Joint development of the field can realize American interests, including:

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1 To: Secretary of State, Hilary Clinton Re: Goliath Gas Field Development The Situation Last month, a joint U.S.-Israeli venture discovered a large deep sea natural gas field approximately 100 miles off the Israeli/Lebanese coast. Dubbed Goliath, it is estimated to contain 31 trillion cubic feet (TcF) of natural gas and 850 million barrels of oil enough to secure Israel s energy future and upend the geopolitics of energy in the Eastern Mediterranean. The challenge, however, is that a portion of the Goliath field falls into waters disputed between Israel and Lebanon and may also extend into Cypriot waters bringing the Turkish Republic of Northern Cyprus (TRNC) and Turkey into the picture. Each of these four parties Israel, Lebanon, Cyprus, and Turkey has requested U.S. assistance with the situation. It should also be noted that an American oil and gas company, Noble Energy, discovered Goliath under contract by Israel and has commercial assets and personnel in the region. Reaching an arrangement that meets core interests of key stakeholders, including the United States, will be critical to accessing the gas and oil in Goliath, and to reaching long-term accommodation between the parties. Summary of Proposed Strategy The US State Department should encourage Israel, Cyprus, Turkey and Lebanon to engage in a joint development of the Goliath gas field. These nations would contribute equity stakes to the venture, and their representatives allotted Board positions. In turn, the national governments would receive dividends from the venture. Given its leadership in discovering Goliath and its strong negotiating position, Israel will receive the largest stake. Noble Energy would manage the operations of the consortium as well as contribute additional financing. Should the United States desire greater policy sway over the consortium, it may also consider providing financing through the Export-Import Bank. A joint venture will meet all stakeholders interests better than their available alternatives saliently, it provides a more secure, lower-cost natural gas export option for Israel, while enhancing energy security and generating foreign exchange for Lebanon, Cyprus, and Turkey. Moreover, such an agreement can lay the groundwork for future development of oil and gas fields in the Levant Basin. Lastly, participating governments, and particularly Israel, should consider streaming profits from the venture into clean energy development. Joint development of the field can realize American interests, including: Enhanced stability in the Middle East, due to resource-based and economic interdependence, thereby promoting Israeli security while maintaining other alliances; Marginalization of Hezbollah and Iran; A strong business opportunity for Noble Energy to serve as a contractor and financier; The Business-as-Usual Scenario Israel possesses the financial capacity to develop the Goliath gas field and could hire a company such as Noble Energy to provide necessary technical capacity. Although Goliath lies under disputed waters, Israel has the military might to press its claim. As a consequence of these three factors, Israel could choose to develop the Goliath field on its own. Israel has considered establishing an undersea pipeline to Greece to export to European markets. These decisions could provoke retaliation from Hezbollah and would likely cause further deterioration of relations with

2 Turkey. Similarly, if Cyprus increasingly aligned with Israel were to continue exploration activities and begin extracting natural gas without any resolution in the status of TRNC, Turkey would likely threaten forceful interdiction of Cypriot extractive activities. All of this is to say that the various stakeholders, if focused on short-term, narrowly-defined interests, would replicate the non-cooperative behavior that has largely defined inter-state relations among these parties, perpetuating the existing cycle of antagonism. The East China Sea Principled Consensus A Model for Joint Development The proposed Goliath joint venture mirrors the joint gas development agreement reached by China and Japan to facilitate gas development in the East China Sea (ECS). The countries faced particular tensions when the Chinese National Offshore Oil Company (CNOOC) began developing hydrocarbon resources in contested waters. i However, in 2008, the countries arrived at the "principled consensus", establishing a joint development zone (see Exhibit 1) in which Japan may finance CNOOC ventures and share in profits. Notably, the consensus explicitly forewent defining maritime boundaries, allowing for joint development without settling these broader differences. ii Nevertheless, the formal adoption of the principled consensus in a bilateral treaty has stalled, due to ongoing jockeying for expanded maritime territory. iii The East China Sea case illustrates the potential for rival nations to establish joint development principles, but also suggests the difficulty of sustaining such partnership through recurrent political contests. Encouragingly, two differences between these cases suggest that the Goliath partners might have greater incentive to cooperate. First, dividing China and Japan's ECS hydrocarbon resources is largely a zero-sum proposition; whatever one receives, the other forgoes. iv In contrast, mutual cooperation around Goliath stands to realize significant strategic benefits in terms of enhanced energy security for all parties. Economically, Israel avoids the costs of Liquefied Natural Gas (LNG) conversion or undersea pipelines and all participating countries secure cheap and reliable natural gas supplies and generate foreign exchange thanks to their stakes in the joint development venture. Stakeholder Interests Taking account of the interests of all relevant stakeholders when crafting a policy around development of the Goliath gas field is critical for promoting American interests. Only a policy that significantly advances the interests of key stakeholders, particularly those who can impede or sabotage the policy objective, can create the buy-in and reciprocity needed for long-term success. A map of stakeholders relevant interests is provided in Exhibit 2. Short Term Calm the Situation In order to head off the scenario described above, the U.S. State Department should approach counterparts in the Israeli government to propose an alternate approach to developing the Goliath field that could meet a broader array of Israeli interests. The State Department can convince the Israelis to delay the next phase of the Goliath development in order to carefully weigh the merits of the State Department s proposal. The Israeli stay would preclude a negative response from the other parties, particularly Lebanon and Turkey, and would buy some time and allow the State Department to approach the other key stakeholders. In order to engender trust among skeptical stakeholders, the State Department would assure the parties that the United States would play a role in facilitating the process of negotiating the terms of the joint development venture. Once tentative interest in the proposal has been expressed by all stakeholders, the State Department

3 would convene a negotiated process to define the terms of the joint development venture amongst representatives from stakeholder countries and Noble Energy. Medium Term Joint Development Venture A joint development venture (JDV) will allow cooperative development of Goliath. Each nation would own equity stakes in the venture, and be allotted Board positions. In turn, the national governments would receive dividends from the venture. The nations should waive royalty payments, given the public nature of the development and to avoid conflict over territorial claims. Noble Energy would manage the operations of the consortium and contribute additional financing. Critically, this proposal avoids defining each country s EEZ and resolving the political division of Cyprus. Interests in joint-venture The creation of a joint development venture (JDV) to cooperatively develop the Goliath natural gas field would create the most shared value for the stakeholders while providing each individual stakeholder with greater value than it would realize in its next-best alternative. Key Israeli interests served by JDV: Achieve energy security (plentiful gas supply supplants uncertain Egyptian supply); Reduce risk of attack on gas infrastructure by Hezbollah; Enhance strategic security through greater economic and resource interdependence; Greater economic benefit due to cost savings over LNG or undersea pipeline to Greece. Best alternative: develop Goliath for domestic use and ship to Europe or Asia via LNG or undersea pipeline, both very costly propositions. Key Turkish interests served by JDV: Enhance energy security due to shipments through completed Arab Gas Pipeline; Enhance regional political and diplomatic influence through participation in key venture, early stake in Mediterranean hydrocarbon development, and conduit for European gas supply through completed Nabucco pipeline. Best alternative: Threaten Cyprus with forceful obstruction of its offshore development. Key Lebanese interests served by JDV: Enhance energy security due to shipments through Arab Gas Pipeline; Foreign exchange revenues through equity stake and royalties; Marginalize Hezbollah through improved functioning of state; Entry into hydrocarbon development. Best alternative: Solicit assistance from Iran to explore and develop offshore gas resources. v Key Cypriot interests served by JDV: Moving forward with offshore natural gas extraction with Turkey s cooperation; Enhance energy security and low-cost energy; Foreign exchange revenues through equity stake and royalties. Best alternative: Coordinate with Israel on gas, and possibly pipeline, development.

4 Key interests of Noble Energy served by JDV: Lower-risk environment in which to operate, lessening chance of attack on infrastructure; Continued development of expertise in Levant Basin; Enhance prospects for future business via positive relationships with all stakeholders. Best alternative: Develop gas fields under Israeli and Cypriot contracts. Structure and Governance of Organization Exhibit 3 proposes the distribution of equity stakes and board representation that the State Department should propose for the JDV. Given the strength of Israel s alternatives, it should have the largest stake in the company. However, Israel should possess less than a controlling share, even with combined efforts from Cyprus. The purpose of this proposed allocation is to ensure cooperation by dependency. To realize these dynamics, the JDV s charter should distinguish between strategic decisions, and more important larger scale investment. A 61% board approval would be needed for strategic decisions around exploration drilling and exportation of natural gas into regional market, effectively giving veto power to Israel. A unanimous decision would be needed for large-scale investment decisions that could dramatically alter the company. The purpose here is to make sustainability of the venture a shared interest of the parties involved. Operations & Financing: Operations would be contracted out to Noble in order to maximize efficiency of exploration and extractive services, leveraging its expertise in Levant gas development. Given the substantial costs projected for the project, debt financing will be necessary. The State Department should consider offering investment or guarantees by the Export-Import Bank, to link U.S. interests and influence more directly in project. Pipelines The JDV will need to access European or other Arab country markets for export of natural gas, requiring the use of pipeline infrastructure. The JDV should connect the Goliath development to the Israeli coast, extending the pipeline that Israel is currently building to the Tamar gas field. vi From there, the JDV may access the Arab gas pipeline network. The Arish-Ashkelon through Egypt is proving too unstable, and new pipelines will need to be developed to access the network. A logical connection would be between Israel and Jordan, leveraging the relatively stable relationship between the two nations. vii Long Term The Levant Basin Treaty and Towards Sustainability The Joint Development Venture will ideally engender cooperation and trust among the stakeholder countries, laying the groundwork for fuller cooperation. One form that this cooperation could take is a Levant Basin Treaty that would govern future extraction of very extensive oil and natural gas reserves. In line with emerging policy interest in sustainable development and energy-resource diversification, the consortium countries could also pursue a long-term strategy of earmarking a portion of profits for fund clean energy development in their countries. Funds could be directed towards: feed-in tariffs for renewable energy sources, energy efficiency and renewable energy financing, and research and development funding. This strategy might present particular appeal to Israel and Turkey, which have both made investments in sustainable energy infrastructure and could leverage their robust entrepreneurial economies to develop export-oriented industries.

5 Exhibit 1. China and Japan s Joint Development Zone Source: Schofield, C.H. & Townsend-Gault, I., 2011.

6 Exhibit 2. Stakeholder Analysis

7 Exhibit 3. Proposed Equity Stake Division in Joint Venture Equity Stake in JV Noble, 15% Turkey, 15% Cyprus, 9% Israel, 40% Israel Lebanon Cyprus Turkey Noble Lebanon, 11% i Manicom, J., "Sino-Japanese Cooperation in the East China Sea: Limitations and Prospects. Contemporary Southeast Asia, 20(3), p ii Schofield, C.H. & Townsend-Gault, I., Choppy waters ahead in a sea of peace cooperation and friendship?: Slow progress towards the application of maritime joint development to the East China Sea. Marine Policy, 35(1), pp iii Acheson, C., Disputed Claims in the East China Sea: An Interview with James Manicom. The National Bureau of Asian Research. Available at: iv Schofield, C.H. & Townsend-Gault, I., Choppy waters ahead in a sea of peace cooperation and friendship?: Slow progress towards the application of maritime joint development to the East China Sea. Marine Policy, 35(1), pp v Economist, Israel and its Natural Resources: What a gas! Economist, 397(8708), pp And Tehran Times, Iran offers Lebanon Expertise in Gas Exploration Endeavors. Tehran Times, Vol Available at: vi Globes, Tamar Gas Pipeline to be Laid this Year. Globes, Sunday April 15, Available at: vii Alternatively, a new pipeline could proceed through the Negev and to the Red Sea. This option would retrofit an existing oil pipeline through Israel and to the Red Sea port of Eilat, where the gas would be converted to LNG for export or piped into the Arab Gas Pipeline. These options lessen the risks of pipelines being attacked, but may alienate stakeholder by avoiding physical connection to the Arab network.