Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 21st April 2022

With Europe actively seeking alternative gas supplies away from the Kremlin hegemony, we must consider the controversy hitting the proposed Mediterranean Pipeline (EastMed).

This is a natural gas pipeline linking East Mediterranean energy resources to Greece through Israel, Cyprus and Crete (see map). The pipeline which is still being designed, will allow for the transportation of 10 billion cubic meters of gas per year, which figure will increase to 20 billion cubic meters of gas per year once the second phase of this project materialises.

The costs of this pipeline will tantamount to an estimated €6 billion and it is being currently developed by IGI Poseidon S.A. on a 50-50% joint venture between the Greek gas utility DEPA and Italy’s Edison.

The pipeline is expected to be completed by 2027, but its completion may come as soon as 2025, following the Israeli government’s approval of the accord whereby it allowed the signatories to proceed according to plan.  One asks how useful is this ambitious commercial venture to exploit offshore rich gas sources in the Eastern part of the Mediterranean.

The raison d’etre behind this project is the bolstering of Europe’s energy security by diversifying its routes and sources and allowing for direct interconnection to the production fields.  It goes without saying that all this will eventually support the economic development of Cyprus, Israel and Greece by providing a stable EU market for gas exports.

Following Russia’s invasion of Ukraine, plans to make the EU independent from Russian fossil fuels before 2030 have been placed at the forefront of the agenda. The EastMed Pipeline would provide an alternative albeit modest supply.  Where does Malta fit in all of this?  Can it benefit?

The European Parliament has agreed to make an exception for those Member States (like Malta) with a unique geographical position which makes them less connected to the main European energy structure.  This concession is mainly intended for island nations which may find it more challenging to partake in Europe’s main energy reservoir.

Future materialization of this project marks it as a Project of Common Interest.  Nonetheless, from a gas-funded project, to render it eligible for assistance, the EastMed pipeline must be able to form the basis for the transition to hydrogen.  Only, under such conditions will the EastMed gas pipeline remain an eligible project.  This is being done with the aim of linking Member States to the European power network.

But there is a fly in the ointment since in the first days of 2022, the Biden administration withdrew its support for the EastMed project. There is now opposition from the EU.  Despite plans to make the EU independent from Russian fossil fuels well before 2030, the EU has not welcomed the development of this project.  The European Commission is adamant on evaluating the EastMed’s pipeline commercial viability as a green energy producer before approving this endeavour.

Generally speaking, projects concerning natural gases do not fall within the ‘Projects of Common Interest’ listed under the Trans-European Energy Networks (TEN-E) Regulations.  These regulations prioritize a climate neutral economy powered by green energy adapting new infrastructures and technologies.  The Commission put forward a set of propositions back in 2013 to achieve climate neutrality by 2050.  There is an obligation for all projects to meet mandatory sustainability criteria and to follow the ‘do no harm’ principle as set out in the Green Deal.  There exists a priority for infrastructure categories eligible for support through the TEN-E policy, thus ending support for oil and natural gas infrastructure.

This matches a new focus on offshore electricity grids with provisions facilitating more integrated onshore and offshore infrastructure Green fuels and implementation of offshore one-stop-shops.  Top preference is being given on a drive to produce hydrogen as an alternative to fossil fuel.  This encapsulates new infrastructure including transport and certain types of electrolysers.  Preference is given to rules to promote the uptake of smart electricity grids.  Such grids will facilitate rapid electrification and scale- up renewable electricity generation.

The EU is moving away from fossil fuels and prefers to fund smart grid investments for integrating clean gases (like biogas and renewable hydrogen) into the existing generation.  It targets new provisions on support for projects connecting the EU with 3rd countries that demonstrate their mutual benefit and contribution to the Union’s overall energy and climate objectives in terms of security of supply and decarbonisation.

The targets for de-carbonization include a revised governance framework to enhance the infrastructure planning process and ensure it is aligned with declared climate goals and energy system integration principles, through increased stakeholder involvement.  This is facilitated by a reinforced role of the EU Agency for the Cooperation of Energy Regulators (ACER) and improved oversight by the Commission.

One cannot omit to mention new measures to simplify administrative procedures, accelerating project implementation, shortening permitting procedures for 3rd Countries.  The emphasis is to avoid delays in projects that facilitate the energy transition, and strengthen transparency and participation in consultations.  Certainly such goals do not warmly embrace the funding and support of the EastMed pipeline - because it does not comply with the objective of the TEN-E Regulations.

As a rule, natural gas projects will not be eligible to obtain the PCI status, nonetheless, the European Parliament and Member States agreed to an exception for those Member States with a unique geographical position which makes them less connected to the main European energy infrastructure.

Despite the fact that the EU is generally against the use of intensive carbon-emitting fuels, in this case, the EastMed project may prove to be vital from some Member States to successfully transit energy from rich offshore deposits. A crucial fact to consider that while the EastMed project has its merits but in the general scheme of things it is insubstantial given that it runs at 10BCM, which is less than 2% of Europe’s annual gas consumption (541 BCM), less than 6% of Europe’s annual imports from Russia (167 BCM).

It is fair to say that EastMed would not be as much a game changer for Europe’s energy supply as we usually think, however Malta stands to gain if it is linked to the Italy pipe network, should this be retrofitted to produce Green hydrogen.

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 21st April 2022
Get in touch: info@pkfmalta.com