Oil and Gas Finds Fueling Tension in Eastern Mediterranean

By James M. Dorsey

(In)Coherenci / World Politics Review

Oil and gas discoveries in the eastern Mediterranean are ratcheting up tensions in a region that already has its fair share of pernicious disputes. Rival communities on the divided island of Cyprus, as well as Turkey and arch-enemies Lebanon and Israel are staking claims in one of the world's newest oil frontiers.

The region's deposits are minor compared to the Persian Gulf, but for small nations like Israel and Cyprus they hold substantial promise. But rather than providing an opportunity for stability through economic cooperation, the discoveries raise the specter of renewed conflict as the parties push ahead with deals to start exploration.

Complicating matters is the fact that the deposits are in international waters, historically a reason for nations to call in the gun boats in the absence of a production-sharing agreements. The potential threat is heightened by the state of war between Israel and Lebanon and tension between Turkey and Cyprus over Turkey's backing of Turkish Cypriots in their dispute with the island's Greek Cypriot majority.

While Israel and Lebanon have warned that their economic rights in the eastern Mediterranean may constitute a casus belli, Turkey and the two Cypriot communities have so far steered clear of military threats in their perennial disputes over oil and gas.

Turkey's announcement last month that it will soon begin to explore for oil in a 288,000-square-kilometer area between the southeastern Turkish city of Mersin and the northern coast of Cyprus has nonetheless fueled tension. Turkey maintains an estimated 40,000 troops in northern Cyprus since its invasion of the island in 1974 and is the only country to have recognized the north's self-declared Turkish Republic of Northern Cyprus (TRNC).

The internationally recognized Greek Cypriot government, the Republic of Cyprus (ROC), which represents the island in the European Union, accuses Turkey of acting as a "bully" in disputes over oil-exploration licenses that are a continuous point of friction in two-year-old peace talks aimed at ending one of the world's most enduring conflicts.

Turkey and the TRNC have denounced ROC negotiations of oil-exploration deals with Lebanon that will also include Syria, arguing that it lacks the authority. Lebanon and the ROC signed an exclusive-zone agreement in 2007 to demarcate an undersea border that would determine the areas in which each may grant oil- and gas-exploration licenses. ROC signed a similar agreement with Egypt, and in September it concluded a memorandum of cooperation with Israel for the surveying and mapping of joint-research energy projects.

ROC initially licensed companies in 2007 to explore blocks in a 20,000 square-kilometer area. Texas-based Noble Energy, an independent oil company, together with its Israeli consortium partners, Delek Drilling and Avner Oil and Gas, acquired a license, but Turkey's opposition persuaded majors such as ExxonMobil, BP, China National Petroleum Corporation and India's Oil and Natural Gas Corporation not to participate. Noble, as well as Libya's National Oil Company, are expected to participate in a second ROC licensing round next year.

Turkey has warned the Lebanese and the ROC governments that it is "determined to protect its rights and interests" and will "not allow attempts to erode them." Turkish officials, however, believe that Lebanon and the ROC will not start exploration any time soon. Amid mounting tension in Lebanon over the proceedings of a United Nations investigation into the 2005 killing of former Prime Minister Rafik Hariri, Ankara believes that parliament is unlikely to focus on the agreement once it is presented for ratification.

As a result, Turkey and Israel may be laughing all the way to the bank. Israel has completed preliminary exploration and is preparing to begin extracting gas in 2012. Israel hopes the oil and gas finds will make it energy-independent, but its preliminary efforts have Lebanon up in arms. Staking its claim on the potential reserves, Lebanon sees newly found oil and gas wealth as its ticket to paying off its $50 billion national debt.

Lebanon accuses Israel of intending to siphon the gas from reserves off the northern Israeli coast that it says are rightfully Lebanese. Israel denies the claim and says that the three fields it has invested in lie between it and Cyprus.The largest of the fields, Leviathan, is estimated to hold 16 trillion cubic feet of gas worth billions of dollars.

The fields are in international waters between Israel and Cyprus, beyond the maritime borders that extend 12 nautical miles off the coasts of both countries. Under international law, Israel or Cyprus could declare an exclusive economic zone that extends 200 nautical miles beyond their maritime borders, but so far neither has opted to do so. Israeli officials say they see no need to make such a declaration because the reserves lie under Israel's continental shelf.

The conflicting Israeli and Lebanese claims have both countries rattling their sabers. Israeli Infrastructure Minister Uzi Landau has warned that Israel "will not hesitate to use force" to protect its investment. In response, Lebanese parliamentary speaker Nabih Berri called for speedy approval of proposals for oil and gas exploration off the coast of Lebanon as "the best way to respond to Israeli threats."

It will take years for Lebanon to prove its claims that Israeli exploration and production would violate Lebanese territory. Even if it does, Beirut lacks the military muscle to do anything about it. That frustrating realization is likely to complicate efforts to reduce tension in a region that already has enough flash points.

Iran: A Different Perspective

One probably shouldn't hold one's breath, but the dawn of the Obama administration offers an opportunity to revisit the question whether confrontation or dialogue is most likely to produce an understanding with Iran that would alleviate Western, Israeli and Arab fears. Engaging Iran in a constructive dialogue would help reduce tension and the potential for violence in the Middle East. Obama has said he intends to engage Iran more actively.

The Israeli offensive in Gaza highlights the threat to stability in the Middle East that confrontation with Iran poses. If Hamas rockets were the immediate driver of the Israeli offensive, tacit support by conservative Arab governments, including Saudi Arabia and Egypt, effectively gave it at least initial diplomatic cover and support. Underlying Israeli and conservative pro-Western Arab calculations, is a deep-seated fear of Iranian ambitions in the region that through Hamas cuts across the Sunni-Shiite divide.

Reading between the lines of statements by militant forces in the Middle East often is an exercise comparable with Kreminology in the days of the Soviet Union or second guessing succession in Saud Arabia. Messages designed to open the door to dialogue, settlement of differences and even rapprochement or at least intended to test the waters, are usually buried in a torrent of militant phraseology, war-mongering rhetoric and blood-stalling verbage and often contained in what a radical state or group does or does not do. Iran is no exception.

Iranian leaders from across the country's political spectrum have been signaling a desire to engage in a dialogue with the United States that could define the Islamic republic's role in the region provided that takes into account Iran's size, resources and regional clout. Some fear that engaging Iran on those terms could shift the balance of power in the Gulf. "US-Iranian detente would sacrifice GCC interests. There is a fear that … a grand bargain would marginalize the GCC states," Mahmoud Monshipouri, a political scientist at San Francisco State University, said in a recent speech in Abu Dhabi. He said such a détente would harm Dubai, which has benefitted considerably from the embargo on Iran. UAE exports and re-exports to Iran amounted to $6.57 billion in 2007, according to figures from the UAE Federal Customs Authority. However, a lifting of the embargo may have less of an impact on Dubai than meets the eye. The Washington Post, quoting reports by the US Justice Department and the Institute for Science and International Security, reports that Iran has shifted the axis of its smuggling of components for its nuclear program from Dubai to Malaysia.

Some US intelligence officials believe that Iran is already capable of building one nuclear bomb every eight months and that Obama will have no choice but to engage Iran and embed it in a broader regional security arrangement. The New York Times reports that President Bush last year rejected an Israeli request for specialized bunker-busting bombs it wanted to drop on Iran’s main nuclear complex and had also refused Israel permission fly over Iraq to reach the facility. Instead, Bush, according to the Times quoting US and non-US officials, advised Israel that he had authorized new covert action intended to sabotage Iran’s suspected effort. Some US intelligence officials however argue that the covert operation, if the past is any indication, will at best delay but not derail the Iranian nuclear program.

Iran most recently signaled its interest in playing a constructive role and engaging in dialogue through its response to the Gaza crisis – a combination of theatrics and some diplomacy. Iran has ruled out military support for Hamas, witness the refusal of Hizbollah to attempt to alleviate Hamas, by opening a second front against Israel on its northern border. Beyond not wanting to jeopardize Hizbollah's ability to perform well in Lebanese elections scheduled for later this year, Iran believes that Israel has created a situation that will cost it dearly, if not in military terms, certainly in political and diplomatic ones. Reason for Mohammed Ali Jafari, head of the Islamic Revolutionary Guard Corp (IRGC) to say this weekend: "Gazan resistance does not need other countries' military help."

No doubt, an advertisement last week offering a reward of $1 million to anyone who would assassinate Egyptian President Hosni Mubarak for betraying the Palestinians placed by the Basij, a volunteer-based paramilitary force subordinate to the revolutionary guards, hardly points to a desire for dialogue. It does however fit into the category of tasteless, counterproductive and provocative theatrics. It is unlikely that Iran is about to dispatch a team of assassins. More probable is that Iran would like to stir the pot in Egypt, witness the call by Iran's Lebanese ally, Hizbollah leader Hassan Nasrallah, on Egyptians to protest their government's refusal to fully open the Rafah border crossing with Gaza. Hizbollah does "not like to target Israeli civilians during election years – and Lebanon has parliamentary elections coming up in April. Hezbollah even kept their rocket attacks down for 1998’s local elections... Extrapolating, this trend indicates how highly Hezbollah values its legal and political standing in Lebanon and its recognition that this standing is damaged when it is held responsible for provoking Israeli strikes," says Aaron Mannes, who works on models of terrorist group behavior at the University of Maryland’s Laboratory for Computational Cultural Dynamics on the TheTerrorWonk blog.

Iranian President Mahmud Ahmadinejad has a particular pension for setting himself up as the boogeyman, denying the Holocaust and calling for Israel's demise. Yet, his predictions that Israel with be destroyed or simply wither away from the pages of history reflect a belief that Israel is digging it own grave and will self-destruct as a result of its own contradictions and policies. Critics of Israel in the west may too argue as they watch the carnage in Gaza continue that Israel's is its own worst enemy. Moreover, Iran's real targets are the conservative Arab governments of Saudi Arabia, Jordan and Egypt, Israel is a tool towards that goal.

Iran sees political mileage in the mass demonstrations across the Arab world not only denouncing Israel but also Arab government failure to bring an end to the crisis. That political capital is all the more important in a period of transition in which it has yet to emerge whether US President-elect Barack Obama will break with the Bush administration's policy of seeking to force Iran to make concessions before engaging in constructive dialogue.

Iran limiting itself to theatrics and rhetoric in Gaza contains another message: compare Iran's response to Gaza to its response to issues about which it is really concerned: Iraq and Afghanistan where Iran's hand in the resistance against the presence of US troops is clearly visible.

Nonetheless, theatrics and rhetoric contain pitfalls. Iranian leaders encouraged Iranians to pour into the streets to protest the Israeli offensive and to volunteer to fight in Gaza. Supreme leader Ali Khamenei declared that "true believers" were "duty-bound to defend" the Palestinians promised anyone who died for the cause of Gaza that he would be a martyr. Demonstrators took things in their own hands and attacked foreign embassies, including those of Britain and Jordan. They had to be cautioned to maintain public order.

Some 200 volunteers of the 70,000 who reportedly signed up to fight in Gaza held an angry sit in at Tehran's Mehrabad Airport, demanding that they be sent to the strip. Ahmadinejad's brother, Dawoud Ahmadinejad, was sent to the airport to advise them that they would not be travelling to Gaza any time soon while IRGC commander Jafari asked them to end the demonstration and called for a "mental and political jihad" against the enemy.

Dubai Reads the Writing on the Wall

The writing was on the wall two years ago. Research then predicted that Dubai’s real estate bubble would burst. Best estimates spoke of a 30% drop in prices by 2009. That was long before the current global economic crisis and the only question was what would trigger the downward spiral. At the time, no one paid attention. Life was too good to be true.

Predictions of a downturn and common sense that an unrealistic, speculative bubble could only burst did little to stop the frenzy. Banks fuelled the six-year frenzy with mortgages of up to 95% often to speculators who had no intention of paying their second loan instalment in the expectation that they would be able to flip the property at a profit before another payment was due. Real estate developers and brokers viewed analysts sounding a cautionary note as mars men from another planet. Today many in the industry as well as in construction accept up to 30% salary cuts and reduced housing allowances and other perks just to save their jobs as thousands are being laid off. Others gratefully accept transfers to other Gulf states where the real estate and construction markets have yet to be seriously hit. That however may be holding on to straw. Kuwait, where real estate prices have dropped by 56% in recent months, serves to prove that Dubai is not an isolated case.

For the finance sector, the chicken is coming home to roost. With stocks of real estate developers nose diving and the market screeching to a virtual standstill, home owners are stuck with properties worth up to half their purchasing price. Increasingly banks are foreclosing on bad mortgages as over-stretched borrowers default because their assumption of continued price rises and demand outstripping supply evaporate. Banks are rightfully paying the price for throwing caution into the wind. But regulators and authorities let it happen.

As banks scramble to protect themselves and the UAE Central Bank prepares for what could be a massive bailout, the question rises whether other sectors of the Dubai economy may have to re-evaluate their prospects and re-examine the assumptions on which they are being built. Take healthcare and retail. They are being developed on the assumption that medical and shopping tourism is as important as domestic UAE consumption. Saudi Arabia, hardly a tourist destination beyond the religious, has a world-class, cutting edge medical and healthcare sector. India despite the recent Mumbai attacks already is a medical tourist destination. What should give Dubai an edge, its freewheeling, liberal environment, is increasingly less of an attraction as other countries push development and position themselves to grab a slice of the pie. The same is true for retail leaving aside that consumers in times of economic downturn and uncertainty are spending less. Shopping malls are springing up across the geography.

Nonetheless, Dubai deserves the credit for developing a model that the larger region – the Indian Ocean, the Gulf and the Middle East – is emulating with whatever tweaking and adjustments. In doing so, Dubai had a first-starter advantage. The trick is to turn that window of opportunity into something that is sustainable and durable. Dubai can learn from the lessons of Bahrain, an island nation that was in some ways Dubai in the 1970s and 1980s and failed to capitalize on its achievements. In the wake of the Lebanese civil war, banks moved their operations from Beirut to Bahrain, making the island a regional financial hub. Bahrain International Airport was the region’s transport hub where global airlines such as British Airways and KLM centred their operations between their European home bases and the Far East. Dubai has taken over that role as Bahrain struggles to catch up but needs to ensure that it stays ahead of the game. That will involve a transition from its gung-ho, can do, build and they will come attitude that served it well but has served its purpose into ensuring that its initiatives are sustainable and can weather the storm.

For the banking sector in Dubai, that transition point is arriving. Some banks may not survive widespread foreclosures on real estate. Exposure to the market expanded tremendously with the boom as well as with the emirate’s decision in 2002 to allow foreigners to buy property and qualify for financing. Foreclosures may not be the solution. Beyond the fact that there are currently no buyers to offload distressed property to, newly enacted laws allowing banks to repossess are untested. Similarly, efforts by real estate firms to prevent foreclosures by easing payment terms may fail as prices drop and homeowners are saddled with negative equity. Just how bad the banking crisis will be is uncertain. While real estate and construction account officially for no more than 20% of the UAE economy, bank exposure is likely to prove far higher. Many loans extended for projects in other sectors are likely to prove to have been diverted to the property sector.

Can Dubai Meet the Challenge?

Dubai never misses an opportunity to be out front. Yet, reality, a realization that even in Dubai global recession means it is no longer business as usual may be kicking in.

Within days of announcing plans for the world's first climate controlled beach, Emirates Sunland Group, a joint venture between privately-owned Emirates Investment Group and Australia's Sunland said the project was on hold until it could be established whether the project was environmentally sustainable. "If an environmentally sustainable approach cannot be found and guaranteed then Sunland Group will not develop the beach in this format," said Soheil Abdeian, the group's founding director, according to Abu Dhabi newspaper The National.

The reversal highlights the pressures on Dubai, a young shoot struggling to grow between two massive trees as Emirati film maker Hamad al Awar in his 2006 animated feature Once Upon A Seed portrays his native land's efforts to carve out its niche in a global economy. Framed before the global economic meltdown during the heyday of Dubai's Richard Bransoniesque development push -- Screw it, just do it, or more elegantly put in the words of Sheikh Rashid al Maktoum, the current ruler's late father, build and they will come -- Al Awar's metaphor probably referred to regional power houses Saudi Arabia and Kuwait.

It harked as far back as the late 1980s when Gulf leaders gathered in Abu Dhabi to create the Gulf Cooperation Council (GCC). Emirati leaders and merchant families then worried whether they would survive competition with the region's wizened, experienced traders, the Kuwaitis, and the far less shrewd but cash-rich Saudis who also benefitted from their sheer population figures. Those anxieties are long gone. Today, the emirate competes with the best of the best and in many ways sets the tone.

Just how far it has come was highlighted this week by a report commissioned by the office of London mayor Boris Johnson predicting that Dubai among others could overtake the City as one of the world's foremost financial centers. "Other centers are simply more coordinated, more strategic and more aggressive" than London said Bob Wigley, Merrill Lynch chairman for Europe, Middle East and Africa and the head of Johnson's panel.

Yet, the report came just as Dubai witnessed its first layoffs in the financial sector and credit rating agencies downgraded the region's financial institutions, many of them in Dubai. The downgrades in ratings and/or outlook reflected fear that already hard hit stock and real estate markets in Dubai and elsewhere in the Gulf could deteriorate further. That in turn would affect asset their quality and profitability.

Emiratis and particularly Dubai will certainly take pride in the fact that their Gulf outpost is viewed as a worthy rival to the world's foremost, albeit humbled, financial centers. But that may be less glory to bask in and more a clarion call that much remains to be done for the emirate to be continued to be counted in the world's top league. Being the world's best, most outlandish, biggest, tallest or whatever may no longer be the name of the game. Getting it right has replaced that. If anything, the Johnson panel warning to the elders of London poses the challenge to Dubai to rise to the occasion.

More to Middle East Arms Race

That Iran looms large in current Gulf thinking was further highlighted with this week's announcement that the UAE has signed a $3.3 billion agreement to purchase US patriot missiles. The deal also involves medium-range Patriot manufacturer Raytheon transferring technology and training. It follows Iranian advances in missile technology with the introduction of its Shahab-3 medium range weapon. For the UAE, the purchase is a balancing act. A key conduit for supply to Iran of goods that fall under US sanctions, some US legislators fear that sensitive technology involved in the Patriot deal as well as US willingness to help the UAE develop a civilian nuclear energy program could end up in Iran. The recent announcements fits a pattern and is part of an extensive military upgrade program. Earlier this year, privately-owned Emirates Advanced Investments joined forces with Raytheon to develop laser-guided missile technology in the UAE. Also, earlier this year, France and the UAE said France would be establishing a military presence in the Emirates by spring of 2009.