics of Oil and Gas in the MENA Region

Abstract

The chapter examines key geopolitical aspects related to oil and gas in the MENA region. By proposing several key case studies related to the Gulf, Mashreq and Maghreb, the chapter outlines how the entire MENA region has become a major geopolitical hotspot given its key role in the current global energy system. Furthermore, the chapter takes into account several regional and international developments in order to assess the role of natural resources in the growing global energy competition.

This Chapter analyses key geopolitical aspects related to oil and gas in the MENA region.

The MENA region has become a major geopolitical hotspot given its key role in the current global energy system. Over the past two decades global oil and gas supply–demand patterns have rapidly changed with the consolidation of new major fossil fuel buyers, especially in Asia, rising climate ambitions in other world’s regions, namely the European Union, and the advent of the US as major hydrocarbon producer and exporter thank to its shale revolution. These developments have changed global players’ energy and economic interests for the MENA region. At the same time, the region has fermented with intra-regional tensions, geopolitical competition, which in some cases have entailed energy consequences.

The Gulf cluster has been characterized by two major crises: one within the Gulf Cooperation Council and the other the clash between Iran and most of the Gulf monarchies. Neither of them has been caused by energy issues. Yet, both of them have entailed profound energy consequences. The GCC crisis erupted in 2017 between some GCC countries (Saudi Arabia, the UAE, Bahrain) and Qatar because of political disagreements on regional affairs and geopolitical competition. Energy was not the cause and energy and energy trade (including Qatar-UAE gas exports) has been preserved. Nonetheless, growing political disagreements have also contributed to Qatar’s withdrawal from OPEC, though this decision was also driven by the Qatari intention to exploit its competitive advantages in natural gas. The other crisis (GCC-Iran) has been a key component of energy geopolitics of the region. The international confrontation against Iran has moreover prevented Iran to fully develop its energy resources and potential, including limiting access to key technologies, such as LNG. Geopolitical confrontations have been visible in the growing tensions around key chokepoints (Hormuz Strait) and major attacks on critical energy infrastructure in Saudi Arabia.

The Mashreq cluster has been at the center of multiple geopolitical developments in the past decade. The Eastern Mediterranean has become a geopolitical hotspot since the discovery of major offshore gas reserves. Thanks to these discoveries, some countries have become (or returned to be) net gas exporters, while geopolitical competition has increasingly soared in the region. Nonetheless, the geopolitical competition is not purely and primarily caused by energy resources. Around the Eastern Mediterranean energy resources, some countries (Israel and Egypt) have expanded and strengthen their bilateral partnerships. Other two countries in the cluster (Syria and Iraq) have experienced major political and security instability. While for the Syrian case, energy resources are not the main motive for geopolitical competition and instability, Iraq’s huge energy resources have in the past been center place of energy conflicts and they remain heavily affected by the ongoing social unrest.

In the Maghreb cluster, there are two main hydrocarbon producers: Algeria and Libya. Algeria has been a key supplier for European energy markets for many decades. The country has recently experienced major political instability especially in 2019, which resulted in the step down of president Bouteflika after 20 years of power. Rising domestic consumption and declining production have caused the erosion of hydrocarbon export volumes. Political disagreements with Morocco caused the end of gas export flows to Spain via Morocco. Italy remains a key buyer for Algeria’s gas volumes and the North African country has gained more relevance in light of Italy’s diversification efforts in response to Russia’s invasion of Ukraine. Libya has been suffering from political and security instability since 2011 when Gaddafi was overthrown. Local militias have been fighting over hydrocarbon reserves and in several occasions the operations have been halted or hindered by militias. Different factions have been fighting over the control of hydrocarbon resources and their revenues. Numerous external players have supported different local militias causing the impossibility to find a peaceful solution for the country. Libya was a key supplier for Europe, but its inability to attract investments and security concerns have left the country’s oil and gas sector underperforming.

The abundance of oil and gas resources and the strategic role of fossil fuels in the present global energy landscape have made the MENA region one of the key hotspots of energy geopolitics for decades. The region attracts numerous geopolitical and geo-economic interests of external actors, primarily the US, European countries, Russia and China. The US has been the most important external player in the Gulf region, whereas the European countries have had stronger relations with the North African countries due to their geographical proximity and historical relations (i.e. the colonial heritage). Over the last decades, other players, such as Russia and China, have increased their energy, economic and political stakes in the region. Moreover, external influence lies on regional dynamics and competition—such as the well-known and ancestral conflict between Sunnis and Shiites.

Over the last decade, the MENA region, just as the world as a whole, has undergone several major transformations in the socioeconomic, political and energy spheres, and so have the international relations of MENA countries among themselves as well as with outside players. This ongoing transformation has been characterized by several turning points: (i) the 2011 ‘Arab Spring’, with the fall of long-ruling leaders, illustrates the weakness of the political structures and social contracts in numerous countries; (ii) the signature of the JCPOA, supported by the then-US President Barack Obama, aims to redesign the regional geopolitical structure engaging with the Islamic Republic of Iran; (iii) the assertive foreign policy pursued by President Trump and the consequent withdrawal from the JCPOA; and lastly (iv) the steady American retrenchment from the region has left a political vacuum that regional and other extra-regional countries are attempting to fill.

Developments in the global oil markets and oil price volatility have contributed to reshaping some political cooperation among MENA oil producing countries and other players (i.e. the US and Russia). In a context of great regional and global transformation, it is inevitable that the balance of power within the region has suffered and will continue to suffer some major shocks.

This Chapter seeks to present and analyze these major changes and shocks for each of the three clusters: Arabian Persian Gulf, Eastern Mediterranean and Western Mediterranean. Old and new conflicts are beginning to meddle with each other. This is the result of the fading supervisor role of the US throughout the region. The reduction of US interests in the region has been caused by numerous factors: the advent of the US shale industry, the reconsideration of its role in the globe, its increasing attention to China’s rise. Whatever the reason, this process has encouraged regional countries to increase their activism to secure their own national interests.

1 The Arabian-Persian Gulf

The geographical cluster of the Arabian-Persian Gulf (hereafter ‘Gulf’) holds a special place in current energy geopolitics. Indeed, it is deeply interlinked with the development of the geopolitics of oil and gas—especially in the second half of the XX century. The vast hydrocarbon resources have positioned the area in the geopolitical energy map of the XX century.

The meeting between US President Roosevelt and Saudi King Abdul Aziz Ibn Saud on the USS Quincy in the Suez Canal on Valentine’s Day 1945 marked the dawn of a new regional architecture in the Gulf region. It also represented the beginning of the longest US relationship with an Arab State, the Kingdom of Saudi Arabia. The Gulf became the strategic heartland of America’s energy security.

The post-WWII structure of the region was then shaken by two episodes: the Islamic Revolution in Iran and the Soviet invasion of Afghanistan in 1979. When the Red Army crossed into Afghanistan, Washington expressed their strong concern for oil security, and US President Jimmy Carter outlined his doctrine (‘Carter Doctrine’), which ensured the full (even military) US protection of the Gulf monarchies. A decade later, this doctrine was implemented by President George H. W. Bush, who decided to intervene to halt Saddam Hussein’s 1990 invasion of Kuwait.

The Doctrine outlined the structure of the regional order: the US provided security for the Gulf states, which were militarily weak, ensuring that oil would flow out of the region, especially through the Strait of Hormuz and other chokepoints, to keep the world supplied. At the same time, the Gulf monarchies were committed to providing oil supplies to the US as well as the global economy. This division of tasks has remained untouched for several decades.

In the last decade, the regional order has experienced new major developments: the decision of US President Barack Obama to engage internationally with Iran—the main US regional enemy since 1979—and the advent of the US shale industry that has enabled the US to become a major oil and gas player. The US decision to engage with Iran resulted in more assertive policies of the Gulf monarchies, which considered the agreement a potential security threat fearing a potential loss of the US security umbrella. The outcome was an intensification of conflicts (i.e. Yemen and Syria) between the two parts.

In 2016, Donald Trump was elected President of the United States. The Trump administration declared Iran a major threat for the regional and international systems. Trump’s foreign policy was based on a strong political support to the Gulf monarchies (and Israel) against Iran. In a sense, this represented the return of US Middle East foreign policy to its post-1979 nature, identifying Iran as a threat while providing security to the Gulf monarchies. To do so, the Trump administration pursued the so-called ‘maximum pressure strategy’ against Tehran, seriously undermining Iran’s oil and gas production and its potential comeback to the global energy markets. In 2021, another potential key turning-point in US foreign policy occurred with the election of Joe Biden. The newly elected President supported the idea of rejoining the JCPOA in stark opposition with the previous administration. Nonetheless, a new international nuclear deal seems quite challenging due to the numerous obstacles put in place by the Trump Administration (e.g. the inclusion of the Islamic Revolutionary Guard Corps (IRGC) in the State Department’s Foreign Terrorist Organization (FTO) list).

Other major economies have enhanced their presence and relevance in the Gulf region. Russia started to increase its political and economic collaboration with the Gulf monarchies, while cooperating with OPEC for the global oil market’s stability. China has steadily strengthened its economic presence while becoming a major energy market for MENA oil and gas exporters.

Given their strategic value, fossil fuels have shaped coalitions as well as conflictual positions in the region, which has experienced two major crises with consequences on the political and economic relations of the cluster and beyond. First, the crisis within the Gulf Cooperation Council (GCC) regarding the role of Qatar. Second, the cleavage between the Gulf monarchies and Iran. In addition to these two crises, the region has seen major setbacks and transformations.

Before diving into these two internal crises in the Gulf (Sects. 5.1.2 and 5.1.3), a short introduction will outline the major evolutions of global oil markets, the role of the MENA region and the recent developments regarding the international actors in the region.

1.1 Global Oil Markets Evolutions and the Major Developments in the Middle East

In 1960, Saudi Arabia, Iran, Iraq, Kuwait and Venezuela founded the Organization of the Petroleum Exporting Countries (OPEC). At that time, the international oil industry was mainly dominated by a few large international Western oil companies, known as the ‘Seven Sisters’.¹ The creation of OPEC resulted from the interplay of different political, economic and energy relations. From the political standpoint, countries around the world were eager to take control over their destiny and resources as decolonization was unfolding.

Until the early 1970s, OPEC acted as a ‘trade union’ whose main objective was to prevent the income of its member countries from falling (Fattouh and Mahadeva 2013). During this period, OPEC did not succeed in influencing prices, but started to gain market power. In fact, the 1955–1970 period was characterized by declining prices as the Seven Sisters’ aim was to keep out competitors. Simultaneously, global oil demand increased rapidly from 30.8 mb/d in 1965 to 45.3 mb/d in 1970 (BP 2020). OPEC countries met most of this demand increase. This contributed to the shift in market power from IOCs to producing countries.

From the 1970s, OPEC, thanks to the initiative of Libya and Iran, began to reverse the power relationship between oil companies and producing countries, with a consequent increase in oil prices. Saudi Arabia is often considered the de factor leader of the Organization because of its weight in OPEC’s reserves, production and exports as well as the relative stability of its supply. However, in the first years of OPEC, Saudi Arabia did not exercise a leadership role. Its main contribution to OPEC was its ability to ensure a consensus-building approach and distance OPEC from the inter-Arab conflicts (Al-Moneef 2020). Saudi Arabia stepped up its prominence within OPEC decisions in the 1970s by leading Arab oil production cuts until late 1973 thus initiating the oil price rise and leading OPEC to assume the price administration role. Saudi leadership was expressed through the charismatic figure of Ahmed Zaki Yamani, who served as Saudi Minister of Petroleum and Mineral Resources from 1962 to 1986 and key figure of OPEC for 25 years.

The economic recession of the 1980s, combined with the growth in non-OPEC crude oil production prompted by high oil prices, caused a decline in oil demand in the mid-1980s depressing oil prices. Global oil markets turned from a ‘seller’s market’ to a ‘buyer’s market’. In 1982, OPEC introduced a formal quota system, which however did not help reverse the slide in the oil price. Over 1982–1985, Saudi Arabia acted as ‘swing producer’, absorbing the brunt of OPEC’s supply adjustment. The loss of market share and low prices proved to be costly for OPEC countries, and in particular Saudi Arabia. In 1985, Saudi Arabia decided to abandon the defense of the official OPEC price and opted for defending its market share. From this shift, a 15-year period of moderate oil prices was inaugurated, which ended with the second oil price boom over the 2000–2014 period, which was fueled by China’s impressive and long-lasting economic growth. After the economic crisis, where oil prices plummeted, from 2011 to mid-2014, global oil markets were broadly stable with prices included between 100 and 120 US$ per barrel. Demand was recovering from the 2008 financial crisis, whereas supply was growing, especially driven by the US shale oil boom. Geopolitical aspects contributed to shaping the supply side in those years. The political instability in Libya significantly reduced its oil output, while Iranian production dropped by almost a third due to the western embargo on Iranian oil exports since 2012. Moreover, the rise of ISIS in northern Iraq and the Russia-Ukraine crisis have contributed to maintaining oil prices above $100 per barrel because of the fear of potential supply disruptions. However, in 2014 oil prices collapsed, with Brent dropping from $111/barrel in June to $62 in December. The preceding years had witnessed a strongly growing US shale oil output (4 mb/d of output were added between 2010 and 2014) fueled by high prices, and at the same time moderate oil demand growth rates due to these very same high oil prices. The collapse of oil prices in 2014 was determined by the Saudi decision to drive higher-cost competitors (i.e. US shale producers)—which had been eating into the revenues of established producers—out of the market. Pouring additional barrels into the global oil market (and thus ending its strategy of withholding production in order to maintain high prices), Saudi aimed at stopping its fall in the market share due to the ever increasing US shale production. Going forward, with the world engaged in decarbonization, and the power struggle between established OPEC+ producers (which can sit together and collectively try to shape a strategy), and US shale oil producers (which cannot sit at a table with OPEC+ because they are very dispersed), will inevitably lead to an uncoordinated oil market and thus high volatilities.

Falling oil prices in late 2014 and early 2015 (Fig. 5.1), which remained low until early 2022, have seriously challenged the Gulf economies, forcing them to consider how to diversify their economies. Since then, the area has witnessed major developments with rising competition among countries, major regional crises and the growing influence of non-US power.

Fig. 5.1

Source Authors’ elaboration on BP Statistical Review of World Energy, June 2021

Oil crude (Brent) price, 1965–2020, US$ per barrel.

Notwithstanding this general context, Russia increased its presence in the Middle East. As mentioned before, Moscow actively supported Bashar al-Assad in Syria with the deployment of the Russian army. Moreover, in December 2016 OPEC agreed with a group of non-OPEC countries on a curtailment of crude oil. The two groups’ leaders and the kingmakers of the so-called OPEC+ ²agreement are Saudi Arabia and Russia. Since the great reliance on hydrocarbon rents of these countries, the decline of oil prices threatened their economic and social stability, following a period of high oil prices. Although prices matter, this union is not just about oil prices. Indeed, the Saudi-Russian cooperation can be explained by several geopolitical elements, beyond the economic rationale.

Russia looked for opportunities to increase its influence in the region beyond its existing partnerships (i.e. Iran and Syria), to avoid getting stuck in the prevailing divisions of the region. Moreover, Moscow aspired to being considered a global power in key geopolitical stages. Its involvement in Syria, Libya, Iraq and its improving ties with Sunni Arab Gulf states, along with Israel, symbolize this ambition. Russia’s Sunni Muslim minority could also have contributed to Russia’s decision to consolidate ties with Sunni Arab Gulf states.

Meanwhile, Saudi Arabia was interested in hedging its foreign policy by establishing a firmer alliance with Russia because of the retreating US influence in the region. In 2017, King Salman became the first ever Saudi monarch to visit Russia, cementing the Saudi-Russian ties. Their relationship is mainly centered on energy issues. The two countries discussed potential partnerships and investments, without, however, attaining any concrete results. This contributed to increasing internal frustration in Russia regarding the OPEC+ agreement. It is also important to note that the two countries disagree on several regional geopolitical issues, notably Syria, Iran, Qatar. And it seems reasonable to believe that oil cooperation will not reduce such disagreements.

China is another player that is advancing its relations with the Middle East area. Energy is one important element of Sino-Gulf relations. Indeed, the relationship can appear as a natural fit. China is a fast-growing energy market, while the Middle East countries hold a significant portion of the world’s oil and natural gas reserves and they are major producers and exporters. Beijing has become the world’s largest oil importer, importing more than 11 million barrels per day in 2018 (BP 2020). The Middle East accounting for more than 40% of China’s oil imports, explains the importance of Sino-Gulf relations. China’s growing energy market is particularly important for Gulf countries, which struggle to secure energy exports. Saudi Arabia competes with Russia to rank the largest source of oil for China. Other Gulf countries export significant quantities as well. For example, Iran managed to continue exporting hydrocarbons to China, which provided vital financial revenues. China is also becoming a major LNG market, becoming one of the largest importers in the world with Japan and South Korea. That is particularly relevant for Qatar, which aims to gain market share through long-term contracts, as seen in the 22-year contract for LNG signed in 2018.

However, China’s influence on the region does not end with energy. Between 2000 and 2017, trade between China and GCC countries has grown from just under $10 billion to nearly $150 billion per year (Fulton 2019). Moreover, China’s foreign direct investment into GCC countries has increased, with over $60 billion invested between 2005 and 2017. Chinese companies have won several major infrastructure construction contracts in the Gulf monarchies, such as the lead venue for the 2022 FIFA World Cup in Qatar, Lusail Stadium, or Saudi Arabia’s Yanbu Refinery as well as the highspeed rail line that connects Jeddah with Mecca and Medina. Sino-Iranian relations have expanded significantly both politically and financially as well as from the energy perspective. The two countries signed a 25-year partnership agreement that envisages ambitious cooperation targets in the investment, economic, political and security fields.

Thanks to their geographical position, the Gulf countries could also contribute to the success of a major Chinese project: the Belt and Road Initiative (BRI). The Arabian Peninsula as well as Iran hold great geostrategic importance, linking South and Central Asia to the MENA region and further to the Mediterranean. Although the newcomers (Russia and China) have increased their stakes in the area, the US is still the dominant power in the Gulf. Washington guarantees security in the region, ensuring that oil chokepoints such as Hormuz remain open.

1.2 GCC Crisis: Political Causes and Energy Implications

The political and energy interests of the three main countries of the Arabian Peninsula (i.e. Saudi Arabia, the UAE and Qatar) have become increasingly conflicting as a result of growing intra-regional tensions. The major outcome of these tensions has been the crisis within the Gulf Cooperation Council (GCC) which started in 2017 and ended in 2021.

The GCC is a regional organization created by Saudi Arabia, the UAE, Qatar, Oman, Kuwait and Bahrain in 1981. These six countries decided to constitute the GCC motivated by the need for an effective collective security institution. Back then, the region had witnessed some major security developments: in 1979 the Islamic Revolution in Iran and in 1980 the beginning of the Iraq-Iran War. Thus, GCC countries were worried about how these developments could threaten their vital security interests.

Since the 2011 Arab Spring, the entire MENA region experienced an intensification of tensions and competition among its key regional players. As a consequence, in June 2017 Saudi Arabia, the UAE, Bahrain—along with Egypt—decided to cut off diplomatic relations with Qatar and imposed a land, sea, and air blockade on the peninsular Emirate, preventing any economic exchange with it.

The key reason for this dramatic decision was Qatar’s alleged support to political Islam and extremism. Moreover, the core competition lies in the substantial differences in foreign and regional policy. For years, Qatar has operated as the main supporter of the Muslim Brotherhood, while Saudi Arabia and the UAE have seen the Muslim Brotherhood as an existential threat to their domestic stability and order. Moreover, the two blocs disagree on their approach towards Iran: Doha is more willing to adopt a cautious approach towards Tehran, whereas other Gulf monarchies look at Iran as a competing regional country and a security threat (see Sect. 5.1.3).

Although Qatar and Saudi Arabia had disagreements before, the GCC crisis came as a surprise for Doha. Saudi leadership was quite cordial to Qatar in the years before the blockade. Nevertheless, higher security concerns and increasing divergence on foreign and regional policies were exacerbated by the more assertive and personalized foreign policy of the new young regional elites, such as Saudi Crown Prince Mohammed bin Salman. He has undertaken to operate more actively and decisively on the regional stage, personalizing Saudi foreign policy.

Another source of higher security and political concerns has been the political vacuum left by the US, the traditional security guarantor. Although the US remain the main security player in the region, Washington has started to reconsider its role in the region’s security architecture, aimed at avoiding additional conflicts and costs as well as repurposing its attention to other world regions (i.e. Asia). All of these elements led to a deterioration of intra-regional relations.

In January 2021, the GCC embargo was officially lifted at the 41st GCC Summit in al-Ula under the lead of Saudi Arabia which aimed to ensure its good will and standing with the new and more Saudi-skeptic administration in the US. Despite the positive development, the key issues that led to the blockade have not been resolved, meaning that renewed tensions could emerge among the countries in the future. Moreover, the crisis has reduced the relevance of GCC for Qatar. For example, the GCC no longer serves its purpose as security provider for Qatar. Indeed, the key security allies for Qatar are the US and Turkey. With Washington, Doha built a protective relationship when it signed the 1992 Defense Pact. The security relation was enhanced when in 2002 Qatar began hosting US forces et al.-Udeid, home to the largest US military base in the Middle East. Yet, during the first phase of the embargo, the US-Qatari relationship was questioned as President Trump expressed his support to the blockade. This political position shifted only after the intervention by then-Secretary of Defense James Mattis and then-Secretary of State Rex Tillerson (Smyth 2020). Over this period, Qatar and US have re-consolidated political relations with two state visits by Qatar’s Emir to the US in 2018 and 2019.

The GCC crisis has pushed Doha toward other countries, making GCC countries less relevant for Qatar’s trade and economy. By contrast, China, India, Iran and Japan are more important partners than the three hostile GCC countries (al-Jabar and Coates Ulrichsen 2020). After three years, the blockade has achieved little or nothing. Qatar has strengthened its relations with Turkey, increasing food imports, upscaling security as well as financial and economic ties. Moreover, Doha has begun using Iranian airspace for its flights and Iranian territorial waters aiming to avoid disruption to its energy exports. Moreover, the blockade decided by three GCC countries (Saudi Arabia, the UAE and Bahrain) did not receive the support of the other GCC members, while obtaining Egypt’s solidarity, showing the limitations of their political decisions and actions.

Given the important role of the GCC countries in the oil and gas markets, at the time of the crisis outbreak, concerns were expressed about its potential spillovers to the energy sphere. However, these countries have managed to limit damages in the energy markets. Firstly, there are no substantial oil or gas exchanges between Qatar and Saudi Arabia or Bahrain. Thus, the political tensions between these countries have had limited impacts on their energy policies. However, Qatar does export gas to the UAE via the Dolphin pipeline.³

Despite the deterioration of the political relations between GCC countries, the contending countries preserved a pragmatic approach regarding energy relations. In 2019 Qatar exported 19.5 bcm to the UAE and 2 bcm to Oman. These figures illustrate that the ongoing GCC crisis did not affect existing energy relations. This is also due to the fact that Doha does not want to be seen as an unreliable supplier hence choosing not to shut down its gas flows to the UAE, albeit its great political isolation.

Nonetheless, future gas relations may be hindered by the remaining distrust among countries coupled with a shift in energy strategy. Indeed, the UAE’s state-owned energy company, ADNOC, has recently expressed its intention to reach gas self-sufficiency. This strategy could undermine future gas flows through the Dolphin pipeline. Yet, questions over economics may arise as the pipeline provides cheap gas (still below $2/MMBtu) to the UAE (S&P Global 2019).

Even though Qatar would represent one of the least costly solutions for GCC countries Bahrain, Kuwait and the UAE, thanks to short pipelines or existing LNG facilities, an interconnected gas network in the GCC has been hindered by Saudi concerns over Qatar’s influence in the region. That was the case of the Qatar-Kuwait pipeline project. In the early 2000s, Kuwait and Qatar discussed the construction of a gas pipeline, but in 2006 the project was vetoed by Saudi Arabia forcing Kuwait to turn to LNG imports. On the other hand, Saudi Arabia and the UAE are committed to developing and increasing their domestic gas production, for example from the Jafurah shale development in Saudi Arabia or the Jebel Ali gas field in the UAE, even though production from these formations requires significant investments. In conclusion, Qatar represents the least costly solution for GCC gas ambitions, but political tensions and personalized foreign policy often undermine a political solution and an improvement of intra-GCC (gas) relations.

Although energy has not been an issue of the embargo, it is clear that the enormous role of natural gas for Qatar is a crucial element of inter-regional tensions. Natural gas, and the LNG industry, has allowed Qatar to amass vast financial reserves, which have been used to extend its soft power across the region, and pursue a more autonomous foreign policy vis-à-vis its neighbors, such as Iran. Saudi Arabia and Qatar represent two of the most relevant countries in the global energy system, with two opposite energy sources: Saudi Arabia holds a leading position in global oil markets, whereas Qatar in global gas markets.

As Sect. 3.1.2 explained, Qatar has developed its LNG industry since 1996, rapidly becoming the world’s largest LNG player. In 2019, it exported 107 bcm of LNG, exporting 72 bcm to Asia and 32.2 bcm to Europe. Benefitting from its geographical position between Europe and Asia, Qatar has the possibility to implement a diversified strategy of energy security of demand and supply two major gas markets. However, its leading role in the global LNG market is threatened by the advent of other major LNG exporters, notably Australia, the US and Russia (Fig. 3.12, see Chap. 3 Sect. 3.1.2). These three countries, along with Qatar, are expected to lead the LNG industry in the upcoming years. All of them are increasingly looking to Asia, Qatar’s main gas markets. Higher competition is likely to take place also in the European gas markets as LNG is seen as the main solution to reduce Europe’s dependence on Russian gas in the medium term.

However, Qatar has taken courageous decisions during the embargo years despite low energy prices and an oversupplied market. In 2017, Qatar lifted its self-imposed 2005 moratorium on the expansion of North Field, which will expand its LNG export capacity from 77 million tons per annum (Mtpa) in 2017 to 110 Mtpa in 2026. In 2019, Doha announced a second stage that will ultimately increase output to 126 Mtpa in 2027. The expansion strategy aimed to use Qatar’s numerous competitive advantages to respond to mounting competition from other LNG exporting countries despite low oil and gas prices. The first new volumes from North Field are expected to be available by late 2025. Moreover, Qatar is further consolidating its LNG position through the Golden Pass LNG project⁴ in Texas in collaboration with ExxonMobil—Qatar Petroleum’s first overseas investment in a liquefaction project. The over 10 billion USD project has a capacity of around 16 Mtpa of LNG and exports are expected to commence in 2024. By 2024/25, Qatar is expected to regain its leading role in the LNG industry. Lastly, in 2018 Qatar decided to integrate its two energy companies (Qatargas and RasGas) in order to improve the efficiency of its energy industry and benefit from its several competitive advantages.

Throughout the years, Qatar has increasingly prioritized its gas industry over oil. This was clear when it withdrew from OPEC in 2018. Qatar was an OPEC member since 1961, and although it is not the first country to leave the organization, it is the first country from the MENA region to take such a decision. For oil markets, the decision has little relevance: in 2017 Doha produced 600 kb/d of crude oil, less than 2% of OPEC’s oil output. It is more a political matter. The small emirate’s decision was driven partially by its desire to free itself from transnational institutions that are under de facto Saudi leadership. Also, Qatar was able to withdraw from OPEC because it earns far more from natural gas and related liquid products than from crude oil. LNG provided 42% of export earnings for the country from 2013 to 2017 (Tsafos 2018). However, the role of gas is far more important than this as Qatar is a major producer and exporter of condensates and natural gas liquids, which can only be recovered by producing natural gas. On international markets, liquids command a much higher net-back price than gas. Moreover, Qatar is also home to the largest Gas-to-Liquids (GTL) plant—known as ‘Pearl GTL plant’—jointly operated by Shell and Qatar Petroleum, which however is only profitable when oil prices are very high.

The leading role in the LNG industry has granted newfound political support since late 2021 when Europe has started to deal with rising energy prices and a growing political crisis, which erupted in 2022 with Russia’s invasion of Ukraine. The US and the European countries have been courting Qatar to supply the European gas markets. Qatar expressed its availability to divert some LNG volumes to Europe if Russia decided to cut its gas supplies as geopolitical tensions were surging. This approach granted Qatar newfound status in the US as well. In early 2022, the Emir of Qatar visited the White House and US President Biden announced that the US would grant Qatar the title of major non-NATO ally. This was also due to its crucial diplomatic role in key regional issues for the US: Afghanistan and Iran. In short, in just a year (2021–22), Qatar has managed to regain centrality in the political debate after the isolation period (GCC Embargo 2017–21).

The Ukraine war and the European Union’s consequent wish to reduce as much as possible and as quickly as possible its gas dependence on Russia, is boosting Qatar’s relevance in global LNG markets and helping to consolidate Doha’s newfound political and strategic status in the West. Qatar holds extensive competitive advantages in the LNG industry as its LNG projects are generally attractive in economic terms, resulting in a lower effective average cost of LNG production compared to other competitors. This is also due to the production of condensate and natural gas liquids in association with natural gas. Moreover, Qatar is in a favorable geographic position between the two major global LNG markets—Asia and Europe—and thus able to play in both markets.

1.3 GCC Versus Iran

The animosity between most of the Gulf monarchies and the Islamic Republic of Iran has been a feature of the regional political competition since 1979. This can be attributed to the historical division between Sunni and Shiite. However, different Sunni countries do not share the same approach regarding relations with Iran. Precisely the different approach towards Iran is one of the main causes of the GCC crisis described in previous Sect. (5.1.2). Doha has adopted a cautious approach towards Tehran, eager to promote economic and cultural links. The Qatari approach is mainly motivated by the need to avoid collision with the country that controls the other half of the North Field (South Pars in Iran), which is the source of Qatari wealth. By contrast, other Gulf monarchies see Iran as a competing regional country and a security threat.

Since the Islamic Revolution in 1979, Tehran has felt isolated in the region due to constant pressure. Indeed, Tehran has attracted the animosity of the US, Gulf monarchies and Israel. Right after the Islamic Revolution, Tehran had to face the eight-year war against Iraq. As a response to these challenges, Tehran built a coalition of Shiite groups across the region as the foundation of its sphere of influence, and used those factions to shape events in the region (Friedman 2019a, b). The Iranian arc of influence covers Iraq, Syria, Lebanon and Yemen. However, though its influence in the region is large, it is far from absolute; it is indeed vulnerable to other powers’ activities.

The US identifies Iran and its sphere of influence as a significant threat to U.S. interests and allies since the foundation of the Islamic Republic of Iran and the overthrowing of the Shah. Washington’s main strategic goal in the region is to counterbalance Iran’s influence and prevent any single power from dominating the region. This strategic opposition was sharpened by the US ‘War on Terror’ and the State of the Union speech given by President George W. Bush in 2002 in which he articulated the existence of an ‘axis of evil’, composed of Iran, Iraq and North Korea.

That speech and the ‘War on Terror’ had a traumatic impact on the region’s politics. Indeed, the US invasion of Iraq in 2003 created space for the empowerment of Shi’a parties supported by Iran, following the dismantlement of the Ba’ath regime of Saddam Hussein. Further pressure and enmity have occurred with the advent of the Trump Administration and its ‘maximum pressure’ strategy. Between these two phases of hostility, President Barack Obama tried to engage positively with Iran through an international agreement and by reducing the burden of economic sanctions on Iran’s economy. With the election of Joe Biden in 2020, the US has recommenced nuclear talks and engagement with Iran with the aim to re-create the international framework on nuclear issues despite the numerous challenges.

Since the 1980s, sanctions have been an essential component of US policy towards Iran. At first, US sanctions were intended to prevent and cease Iran’s support to terrorist groups and to limit its strategic power in the Middle East. Since the mid-2000s, the US and its international allies have imposed sanctions targeting Iran’s nuclear program with the aim to persuade Tehran to agree to limiting it.

Sanctions have targeted several sectors of the Iranian economy, with a special focus on the energy sector given its great potential. Throughout the years, countries, mainly the US and the EU, and international organizations, such as the UN, have issued a complex set of sanctions that forced international companies to leave Iran, limited the international sale of Iranian oil, prevented American and European investments in the Iranian energy sector, excluded Iran from the SWIFT banking network, and effectively forced major European banks and insurance companies to stop dealing with the country.

International sanctions have strongly affected Iran’s gas export potential as they have prevented access to the LNG technology. Indeed, Iran and Qatar, which share the North Field/South Pars field, have experienced opposite results in the LNG, with Qatar becoming the leading player while Iran holding zero LNG capacity. For many years, Iran has considered LNG exports in order to fully exploit its large gas reserves. The Iranian ambition clashed with the reality of international sanctions that stalled LNG projects over the past decades. An example, French’s Total and Royal Dutch Shell had two projects, the 10 Mtpa Pars LNG and 16.2 Mtpa Persian LNG, respectively. However, they had to abandon them as sanctions intensified in the 2000s and early 2010s. International sanctions prevented the development of the two LNG projects under the management of the state-owned oil company NIOC due to the re-imposition of sanctions in 2018.

The sanctions enforced by the US and the EU in 2012 had negative repercussions on Iran’s economy as well as on its oil and gas production. Iran’s oil production declined to 2.7 mb/d in 2013, down from 3.7 mb/d in 2011 and Iranian exports of crude and condensate shrunk from 2.5 to 1.1 mb/d in the same period (Jalilvand 2018a). Iran tried to offset the negative consequences of international sanctions, creating a set of counter policies under the umbrella of the ‘resistance economy’ strategy. Under this economic strategy, companies affiliated to the Islamic Revolutionary Guard Corps (IRGC) sought to fill the gap left behind. However, neither IRGC nor the National Iranian Oil Company (NIOC) managed to counterbalance the loss of cooperation with Western companies. Indeed, Iran was unable to stop the decline of its energy industry under sanctions (Jalilvand 2017).

The Iranian energy industry experienced a spark of hope with the signing of the Joint Comprehensive Plan of Action (JCPOA), known as the ‘Iran nuclear deal’. It was concluded in July 2015 between Iran and the ‘E3 + 3’, composed of the European countries France, Germany and the UK, along with the EU, and the world powers, the USA, China and Russia. The JCPOA was formally implemented on January 16, 2016. It allowed the lifting of several sanctions against Iran in exchange for limitations on, and greater international inspections of, Iran’s nuclear program. Under the deal, European companies were allowed back to Iran, investments in the energy sector were possible again and restrictions on exports were no longer in place. Even though the JCPOA did not completely erase uncertainty and all contentious issues, its implementation attracted the interest of several international oil companies (IOCs) from around the world. Numerous companies began signing several memoranda of understanding (MoUs). Among these companies there were American-Dutch Schlumberger, British-Dutch Shell, Chinese CNPC, French Total, German Wintershall, Italian Saipem, Japanese Inpex, Norwegian DNO, and Russian Gazprom.

In July 2017, Iran reached a first and important milestone by signing a $4.8 billion contract with Total and CNPC, which formed a consortium to develop the eleventh phase of the giant South Pars. The contract was welcomed enthusiastically at first, but it turned out to be the exception rather than the rule; indeed, it did not produce further deals with Western partners.

Total had a long history with Iran’s energy industry, having developed the second and third phases of the South Pars field, and it was the last European company to leave the country in 2010. Additionally, Total affirmed that it could afford the initial investment of $1 billion from the company’s own cash reserves, overcoming a major obstacle to cooperation and investment in the country. Moreover, the decision to cooperate on gas rather than oil was probably motivated by the belief and hope that natural gas projects in Iran might be more acceptable to the US than oil (Jalilvand 2018b). Indeed, natural gas is mostly used for the Iranian domestic market, whereas oil is exported abroad providing hard currency for the Iranian regime. For example, in 2016, the IMF estimated that Iran’s oil exports account for between 50 and 60% of total exports and almost 15% of GDP (Ratner 2018). This is the main reason why Washington imposed sanctions on Iranian oil, aiming at preventing revenues that could finance Iran’s activities in the Middle East.

In March 2018, Iran signed a second contract with a foreign company, Russia’s state-owned Zarubezhneft, marking a potential growth of international cooperation. The Russian company agreed to develop jointly with NIOC and private Iranian company Dana the Aban and West Payedar oil fields, both shared with Iraq. Under the 10-year deal, the Russian company had a stake of 80% (Jalilvand 2018a, b). Moreover, Zarubezhneft would have provided enhanced oil recovery (EOR) technologies that would allow adding 48,000 b/d to Iran’s production from the two fields. The advent of a Russian company was a major news for Iran, representing Iran’s ambition to diversify its international energy portfolio. Indeed, all previous international energy contracts were concluded either with Asian or (West-) European companies.

Meanwhile, the removal of several international sanctions contributed to the increase of domestic output (back to 4.5 mb/d in 2016) and its comeback into the international oil markets. Iran has increased its oil production to 4.5 mb/d in 2016.

The JCPOA was also a major change for US regional policy. It was at the heart of Obama’s vision on the region. Obama decided to engage positively with the moderate and reformist area of the Iranian regime, led by President Hassan Rohani and Foreign Minister Mohammad Javad Zarif. However, the substantial change of the US Middle East policy caused alienation between Washington and its more traditional allies in the region, notably Saudi Arabia, the UAE and Israel. These countries expressed their great anxiety over the risk of the fading US security supervision within the region as well as its engagement with Tehran.

Saudi Arabia is seen as the regional nemesis of Iran. Traditionally, the 1979 Revolution is considered as the watershed moment in the region. This event certainly played a crucial role in shaping the relationship between the two countries. However, in the years before the revolution, both Iran and Saudi Arabia were seen as ‘twin pillars’ of Gulf security following the UK withdrawal from the region. In this security structure, Iran played a key role as a bulwark against the Soviet threat to the region (Mabon and Wastnidge 2020). Both countries had regional ambitions and roles as major oil producers. Nevertheless, as Riyadh began to assert its position as a key oil producer, it was able to undermine Iran’s regional clout thanks to its role in the Arab oil embargo in response to the Yom Kippur War and its rapidly swelling coffers (Idem). Thus, in the lead up to the events of 1979, both states ramped up their military spending to reinforce their regional standing and domestic control. Since the 1979 Islamic Revolution, Saudi Arabia and the US has consolidated their security ties more and more.

Obama’s decision to engage with Iran has shaken the traditional security and political structure of the region. Moreover, under the Obama Administration, the US foreign policy has begun to focus toward other areas, notably Asia (i.e. “pivot to Asia”). Simultaneously, in those years, the US had increased its oil and gas domestic production, resulting in a decrease of reliance to Middle East hydrocarbon imports. These transformations contributed to increasing uncertainty in the region, with Saudi Arabia and the UAE starting to fear that the US security umbrella would be reduced or worse. That led to a more assertive foreign policy undertaken by these regional players and their leadership. In this scenario, in 2015 Saudi Arabia and the UAE waged the Yemen war, seeking to restore the previous Yemeni government to power. The military operations targeted the Houthis group, backed by Tehran, starting another proxy war between Saudi Arabia and Iran.

However, the election of Donald Trump as President of the US in November 2016 marked the turning point of this region’s politics. He has consolidated a strong (personal) relationship with the Saudi and Emirates leadership—particularly with the Saudi Crown Prince Mohammed bin Salman. An odd group of countries has been gathered around Trump’s foreign policy toward Iran. Indeed, the strong animosity against Tehran was welcomed by Saudi Arabia, the UAE and Israel. Israel and the Gulf monarchies have begun a coordinated action against Iranian activities in the region, marking a major development in the region’s politics. The three countries were particularly worried about Iran’s nuclear program, criticizing the signature of the JCPOA. Thus, they found a new ally in Washington with the advent of Donald Trump. Indeed, during the presidential campaign and his presidency, Trump has openly criticized the Iran nuclear deal, condemning Iranian activities in the region against US interests and allies.

In the pursuit of reducing Iran’s sphere of influence in the region, the Trump Administration established the so-called ‘maximum pressure’ strategy, designed by Ambassador John R. Bolton.⁵ Under this strategy, the US has re-imposed sanctions against Iran weakening the international architecture of the JCPOA. On May 8, 2018, the Trump Administration announced the immediate and full withdrawal from the JCPOA, resuming all nuclear-related US sanctions. To further put pressure on Iran, on November 6, 2018 Washington re-imposed all US secondary sanctions, which are applied also to third countries that have economic ties with Iran. The US has increased its pressure on Iran’s energy industry through its unilateral sanctions. The US decided to prevent not only the international sale, but also exports of Iranian oil products and natural gas—unlike before the JCPOA (Jalilvand 2019). At the same time, the US decided to grant temporary sanctions waivers⁶ to eight importers of Iranian oil: China, Greece, India, Italy, Japan, South Korea, Taiwan, and Turkey. In doing so, these countries could continue importing Iranian oil for a period of 180 days.

Despite these concessions, the US decisions prevented Iran’s full return to the international energy landscape. All IOCs left the country in 2018 and Iran’s oil exports fell sharply. Crude oil exports collapsed from an average of 2.5 mb/d in 2017 to just around 1 mb/d in April 2019 (Greenley 2019). In the first half of 2020, Iranian crude and condensate exports averaged just 238,000 b/d, worsening Iran’s economy. Oil and gas revenues brought in just $8.9 billion for the last Iranian calendar year², compared to $27.8 billion in the year before—the last year before the renewed sanctions took effect.

The unilateral withdrawal from JCPOA reverberated also on transatlantic relations, with a political drift between Washington and its European allies. Indeed, Europeans expressed their commitment to keeping the JCPOA in place, supporting trade and investments with Iran. In August 2018, the EU introduced its Blocking Statute, asking European companies not to follow US sanctions. Yet, all European IOCs left the country and by February 2019 no Iranian oil reached European shores. As a consequence, Iran lost the European market which accounted for 25% of its exports in 2017 (Jalilvand 2019). Asian countries were also affected by US decisions. Most of them are also traditional allies of the US, such as South Korea, Japan and India.

Russia and its energy relations with Iran were affected too. On the one hand, Russia effectively cancelled its investment in Iran made by Zarubezhneft. On the other hand, Russia has benefited to some extent from the US sanctions regime against Iran’s oil and gas sector. The blockade of Iranian oil has left room for other producing countries, including Russia. As the grades of Russia’s oil are similar to Iran’s, Moscow has thereby contributed to replacing Iranian oil globally.

One major consequence of the maximum pressure strategy has been the increase of security concerns among US regional partners. Tehran has responded to increasing pressure with some important activities and operations in the region, which led to an intensification of tensions among regional players. Iranian activities and responses targeted both Saudi and international oil facilities as well as energy infrastructures. Additionally, Iran has decreased its compliance with some of the nuclear commitments of the JCPOA since mid-2019.

Since May 2019, Iran has staged operations in the region, increasing tensions on the global oil market. For example, Tehran targeted ships in port, then tankers in transit and finally it captured a British tanker and crew on the high seas. These activities were undertaken in the world’s most important chokepoint for oil and gas trade: the Strait of Hormuz (Map 5.1).

Map 5.1

Source https://fas.org/sgp/crs/mideast/R45281.pdf

Persian Gulf and the Strait of Hormuz. Note Location of terminal icons are indicative and not a precise location.

Iran has always used the Strait of Hormuz as a strategic element of its security policy. It has never hesitated to use it as a geopolitical instrument for pressuring the change of US policies. For such reasons, every time tensions in the region rise, concerns about the chance of a closure of the Strait by Iran are expressed globally. Therefore, there is a direct correlation between the threat level perceived by Iran and the actions undertaken by the regime in the Strait. Its actions must be read with this lens.

The Hormuz Strait is a crucial element of the global oil and gas market. In 2018, the daily oil flow through this narrow passage—just 41 km wide at its narrowest point—averaged 21 mb/d, which accounts for about 21% of global petroleum liquids consumption. The top oil supplier through the Hormuz Strait is Saudi Arabia, followed by Iraq. Given the security risks, alternative routes are often considered by Gulf producers. Until 2021, the only operating bypass pipelines are of Saudi Arabia and the UAE: Riyadh has the East–West pipeline and the UAE controls the Habshan-Fujairah pipeline. However, these existing alternative routes are very limited and face some challenges.

The Saudi East–West pipeline carries crude to the Red Sea Yanbu ports, which have crude storage of around 22.5 mn b/d and can export in excess of 5 mn b/d. The pipeline delivered 1.53 mn b/d to refineries in 2018, which would still leave space for more than 3 mn b/d crude for exports—less than half of typical Saudi exports of 7 mn b/d. Saudi Arabia is boosting its Red Sea capacity by expanding the East–West pipeline to 6.5 mn b/d by 2023 in order to further reduce its vulnerability on Hormuz. Saudi vessels headed to Asian markets would need to pass through the Bab al-Mandeb. The Habshan-Fujairah pipeline links the onshore Habshan with the port of Fujairah located outside the Strait of Hormuz. Abu Dhabi typically exports up to 800,000 b/d from Fujairah, while total Emirati exports are typically around 2.4 mb b/d. Thus, the two alternative routes could accommodate an additional 3.5 million barrels per day. However, to put into context, it corresponds to only 17% of current Hormuz oil exports (Schaus 2019). Furthermore, also these routes have been targeted by some attempted attacks, leaving the security concerns unanswered. Indeed, the Bab al-Mandeb is a perilous stretch of water and there have been episodes of attacks to Saudi tankers in July 2018 when transiting the passage.

In July 2021, Iran itself has built and inaugurated its first oil export terminal on the Indian Ocean. The Bandar-e Jask terminal cost $2 billion and is located at the end of the 1,100 km-long Goureh pipeline (with a transmission capacity of 1 mb/d) in the Gulf of Oman (Map 3.2 in Chap. 3 Sect. 3.1). Obviously, the construction of the terminal is not motivated by security concerns over blockade, but it can provide new room for future periodic threats from Iran to block Hormuz. Indeed, until the commissioning of the terminal, Iran would have blocked also its own oil export.

It is clear that a potential closure would have important consequences for importing countries depending on the degree of reliance on oil or gas imports from this area. From this perspective, Asian countries are more reliant on the hydrocarbon trade through Hormuz than Western countries (Fig. 5.2). In 2018, 76% of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets; with China, India, Japan, South Korea as the largest destinations (accounting for 65% of all Hormuz crude oil and condensate flows in 2018). In terms of volumes, China is the largest importer of oil from the region, but it is not the most reliant country on these flows given the size of its overall oil demand. Japan, South Korea and India are particularly dependent on these exports. The US still imported 1.35 mb/d in 2018 (Schaus 2019).

Fig. 5.2

Source CSIS research and analysis using data from EIA, IEA, PPAC, KEEI, and PAJ; John Schaus and Andrew J. Stanley, “Oil Markets, Oil Attacks, and the Strategic Straits,” CSIS, CSIS Commentary, July 19, 2019, https://www.csis.org/analysis/oil-markets-oil-attacks-and-strategicstraits. Reprinted with permission

Asian Importers rely heavily on Hormuz Export Flows.

Thus, Japan, South Korea and India have an immediate vulnerability to any potential disruption at the Strait. However, an extended disruption would have pricing impacts not limited only to these markets but globally. The Asian economies would feel more economic pressure, while the US could have some benefits as exporter. However, also the US economy would be affected to some extent by higher prices, as the entire world’s economy.

The Strait of Hormuz is critical also for the global LNG trade. Indeed, the Middle East accounted for 26.3% of global LNG exports in 2018, being one of the main supply sources of LNG in the world. Qatar exported 76.8 Mt (24.5% of global LNG exports), while UAE exported 5.5 Mt (1.8% of global LNG exports). These LNG volumes must pass through the Hormuz Strait. Although the maritime natural gas trade through the Hormuz Strait represents a relatively small proportion of global natural gas trade (8.4%), any disruptions to these flows could have severe energy pricing impacts for LNG dependent importers. Of the top 10 importers of Qatari LNG (the main source from Hormuz), eight are Asian countries and two are European, stressing the shift of destination of Qatari LNG throughout the years (Table 5.1). This could potentially change in the future as Europe seeks to import high LNG volumes to reduce its overdependence on Russia’s gas.

Table 5.1 Top 10 importers of Qatari LNG in 2021, (MT)

However, the world today is very different from the one of 1973. Recent assertive operations along this narrow passage had a smaller impact on oil prices. By contrast, geopolitical risks added a premium to oil prices in the 1970s. Today, climate policies and technological developments are expected to drastically reduce the use of hydrocarbons. Moreover, over the period 2015–2020, both oil and gas markets witnessed an oversupply condition with low prices. Therefore, assertive operations along this narrow passage had less impact than those back in the 1970s. Nevertheless, some countries are concerned about regional tensions in the Hormuz Strait, especially those that rely heavily on oil and gas flowing through the Strait and that could be harmed by potential disruptions. In 2018, 76% of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets; with China, India, Japan, South Korea as the largest destinations (accounting for 65% of all Hormuz crude oil and condensate flows in 2018). A different scenario would be a closure of the Strait, which currently seems unlikely. A complete blockade of transits through Hormuz would cause major oil and gas price spikes and potential disruptions due to the relevance of exporting countries in this region for the global oil and gas markets.

China has been a major importer of Iranian oil, helping the Iranian regime to collect revenues that are vital for its economy. Following the JCPOA, China’s CNPC entered the Iranian upstream sector through the international consortium with Total for the development of the eleventh block of South Pars. Beijing has also been one of the top importers of Iranian oil. In 2018, Iran exported around 650,000 b/d of oil to China (S&P Global 2020a, b). However, Iranian oil exports to China were severely hit by US sanctions. Indeed, in the second half of 2019, Iranian crude and condensate exports declined to around 225,000 b/d down from around 400,000 b/d in the first half of the year (Idem). Moreover, CNPC left the consortium for the development of the eleventh block of South Pars, following Total’s withdrawal in August 2018, showing the Asian buyers’ sensitivity to US sanctions.

Moreover, China must face a broader and increasing political confrontation with Washington. Since Beijing is one of the most relevant importers of Iranian oil, China will want to avoid Iran’s crude imports getting caught up in the broader US-China relations—mainly in light of the risk to its large energy traders—even as negotiations with the US have once again reached a dead-end (Meidan 2019).

An example is the US Department of State’s announcement on July 22, 2019 concerning its decision to impose sanctions on a Chinese trader, Zhuhai Zhenrong, and its chief executive for knowingly purchasing or acquiring oil from Iran, contrary to US sanctions (Idem). The US decision was driven by the need to pursue its maximum pressure strategy. Meidan (2019) explains that the US decision may be seen as a sign of further escalation in the already fraught relations between the US and China, but in reality the choice of Zhuhai Zhenrong allows both the US and China to maintain opposing diplomatic stances on Iran, without further damaging their increasingly tense bilateral relations. Indeed, Zhuhai Zhenrong has limited exposure to the US market, so the designation is effectively meaningless (Idem). Despite the effects of these sanctions, Beijing will therefore tread carefully with its Iranian imports.

Regional tensions reached a new level on September 14, 2019, shaking the oil markets. On that day, a drone and missile strike hit Saudi Arabia’s Abqaiq and Khurais oil facilities. Iran’s direct (or indirect through its proxy) role in the attacks was a critical development in the region’s politics and in the global energy system. Indeed, Friedman (2019a, b) explained that Iran aims at generating pressure on the US to ease US pressure on the Iranian economy. Tehran identified Saudi Arabia as both vital to the anti-Iran coalition and yet vulnerable to regional tensions. Additionally, Tehran evaluated that Saudi is most vulnerable in oil revenue. So, it supported the attack in order to demonstrate the vulnerability of the Saudi oil industry, while reducing Saudi oil production and inflicting real pain (Idem). Indeed, Abqaiq is the most important oil facility in Saudi Arabia; the plant has a processing capacity of 7 mb/d. Although it was running at 4.5 mb/d at the time of the attack, its capacity accounted for more than 50% of the Kingdom’s output (MEES 2019a, b, c). The Saudi Energy Minister affirmed that the attack curtailed Aramco production by 5.7 mb/d to around 4.1 mb/d, implying that the Khurais facility operated at 1.2 mb/d at that time (Idem). Despite its profound significance, the action had only a limited effect on the global oil market and on oil prices. Also, the US did not respond as strongly as they would have done in the past. This can be mainly motivated by the impressive growth of US domestic oil production, which has reduced Washington’s vulnerability and produced a more assertive foreign policy.

The greater assertiveness of US foreign policy thanks to its oil production was reaffirmed by a remarkable operation. On January 3, 2020, the US killed Iranian Lieutenant General Qassem Soleimani, head of Iran’s Islamic Revolution Guards Corps (IRGC) Qods Force, with an air strike at the Baghdad International Airport. It was an unprecedented event, given the relevance of the target. The air strike produced a sense of uncertainty on the GCC countries and US regional allies, which called for a de-escalation of regional tensions. Indeed, the Sunni countries have begun to fear a military escalation between the US and Iran, especially after Iran demonstrated its capability to target both Saudi and Emirati shipping and assets. This risk persuaded leading GCC players to take a more prudent approach, adopting a relatively conciliatory tone.

With the election of Joe Biden, the US has restarted talks with Iran in Vienna aimed at re-establishing the JCPOA. A potentially renewed JCPOA could contribute to bringing Iranian hydrocarbons back to the international energy markets. Yet, the diplomatic effort faces several challenges. Within the US, Republicans have expressed their opposition to the deal, while in the region the US needs to address Gulf countries’ concerns. Lastly, Western sanctions imposed on Russia following its invasion of Ukraine have driven Russia to abandon its facilitating role in Iran’s nuclear negotiations. Moscow has requested Western governments guarantees that the sanctions related to the Ukraine invasion do not affect and threaten Russia’s relationship with Iran. In doing so, Russia has limited the potential comeback of Iranian oil into the world’s tight market and halted the negotiations.

2 Mashreq

The East Mediterranean cluster, which in this book comprises Egypt, Iraq, Israel, Jordan, Lebanon, Palestine and Syria, has been characterized by rising geopolitical tensions and energy hopes. Over the past decade, energy and power politics have shaped major developments in the area. A growing number of exploration and production activities in the Eastern Mediterranean Sea have brought several oil and gas discoveries offshore Egypt, Israel and Cyprus. Meanwhile, Iraq and Syria have experienced serious social unrest and military conflicts within their borders, which reverberate throughout the entire region.

Cooperation and competition have developed often around energy as it plays an important role in the area. In this cluster, Iraq, Egypt and Syria are traditional hydrocarbon producing countries, while Israel has become a gas producing country only in the last decade. By contrast, Lebanon and Jordan have not found exploitable reserves so far. Old and new regional competition meddles with new energy discoveries and regional energy potential. This section will analyze first two of the traditional hydrocarbon producers in the area: Iraq and Syria. The other major hydrocarbon producer, Egypt, will be analyzed with special emphasis on the East Mediterranean gas saga, which started around 2010.

2.1 Oil and Gas Sector in Conflict Countries: Iraq and Syria

• Iraq

Within the East Med cluster, Iraq stands out as a major oil player. Iraq holds a great amount of reserves of oil and gas (145 thousand million barrels and 3.5 trillion cubic metres at the beginning of 2020, respectively). Iraq holds the world’s fifth largest proven oil reserves, accounting for around 10% of the global total. Most of its resources are considered as the world’s least expensive and easiest oil to extract. Although these reserves are geographically dispersed throughout the country, the majority is located in the south, concentrated in and around the city of Basra, while 17% are found in the north. According to the IEA (2019), Iraq’s oil fields in the South contain abundant conventional, low-cost onshore oil resources. This area are also includes the “big 4” oil fields of Rumaila, West Qurna, Zubair and Majnoon. The “big 4” fields combined account for 60% of Iraq’s oil production in 2018, and an estimated 70% of the increase in Iraq’s production to 2030 (Idem).

Rumaila and West Qurna are ranked among the top-15 largest oil fields globally based on remaining reserves. By contrast, just under a fifth of Iraq’s production in 2018 came from the North, primarily from the Kirkuk and Bai Hassan fields. The area of Kirkuk is where Iraqi oil was first discovered in 1927, but the area is at the heart of the dispute over land rights and oil revenue sharing between the central government in Baghdad and the Kurdistan Regional Government (KRG) in Erbil, which delayed the development of the region’s resources. It has been further frustrated by the battles against ISIS in the 2014–17 period.

However, Iraq’s oil production and exports have consistently lagged behind the potential of its resources. For example, Iraq’s oil output (1.3 mb/d) did not diverge widely from that of Saudi Arabia (2.2 mb/d) in the mid-1960s; but Iraq had reached only 2 mb/d in 1973 while at the same time Saudi production was close to 8 mb/d (IEA 2012). Additionally, three wars (against Iran from 1980 to 1988 and US-led coalition forces in 1991 and 2003), international sanctions and internal instability have prevented Iraq’s oil output expansion. For example, Iraq had some success in the 1970s, bringing oil towards the strategic goal of creating a 5.5 mb/d production capacity by 1983 formulated at that time. However, this goal was never reached because of the Iran-Iraq war. The war reduced Iraq’s production to 1 mb/d, with exports collapsing from 3 mb/d to 750,000 b/d. A subsequent plan to raise capacity to 6 mb/d by the mid-1990s was once again not realized, because of the First Gulf War in 1991. The US-led Operation Desert Storm inflicted severe damages on Iraqi oil infrastructure. Lastly, Iraq’s oil output suffered another major setback following the US-led invasion in 2003 and the collapse of the former Hussein regime. Indeed, it fell from 2.5 mb/d in the early 2000s to approximately 1.4 mb/d after 2003.

Conflicts and regional politics have also affected Iraqi export growth and potential routes, particularly from the northern region. Indeed, oil produced in the southern regions is exported via sea from the Basra and Khor al-Amaya ports. However, the existing infrastructure does not provide adequate capacity for the potential growth of export volumes. Instead, most of Iraq’s major crude oil pipelines are located in the north (Map 5.2).

Map 5.2

Source https://www.eia.gov/international/content/analysis/countries_long/Iraq/iraq_bkgd.pdf

Iraq’s oil and natural gas infrastructure.

The Iraq-Iran War altered the Iraqi pipeline map. At the time, Iraqi oil moving eastwards via Syria was blocked due to President Hafez al Assad’s support to Iran during the conflict. Therefore, with no viable export route for Iraqi oil through Syria, Baghdad increased its reliance on Turkey via the Iraq–Turkey pipeline (whose capacity was raised from 750,000 b/d to 1.5 mb/d) (Mehdi 2018). Additionally, Baghdad tried to further diversify its export routes striking a deal with Saudi Arabia to have a pipeline from southern Iraq to the Saudi Yanbu port on the Red Sea. It was commissioned in 1990 but closed and expropriated by Riyadh after the Iraqi invasion of Kuwait (IEA 2019).

Iraq’s oil exports are mainly shipped to Asia, which accounts for over 60% of its total crude oil exports, while Europe is the destination of 25% of Iraq’s crude oil exports. Asia, China, India and South Korea are the key buyers of Iraq’s crude oil, with China and India importing almost 1 mb/d each.

Despite damages due to conflicts and impressive domestic challenges, Iraq has been able to nearly double its oil production over the past decade to 4.7 mb/d, accounting for a fifth of the net increase in global supply. In 2019, Iraq ranked as the fifth-largest source of global oil supply (IEA 2019). The recent growth cemented Iraq’s position as OPEC’s second largest producer, with federal production capacity just under 5 mb/d as in early 2020. Oil production growth has produced an increase also in the export volumes, with southern exports passing from 1.7 m b/d in 2007 to an average of 3.5 m b/d in 2019.

Oil and gas are core pillars of the country’s economy, accounting for almost 60% of the country’s GDP, 99% of export earnings and 90% of government revenues, making the Iraqi economy one of the most oil-dependent in the world (IEA 2019). At the same time, this abundance is also Iraq’s Achilles’ heel due to poor management and its unstable political economy. Following a “pro-cyclical” fiscal policy, the Iraqi economy suffers the volatility of oil prices, especially when oil prices fall under its breakeven fiscal price undermining the government’s expenditures and plans to improve the living standards of its own citizens.

Moreover, the Iraqi energy sector must deal with some challenging features. Iraq’s oil sector has been undergoing a significant upstream growth, while its midstream and downstream have failed to keep pace. Unlike its upstream regional peers, Iraq is the only major producer heavily reliant on refined product imports, reflecting an underdeveloped refining system and a misalignment between the production yield of Iraq’s refining output and its domestics demand (Mehdi 2018).

The hydrocarbon industry is also at the center of a national political debate between the central government in Baghdad and the KRG in Erbil. Baghdad and Erbil have debated strongly over the control of the resources and their revenues. Under the 2005 Iraqi constitution, KRI enjoys considerable administrative autonomy. However, relations between the KRG and the central government are shaken by issues concerning territory, energy and revenue sharing. As already mentioned, Erbil and Baghdad fight over the control of the oil-rich area of Kirkuk. In 2014, the Iraqi military abandoned Kirkuk, as ISIS was emerging and expanding across the area. The Kurdish Peshmerga units fought against ISIS and regained control over the area. From that moment on, the Kirkuk oil has been sold by the KRG rather than the central government. This has inevitably ignited Baghdad’s opposition. In 2022, the Federal Supreme Court ruled Iraqi Kurdistan’s 2007 oil and gas law unconstitutional. The law regulates the Kurdish oil sector and is the basis for foreign companies’ investment in the region.

Oil is essential for the cash flow of both Baghdad and Erbil, but the two entities disagree over oil export revenues. In September 2017, the KRG held a controversial advisory referendum on independence, amplifying political tensions with the national government. As a response, the Iraqi military forces reentered some disputed territories, regaining control of some oil fields in the region. The two entities have extensively discussed revenue sharing and exports of oil and gas produced in the country. In 2018, the central government and the KRG reached an agreement to resume the export of Kirkuk oil to Turkey’s Ceyhan port via the KRG pipeline, which can handle up to 1 mb/d of export flows (IEA 2019). Regarding export routes through KRI, Russia has risen as a potential broker of a deal between Baghdad and Erbil.

Moreover, Iraqi ambitions to increase its oil production in the future cannot be translated into reality unless significant quantities of water are available for field injection. Indeed, many of Iraq’s oil fields have relatively low recovery factors. Therefore, secondary oil recovery is needed to boost recovery factors and maintain or increase production rates. Being essential for secondary oil recovery, water availability and supply are great concerns for the Iraqi oil industry and IOCs in the country. For example, plans were drafted in 2011 to build the Common Seawater Supply Project (CSSP) that would process seawater from the Gulf and transport 5 mb/d of treated seawater to the largest oil fields in the South to be used for injection. IEA (2019) estimated that in total, by 2030, over 8 mb/d water will be required for Iraq’s oil production, up from 5 mb/d used in 2019.

Contrary to its well-developed oil sector, Iraq’s gas sector has been ignored for a long time. Its reserves and production are large, but Baghdad has not been able to use it efficiently and sufficiently. The vast majority of its gas reserves is associated gas, with some significant reserves of non-associated gas. Since Iraq does not have adequate infrastructure in place to allow the production of associated gas and provides few incentives to produce and use it efficiently, Iraq flares a large portion of its gas production, ranking as the world’s second-largest source country of flared gas in the world behind Russia. However, natural gas would be highly beneficial for Iraq’s economy and independence. As of today, Iraq continues to suffer power shortages, which often lead to social unrest like that occurred in Basra in mid-2018.

The great potential of Iraq’s oil and gas industry has attracted several foreign companies and actors. Some IOCs have invested in the promising Iraqi oil upstream sector. The IOC operations in Iraq are governed by the Technical Service Contract (TSC) model. Under the TSCs⁵, IOCs are reimbursed for their production costs on a quarterly basis and receive a taxable remuneration fee on incremental production, meaning production above pre-contract levels. The big 4 fields (Table 5.2) are operated by ExxonMobil (West Qurna-1), BP (Rumaila), Eni (Zubair) and Lukoil (West Qurna-2).

Table 5.2 Companies in Iraq’s “big 4” fields

IOCs have contributed to sustaining and developing Iraq’s oil sector. Also, the natural gas sector has attracted some major international companies. For example, Shell decided to end its oil activity in Iraq but it is the most active IOC in the gas sector through its gas-capture program in Basra, which is jointly operated with the Iraqi government (the Basrah Gas Company) (IEA 2019).

Furthermore, Baghdad’s energy sector is caught up in the competition between Washington and Tehran. Iraq relies heavily on Iran both for electricity and natural gas. As previously mentioned, Iraq flares the vast majority of its gas output and at the same time imports gas from Iran. In 2019, Baghdad received around 7 bcm of gas and 1.57 GW of electricity. Some experts have estimated that Iran, directly and indirectly, met a whooping 28% of Iraq’s peak summer power supply (MEES 2020a). The US seeks to create and support a strong Iraq, capable of tackling Iran’s expansion activities in the region.

Because of its geographic location in the center of the Levant, Iraq has long been a key state in the Middle East balance of power. Moreover, additional geographical features (proximity to the Mediterranean, an easy access to the Persian Gulf, abundance of proven oil and gas reserves) make Iraq an interesting state for regional stability and competition. Therefore, Iraq has been in the midst of the competition between the US and Iran, being a key part of the Middle East strategies of both countries. Both US and Iran want to prevent Iraq from becoming too powerful as it was between the 1980s and 2000s, but their approach towards Iraq diverges. Iran seeks to project its influence across the region; thus, it wants to keep Iraq fragmented and easily exploitable through the support of Shia militias in the country. Inversely, the US wants to strengthen Iraqi institutions in order to weaken Iranian influence in the country. In doing so Baghdad will be able to stand on its own again, frustrating Iran’s plans. This strategic goal will enable the US to achieve its long-term objective to reduce its presence in the region (Rose 2020). With this strategy, the US aims at reducing the use of hard-power projection in the region, choosing to rely on soft-power as its primary tool of influence in the Middle East. Given the great competition between Iran and the US in Iraq, energy ties between Baghdad and Tehran produce concerns in Washington for two reasons: firstly, because Baghdad is considerably dependent on its neighbor, which can try to exploit this advantage; and secondly, because Tehran can collect revenues from its exports to Iraq, undermining the US “maximum pressure” strategy. Nevertheless, Iraq has sought relief from US sanctions on their imports from Iran since 2018. In 2020, following the formation of the new Iraqi government, the US granted Baghdad another sanctions waiver (for 120 days) to continue importing natural gas from Iran. The US keeps granting Iraq waivers as long as they make long term progress toward independence for its energy sector. Iraq is trying to keep its promises, ending imports by 2022 and relying solely on domestically produced gas. Despite the effort, the target seems unreachable in the short term. Baghdad is too dependent on Tehran and the interruption of gas imports would provoke power shortages and social unrest.

For these reasons, the Trump Administration promoted and invited US companies to aid Iraq’s power generation capacity and gas sector to help Iraq achieve energy independence. The US companies can provide the expertise and investment that Iraq’s oil and gas sectors are desperate to attract. Yet, the Administration’s praise has very limited positive results as the US firms still hesitate to invest in risky Iraq. Domestic instability, security concerns and the unfavorable investment environment make IOCs unwilling to enter the country. For example, Exxon Mobil was awarded the Common Seawater Supply Project (CSSP) in 2010, but Iraq suspended the project contract in 2011 after Exxon signed an oil extraction deal with KRG in the north (the Pirmam block). Four years later, Exxon reportedly re-entered the project, but little progress has been made. In 2019, ExxonMobil was given the initial government nod for its involvement in the South Iraq Infrastructure Project (SSIP), which could contribute to the positive development of the Iraqi energy sector. However, the presence and future investments of US companies might suffer setbacks due to security concerns as well as unstable and unfavorable conditions.

A potential supporter of Iraq’s energy independence could surprisingly be Iran’s bitter rival Saudi Arabia. Indeed, Saudi Arabia and Iraq have halted bilateral relations since 1990. However, there was a rapprochement in 2015. That year, Saudi Arabia returned an ambassador to Iraq after an almost 25-year absence. A Saudi-Iraq rapprochement has always been called by the US, in the belief that it could undermine and curtail Iran’s influence in the country. However, the US decided to apply a more pragmatic diplomacy in Iraq, abandoning its assertive foreign policy against Iran, which has produced no remarkable success so far (i.e. Yemen War, Lebanon and GCC crisis against Qatar) (Mansour 2018). Saudi Arabia has some political and economic tools to gain influence in Iraq. Firstly, it can exploit the growing intra-Shia rift in the country. Indeed, numerous protests have taken place in Iraq against the elite, criticized of being too dependent on and influenced by Tehran. Secondly, it can propose strengthened integration, establishing interdependencies with Baghdad and weakening the role of its regional antagonists Turkey and Iran. Iraq would welcome Saudi investments in its oil and gas sector as well as in the reconstruction process, and Saudi Arabia would be pleased to reduce Iran’s influence in the country. One sector in which the mutual goals could be easily achieved is power generation. If Saudi Arabia helps Iraq overcome its lasting electricity shortages, it would be a major diplomatic success. In this context, through the GCC Interconnection Authority (GCCIA) Saudi Arabia and its allies have already agreed to help Iraq providing 1 GW via Kuwait to Basra (MEES 2020b). Moreover, a separate agreement could see Saudi Arabia provide additional electricity via its grid at Arar within a year. These projects could result in Saudi Arabia and the GCC supplying 10% of Iraq’s electricity demand (Idem). This would be an important step toward deepening Saudi-Iraq relations; however, it is unlikely to wean Iraq off Iranian electricity imports in the short-term.

In 2021, Total signed with Baghdad a $27-billion deal to invest in oil, gas and renewables in the country. This represents a new formula of major deal, addressing both fossil fuels and renewable energy, to help Iraq improve its electricity supply. Under the deal, the French energy major plans to initially invest $10 billion in infrastructure, which will then allow a second round of investment of $17 billion. The first investments cover: (i) increasing oil production capacity from the Ratawi oil and gas field in the Basra province from 85,000 b/d to 210,000 b/d of crude oil; (ii) new gas gathering networks and treatment units to supply local power stations and optimization in the oil and gas production; (iii) the construction of a water injection facility for reinjection into oil reservoirs; and (iv) 1GW solar facility for power generation.

Besides the US (and Saudi Arabia) and Iran, other countries are interested in the Iraqi energy sector, albeit the numerous challenges. Russia and China are two of the most relevant countries in Iraq. These two countries began to enter the Iraqi energy sector when Saddam was in power. Indeed, Saddam signed two major Production Sharing Contracts (PSCs) with Russian and Chinese companies in the 1990s. One of these was with Lukoil for West Qurna, while the other with CNPC for Ahdab. The choice of Russian and Chinese companies was due to sanctions. Whilst Lukoil’s contract was cancelled in 2002 for failure to perform, the PSC with CNPC was renegotiated as Iraq’s first major Technical Service Contract (TSC) in 2008.

Energy is a key pillar of bilateral relations: Russia has invested more than $10 billion in Iraq’s energy sector over the last decade. Moscow has sought to gain influence in the country since 2003, when the new government in Baghdad cancelled many of the Saddam Hussein-era energy contracts. In 2008, Russia agreed to write off most of Iraq’s $12.9 billion debt in exchange for a $4 billion oil deal that included access of Lukoil to the West Qurna-2 field. Lukoil has managed a 75% stake of the giant oilfield since Equinor left in 2012. Furthermore, Russian companies have gained relevance also in the KRG since 2012. Russian companies have increased their footprint as American and Western energy companies began to decrease their presence due to security concerns—especially after 2015/15 due to ISIS—and recent major discoveries around the world. Lukoil and Gazprom Neft entered the energy market of the KRI in 2012 and have won a number of contracts since (Sassi 2019). Lukoil played an important role also in exploration activities. In 2017 it discovered the largest Iraqi oil field of the last 20 years, Eridu, whose reserves were estimated to be as high as 7–10 billion barrels. The field is operated by Lukoil (60%) and Inpex (40%). Gazprom Neft participates in several oil and gas projects in the region (the Garmian and Shakal blocks), but it faces logistical and security concerns that delay the progress. Gazprom Neft is also developing the Badra oil field in eastern Iraq.

In recent years, the Russian giant oil company, Rosneft, has stepped up as a leading partner for the energy sector of both central government and KRG, signing oil contracts with both entities. However, since 2017, Rosneft has surged as a main investor in Iraqi Kurdistan. Indeed, it has invested a significant amount of money securing a solid position in the area. Between 2017 and 2018, Rosneft has signed multiple deals with the KRG for a total value of about $3.5 billion. This represented a potential lifeline for KRG energy development. Firstly, it signed a contract for the purchase of Kurdish oil in February 2017. Rosneft lent Kurdistan around $1.2 billion to cover the region’s budget deficit. In October 2017, the KRG allowed Rosneft to carry out exploratory work covering five blocks within its territory under a PSA. The contract was estimated at $400 million. In October 2017, Rosneft has agreed to take control of Iraqi Kurdistan’s main oil pipeline, which connects the Kirkuk oil area to Turkey’s Ceyhan port. Rosneft owns 60% of the pipeline while the KAR Group retains 40%. The investment was about $1.8 billion. The role of Rosneft in the Kurdish oil export lines provides Russia with a degree of leverage with Baghdad, placing Rosneft and Russia at the center of talks between Baghdad and Erbil.

Rosneft has also consolidated its activities in the rest of the country, balancing its support to the Kurdish area and the central government. It discovered new reserves in Block-12, in south-eastern Iraq, which could contribute to the increase of export volumes. In May 2018, Rosneft enhanced its presence in the KRI, signing an agreement for the development of gas reserves in the area. The deal also includes the construction of a gas pipeline (whose capacity would be around 30 bcm) for exports to Turkey. It would run parallel to the existing oil export pipeline, meeting with the Turkish gas pipeline system. Rosneft’s involvement in Kurdish natural gas development and export routes sparks competition with its domestic rival, Gazprom (and its subsidiary Gazprom Neft). Russia’s role in Iraq’s energy sector underscores how Moscow sees energy as a foreign policy tool, gaining influence through its companies and taking advantage of the fading role of the US in the entire region. Through investments in upstream and pipelines, Russia aims at holding a favorable strategic position in the long-term with the KRG, Baghdad and also widely with regional politics. Nonetheless, there are growing questions over the ability of Russian companies to invest in Iraq and actively operate their assets after being hit by the international sanctions following the Ukraine invasion.

China and Iraq have enhanced their bilateral relations throughout the years. Their political and economic relations have improved despite the wars, sanctions and domestic unrest experienced by Iraq. In September 2019, the two countries signed eight wide-ranging MoUs, a framework credit agreement, and announced plans for Iraq to join China’s Belt and Road Initiative (BRI) (Calabrese 2019). The two countries have been strengthening their trade ties. Bilateral trade amounted to $30 billion in 2018. By contrast, the volume of bilateral trade between Russia and Iraq amounts to $1.7 billion. The lion’s share of China-Iraq’s bilateral trade consists of Iraq’s crude exports. In 2018, it amounted to $22.5 billion. This figure illustrates the relevant role that energy plays in the bilateral relations. With the PSC in the 1990s to CNPC for Ahdab the involvement of Chinese energy companies began. However, their involvement had been halted between 2003 and 2007, during the domination of US and Western companies after Saddam’s fall. In August 2008, CNPC managed to renegotiate a contract with Baghdad to implement the Ahdab oilfield, which was the first major oil deal Iraq made with a foreign company since 2003. This renegotiation marked China’s commercial comeback in Iraq. Its growing appetite for energy has led China to enhance its presence in Iraq’s energy sector. The energy relations between these two countries have grown and expanded since then. Indeed, in 2009 during the first round of bidding, the Chinese NOC CNPC (partnered with BP) struck a major deal in Iraq, winning a service contract to develop the Rumaila oilfield, the largest oilfield in Iraq (Idem).

CNPC further boosted its presence in the country six months later when it won the contract for developing Iraq’s Halfaya oilfield, jointly with Total and Petronas (Idem). In the same year, China secured a presence in Kurdistan through the acquisition of Addax Petroleum’s operation in the region made by Sinopec. Baghdad inevitably expressed its strongest opposition to the acquisition. The central government cancelled Sinopec’s participation to bid for oil and gas licenses because of its ties with Erbil. Despite some disagreements on Erbil, Beijing has managed to expand its presence in Iraq through its companies. In 2013, China increased its strategic presence when PetroChina entered the West Qurna-1project, reaching a 32.7% stake in the project. Moreover, Chinese services and engineering companies obtained contracts in important Iraqi oilfields; for example, since April 2011, CPEEC has been the main contractor of the Rumaila oil field, and in 2018 China’s Anton Oil was awarded by Basra Oil Company a 3-year contract to ramp up production at the Majnoon field after Shell’s departure. Chinese companies are also called in Iraq to foster recovery in several oilfields. For example, in May 2018 Zhenhua Oil finalized an agreement to develop Iraq’s huge 8 billion-barrel East Baghdad field. Through the deal, Zhenhua has the chance to become a potentially key player in Iraq’s upstream sector. The East Baghdad field has a great potential, which is not properly expressed. Zhenhua was mandated to exploit this great potential, increasing production from the current 10,000 to 40,000 b/d by 2023. However, it is encountering multiple challenges related to investments and the infrastructure required to achieve the target. Despite some delays, Chinese companies have emerged as a major player in the Iraqi oil sector (MEES 2020c). China is importing a growing volume of Iraqi crude and it is committed to securing stable supplies. This is also why the Chinese companies (notably CNPC and CNOOC) are seriously considering buying ExxonMobil’s 32.7% stake in the West Qurna 1 license. Currently, the field is producing 465,00 b/d of oil, with a plateau target of 1.6 mb/d by the 2030s.

China is not only a key investor in Iraq, but it is also a key market for Iraq’s oil exports. Iraq was China’s second largest oil supplier in 2019. Additionally, Chinese dependence on energy imports from Iraq accounted for 8.9% in 2019 (ChinaMed 2020). China is becoming more and more interested in the reconstruction effort of the country. The World Bank estimated Iraqi needs of post-ISIS reconstruction at $88 billion (World Bank 2018). A potential response came from the visit of Iraqi then-Prime Minister Adel Abdul Mahdi to China in September 2019. During that visit, Iraq and China agreed on an “oil-for-reconstruction” and investment program. Under this agreement, Iraq would sell around 3 million barrels of oil a month to China in exchange of projects that Chinese companies would carry out in the country (Al Monitor 2019). The projects should be related to the construction and modernization of critical infrastructure such as roads, railways, schools, hospitals, residential cities, ports and airports (Idem). Such an agreement should last 20 years. Nevertheless, the deal has been heavily criticized domestically because the government did not disclose its details. Although political instability has cooled down the implementation of the deal, China has not reduced its engagement with the country. In 2021, Sinopec won a deal to develop Iraq’s Mansuriya gas field near the Iranian border, while Beijing struck $10.5 billion in new construction deals in Iraq in the same year, cementing its position in the country.

It is noteworthy to underline a trend in the Iraqi energy sector and the involvement of foreign companies and countries. In the aftermath of the fall of Saddam’s regime, US and Western countries had a special advantage. Through the IOCs, these countries supported Iraqi oil production growth. However, the role of IOCs, most of which from Western countries, in Iraq’s oil production, has gradually decreased. Indeed, today around half of Iraq’s oil production is operated by IOCs, down from around 65% in 2012 (IEA 2019). The (Western) IOCs have tended to be replaced by NOCs, notably from Russia and China. A low security environment, an oversupplied oil market, low oil prices, unfavorable economic and social conditions undermine the involvement of IOCs. For example, in 2021/22 ExxonMobil announced its decision to exit Iraq altogether. The IOC decided to quit the Primam block in KRG and announced its intention to sell its share of the West Qurna-1 field.

By contrast, Russian and Chinese NOCs have shown a great propensity to take risks, aiming at increasing their relevance in the Iraqi energy sector with a long-term strategy view. This approach is strongly supported by their political elite at home. Investments and operations of these NOCs are highly motivated by political goals.

In conclusion, Iraq has been the battleground of the wider competition between the US and Iran. Iran has been able to exploit sectarian divisions in the country to gain influence, although it has been recently criticized and its influence is far from solid. Iraq is a major player in the world’s oil system; it holds significant reserves and it has a primary role in OPEC production. Nevertheless, its energy industry is facing substantial challenges, notably lack of security guarantees, geological challenges in oil production, low water availability required for recovery techniques, electricity shortages and limited export infrastructure. These challenges undermine Iraq’s oil and gas sector which has gained relevance for Russia and China. These two countries, through their NOCs, have enhanced their role in Iraq, providing investments in critical oilfields. Regional competition might undermine Iraq’s potential growth.

• Syria

Over the last decade, Syria has been at the center of a brutal clash between local, regional and international actors. In 2011, social unrest turned into a major civil war that lacerated Syria’s precarious socioeconomic structure.

Syria’s current borders were set by the League of Nations’ French Mandate, following the dismantling of the Ottoman Empire after World War I. Its current borders also represent its main geographical challenges: diverse ethnic groups under one domestic power. Although Syria deliberately avoids conducting censuses on religious demographics, some estimates are possible. The total population—19 million as of 2020—is composed of Muslims (87%), Christians (10%) and Druze (3%) (CIA 2020). However, Sunni is the largest ethnic group accounting for 74% of the total population, while Alawite (the ruling group) accounts for 7%. The Alawite minority group combined with Shia and Ismailis (non-Sunni groups) represent around 13% of the total population (Bhalla 2011).

The Alawites are often, but erroneously, categorized as Shia. They have many things in common with Christians and are often shunned by Sunni and Shia alike. The Alawites’ homeland is the Latakia province, which provides critical access to the Mediterranean coasts. Historically, the Alawites represented the impoverished lot in the countryside while the urban-dwelling Sunnis dominated the country’s businesses and political positions. The French mandate encouraged the rise of the Alawites in Syria’s political order. Under the French, for the first time the Alawites—along with other minorities—enjoyed subsidies, legal rights and lower taxes than their Sunni counterparts. France implemented the minority manipulation strategy in the Levant, especially in Lebanon and Syria. This strategy helped France reverse the Ottoman designs of the Syrian security apparatus, allowing the Alawites to secure military, police and intelligence posts to suppress Sunni challenges to French rule (Idem). Nevertheless, the Sunni focused on maintaining their position in the top ranks of the security apparatus, leaving the lower ranks to the rural Alawites.

This structure and strategy represented the perfect ingredient for sectarian and demographic clashes. With the end of the French mandate in 1946 the urban Sunni elite targeted the Alawites. However, the birth of the Baath party in 1947 in the country provided the ideal platform and political basis to organize and unify around the country, also for minorities like Alawites. Given its campaign in favor of secularism, along with socialism and Arab nationalism, the Baath party met a strong opposition from the Sunni group. In 1963, the Baath party reached power through a military coup led by President Amin al-Hafiz.

Al-Hafiz conducted several purges against the Sunni in the military, opening positions for hundreds of Alawites to fill top military positions between 1963 and 1965. Alawites steadily gained power. In 1970, the Alawite rivalries and Syria’s string of coups and counter-coups were put to rest with a bloodless military coup led by then-air force commander and Defense Minister Gen. Hafez al Assad. The al Assads co-opt in the security apparatus loyal clansmen while taking care to build patronage networks with Druze and Christian minorities that facilitated their rise.

Syria’s history can be described as a struggle between the Sunnis on the one hand, and a group of minorities on the other, rather than a more traditional and clearer Sunni-Shiite religious-ideological division. Despite the precarious balance and the fact that the Alawite power in the country is relatively young, the al Assads have managed to consolidate their power quite remarkably in about five decades. After Hafez’s death in 2000, the presidency was assumed by his younger son, Bashar al Assad. Initially, it was Hafez’s eldest son, Bassel, that was groomed for power. However, Bassel’s death in a car accident in 1994 thrust Bashar to the fore. Despite a tough security and political control, Syria has developed a precarious political order.

Syria’s political weaknesses clearly emerged with the outbreak of social unrest in 2011. When mass protests broke out in the country in February 2011, they were viewed as the next episode of the Arab Spring. At the beginning, numerous commentators affirmed their belief that Bashar al Assad would have had the same destiny of the other regional long-lasting presidents, such as Tunisian President Zine El Abidine Ben Ali and Egyptian President Hosni Mubarak. The regime decided to stamp out the protests, adopting a strong response. By doing so, it sharpened social discontent, triggering much more vigorous protests. Social discontent soon turned into a widespread domestic conflict, which then quickly became the battleground for regional and international powers. Several external actors began to support different parts of the conflict to either defend or increase their own influence in the region. In the midst of the ongoing civil war, the Assad regime once more reaffirmed its resilience against domestic and international challenges.

During the conflict, Bashar al Assad and his regime have received significant support from Russia and Iran, while rebel groups were supported by the Gulf monarchies, Turkey, the US and European countries such as France. Ironically, France supported those factions against the Alawite regime, which France had helped to rise in post-WWII. The dramatic result of these developments has been a more-than-10-year-long civil and proxy war with no sign of a peaceful and stable resolution in the foreseeable future. Syria’s conflict has gone through several phases and external powers have been involved with it in different ways throughout the last decade. In early 2012, the role of external forces increased.

Syria represents the US’ reluctance to intervene directly in Middle Eastern conflicts, as shown by President Obama’s unwillingness to get involved in the conflict in August 2013 following reports about a chemical attack in the eastern part of Damascus, known as Ghouta, even though the use of chemical weapons was considered a “red line”. Nonetheless, the US did take part in the conflict, supporting some Syrian opposition groups. In 2013, Congress authorized nonlethal assistance to vetted Syrian opposition groups, and in 2014 the Obama Administration requested authority and funding from Congress to provide lethal support to rebel groups. Furthermore, Washington has formed an international coalition for conducting airstrikes against ISIS’ bases and operations as ISIS⁷ began to operate in Syria.

The US’ limited involvement in the Syrian crisis allowed three countries to surge as the most relevant actors in the country: Russia, Iran and Turkey. These three countries have forged a temporary triumvirate to manage the conflict, which, however, represents only a marriage of convenience in the short-run. Indeed, these three countries cooperate only on some short-term issues because they do not share long-term strategic goals in Syria or in broader regional affairs.

Russia and Iran both support Bashar al Assad’s regime and at the same time they have some opposing interests in the broader region. Iran’s strategic goals in Syria are different from Russia’s. As Russia seeks stability in the region by preventing the supremacy of any regional power, Iran seeks to expand its influence in the region. By contrast, Turkey supports anti-governmental forces and operates in the northern region of Syria, mostly aiming at preventing the consolidation of Kurdish forces alongside its borders. To do so, Turkey has cooperated partially with Russia, and later with the US. An example is the agreement between Moscow and Ankara reached on March 5th, 2020, that formalized new lines of control in the Idlib province.

Russia’s role in the Syrian conflict represents one of the most important developments of Russia’s Middle East policy. It has allowed Moscow to enter heavily into Middle Eastern politics, gaining a role that could become a bargaining chip for relations with other Middle Eastern countries (such as the Gulf monarchies). This important step was taken through Moscow’s decision to launch a military campaign in favor of Syria’s central government since September 2015. Through this military campaign, Russia has surged as the top supporter of the Assad regime. Moreover, this decision marked a turning point on the battlefield. Indeed, Russia’s airstrikes were essential for Assad, who had been suffering losses on the ground until then. Since then, Assad has managed to regain most of the national territory.

The decision was motivated by both domestic and foreign considerations. Back then, Moscow was facing a critical internal and international situation. Domestically, Russia’s economy was struggling, so the intervention provided a distraction from the country’s internal challenges. Additionally, Russia was dealing with an unfavorable international context. At that time, Moscow was dealing with the Crimean crisis and its consequences (i.e. the establishment of an international sanction regime against its core industries and companies). Russia seized the opportunity to establish a foothold in the Middle East, increasing its status as a global power. Moreover, it was committed to rescuing a long and good ally in the region. Indeed, Syria was one of the closest partners of Russia in the area. The two countries had established bilateral relations as soon as Syria became independent in 1946. Syria quickly fell in the midst of the Cold War, consolidating its ties with the Soviet sphere. Syria has a strategic relevance for Russia, because it hosts the only Russian naval base in the Mediterranean Sea. Indeed, Syria has hosted the Russian navy in the Tartus base since 1971 (Lovotti and Sučkov 2020). Thus, Russia’s intervention was motivated also by the need to protect its Tartus naval base, which could be at risk if a less friendly regime took power in Damascus. More important, Moscow wanted to prevent potential spillover of the chaos in Syria into the entire region, which could have threatened stability and expanded north into the Caucasus. The Caucasus is considered Russia’s soft underbelly, and Moscow couldn’t afford the risk of chaotic and threatening conflicts spreading to Russia’s doorstep, especially groups like the Islamic State (Snyder 2019).

Iran shares with Russia the tactical goal to preserve and maintain in power the Assad regime even though Syria has a different relevance for Iran. Indeed, Syria is an essential element of Iran’s regional strategy and policy. Tehran has pursued the consolidation of a “land bridge” from its border to Lebanon via Iraq and Syria. Therefore, Iran has supported Assad since the beginning of the conflict through its multinational Shiite militias, such as Hezbollah. Through the Shiite land bridge, Iran would gain direct access to the Mediterranean Sea and would substantially challenge its historical opponents in the region. For this reason, its presence in the country is continuously challenged by the US and Israel, which has undertaken several airstrikes against Iranian-linked targets in Syria.

Turkey has supported the rebels against Bashar al Assad, and one of its top priorities is to prevent the consolidation of Kurds along its borders. For such reasons, Ankara has launched some operations in northern Syria. The first operation is the so-called Operation Euphrates Shield that Ankara launched from August 2016 to March 2017. The Operation’s scope was to support the activities of the Free Syrian Army as it pushed Islamic State fighters back from the Turkish border. In doing so, Turkey intended to achieve a double goal: (i) pushing ISIS fighters away from its borders and (ii) stopping the Kurdish militias—the so-called “People’s Protection Units” (YPG)³—from crossing the Euphrates westward and consolidating their presence alongside its borders.

A second operation occurred in early 2018. In January 2018 Turkey decided to intervene in the Afrin province with the “Olive Branch” Operation, specifically targeting the Syrian Kurds instead of government forces. The main goal was to prevent the connection between the Kurds located in Syria’s northeastern region and their forces in the northwestern areas of the country. That operation, agreed upon by both Russia and the US, marked an important development regarding Kurds and international support. Indeed, the US has worked together with the Kurds in Iraq and Syria and has been the Kurds’ main security guarantor since 2014. Moreover, the US and its coalition gains against the Islamic State have come largely through the assistance of Syrian Kurdish partner forces. Nonetheless, the increasing presence of Kurdish forces along the Turkish ones poses a security challenge for Ankara as the Kurds seek to establish a Kurdish nation at the expense of Turkey. Yet, the US does not support this project and over the years, Turkey has gained more relevance than the Kurds for the US vis-à-vis Iran’s presence in the Middle East (Friedman 2019b). For these reasons, the Trump Administration decided to approve some Turkish operations in the northern part of Syria at the expense of the Kurds. In October 2019, Turkey launched a third operation, the Turkish “Peace Spring” Operation, consisting of a series of airstrikes in the north-east of the country against the Kurds. Through this operation, Turkey’s objective is to create a 30-km “safe zone” in northeastern Syria—called Rojava by the Kurds—and its border. In doing so, Turkey would accomplish simultaneously two objectives: firstly, to decimate the presence of SDF fighters in the area, which are connected with the Turkish Kurdistan Workers Party (PKK); secondly, to create a space in which Turkey could gradually resettle the around 3.5 million Syrian refugees currently living inside its borders (MEES 2019a).

The US has tried to stay out of Syria’s conflict, leaving the regional powers clashing and offsetting among themselves. With the advent of Trump, that became clearer. For example, in December 2018 he announced the US withdrawal from Syria, having stated that ISIS was defeated. However, the decision met the strong opposition from the Administration’s members and Congress. For example, then-Defense Secretary James Mattis announced his subsequent decision to resign (Humud and Blanchard 2020). A year later, in conjunction with the Turkish “Peace Spring” Operation, President Trump ordered the withdrawal of some forces from the country and the repositioning of others in areas of eastern Syria, freed by the Islamic State. In doing so, Trump has shifted the US presence in eastern Syria, an oil-rich region, and a good position to tackle Iranian presence (Trombetta 2019).

The Syrian conflict is motivated by this geopolitical competition rather than by its oil and gas resources. It is often, but erroneously, believed that oil and gas are the key driver of the conflict. Although it might be an attractive theory, this assumption is wrong. Indeed, Syria’s oil and gas resources have hardly any importance for the world’s oil market. Syria’s oil production before the civil war began in 2011 was at 385,000 b/d, which was less than 0.5% of the world’s supply. In 2019 Syria’s proven oil reserves were estimated at 2.5 billion barrels (BP 2020). Syria’s crude oil production peaked at 610,000 b/d in 1996, but since then it has declined. Syria also holds 241 bcm of natural gas reserves, and in 2010 it produced 8.4 bcm of natural gas, most of which was used for electricity generation. These figures are very small compared to those of some of its neighboring countries.

Syria’s oil and gas resources are too small to be considered a prize and the main driver of the struggle over the country’s destiny. Given its geographical location, Syria could have a strong potential as an energy transit hub. Several pipeline connections run through Syria to Egypt, Jordan, Lebanon and Iraq. In 2009 Bashar al Assad attempted to maximize Syria’s favorable geographical position by announcing an ambitious policy⁴ aimed at connecting the Mediterranean Sea, the Black Sea, the Caspian Sea and the Persian Gulf and turning the country into a major energy hub. Some analysts put forth the theory that the proxy war was about two pipelines: the first (allegedly backed by the US) would run from Qatar through Saudi Arabia, Jordan to Syria; the second (allegedly backed by Russia) would go from Iran to Syria via Iraq. The key market for both pipelines would be Europe. Despite some popularity of such theories, it seems odd to think that the main reason of the conflict was the competition over pipelines, which were challenging projects both economically and politically. Even though the Syrian crisis has not been resolved, Syria is expected to become a transit country under the agreement between Egypt and Lebanon announced in late 2021. The agreement aims to address Lebanese power shortages thanks to Egyptian gas. Syria has also agreed to transfer Jordan’s electricity to Lebanon. The Biden Administration has expressed support for this regional deal, describing it as a humanitarian effort funded by the World Bank.

Although Syrian oil has small relevance for the world’s oil markets, it has always been of prime relevance to the Assad regime. The oil and gas industry was a crucial contributor to Syria’s government revenue and foreign exchange earnings. Prior to the civil war, the sector contributed about 35% of export earnings and 20% of government revenue in 2010 (Syria Report 2020).

Syria’s oil reserves are located in two principal oil producing regions. The first fields to be developed were those discovered in the 1950s and 1960s around Sweidiyeh in the northeastern Hasakah Province. The second region is located in the Euphrates Valley, running from Deir ez-Zor down to the Iraqi border. Here, oil production began in 1980 following the discoveries made by Pecten, a US branch of Royal Dutch Shell (Butter 2014). The second region accounted for about one-third of Syria’s total output on the eve of the 2011 uprising.

Most of the oil sector is dominated by the state-owned Syrian Petroleum Company (SPC). In March 2011, 55% of the total oil production was from SPC-operated oil fields and the rest from the joint ventures between SPC and foreign companies. The tight governmental control on the resources is highlighted by the fact that SPC takes a 50% stake in development work with foreign partners. Before the war, a relatively diverse foreign investor mix was present in Syria; there were both large companies (notably Total and Sinopec) and small companies such as Gulfsands, which were all working alongside SPC in production-sharing agreements (Diwan and Yergin 2019). Nevertheless, Syria was not particularly attractive for foreign oil companies. The government took 85% of the revenues from operations, compounded by heavy-handed administration by the regime (Idem). Additionally, the reserves in Syria are small, dispersed and far from export facilities in the Mediterranean.

Nevertheless, the foreign partners were critical elements of the attempt to counter the declining trend in oil production. Of Syria’s pre-war output, about 125,000 b/d came from the Deir ez-Zor fields operated by two 50–50% joint ventures: the Shell-led Al Furat Petroleum Company (100,000 b/d) and the Total-led Deir Ez-Zour Petroleum Company (25,000 b/d) (MEES 2019b).

The conflict, combined with international sanctions, has posed further challenges to Syria’s declining oil industry and economy. As the US and EU implemented sanctions, Western companies were forced to leave the country and Syria saw its oil exports collapsing. Indeed, the EU implemented sanctions against Syria’s oil, banning import of Syrian oil. Before the sanctions, Syria’s crude oil exports went almost entirely to the European market, in particular Germany (32% of the total), Italy (31%), France (11%), and the Netherlands (9%) (EIA 2011). Before the war, Syria was a net exporter, shipping some 150,000 b/d of crude oil, albeit it imported some oil products (around 40,000 b/d).

As the conflict exacerbated, oil production collapsed. Crude oil production dropped from an average of 385,000 b/d in 2010 prior to the conflict to an average of 164,000 b/d in 2012 and to just 28,000 b/d in 2013 and further down to 9,000 b/d in 2014 (Butter 2014; MEES 2020d). The government declared that Syria produced 43,000 b/d of oil in 2020. According to the government, in 2021 the production increased to 86,000 b/d, although most of it was produced in Kurdish-controlled areas (MEES 2022).

The collapse of production forced Syria to increase its crude oil imports in order to keep its refineries running. The country has also increasingly needed imported products to meet domestic demand for gasoline, liquefied petroleum gas, and diesel. In 2021, only 16,000 b/d of the domestic production went to refineries under the control of the Assad regime (MEES 2022). Syria began to rely on its partners for energy imports, especially Iran, in addition to buying volumes from Kurdish-controlled fields in northeastern Syria. By early 2013, the Central Bank of Syria reached an agreement with Iran for $3 billion worth of letters of credit to cover oil supplies, as part of an overall line of credit of up to $7 billion (Butter 2014). Indeed, Iran has emerged to save the regime, supplying Syria’s 125,000 b/d (pre-war) capacity Baniyas refinery, and to a lesser extent the 120,000 b/d (pre-war) capacity Homs refinery with enough crude to survive (MEES 2020d). Iranian supplies of oil products were a lifesaver for the battered regime and economy; the lack of oil products led to massive protests across the country in the winter of 2018–2019. The energy trades have been beneficial also for Tehran, tightened by the US sanctions on its oil exports. Indeed, in 2020 Syria has become the top importer of Iranian crude for the first time in history, overtaking China (MEES 2020d).

The establishment of Western sanctions against Syria has inevitably left a vacuum for other non-Western companies. Among these, Iran and Russia are commonly considered to be the potential contributors to Syria’s economic survival and reconstruction. Their political and military engagement in the country justifies their contribution, whereas other countries may be more reluctant to invest in the country and in the energy sector due to the current challenging context.

In 2019, two Russian companies were awarded three exploration and production contracts for Block 7, 19 and 23 (MEES 2019c). For example, Russia’s Stroytransgaz won a 49-year concession to operate Syria’s commercial seaport at Tartous in early 2019 (MEES 2019c). In January 2018, the two countries signed a “road map” agreement for the reconstruction of several assets. Through the agreement, Russia should rehabilitate the damaged infrastructures of the country. Stroytransgaz signed a deal with Baghdad to connect those fields operated respectively by Lukoil and Gazprom in Iraq and in the Kurdistan Region of Iraq, with the Syrian port of Baniyas through the construction of an oil pipeline (Sassi 2019). This reiterates that Moscow has been interested in translating its military gains achieved in the country into broader geopolitical and geo-economic gains, capable of shaping the stability of the region.

China could also emerge as a potential and crucial contributor to economic recovery in Syria—also for the energy sector. Jointly with Russia, China opposes any efforts to sanction Syria in the UN Security Council, contributing to forging positive relations. Additionally, not only China’s CNPC produced some oil from Syrian oil fields before the war, but it is also a stakeholder in the two largest Syrian oil companies: SPC and Al Furat Petroleum (Idem). Moreover, in early 2015 Ali Suleiman Ghanem (Ministry of Petroleum and Mineral Resources) estimated that the conflict damaged facilities for a value of over $27 billion (Idem). China’s significant financial resources, which often come without parallel demands for socio-democratic reforms, might play an important part in the reconstruction phase, further enhancing the partnership between Beijing and Damascus.

As aforementioned, the conflict has affected the Syrian oil industry. Militias and regime have been struggling with the control of key oil fields. However, the regime has lost control over most of the oil fields. By mid-2013, the northeastern oil fields were generally held by the Kurds, with the support of the US forces, while in the eastern region the Islamist groups took over. Thanks to the airstrikes undertaken both by the Russian and the US-led coalition, the Islamic State’s presence on the ground was strongly reduced. As the ISIS lost ground, the Kurds have gained territorial control in the east of the Euphrates Valley. The conflict attributes great importance to Syria’s oil, although it has small relevance and potential in the world’s oil markets. For example, in conjunction with the Turkish “Peace Spring” Operation in 2019, the US announced the repositioning of US forces in northeast Syria “to secure the oil”. There are several reasons that motivated the US to maintain a presence in defense of Syria’s oil fields despite their relative irrelevance. Firstly, in doing so, the US prevents the oil fields from falling into the hands of ISIS, and consequently benefiting their coffers. Secondly, they can keep oilfields out of reach of Assad (and also Russians or Iranians), maintaining a bargaining chip for the opposition in the post-war scenario. Lastly, they preserve these oil fields as an engine of recovery for a possible post-Assad regime (Diwan and Yergin 2019), something reaffirmed by US Vice President Pence. He stated clearly that U.S. troops in Syria will “secure the oil fields so that they don’t fall into the hands of either ISIS or Iran or the Syrian regime” (Humud and Blanchard 2020).

If the oil industry is deeply affected by the conflict, the regime looks with some hope to natural gas. The natural gas situation is more comfortable for the government. Most of the major production facilities are in the government’s hands in the region between Raqqa, Palmyra and Homs. ISIS has inflicted severe damages to some facilities, but in 2018 gas production has been brought up to about 16 mcm/d (Butter 2019). Given the reduction of oil production, Syria considers natural gas the only solution to its power generation woes. SPC’s gas division the Syrian Gas Company (SGC) aims to nearly double raw gas output from its current 16.5 to 20 mcm/d by 2023 (MEES 2019d). Also, Syrian offshore reserves in the Mediterranean Sea are very promising in terms of natural gas reserves. Some non-Western companies, notably Russian and Chinese, might be interested in investing and exploring the area. E&P activities in Syria’s offshore will inevitably further complicate the rush in the East Med gas from a geopolitical point of view.

To increase gas production and boost its economy, Syria needs to find a significant amount of money. As aforementioned, some countries are moving in order to gain potential influence in the post-war phase. However, the US have taken important steps to influence this stage. The US Treasury Department began implementing new sanctions on June 17, 2020. These new sanctions are under the so-called “Caesar Act”, which represents a new level in the long history of US sanctions against the Assad regime. Indeed, it is the most wide-ranging US sanctions ever applied against Syria. Indeed, unlike previous sanctions, the Caesar Act brings under its jurisdiction third-country companies and people for economic activities that support Syria, raising the costs of economic engagement with the Assad regime. In expanding sanctions to third parties through the Caesar Act, the US seeks to influence Syria’s future reconstruction. Obviously, this effort might be undermined if Trump does not earn the second term in office. The Caesar Act potentially poses Lebanon, Russia and China at risk of sanctions. However, it also throws serious obstacles in the path of some Gulf monarchies (and US allies), notably the UAE. Indeed, the UAE have begun a process aimed at normalizing their relations with the Assad regime, abandoning their initial support to Syria’s opposition.

In conclusion, Syria’s oil and gas (given their limited sized compared to that of its neighboring countries) are neither the main driver of the conflict nor the main reason for the involvement of external countries. Oil and gas reserves are far more important for the well-being of Syria (and its government) rather than for the world’s oil market. Therefore, the US decided to protect oil fields in Syria mainly because it aims to prevent their monetization by the Assad regime (and Russians and Iranians) or by the Islamist militias. While Syria’s oil was crucial for the government’s coffers, it’s still unclear whether the hydrocarbon industry will be an important contributor to the economic recovery and reconstruction. To do so, Syria should make significant investments in energy infrastructure and production. Thus, Syria will encounter obstacles in restarting its oil exports and in regaining its past market share (i.e. in Europe).

2.2 East Med Gas: A Potential Gas Export Hub

Among the East Med riparian countries, Egypt is the only one with a long hydrocarbon production and export history. Egypt’s hydrocarbon history began with oil and then started developing its gas resources in 1990 (Chap. 3 Sect. 3.2.2). Thanks to its hydrocarbon industry, and the Suez Canal, Egypt has managed to become a pivotal player in the region. In doing so, Egypt has shifted from being a large oil producing and exporting country to a gas producing and exporting country. This structural shift was made possible in particular thanks to the latest discoveries in the East Mediterranean offshore, which have allowed Egypt to partially overcome its domestic energy constraints.

Over the last decade, the East Mediterranean has become a hotspot of major geopolitical competition and energy interests following numerous gas offshore discoveries (Table 5.3). Such discoveries have increasingly attracted the interests of several international oil companies (IOCs), such as ExxonMobil, Shell, Italy’s Eni, France’s Total, the US’ Noble Energy and Qatar Petroleum, as well as those of other countries.

All started in 2009 with Noble Energy’s announcement of the discovery of Israel’s Tamar offshore field. Despite its relatively small gross mean resources (280 bcm), the discovery of the Tamar field pushed forward new exploration activities in the area. Noble Energy also announced the discovery of the Leviathan field (in 2010) in offshore Israel and the Aphrodite field (in 2011) in offshore Cyprus. While it is estimated that the gross mean resources of the Aphrodite field are 140 bcm, the estimates for the Leviathan are more relevant—620 bcm (Hafner and Tagliapietra 2016).

The real game-changer for the region occurred in 2015 when Eni announced the discovery of the giant Zohr gas field in offshore Egypt. With its 850 bcm of estimated gross mean resources, the Egyptian offshore field is the largest ever discovered in the Mediterranean Sea. In 2016, Rosneft bought a 30% participating interest in the Shourouk Concession, offshore Egypt, where the supergiant Zohr gas field is located, marking the entry of Russia’s Rosneft in the East Mediterranean gas rush.

Table 5.3 Main discoveries of gas fields in the East Med

These discoveries reinforced the promising prospects of the resources in the area, although the region remains one of the world’s most under-explored or unexplored areas. Back in 2010, the US Geological Survey (USGS) estimated the presence of nearly 9800 bcm of undiscovered technically recoverable gas and over 3.4 billion barrels of oil resources in the region in two assessments (Hafner and Tagliapietra 2016).

In light of these figures and the recent discoveries, the East Med countries have expressed their ambition to make the area an important natural gas hub. This goal has traditionally faced some relevant infrastructural, economic and geopolitical challenges: viability of the potential export options; natural gas prices required to make projects economically viable; and lastly, geopolitical competition over the resources and maritime borders. Each of these issues is deeply interlinked to the others (Map 5.3).

Map 5.3

Source https://www.ecfr.eu/specials/eastern_med

Main gas fields, pipelines and EEZ in the Eastern Mediterranean.

Before addressing major energy and geopolitical issues over East Med gas, it is important to consider that geopolitical competition in the area is not only related to energy resources. A growing (geo)political confrontation has gathered pace around the East Mediterranean. The geopolitical confrontation has also affected partners, such as the extraordinary tensions between France, Greece and Turkey in summer 2020 (despite their common NATO membership) due to the collision of a Greek and Turkish frigate.

(Geo)political tensions and confrontation are driven by several issues. The core issues are maritime claims and the demarcation of exclusive economic zones (EEZs). Each issue is linked to the other and is related to several countries. In time, Turkey has emerged as the most assertive actor in the area regarding these two issues.

The first political dispute is about the status of Cyprus. Since 1974, the island is divided into two entities: the Republic of Cyprus in the southern part of the island and the Turkish Republic of Northern Cyprus (TRNC) in the northern part. While the Republic of Cyprus is recognized by the entire international community, the TRNC is recognized only by Ankara. Turkey believes that the Republic of Cyprus does not have the sovereignty to explore and exploit offshore resources without an agreement with TRNC. Additionally, Turkey demands that energy profits be equally shared between the two Cyprus entities. The two parts have not yet reached an agreement on the issue, and an understanding does not seem reachable in the foreseeable future. Without an agreement, Ankara considers illegal all the activities pursued by the Republic of Cyprus in Cyprus’ waters. This standoff has several repercussions on the right to issue and grant licenses offshore Cyprus. While the Republic of Cyprus has issued licenses offshore its southern coast, the TRNC did not only issue licenses only in waters off its coast, but also in the south, overlapping with licenses issued by the Republic of Cyprus. The legal assumption is that both entities have the right over the whole island. Ankara believes that Turkish Cypriots have an equal right to issue licenses around the island. In order to prevent further exploration (or at least, to gain some leverage in the development), Ankara has aggressively asserted its sovereignty over the waters it claims, implementing the so-called “gunboat diplomacy”. In response to Cyprus’ ambitions, Turkey has undertaken naval activities that prevent further drilling and exploration activities in some Cyprus offshore blocks. In February 2018, Turkey’s navy intercepted a drillship of Italy’s Eni that was heading to Block 3 of the Cypriot EEZ, forcing Eni to abandon that effort. Since then, Turkey has conducted naval activities and exercises offshore Cyprus. Nevertheless, Cyprus did not halt its ambitions, approving licenses for Eni and Total to explore Block 7 of its EEZ in July 2019. It did not take too long before the Turkish response arrived. Ankara sent its own drilling ship into Block 7, escorted by a pair of Turkish warships. This prompted harsh criticism from the EU in early 2020 although with limited real economic consequences. Indeed, the EU did not want to alienate a key ally in the containment of mass migration from the Middle East towards Europe, especially from war-torn Syria. Meanwhile, both Eni and Total suspended their activities, affirming that they did not seek a war over gas. Turkish activities reflect the relevance of this issue for the Turkish agenda.

The other major political issue in the area is opposing claims over maritime boundaries and the influence of islands in claiming a continental shelf and in creating an EEZ. On this important issue, Turkey is involved against both Republic of Cyprus and Greece. Turkish’s legal base is that islands, under international law, do not have any right to a full EZZ automatically. Turkey declares that its long coastline should entitle it to a sizable EEZ in the region, while describing as “unfair” the recognition of a full EZZ to various islands. Such a legal and political position produces several conflicts. The Turkish position collides with Greece over its island of Kastellorizo, which is the easternmost island of Greece, located near the Turkish mainland. Greece claims that all islands are entitled to a full EZZ, something that Turkey considers a potential threat since it would significantly reduce Turkish EEZ while granting Greece a bigger EEZ (Tsafos 2020).

Turkey pursues a similar position regarding Cyprus and the Republic of Cyprus. Despite the fact that Cyprus is an island state and it is bigger than Kastellorizo, Turkey affirms that its coastline should be more important than Cyprus’ EEZ. On this legal basis, Turkey has issued licenses for exploration in areas that are claimed by Cyprus. Lastly, a further confrontation emerged following the signature of a Memorandum of Understanding between Ankara and the Tripoli-based Libyan government in November 2019. The agreement expanded the areas that Turkey claimed as part of its continental shelf. The westernmost point in the delimitation agreement is about 50 nautical miles south of the island of Crete. In doing so, Turkey altered the EEZ demarcation in the area, positioning itself between Greece and the Republic of Cyprus EEZs. Additionally, this MoU represents a potential obstacle to the development of the EastMed gas pipeline, one of the possible export routes for East Med gas as explained below. With this agreement Turkey aims to play a key role in the regional and energy landscape. The Turkey-Tripoli agreement also highlights the growing connection between the evolution in the Eastern Mediterranean and the Libyan conflict. The two blocs in the Libyan conflict mirror the blocs that are being formed in the East Mediterranean (i.e. Turkey against Egypt). For example, on May 11, 2020, Egypt announced an anti-Turkey alliance, which gathers Greece, Cyprus, the UAE and France, to confront Turkish moves in Libya and the Mediterranean (Al Monitor 2020a, b, c) (Map 5.4).

Map 5.4

Source CSIS research and analysis; Nikos Tsafos, “Getting East Med Energy Right,” CSIS, CSIS Commentary, October 26, 2020, https://www.csis.org/analysis/getting-east-med-energy-right. Reprinted with permission

Eastern Mediterranean Maritime Claims.

The primary reason for the soaring geopolitical competition is the fading role of the US as “supervisor” and “external guarantor” in the region. The increasing perception of this political vacuum led to the current geopolitical competition in the region, prompting regional players, with their own interests and strategic goals, to rise and interact directly between each other without an ultimate judge. Furthermore, the entire area has suffered from growing geopolitical competition and ambitions in the aftermath of the 2011 Arab Springs. In this context, Turkey has expanded its presence and role in the area with a more assertive foreign policy, as highlighted in the previous paragraphs. As it seeks to expand its influence in the area, Turkey has been driven by the “Mavi Vatan” (also known as “Blue Homeland”⁸). The slogan refers to the Turkish doctrine in place until 2006 and revived in 2019, i.e. the ambition to turn Turkey into a regional power, which would compel every other power not only to take its interests into account, but to view it as an essential partner (Haaretz 2020).

The Eastern Mediterranean region has been characterized by conflictual positions and political tensions well before the discovery of offshore natural gas. The existing tensions and competition are only to be considered as a byproduct of energy discoveries. The ongoing tensions did not occur near natural gas discoveries and none of the natural gas fields discovered so far are a matter of dispute, being entirely within the EEZ of Israel, Cyprus and Egypt (with the exception of Aphrodite which is in Cyprus but extends into Israel’s EEZ). Natural gas discoveries have essentially reinforced pre-existing tensions or rapprochements. Energy is often seen as a factor for political competition, tension and conflict. Yet, energy can also be a powerful factor for political and economic cooperation. These natural gas resources have been able to shape and form political ties to some extent among some countries (i.e. Egypt, Israel, Greece, Jordan and Cyprus). The cases of gas trade between Egypt and Israel and Israel and Jordan testify the potential for cooperation.

Initially, some regional countries and international commentators hoped that the natural gas discoveries would enhance cooperation among regional countries, in an area traditionally characterized by tensions and animosity. This position was based on the history of the European integration process, launched and built upon coal and steel. This position has special relevance for Israel, which is committed to using these resources in order to improve its relations with its Arab neighboring states. To overcome some of the major political challenges, closer energy cooperation was encouraged on the basis of economic considerations. For example, a joint effort to develop regional natural gas would be particularly convenient for Cyprus and Israel, given the size of their current gas fields. A positive development occurred on January 14th, 2019, when Egypt, Israel, Jordan, the Palestinian National Authority, Cyprus, Greece and Italy launched the East Mediterranean Gas Forum (EMGF), the first regional organization, with the aim to improve energy policy coordination in the region. However, Turkey declared the EMGF and its activities to be unlawful since the agreements reached between Egypt, Israel, Jordan, the Palestinian National Authority, Cyprus, Greece and Italy do not respect Turkish territorial claims.

East Mediterranean Countries have started to consider export options in order to fully develop their offshore resources due to the limitations of their domestic markets. However, export plans ought to deal with the extensive legal and political disputes that have deeply influenced the feasibility of export options. All East Mediterranean countries are willing to find energy markets for their resources in order to exploit and monetize them. A wide range of export options both as pipelines and LNG have been discussed:

• 1. Israel-Jordan and Israel-Gaza pipelines;

• 2. Israel-Cyprus-Greece pipeline (known as ‘EastMed pipeline’);

• 3. Israel-Turkey pipeline;

• 4. Israel-Cyprus-Greece electricity interconnector;

• 5. LNG plant at Vasilikos;

• 6. (F)LNG plants in Israel;

• 7. Connection between Israel-Cyprus fields to existing Egypt’s LNG plants;

• 8. Israel-Egypt pipeline (to Egypt’s LNG plants)

Each of the above export options needs to overcome economic and geopolitical issues, which are particularly challenging for some of them. For example, unless new gas is found offshore Cyprus waters, the construction of an LNG plant at Vasilikos, Cyprus, is unrealistic due to the limited size of the available resources in Aphrodite and high costs in building such a scheme. In fact, the project’s cost was estimated at about $10 billion (Tagliapietra 2017).

Other options are limited to the local market, i.e. Israeli attempts to deliver its gas locally through the Israel-Jordan and Israel-Gaza pipelines. In September 2016, Jordan became the first official buyer, signing a 15-year $10 billion agreement that commits Israel to deliver a total of 45 bcm of gas to Jordan commencing in 2020. The US has pushed through the deal for Jordan, which has a peace treaty with Israel, despite opposition in Jordan (Reuters 2020). After securing the supply to its domestic market, Israel started to look for external markets large enough to cover the cost of full-scale production from Leviathan. However, the Jordan and Palestinian markets are too small, and Israel is evaluating possible options in larger markets, notably Turkey, Egypt or Europe.

Nevertheless, a difficult equilibrium on the development of both resources and export options has to be found among the region’s three main poles, namely Israel, Egypt and Turkey. As already mentioned, the resources have produced some degree of cooperation among these countries in the name of economic interests, as illustrated by the EMGF. On the other side, the forum does not include some important countries—i.e. Turkey, Syria and Lebanon—alienating them and inflaming the geopolitical competition. Israel, Egypt and Turkey yearn to take the lead in East Med energy affairs; each of them aims to become a regional gas hub. The three main export options (the Israel-Turkey pipeline, the EastMed pipeline and Egypt’s LNG plants) embody economic and geopolitical challenges.

The Israel-Turkey pipeline encounters more geopolitical obstacles than economic ones. The project consists of a 470-km gas pipeline connecting Israel and Turkey, with a capacity of 16 bcm per year. In 2013, Turkey’s Turcas Holding submitted a $2.5 billion offer to Israel for the construction of the pipeline. Initially this project would have also served the Turkish ambition to become an important energy hub between the East and West after the South Gas Corridor⁹ and TurkStream.¹⁰ Nonetheless, the project suffered several setbacks due to the increasingly complicated relations between Israel and Turkey. In 2016, the two countries reached a reconciliation agreement, ending their six-year diplomatic freeze due to the ‘Gaza flotilla raid’ of 31 May 2010. Following the reconciliation, the project seemed to gain new momentum. However, the US’ decision to move its embassy in Israel from Tel Aviv to Jerusalem in May 2018, triggered a diplomatic crisis, and Turkey and Israel haven’t had ambassadors in their respective capitals since that date. However, the two countries share some mutual interests in the Syrian conflict and in the fight against Iran’s regional policy. These mutual interests could make the two countries converge their actions also in the field of energy, albeit several obstacles. A much greater obstacle to the realization of the pipeline lies in the unresolved hostility between Cyprus and Turkey since a potential Israel-Turkey pipeline would need to pass through the Republic of Cyprus’ offshore territory. Thus, an agreement between Nicosia and Ankara on the last-lasting Cyprus issue is the fundamental prerequisite for the positive development of the Israel-Turkey gas pipeline project. Given the presented features, it is reasonable to believe that there is little hope that Turkey will receive Israeli gas through a direct pipeline or, indeed, that Turkey would act as a conduit of Israeli gas to Europe in the foreseeable future. Therefore, Israel is attempting to create alternative export routes for its gas.

Other two options gained great interest: the EastMed pipeline and the utilization of Egypt’s existing LNG plants. These two alternatives provide different solutions for the ongoing transformation of the gas markets. While a pipeline ensures greater energy security to the buyers (yet, raising questions over the future gas demand in the importing countries), LNG would provide more flexibility to the exporting countries in a more globalized gas market. The EastMed pipeline consists of a 10 bcm pipeline delivering the resources located in the Levantine Basin to Europe linking Israel, Cyprus, Greece and Italy. The project consists of a 1900 km long pipeline and the final costs are estimated to be between $6–7 billion with Greece as final destination or $8–10 billion with the extension to Italy. The project is being designed by IGI Poseidon, a 50–50% joint venture between Greek DEPA and Italian/French Edison. The pipeline is projected to be built in conjunction with the Interconnector Turkey-Greece-Italy (ITGI) and the Interconnector Greece-Bulgaria (IGB) pipelines, to supply Italy and other South East European countries.

Some regional countries have started working together on this option. In January 2020, Israel, Cyprus and Greece signed an inter-governmental agreement for the EastMed gas pipeline in Athens. The inter-governmental agreement sets the legal framework for the possible construction and operation of the EastMed gas pipeline, if implemented, but it does not call for its construction. For this purpose, exporting countries need to secure buyers of their gas in Europe and companies to invest in the pipeline. Within this framework, market and price conditions might be two challenging factors—besides geopolitical issues.

Initially, the project gained the support of the EU and the US, which appreciate any attempt to reduce European dependence on Russian gas imports. Indeed, the project was welcomed as a key infrastructure for the improvement of Europe’s energy security of supply. This is why the EastMed pipeline was enlisted in the EU Project of Common Interest (PCI) list since 2013 and reconfirmed in the fifth EU PCI list at the end of 2021. Yet, in early 2022 the US expressed reservations on the project due to economic viability and environmental issues.

Indeed, given the limited production base and glut market until 2021, countries have been struggling to put forward such a project. Moreover, questions on future European gas demand have arisen as the European institutions have set numerous and ambitious climate targets, which are expected to reduce the consumption of fossil fuels—especially after 2030. This is a particularly relevant issue for the European countries, given the rigidity of a point-to-point infrastructure.

In this respect, another approach to exploit and monetize the region’s resources is through Egypt’s LNG facilities (Map 5.5). This option would involve the transportation of Israeli and Cypriot gas to Egypt for re-export from the Idku and Damietta LNG facilities on Egypt’s northern shore. Egypt’s total LNG export capacity amounts to 19 bcm per year (Idku with a total capacity of 11.48 bcm/y and Damietta with a capacity of 7.56 bcm/y) almost twice the capacity of the EastMed pipeline. This export option would be the cheapest way to export East Med gas, given the current under-utilization of these two LNG facilities. This solution would put Egypt in a central position in the East Med gas developments besides fulfilling Egypt’s ambitions to become a major regional player and energy hub.

Map 5.5

Source CASSINI

Egypt’s regional ambitions.

The use of the existing LNG infrastructure, which can be expanded at low cost if necessary, could allow the region to become a gas supplier for Europe and beyond. Indeed, Egypt’s LNG plants could provide the required flexibility in a changing regional and global scenario. This solution, which would be the least expensive option to export, has been praised by those who raise the uncertainty about Europe’s future gas demand. The proximity of three of the main fields in the area (Zohr located only 90 km away from Aphrodite, which in turn is only 7 km off from Leviathan) could allow the coordinated development of the fields and thus the creation of the economies of scale needed to put in place a competitive regional gas export infrastructure (Hafner and Tagliapietra 2016).

The creation of EMGF provides a partial response to this issue. Meanwhile, the establishment of EMGF’s headquarters in Cairo is evidence of Egypt’s weight in the political debate on the region’s energy affairs. Due to its geographical position at the crossroads of North Africa, the Persian Gulf, Middle East and Europe, Egypt craves to become the region’s gas hub and leader. The country has launched several drilling activities in its offshore areas and attracted numerous IOCs, including Chevron, ExxonMobil, ENI, Shell and also QatarEnergies.

Moreover, some countries have already started some cooperation and energy exchange. Egypt already has an agreement with Cyprus to construct a pipeline. On September 19, 2018, Egypt and Cyprus signed an agreement to construct a $1 billion undersea pipeline linking Cyprus’ Aphrodite gas field to Egypt’s gas liquefaction stations (Al Monitor 2020b). On the other hand, Israel and Egypt agreed on natural gas trade. In February 2018, Noble signed a 10-year supply deal with Dolphinus for the supply of a total of 64 bcm of gas from Leviathan and Tamar to Egypt. In October of the same year, the two parts extended the previous contract to 15 years, increasing the total volumes contracted to 85 bcm (S&P Global 2020b). In January 2020, Israeli gas began to flow to Egypt through the El Arish-Ashkelon pipeline. The gas flow marks one of the highest points of economic cooperation between Israel and Egypt since the peace treaty signed by the two countries in 1979. The El Arish-Ashkelon pipeline came into operation in 2008 to flow Egyptian gas to Israel and it has a design capacity of 7 bcm per year. However, following the Arab Spring in 2012 Egypt unilaterally halted its gas supplies to Israel. In order to receive Israeli gas, the pipeline has been engineered to allow reverse flows in the Israel-Egypt direction (Idem).

At the current volumes, the use of existing Egypt’s LNG facilities and the construction of the EastMed pipeline are in contrast, stressing the difficulties to find the right coordination and cooperation among countries with similar ambitions. For example, the EastMed pipeline would position Israel as a critical element of the European energy security structure. According to Israeli Energy Minister Yuval Steinitz, direct gas trade with the EU would deprive Arab states of the opportunity to put Israel under political pressure (Wolfrum 2019). However, the project will produce an exclusive access to the EU gas market for Israel, Cyprus and Greece. This would marginalize the Arab countries of the EMGF, paralyzing and weakening the organization as well as undermining Egypt’s aspirations. The economic and political potential of a common gas market in the Eastern Mediterranean, as envisaged by the EMGF, would remain untapped (Idem).

Yet, the two options could potentially coexist if new production commenced. On the other side, further gas could boost the momentum for other export options at a time in which countries are still struggling to be combined into a single option that can be attractive for investors and buyers. On this issue, Tsafos (2019) affirmed that more gas is probably necessary to underpin the EastMed gas pipeline, but more gas could also tip the scales toward other development options or further complicate the task of aggregating disparate supplies.

Even though the East Med gas has been seen as a potential option to increase European energy security and reduce Russia’s dominant role, until 2021/22 its actual role has been quite modest. The EastMed gas pipeline was initially supported by the EU and the US because of its potential contribution to European gas security and diversification strategy, but the potential political benefits were not fully met by the commercial ones. Low oil prices and an oversupplied market have fundamentally undermined the development of the EastMed pipeline, which had to face fierce competition in the European gas market, which was dominated by other traditional suppliers, notably Russia, Norway, Algeria, Libya, Qatar, and the US. Moreover, European climate policies, namely the European Green Deal, poses questions over European gas demand in the long run. For these reasons, importing from Egyptian LNG terminals would have represented the best and least-cost option suited to Europe’s climate ambition because it provides adequate flexibility.

The entire paradigm and picture have been dramatically and drastically changed with Russia’s war in Ukraine. Since 2021/22, Europe has expressed its strongest political commitment to weaning itself off Russia’s gas as response to the growing energy prices and political crisis. In light of this shift, the pipeline project argument is nevertheless gaining momentum, despite some remaining challenges. The EastMed gas pipeline could be instrumental for European energy security as it seeks to find alternative suppliers and supplies. The project is also expected to be hydrogen ready in order to be in line with EU climate targets, which was one of the reasons why the EU maintained the project in its PCI list. Additionally, importing via pipeline would prevent Europe from competing for supplies with other consuming countries (i.e. Asia) as in the case of LNG. In conclusion, the East Med region could benefit from the tectonic shifts caused by Russia’s war in Ukraine, but it will need to satisfy both political and commercial requirements before becoming a major gas export hub.

3 Maghreb

Algeria and Libya are two of the most relevant oil and gas producing countries in the region. Nevertheless, they are dealing with major political challenges, due to their critical domestic situation. Since 2019 Algeria has been experiencing important political and economic issues, triggered by the massive popular protests that led to the fall of its long-lasting president, Abdelaziz Bouteflika. Libya has fallen into a civil war following the fall of its former leader, Muammar Qaddafi, in 2011. External players enhanced the division in the country leading to a proxy war, similar to the Syrian conflict and whose end is unlikely to be foreseen.

3.1 Algeria

Algeria’s abundant hydrocarbon reserves make the country an important player in the global energy system. Historically, Algeria had strong ties with Europe and especially with France, its former colonial power. Algeria gained its independence from France in 1962 after eight years of war. The newly independent country built its economy on the hydrocarbon industry. Oil production began in 1958, but thanks to major investments in the 1960s and 1970s the domestic output grew quickly. In 1969, Algeria also became a member of OPEC. In a few years, Algeria became a major energy supplier to Europe and beyond, reaching also the US. In 1964 Algeria also became the first exporter of LNG in the world.

Algeria’s entire economy is rooted in oil and gas resources, and its economy is based on the revenues from its oil and gas exports. Indeed, hydrocarbons revenues make up 93% of its export earnings. At times of high oil prices, oil and gas revenues accounted for nearly 80% of overall budget revenues (they still accounted for around 40% in 2019).

Regarding oil exports, traditionally Algeria exports most of its oil to Europe and Eurasia, with a significant share to the West Hemisphere (Fig. 5.3). However, since the 2010s Algeria’s export volumes and market share have decreased. For example, Algeria’s oil exports suffered a major loss in the US market, one of its largest markets in the Western Hemisphere. This loss was due to the US energy revolution triggered by fracking. The first consequence of the shale oil boom was the collapse of Algeria’s oil exports to the American market, as shown in Fig. 5.4.

Fig. 5.3

Source Authors’ elaboration on OPEC ASB 2020 data

Algeria’s crude oil exports by destination region, 2012–2019 (thousand barrels per day).

Fig. 5.4

Source Authors’ elaboration on EIA data

US imports from Algeria of crude oil and petroleum products (thousand barrels per day).

The shale oil boom increased the competition for Algeria’s oil exports, while reducing the US’ need of Algerian crude imports. This is because Algeria exports the light sweet naphtha-rich Saharan Blend, a grade whose quality is similar to the US shale output. Therefore, Algerian oil was one of the first types of crudes that the US stopped importing. Moreover, given their similar quality, the Algerian and US crude oil compete for the same markets.

However, Algeria must face competition not only in the global oil markets, but also in the natural gas markets. This is particularly challenging because natural gas is a key pillar of Algeria’s economy. Indeed, it is estimated that the natural gas of Algeria’s total hydrocarbon export revenue ($40 billion in 2018) could be between 35 and 40% (Ouki 2019). Such a gas export revenue is critical to both the Algerian economy and the energy sector, which needs significant investments in order to offset the declining trend of production and export volumes. Algeria is one of the key suppliers to European gas markets especially via pipeline (Map 5.6). However, the expansion of the global natural gas supply and the strong growth of LNG has led to a reduction of prices, which pressures Algeria’s gas exports. The combination of these factors started to give economic leverage to gas buyers worldwide, which are reluctant to commit to long-term and oil-indexed contracts. Algeria is one of the most determined defenders of long-term and oil-indexed contracts in natural gas trade. Moreover, Algeria’s gas exports are challenged also from the inside. A soaring domestic gas consumption and the depletion of its aging fields leads to reduced availability of export volumes, posing a threat to the country’s main source of revenue.

Map 5.6

Source CASSINI

Algeria resources in a fragile territory.

Algeria exports most of its gas to Europe and via pipeline to Italy (via the TransMed pipeline) and Spain (via the MedGaz pipeline and Maghreb-Europe pipeline). While the MedGaz pipeline provides a direct link to Spain, the other two pipelines cross through Morocco (Maghreb-Europe pipeline) and Tunisia (TransMed). These three pipelines have a total capacity of 53.5 bcm (Table 3.9 in Sect. 3.3.1). Italy and Spain combined receive around 60% of total Algerian gas exports (Fig. 3.51 in Sect. 3.3.1).

Over the past two decades, Algerian gas exports have dropped, mirroring the declining use of Algerian export gas pipelines, which reached their lowest point in 2020 due to the collapse of gas demand in these countries following the outbreak of COVID-19 and soaring gas demand in Algeria (Fig. 5.5).

Fig. 5.5

Source Authors’ elaboration on MEES. Note Others: Tunisia, Morocco and Portugal (via Spain)

Algeria’s natural gas exports, 2001–2019, bcm.

With the rise of gas prices in Europe in 2021/22, Algeria’s gas has become increasingly relevant for some importing countries, particularly for Italy as it seeks to reduce its overdependence on Russian gas. Algeria’s gas prices—often oil-indexed—have enhanced the competitiveness of Algerian gas vis-à-vis spot prices.

Italy is Algeria’s overall largest trade partner and export market. The Algerian-Italian relationship dates back to the years of the independence war, and since then energy has had a major role. Indeed, Enrico Mattei—the first chairman of the Italy’s oil company Eni—supported the independence cause both in Algeria and in general in order to increase Eni’s presence abroad at a time when global hydrocarbon markets where dominated by the ‘Seven Sisters’. To do so, Mattei offered better economic conditions to the hydrocarbon producing countries in the South Mediterranean. Throughout the years, Rome has promoted energy connectivity with Algeria through Tunisia, which led to the construction of the 2475 km Transmed pipeline in 1983. Since then, Algeria has become a key pillar of Italy’s energy security. The strong energy relation between the two countries is highlighted by the fact that Eni is the first IOC by reserves in the country thanks to its leading position in the North Berkine basin (in the eastern part of the country) since 1981, where all its current production assets are located. Algeria has earned a renewed strategic role amidst the energy and geopolitical crisis in 2021/22 due to Russia’s war in Ukraine given the existing (underutilized) interconnection (Fig. 5.6).

Fig. 5.6

Source Authors’ elaboration

Algeria’s natural gas export via TransMed pipeline, 2010–2021, bcm.

The other major gas market for Algeria is Spain. The two countries have a long history of energy relations, which benefit from the close geographical vicinity of the two countries. Algeria can easily and quickly supply gas to Spain through two gaslines and LNG. The first pipeline, the Maghreb-Europe Gas (GME) pipeline, brings gas to Spain via Morocco with a total capacity of 11.5 bcm/y, while the second, the MedGaz pipeline, links the two countries with a current capacity of 8 bcm/y.

The 11.5 bcm/y GME pipeline has long been the key conduit for Algeria-to-Spain shipments. However, poor political relations between Algeria and Morocco have undermined this route. In November 2021, gas flows through the GME pipeline were halted as the multiannual contract between Algeria and Morocco expired. The two countries did not renew the contract due to political disagreements on the status of the Western Sahara. This decision was the peak of ever-growing tensions between the two countries in the previous months and years. In the meantime, Algeria has started working on expanding the MedGaz pipeline to 10 bcm/y in order to balance the potential loss of GME’s capacity. Algeria is also building a 4.5 bcm/y pipeline linking Kasdir (just before the GME pipeline crosses the Morocco border) to the Medgaz jump-off point of Beni Saf in order to reduce its dependence on the GME pipeline and Morocco. Moreover, Sonatrach and Naturgy bought Mubadala’s 42.09% stake in MedGaz, reaching 51% and 49%, respectively. However, this long history of energy relations was not immune from episodes of confrontation and litigation. A key issue has been the pricing formula. Renegotiation talks have been characterized by lengthy discussions and sometimes have led to arbitration procedures. The Algerian-Spanish relationship has been increasingly under pressure due to the shift of Spain’s position on Morocco and Algeria’s territorial dispute in the Western Sahara. Moreover, in 2022 Spain has considered the possibility to redirect some Algerian gas to Morocco as a way to support its partner’s needs. This possibility has prompted a harsh warning from Algerian officials.

Spain has substantially reduced the share of Algerian gas in its supply mix over the last few years. In 2019, Algeria’s gas share accounted for 33% of Spain’s gas imports, down from 60% in 2015. Algeria’s gas was displaced mostly by two LNG sources (i.e. the US and Russia).

Although the European gas markets are witnessing a greater diversification of supply at lower prices, in the period 2018–2019 Sonatrach managed to renew several gas contracts with key markets which were set to expire in 2019 and 2020 (Table 5.4). In June 2018, Sonatrach agreed with Spanish Naturgy to extend gas trade until 2030 through an 8 bcm/y deal. In May and June 2019 Sonatrach signed two separate agreements with ENI and Enel renewing its gas supply.

Table 5.4 Algeria’s new gas supply contracts

Extending these contracts was crucial for Algeria’s economic and political situation; however, the new contracts are shorter, more flexible and generally speaking for lower volumes (stressing the great competition in the global gas markets).

Despite the long-lasting energy relations and the relative relevance of Algeria’s gas supply for South Europe, Algerian gas is losing ground in the European gas markets. In order to offset some of this decline, Algeria could use its LNG potential. Algeria has four liquefaction plants with a total capacity of 25.3 Mt per annum. Indeed, Algeria could utilize LNG as an option to reach both long-haul buyers and spot buyers when prices and demand in its core Mediterranean region are depressed. In 2019, Algeria managed to boost its LNG exports, but it is still far too small compared to the collapse of its pipeline exports to key markets (MEES 2020e). However, the non-utilization rate of Algeria’s LNG export facilities is particularly significant (higher than 45% in 2019). This is caused by the declining output from its largest gas field, Hassi R’Mel, and the delayed new field development in the southwest region. However, the availability of liquefaction capacity will not be enough to counterbalance the collapse of gas exports and revenues, unless Algeria tackles its limited gas supply and uncompetitive gas export pricing and contractual terms.

Indeed, international investors and international oil companies have encountered several obstacles, which undermine the positive development of Algeria’s oil and gas sector. The inglorious 51/49 rule and other legal and economic conditions discourage IOCs from investing in Algeria’s abundant hydrocarbon reserves. The new government has made some adjustments with the new hydrocarbon law; however, the “51/49” rule remains. In 2020, Sonatrach managed a series of MoUs with some IOCs (i.e. Chevron, Zarubzhneft, TPAO, ExxonMobil, Lukoil, OMV and CEPSA) on possible opportunities in the exploration, development and exploitation of oil and gas in Algeria. Despite the lack of details, the deals highlight the potential attractiveness of Algeria’s upstream sector after the introduction of the new hydrocarbon law. Nevertheless, these deals will need to overcome a difficult energy and economic landscape, characterized by lower energy prices, lower demand, lower energy investments and the boost of decarbonization policies. The challenging environment for energy investments and expansion of upstream activities in Algeria is also fueled by political instability and political opposition to international deals. A clear example of the latter is the political decision to halt major international acquisitions in Algeria’s upstream sector, especially against Total’s purchase of Occidental’s ex-Anadarko assets or Energean’s purchase of Edison’s E&P assets. Political obstructionism might represent an obstacle for BP’s divestment strategy. Indeed, BP expressed its intention to sell its 45.9% stake in the key In Amenas gas plant located in the Sahara Desert. Sonatrach is unlikely to give the green light, stressing once again the immobilism of Algiers. Furthermore, the ongoing domestic social unrest undermines the stability of the country and its energy sector. Sonatrach has been caught in the fire of this power struggle, jeopardizing its ability to implement a serious strategy for the recovery of its oil and gas activities and assets.

Besides its energy relations, Algeria holds an important strategic position in North Africa. It is located at the crossroads between the Mediterranean Sea and Sub-Saharan Africa—a strategic position especially for European countries. Moreover, it is encircled by troubled countries and regions, such as Libya and Sahel. While increasing its stakes in North Africa (especially in Libya), Turkey is keen to strengthen its relations with Algeria. Indeed, Algeria is considered to be one of Turkey’s most important gateways to the Maghreb and Africa (Tanchum 2020). Thanks to its $3.5 billion of investments, Turkey is one of Algeria’s top foreign investors, highlighting Turkey’s strong bid for a strategic presence in the country. Additionally, Erdogan announced his goal of increasing Turkey-Algeria bilateral trade to $5 billion, calling for a free trade agreement. Currently, Algeria is exporting LNG to Turkey (a fast-growing LNG market) with a 4-Mtpa deal due to expire in 2024.

China and Russia have had long relationships with Algeria as well. The relationship with China is also motivated by ideological reasons. The Chinese communist party endorsed the Front de Liberation National during the independence war from French colonial rule, and China was the first non-Arab country to recognize the newly independent country. However, this cultural and ideological root did not translate into a major economic relationship until the beginning of the 2000s. As security and stability was restored in the country following the “black decade¹¹”, Algeria was committed to revitalizing and diversifying its economy through massive public investment programs. Since the 2000s China has built its economic relations with Algeria on two pillars: major infrastructure projects and trade. China played an essential role in Algeria’s construction boom and participated in other major infrastructure projects (e.g. the East–West Highway and the Great Mosque of Algiers). Slowly but steadily, China has become a major trading partner for Algeria. It has overtaken France as Algeria’s largest source of imports (Calabrese 2017). Although the two countries have increased their economic relations, it is true that Algeria’s exports represent a small share of the total trade balance. Moreover, Algeria’s energy sector has small relevance for China, compared to other producing countries in Africa and in the world. Indeed, Western firms still dominate the energy landscape in Algeria, while China has an interest in Algeria’s Zarzaitine field in the eastern Sahara desert, operated jointly by Sinopec and Sonatrach.

By contrast, Russia-Algeria trade relations are dominated by weaponry trade. Indeed, between 2014 and 2018, Russia supplied the Algerian military with 66% of its weapons and Algeria was Moscow’s largest African client. In 2017, Russian companies, Gazprom and Transneft, have cooperated with Sonatrach on pipeline construction projects, and Gazprom also conducts exploration activities in the El Assel onshore area in the Berkine Basin.

Among external powers, the US has always been interested in North Africa in general and in Algeria more specifically. The US has minimal direct diplomatic, economic, and military exposure to Algeria. Some American oil and gas companies (e.g. Chevron and ExxonMobil) have been operating in the country and they have recently signed some MoU to develop the upstream sector. However, the increasing turbulence and shifting dynamics in the country might damage a wide range of US interests. For example, Algeria is strategically important for the US for its influence on counterterrorism efforts. The growing presence of external and competing players in North Africa have forced the US to rethink its approach towards the region and Algeria. The visit of US Defense Secretary Mark Esper in October 2020 confirms the US’ intention to step up its presence in the region against Russia and China.

Thanks to its abundant hydrocarbon reserves, Algeria has become a pillar of Europe’s energy security of supply strategy. Nevertheless, a soaring domestic consumption and the depletion of its aging fields are threatening the future of gas exports, which are a key revenue source for Algeria’s economy. Over the period 2014–2020, a fierce competition in the global gas markets, especially from LNG exporters, had depressed gas prices in Europe. Higher competition and low prices have resulted in a reduction of gas imports from Algeria by its two main markets, Spain and Italy.

Since 2021/22, European gas prices have steadily increased reaching their highest level with the eruption of Russia’s war in Ukraine, while European countries seek to wean themselves off Russia’s gas. Higher gas prices and a favorable geographical position has put Algeria back in the European gas market. Nonetheless, this new position has not come without constraints. While Algeria has enhanced its energy relationship with Italy (through the signature of a new contract in 2022), it has been experiencing a deterioration of its political relations with Spain due to the territorial dispute with Morocco that could potentially undermine a stable energy relation with the Iberian Peninsula. Lastly, Algeria needs to address chronic domestic issues in order to benefit from the new context in the European energy landscape. For example, political instability and obstructionism undermine the attractiveness of future upstream developments for international investors, which are key to the future sustainability of gas exports.

3.2 Libya

Libya ranks as Africa’s largest oil reserves, holding 648 billion barrels of oil reserves (2.8% of world’s total proven reserves), while it holds Africa’s fifth largest gas reserves (1.4 tcm), behind Nigeria, Algeria, Mozambique and Egypt. Globally, Libya holds the 10th and 18th largest oil and gas reserves, respectively.

Libya quickly became a major pillar of the oil (and later gas) security strategy of European countries. However, Libya’s oil and gas sector have experienced numerous ups and downs over the last decades. With the fall of its long-lasting ruler Qaddafi in 2011, the country fell into an escalation of violence and chaos, deeply affecting oil and gas production and exports (Fig. 5.7).

Fig. 5.7

Source Authors’ elaboration on BP Statistical Review of World Energy (2019)

Libya’s oil and natural gas production.

Its oil and gas industry began at the end of the 1950s, with the discovery of its first oil in 1959. Two years later, Libya began to export its oil and became a member of the OPEC in 1962. The country’s oil industry developed under the monarchy,¹² which set a positive and open environment to foreign investments. The first Libyan oil industry managed to attract foreign companies thanks to the strong competition through smaller concession areas than usually done in the other regional countries at the time (Fattouh 2008). Moreover, Libyan oil gained more strategic relevance at the end of the 1960s following several political episodes. Due to the Six-Day War, the closure of the Suez Canal in 1967 considerably increased the value of Libya’s oil that earned greater strategic relevance thanks to its proximity to European markets. During this time, Libya’s oil production grew rapidly, reaching a peak of around 3 mb/d in 1970.

With the advent of Colonel Muammar Qaddafi in 1969, Libya’s energy resources became more and more essential for his political power. Qaddafi used revenues derived from hydrocarbon resources to provide economic prosperity to the small population in Libya, transforming the country into a classic petrostate and a rentier state. In 2012, revenues from the sale of oil and gas accounted for 96% of government revenues and 98% of export revenues and 65% of GDP (EIA 2015). During Qaddafi’s regime, Libya was able to amass significant cash revenues and run a debt-free economy for years; however, it was almost entirely dependent on the import of food, medicine and consumer goods. The new source of income (petrodollars) also allowed Qaddafi to pursue a strong foreign policy, emerging as a prominent player in the international and regional scene (e.g. within the African Union and the Arab League). Qaddafi’s foreign policy, along with its financial and political support to some terrorist groups and activities, fueled a hostile relationship with several Western governments—especially with the US.

In 1970, the Libyan National Oil Corporation was created to manage the country’s hydrocarbon industry. Meanwhile, the new Libyan regime initiated its campaign to strengthen its bargaining position vis-à-vis foreign companies. The new course was favored by the propitious time in 1970. At the time, Libya was supplying 30% of Europe’s oil, but the critical situation of global oil transportation enhanced Libya’s strong position. Indeed, besides the Suez Canal closure, an incident to the Trans-Arabian pipeline¹³ in Syria prevented the export of 500,000 barrels per day of Saudi oil to the Mediterranean intensifying the pressure on oil transportation. Although there was no shortage of oil, there was a shortage of transportation, putting Libya and Qaddafi in a strategic position because of Libya’s geographic proximity to European markets (Yergin 2009). In September 1970 Libya reached an agreement with Occidental, which agreed to pay taxes on the basis of increased posted prices. Additionally, Libya managed to hike its profit share from 50 to 55%. Soon after, other foreign companies accepted the new terms. The new political course on the oil industry undertaken by Qaddafi, coupled with the evolution of global oil demand and supply and oil prices, affected the balance of power between the governments of the producing countries and the oil companies (Yergin 2009). Libya relaunched the exporters’ campaign for sovereignty and control over their oil resources, which had begun a decade earlier with the foundation of OPEC, but then had stalled. Other Middle East oil producers invoked the same terms for themselves, triggering a wave of demand to the companies across the world. The wave of renegotiation led to the Tehran and Tripoli agreements in 1971. The Tehran agreement resulted in a 55:45% profit sharing for Gulf nations with annual increases in the posted price on February 14^th, 1971. On the other hand, the Tripoli agreement on April 2, 1971 resulted in the posted price being raised 90 cents for the OPEC oil in the Mediterranean—well beyond that of the Tehran Agreement. The Tripoli group included Libya and Algeria and also Saudi Arabia and Iraq, since part of their production came to the Mediterranean through pipelines. During 1971–1973, Libya decided to revise existing concessions in favor of 51% participation agreements with the state oil company (Fattouh 2008). For those companies that rejected the new participation terms, the government issued a decree in September 1, 1973 nationalizing 51% of their concessions. However, the nationalization of oil assets led to a decrease of production to around 1 mb/d in the early 1980s (from 3 mb/d in 1970). Oil production also suffered from a growing international pressure in the 1980s and 1990s due to political confrontation between Libya and key Western countries, especially the US. This led to the enforcement of sanctions against Qaddafi’s regime and Libya’s oil and gas industry by the UN and US, preventing their full development.

In the late 1990s, the international context improved, and a reconciliation process between Libya and Western countries began. The international sanctions were lifted in the early 2000s, rehabilitating Libya and its hydrocarbon sector, which underwent a positive development since the 2000s. Libya tried to attract new international investments and E&P activities by foreign companies in its oil and gas industry. The result was a moderate increase in Libya’s overall output and a relatively stable period for Libya’s oil sector. Moreover, natural gas production witnessed a strong growth in this period, increasing from an average of 6.0 bcm in 2000–2004 to 13.6 bcm in 2005–2010. This was possible thanks to the partnership between Italian ENI and NOC. The two companies own the Western Libya Gas Project and the associated 520 km GreenStream pipeline that transports Libyan gas from Mellitah to Italy.

However, this period of stability did not last more than a decade. The oil and gas industry began to face great uncertainty and insecurity with the outbreak of the revolution in 2011. In February 2011, the ‘17th February Revolution’ began in Libya’s eastern region (Cyrenaica) and led to the overthrowing of Muammar Qaddafi on October 20th, 2011—after 42 years of power.

The social and popular revolt was part of the broader social unrest (i.e. Arab Springs) that was spreading throughout the region in that period. However, Libya’s social revolt quickly gained the support of several external actors that pursued different strategic goals and began to get involved in the local protests. Western countries, namely France and the United Kingdom, and the Gulf monarchies decided to support the anti-governmental factions. Nevertheless, the regime showed a certain resilience to popular protests, compared to other regimes in the region at that time. It was not until the short but decisive mission undertaken by NATO (with the critical role of the US) that Qaddafi’s regime began to lose ground and ultimately fell. The NATO decided to target Libyan governmental assets, destroying Libya’s air force in order to prevent the regime’s response against opposition forces.

Since the fall of Qaddafi in 2011, Libya has experienced a period of chaos from the political, security and energy point of view. The country is composed of three regions (Tripolitania, Cyrenaica and Fezzan) populated by several tribes with a background of strong rivalry. Indeed, Libya has experienced long-lasting conflicts between Arab tribes and the original native population of the region (the Amazigh, Touareg and Toubou), as well as between settled peasant populations and semi-nomadic and nomadic tribes. The Qaddafi regime had exploited these localized conflicts to play tribes off against each other, while keeping the country united through a hard-hand approach and the distribution of revenues in order to appease the tribes. However, Qaddafi often changed top officials, especially in the NOC, in order to prevent consolidation of power and possible opponents. Libya has thus been unable to create strong institutions. With the fall of Qaddafi’s regime and weak institutions incapable of helping the transition, these regions and the several tribes failed to achieve unity under a new political structure.

Since 2011, the country is exasperated by violence and clashes between opposite armed groups and militias. National and local disunity has been further enhanced and exacerbated by external involvement. The interference of external actors was driven by the aim to increase their geopolitical power and by other reasons, such as Libya’s geographical position and significant hydrocarbon reserves. Moreover, Libya’s resources and the revenues derived from their sale are the central driver of this conflict. Armed groups, supported by external actors, struggle to take control over oilfields, oil and gas infrastructure and their revenues.

Hydrocarbon resources quickly became a bargaining chip for armed groups to increase their influence and control on the ground. In this context, oil production, exports and foreign companies’ activities in the country have been affected by the evolution of violence on the ground and security concerns. Oil and gas production and exports have experienced ups and downs with different degrees of intensity over the last decade. Nonetheless, these clashes highlighted how oil, rather than gas, is at the heart of the political disputes in Libya with different groups and factions targeting the oil industry in order to gain leverage and political ground. This general context has strongly conditioned hydrocarbon output.

Initially, in 2011, the oil production rapidly recovered to 1.1 mb/d from the effects of major disruptions (which also led to a brief low of almost zero), stabilizing around 1.5 mb/d during 2012 (Barltrop 2019). This triggered a sense of hope for the future recovery of Libya’s oil and gas production. However, the increasing activity of local armed groups and militias on the ground dashed all hopes of recovery. Lack of security standards, also due to the fragmentation of the Petroleum Facilities Guard (PFG) and local competition over oilfield control since mid-2014, caused major uncertainty for the country’s oil and gas industry.

The disunity among key Libyan regions has deepened with the 2014 elections that took place without any political agreements and ultimately led to the dichotomy between two governments in the Eastern region (Cyrenaica) and in Western Libya (Tripolitania). Cyrenaica hosted the government supported by the House of Representatives (HoR), located in Tobruk, while the coalition called Libya Dawn formed an opposing government in Tripoli. With the UN-brokered Skhirat agreement in December 2015, Tripoli hosts the internationally recognized government, the Government of National Accord (GNA). The head of the GNA is Fayez al-Sarraj, who is head of the Presidency Council. The HoR supports the Field Marshal Khalifa Belqasim Haftar, who leads the Libyan National Army (LNA). Since then, the local fracture within Libya has crystallized.

This local dimension is the first level of the broader Libyan conflict, which consists of three different levels that make resolution almost impossible: local (between the two main different factions led by Haftar and al-Sarraj, respectively, but also between some other armed groups); regional (UAE and Egypt against Turkey and Qatar); and international (with the involvement of Italy, France, the US and Russia).

At the local level, the conflict is characterized by multiple armed groups with opposing and mutating interests. The situation on the ground is very complex with factions that are pursuing conflicting interests in a context of lack of accountability. The main two factions are the GNA and LNA, which are linked to the West–East dichotomy.

Within this clash (i.e. GNA vs. LNA) the geography of the resources, infrastructures and the revenues management system have a paramount relevance (Map 5.7). Regarding the geography of its resources, Libya has six large sedimentary basins: Sirte, Murzuk, Ghadames, Cyrenaica, Kufra and the offshore. However, Libya’s natural resources are unequally distributed across the country. More than 85% of the discovered oil reserves are located in the Sirte Basin, with the balance being shared equally between the Murzuk Basin, Ghademes Basin and the Pelagian Shelf (offshore). The Sirte basin also accounts for most of the country’s oil production capacity (EIA 2015). The Sirte basin still accounts for over 70% of the remaining gas reserves, while the offshore Pelagian shelf has approximately 25% of the remaining gas reserves, with the rest located in the Ghadames and Murzuk basins. Moreover, five of six of export terminals and four of five refineries are located in the eastern part of the country.

Map 5.7

Source CASSINI

Political rivalries around hydrocarbons in Libya.

As Haftar expanded his control in the east, LNA has taken control over most of the oilfields and infrastructure. Additionally, the request for autonomy of Cyrenaica, which accounts for 30% of Libya’s population but 60% of its oil resources, and the economic inequality between Cyrenaica and Tripolitania are two of the main reasons behind Haftar’s ascent (Varvelli and Lovotti 2019).

Another important outcome of the 2014 political split is the financial split between the Central Bank in Tripoli and the eastern branch in Benghazi that decided to operate autonomously. This division was decided by the Central Bank in October 2014 to disconnect its eastern branch from the automated clearing system, which all Libyan commercial banks use to manage their accounts with the Central Bank. The decision was taken to prevent east-based authorities from accessing government accounts and funds—both reserves and oil revenues (International Crisis Group 2019). In achieving this goal, Tripoli triggered a deep clash with the eastern part of the country, enhancing a polarized system and unleashing a sense of disenfranchisement in the region. Moreover, a financial squeeze in the east could also reignite fighting over Libya’s sole source of revenues: its oil. The eastern faction could ask its international backers to bankroll its war effort. However, as the battle wears on, the east-based government could decide to shut down the country’s oil fields and export terminals, most of which are under LNA control (Idem).

Libya’s oil and gas resources have been weaponized by local players. For example, in 2020 Haftar took advantage of his control over most of the oil-rich areas and decided to weaponize hydrocarbon resources and exports. On January 17, 2020 the LNA has imposed a blockade of export terminals in the Sirte basin, forcing a shutdown of oil production, which also caused electricity blackouts in parts of the country, inflicting additional pain to the civilians. Due to the blockade, NOC declared a force majeure on the five key oil export ports of Brega, Ras Lanuf, Hariga, Zueitina and Sidra. In a parallel development, local militia also shut down production form the giant El Sharara and El Feel fields. As a consequence, all the oil and gas production was shut down except for the offshore fields of Bouri, Bahr Es Salam and Al Jurf and the onshore Wafa fields. This resulted in a major economic loss for Libya’s economy and the slash of Libya’s oil output (from 1.15 mb/d in December 2019 to 0.04 mb/d in April 2020). The decision was an attempt to put further pressure on the GNA, preventing it from collecting revenues from the sales of oil and gas and weakening social cohesion and support to the Tripoli-based government. However, the decision can also be interpreted as a sign of weakness as it confirms the failure of the military operation launched by Haftar in April 2019 to seize power, defeating the GNA and controlling the country’s key institutions located in the city. The failure of the military operation launched in April 2019 showed the incredible resilience of GNA, which managed to resist the attack thanks to the military support of local forces and Turkey.

The role of Turkey highlights the increasing influence of external players in the conflict. Libya became the battleground for several countries—both regional and extra-regional—with competing interests. These external interventions worsened the situation, providing military supplies as well as financial and political support.

The conflict soon became the stage for regional competition between Egypt, the UAE, Saudi Arabia, Qatar and Turkey. This regional cleavage is driven by the desire of security, geopolitical competition as well as ideological—and religious—beliefs. The 2011 Arab Spring fostered the competition among these regional players, which aimed at establishing a new regional hegemony. The involvement of regional foreign players exploited and exacerbated the east–west division, with groups in western Libya backed by Qatar and Turkey, and the UAE, Egypt and Saudi Arabia backing the eastern militias.

The UAE is the main supporter of Haftar’s political and military projection in Libya. The Gulf country is driven by both ideological and economic reasons. Ideologically, the UAE considers the possibility of Islamist groups in power as an existential threat to the survival of the Gulf monarchies. The 2011 Arab Spring unleashed these fears in the Emirates that have committed themselves to preventing the rise of the Muslim Brotherhood in the region, using Libya as the central battleground in this struggle. Moreover, Libya is particularly attractive for UAE’s economic goals. Its geographical position is important for two main sectors in which the UAE have heavily invested as a diversification effort: shipping and port facilities, and construction. The UAE has thus provided significant financial and military assistance to Haftar’s troops. Since 2014 the UAE provides drones that were essential in Haftar’s operations against Tripoli, especially in 2019. Energy does not have a great share in the calculus of UAE’s activities in Libya, given their reserves at home.

Haftar has also received critical support from Egypt, which shares a 1100 km-long desert border with Libya. This border is a threat to Egypt’s national security, due to the possibility of terrorist crossing and activities in Egypt. Due to the deployment of his forces near the Egyptian border, Haftar is considered Cairo’s natural ally. Given its geographical vicinity, a stable Libya can also be important to Egypt for economic reasons. Moreover, Egyptian President, al-Sisi, shares with Haftar the same belief that militarism is the only possible response to the Islamist threat. Al-Sisi has thus provided military and diplomatic assistance. In particular, during his visit to the US in April 2019, Al-Sisi promoted Haftar’s cause with President Trump, leading to Trump’s surprising call to Haftar (Megerisi 2019).

Lastly, Saudi Arabia—the de facto leader of the Sunni Arab world—took a different approach on Libya’s conflict. Initially, Riyadh supported a Salafist group, known as the Madkhalist group, in the attempt to influence the political transition in Libya, using the religious authority instead of financial or military tools. Since 2011, the Madkhalist group gained relevance in Haftar’s security services and Libya’s religious institutions (Megerisi 2019). This group believes in total obedience to the national leader and expresses hostility towards the Muslim Brotherhood, making it a naturally ally for Haftar. Nevertheless, in April 2019 Haftar decided to wage an offensive against the Tripoli-based government after visiting Riyadh. This visit marked a turning point in Saudi policy, which became more assertive with an increasingly active support to Haftar. Many reasons might contribute to changing Saudi policy; for example a renewed wave of political turmoil in North Africa might create the opportunity for Saudi Arabia to act and shape the new regional order in alignment with the UAE; the intention to foster its economic diversification, exploiting the gas sector in particular; and finally, the mindset of the new Saudi Crown Prince Mohammed bin Salman, who is known for his energetic and assertive foreign policy.

On the contrary, the UN-backed government headed by al-Sarraj earned financial, military and economic assistance from Qatar and Turkey. The two countries shared the same views on the Islamist political movement, supporting the Muslim Brotherhood across the region. Qatar has been the key regional player in Libya since the beginning of the revolt. It supported the rebels also with its worldwide broadcasting services, Al-Jazeera, providing images and videos on the protests and the regime’s responses. As the conflict continued, Qatar supported the GNA both financially and militarily. Along with Qatar, Turkey has strengthened its role in Libya by supporting the Tripoli-based government. Initially, Turkey was a late supporter of the revolution. Indeed, Ankara had contracts with Libya for roughly $15 billion in 2011 and it desired to fulfil them. Nevertheless, Turkey strengthened its relationship with groups in western Libya not only because that is where its key economic interests lay, but also doubtlessly in opposition to Haftar’s growing alliance with Egypt and the UAE (Megerisi 2019). As its influence was growing, Turkey managed to sign an agreement with the Tripoli-based government on maritime boundaries in the Mediterranean Sea on November 27th, 2019. The deal is crucial for Ankara’s strategic goals in the Eastern Mediterranean (i.e. Cyprus). Additionally, thanks to this agreement, Ankara can start to develop exploration activities in the Libyan gas offshore, which is particularly attractive for Turkey. The deal alters maritime demarcation and allows Ankara to obstruct the plan of a potential gas pipeline from the East Mediterranean to Europe via Greece. Indeed, the preliminary agreement demarcates a 35-km line along the maritime boundary separating the two countries’ respective exclusive economic zones. In this way, Ankara can break the continuity between the continental shelves and EEZs of Cyprus and Greece.

Libya’s turmoil has also been influenced by extra-regional players. Due to its geographical position and historical background, Libya is particularly strategic for European countries, notably South European countries (i.e. Italy, France and Spain). France and Britain were crucial to support the initial revolt in 2011. Over the years, the UK has reduced its direct involvement in the country, decreasing its engagement with European foreign policy following Brexit.

Libya also became the stage of a clash between the different interests of single European countries. The EU has been incapable of developing a consistent policy to end the conflict in the country due to diverging national interests. The main rift is between France and Italy. France provides military and financial support to Haftar, while Italy backs the UN-supported government.

Since its initial decision to intervene in the 2011 revolt, France looked at the political evolution in Libya as a possible opportunity to increase its influence in the southern Mediterranean shore. As the crisis worsened, France considered Haftar a strongman capable of uniting the country, establishing domestic order and preventing the establishment of political Islam and radicalization. Moreover, France has important and strategic interests in the Sahel, which borders with Libya’s southern areas (i.e. Fezzan). Thus, France believes that Haftar would be capable of contrasting terrorist activities in Libya’s south border with the Sahel. Moreover, France would increase its interest in the country’s oil and gas sector. French oil major, Total, is the second player in the country in terms of value and comes second only to Italy’s Eni. The country does not currently contribute to a significant extent to Total’s production, accounting only for 2.9% in 2019.

Traditionally, Libya has represented the most important country in the Mediterranean for Italy. From the political point of view, Italy has been suffering increasing marginalization in the country’s post-Qaddafi era due to diplomatic missteps and the lack of strategic thinking, despite its long-standing position of influence in its former colony. Italy contributed significantly to the creation of the GNA in 2015, considered an important element in tackling immigration flows towards Italy.

As Haftar was expanding his power in the country, Rome tried to appease its relations with the Cyrenaica’s strongman, driven by its increasing economic interests with Egypt. Nevertheless, this change in approach ended up by alienating and losing ground on both sides of the conflict, allowing the rise of more assertive and committed new players—Turkey and Russia.

Nevertheless, Italy still holds an important presence on the ground through the Italian energy company, Eni. The company operates extensively in the country, being the leading player in terms of value, leaving the company exposed to the evolution of the conflict. Indeed, Libya accounted for around 15% of Eni’s net output in 2019 (with 282,000 boe/d). Moreover, Italy represents the sole export outlet for Libya’s gas pipeline thanks to the Greenstream pipeline (with a total capacity of 11 bcm/y). Most of the gas that feeds the Mellitah gas terminal (where the Greenstream pipeline starts) comes from Wafa (in the western part of the country) and Bahr Essalam, Libya’s biggest offshore gas field. Because of the important exposure of its main company in the country’s western part, Italy officially supports the Tripoli-based government.

Since the fall of Qaddafi, the pipeline is underutilized with varying spare capacity available depending on the evolution of the conflict and the Italian gas market. National natural gas production has declined from 16.8 bcm in 2010 to 10.5 bcm in 2020 (Fig. 5.8).

Fig. 5.8

Source Authors’ elaboration on ENERDATA

Natural gas production and consumption, 2000–2020, bcm.

Until 2019, gas supplies to Italy were not significantly disrupted by the almost-10-year civil war with few episodes of clashes near the Mellitah gas complex. Gas exports have been stable for some time mainly for two reasons: the offshore production has been largely immune to the political chaos and military activities that have deeply affected Libya’s energy production since 2011, and neither the pipeline, the Wafa onshore gasfield nor the Mellitah processing and pumping complex on the Libyan coast have experienced significant levels of disruption over the past five years thanks to the security protection of several militias in the area. Nonetheless, since 2019 gas exports have started declining and in 2021 Libya’s gas supplies reached their lowest level in a decade (Fig. 5.9) because of rising domestic consumption and a rapid natural decline. Libya’s NOC announced that it aims to increase gas production, yet there are several challenges.

Fig. 5.9

Source Authors’ elaboration on Italian Ministry of Economic Development (MISE)

Italy’s gas imports from Libya, 2004–2021, bcm.

Traditionally, the US did not have a direct influence on the country, despite the significant presence of American energy companies on the ground. At the beginning of the popular upheaval, Washington decided to pursue the “leading from behind” strategy, allowing its European allies to operate in the country. Despite its decisive involvement in the air bombing mission within NATO in 2011, the US considers the Libyan conflict a European issue, considering the country of little strategic importance for American core interests. Nevertheless, it endorsed and supported the UN-brokered Skhirat agreement in December 2015 which granted international recognition to the GNA. However, Trump’s offensive attack on Tripoli in April 2019 might mark a shift in American strategy towards Libya. The call was reduced to a personal favor to Egypt, but it shows the pillars of Trump’s policy in the region. Since Donald Trump became President, he has based US foreign policy towards MENA on the fight against terrorism thanks to his close allies, the Saudi Crown Prince and Egypt’s President. Nevertheless, it is noteworthy to mention that the US guaranteed the Tripoli-based government and the Central Bank the right to collect oil revenues and operate in the international financial market as the legitimate Libyan institutions, through a resolution passed in the UN Security Council in 2016. As Turkey and Russia increase their influence in the country, Washington might decide to strengthen its role in order to counterbalance these two powers.

Indeed, the combination of the US lack of interest in Libyan affairs and the lack of political unity among European countries has produced a substantial political vacuum, easily occupied by other countries—i.e. Russia and Turkey. This development might result in the official transformation of the conflict into a proxy war, like in Syria.

Russia’s attraction to Libya began in Postdam in 1945 with Stalin’s attempt to control Tripolitania. During the Cold War, the Soviet Union established ties with the anti-Western ruler, Qaddafi. In 2008, Moscow wrote off most of Libya’s nearly $5 billion debt in exchange for contracts on oil, gas, weaponry and infrastructure. Moreover, Qaddafi granted the Russian fleet access to Benghazi’s port. Since the 2011 revolt, Russia has steadily increased its role in the country. Moscow pursues an opportunistic policy, exploiting the vacuum created by US disengagement and European disunity. Russia wants to be seen as a great power and an essential player in regional affairs, while creating opportunities to establish economic and political relations favorable to Russia’s interests. Russia supports Haftar and the eastern part of Libya financially and through military equipment and personnel (around 1–2000 Russian mercenaries are on the ground). Such support is also part of the strategy to strengthen its ties with Egypt, the strong backer of Haftar. Russia’s support to Haftar’s campaign in 2019 and 2020 helped LNA’s leader seize the control of major oilfields and oil export terminals, contributing to the blockade of Libya’s oil production. Although it is partially motivated by tactical goals, Russia looks favorably to the possibility of reactivating energy and infrastructure projects signed before the 2011 revolution.

Lastly, China is a discreet but relevant player in the country, although it is often neglected by the multitude of great and regional powers involved in Libya. China has a long history of economic ties with Libya. Under Qaddafi’s regime, China was present in the country with various infrastructure projects. By the year of the revolt, China had 75 companies conducting roughly $18.8 billion worth of business in Libya, involving 36,000 Chinese workers. These workers operated across 50 projects from residential and railway to telecommunications and hydropower ventures. Moreover, in 2011 Libya provided 3% of China’s crude oil supplies (equal to roughly 150,000 barrels per day). Also, China’s top state oil firms had standing infrastructure projects in Libya. Since 2014, China observed Libya’s fractured landscape and decided to pursue a policy of cautious neutrality as well as diplomatic and economic diversification. Officially, China backed the creation of the GNA in 2015. In mid-2018, China and the GNA signed two MoUs committing to work together to bring China’s Belt and Road Initiative to Libya. In 2019, bilateral trade between the two countries amounted to $6.2 billion, primarily due to rebounding Libyan oil exports to China (Wehrey and Alkoutami 2020).

Libya’s geographical location is strategically relevant for China’s Maritime Silk Road in light of increasing Chinese interests in the Mediterranean. Since 2014, China’s involvement in the country has focused on the economic aspects (its main line of influence). China has managed to avoid becoming involved in the conflict and hedging its investments and bets. As it signed a BRI agreement with GNA, China’s CNPC and subsidiary oil corporations are poised to engage with an increasingly autonomous east, which comprises a large portion of the oil infrastructure in Libya.

In 2020, Libya’s conflict saw an intensification of clashes. Haftar experienced major setbacks failing to seize power in Tripoli. Libya’s oil industry suffered a major drop following Haftar’s blockade on oil export terminals in the Sirte Basin. The blockade of oil export terminals caused the halt of oil output. However, in October 2020 the two conflicting parties reached an agreement and Libya managed to quickly increase its output. The comeback of Libya’s oil in the global oil markets poses further pressure to the OPEC+ agreement.

While Libya could easily monetize and benefit from its vast resources and geographical position, this potential has been significantly undermined by the ongoing conflict. Over the past decade, the conflicts and clashes among different factions have undergone several phases of intensity. Nonetheless, the general inability to stabilize its domestic dimension has limited Libya’s role in the global oil and gas markets even in 2021/22 when energy prices and geopolitical tensions favored a potential comeback of Libyan hydrocarbon resources. Indeed, in 2021 and 2022, the two local factions (the House of Representatives in Tobruk and the Government of Unity) have restarted political confrontation with two competing governments. The hydrocarbon industry remains a potential target of the temporary rise of clashes, making Libya’s serious and stable comeback of Libya in the global oil and gas markets uncertain.