On the 17th of May we had a very interesting seminar on the hydrocarbon discoveries in the East Mediterranean, this time from the Cypriot perspective. This was the second such event at St.Antony’s this term on the issue. The main presenter was Dr Charles Ellinas, the Chairman of the Cyprus National Hydrocarbon Company, the discussant was Anastasios Giamouridis from Poyry who recently wrote a paper on the monetisation prospects and challenges of these deposits and Androulla Kaminara EU Fellow was the organiser and the Chair.
The presentation of Charles Ellinas focused on three main issues,
- The technical aspects and the developments so far and the estimated natural gas discoveries,
- Cooperation prospects with Turkey, Israel and Lebanon
- Future milestones for Cyprus
- 1. The technical aspects and the developments so far and the estimated natural gas discoveries
- American owned Noble Energy has already discovered about 7 tcf recoverable gas reserves in Cyprus’ EEZ in the Aphrodite field and will be carrying out appraisal drilling in June 2013. Noble has strong indications through the evaluation of their 3D survey data that there is another gas field in Block 12, possibly of the order of about 3-5 tcf.
The next key stages in the development of the Aphrodite gas field are as follows:
- Pre-Feed (Preliminary Front End Engineering Design – PRE-FEED): This is in progress and will be completed by Q2 2013.
- Appraisal drilling will take place during the summer of 2013, and by Q4 we should be able to confirm gas volumes and commerciality in 2014, taking into account export and project execution options.
- Cyprus expects to complete FEED by Q1 2015 and LNG sales agreements before the middle of 2015. The bidding process and selection of the EPC contractor and project finance should be completed by Q3 2015.
- The Final Investment Decision (FID) is targeted to be taken by the end of 2015.
- They expect to start construction of the offshore facilities, subsea pipeline and the LNG Plant at Vasiliko early in 2016. This is achievable if all preparation is carried out as planned and will provide good employment opportunities for Cypriots.
- Delivery of natural gas for the local market is expected by the end of 2018/early 2019. This will help the economy since currently the cost of electricity on the island is five times more expensive than the cost of electricity in the UK and this puts a huge burden on the cost of businesses and households.
- By the end of 2019/early 2020 the LNG Plant is expected to be operational, starting LNG exports to Europe and other parts of the world.
Cyprus has so far leased 6 Blocks and progress is as follows (see map):
- Italian ENI with Korean KOGAS have Blocks 2, 3 and 9 and are about to start their survey program, with exploration drilling scheduled early 2015.
- French owned TOTAL has Blocks 10 and 11, with potential both for oil and gas, and are also about to start their survey program, with exploration drilling scheduled earlier, in 2014.
These two consortia have committed to very aggressive survey and exploration programs that over the next 2-3 years will cost of the order of US$2 billion dollars. This substantial investment confirms their confidence for success.
All indications are that Block 9 holds substantially more gas resources than Block 12. Based on the above it is estimated that all 6 leased Blocks potentially hold 40 tcf of natural gas. This in turn is a good indication that indeed the Levantine Basin has 122 tcf and the Cyprus EEZ 60 tcf of gas, as suggested by USGS (USA Geological Survey)
2. Cooperation prospects with Turkey, Israel and Lebanon
Israel has a proven and probable gas reserves (Tamar) – 10 tcf, proven gas resources (Leviathan) – 19 tcf as well as small gas fields and prospective gas resources (undrilled prospects) – 15 tcf. There has been a lot of very high level contacts between the two countries recently including a visit by President Anastasiadis to Israel earlier on in the month and prospects for closer cooperation are very good.
Lebanon is in the process of going for its first licensing round, and it estimated to have at least 25 tcf and there is a lot of interest already from perspective bidders. Lebanon has also shown interest for cooperation with Cyprus
To pipeline or not to pipeline – that is the question?
- Technical considerations provide serious arguments against the pipeline option: Cyprus is talking about gas exports that could reach 50 bcm per year. Due to water depth (2000m) there is a limit in the diameter of subsea pipelines that can be installed. As a result 5 to 6 pipelines might be needed to export such volumes of gas.
Such a solution would be neither practical nor economic.
- Legal complexities.
Pursuant to Art. 58 and Art. 79 of UNCLOS all states are entitled to lay submarine pipelines on Costal States and EEZ. Although according to subparagraphs 79(2) and (3) require that: “Subject to its right to take reasonable measures for the exploration of the continental shelf, the exploitation of its natural resources and the prevention, reduction and control of pollution from pipelines, the Coastal State may not impede the laying or maintenance of such pipelines.” It is also stated “The delineation of the course for the laying of such pipelines on the continental shelf is subject to the consent of the coastal State.”
The geography of the area and the legal implications therefore mean that even if Israel wanted to built a pipeline to Turkey – it will need the consent of the transit states – i.e. Syria, Lebanon or Cyprus. In the current political context this consent will be very difficult to achieve.
Additional legal limitations arise wrt transit via pipelines through EEZ under Energy Charter Treaty (Cyprus, Greece and Turkey are parties to it)
According to Ellinas, the answer to pipeline or not to pipeline can only be not to pipeline and to built an LNG Plant at Vasiliko is the only logical but also economical solution for Cyprus.
The decision by Cyprus’ Ministerial Council in 2012 to establish an LNG Plant at Vasiliko, reconfirmed by the President in April 2013, was vital as it makes it possible to access world markets not just in Europe but also the Far East, thus contributing to the security of sales and stability of prices in the longer term.
With the timely establishment of the LNG Plant, Israel and Lebanon should also be able to bring their gas to Cyprus for liquefaction, making it possible to create a world class LNG hub at Vasiliko (and potentially other gas or energy dependent industries).
This is one of the main reasons KOGAS, the largest LNG trader in the world, ENI and TOTAL decided to invest in Cyprus. Pipelines do not offer flexibility in the selection of markets, there could be legal complexities and are subject to longer-term commercial and political risks.
EU Gas needs
- As we saw earlier, by 2025 Cyprus could be in a position to export 25 million tonnes LNG (35 bcm) per year, starting with 5 million tonnes (7 bcm) by 2020. This could rise to 35 million tonnes (50 bcm) per year if Vasiliko becomes an LNG hub for the region.
- As a result, by 2025 Cyprus and the Levantine Basin could supply 50% of the additional gas needs of the EU. Through the South-East Med Gas (SEMEG) Corridor it could form a new independent and secure supply of LNG which could contribute substantially to EU’s future energy security.
- The EU is looking for secure and independent sources for its future gas needs. Something which requires a new and independent gas corridor. This is what an LNG hub at Vasiliko can offer, at the centre of the Levantine Basin. From there LNG can be distributed to any regasification terminals in the EU.
- Although the South-East Med Gas Corridor is essential this has not yet received the backing it deserves and as Ellinas put it «We have a lot of work to do to make the case!»
- The South-East Gas Corridor that Cyprus offers is important because it can cover up to 50% of the additional gas needs of the EU by 2025.
- Given EU’s future gas needs, both the Southern Corridor (through Turkey) as well as the South East Gas Corridor will be needed.
3. For Cyprus the key milestones are:
- Start of construction in Q1 2016 creating thousands of much needed employment opportunities.
- Delivery of natural gas to the island end of 2018 / early 2019 leading to major reductions, possible 50%, in the cost of fuel for electricity.
- Export of LNG by the end of 2019 / early 2020 producing much needed revenue and profits.
- If Cyprus pursues the development of its natural gas resources correctly, then by 2025 Vasiliko will become the LNG hub for the region – including Israel and Lebanon.
- The South-East Med Gas (SEMEG) Corridor will be of major strategic importance to Europe, firmly establishing the Levantine Basin and Cyprus within the energy and political map of the EU.
- Vasiliko will become a major centre of gas-based and energy-intensive industries, with major long term employment opportunities.
From his side Anastasios Giamourides made the following points:
Aphrodite and other recent discoveries in the East Mediterranean have given rise to a lot of optimism that Cyprus can emerge as a natural gas exporter in the coming years. This is feasible but not a given. It presupposes significant current technical/commercial uncertainties (perfectly normal at this stage) are clarified favourably before a Final Investment Decision (FID) can be reached before early 2016. These include clarification of the exact size of recoverable reserves; and the ability of Noble Energy and any partners to contain infrastructure development costs (production, pipelines, liquefaction etc.) and sign long-term sales contracts that capture high prices and other commercially appealing terms. Work done by Nobel so far demonstrates that this first phase of developments is feasible and viable with 6tcf of gas.
If economics at Aphrodite alone do not work, if appraisal drilling does not confirm more than 6tcf of gas,then Cyprus will have to seek economies of scale with its other offshore blocks and/or with Israel, albeit this is likely to delay the commercialisation process. Furthermore, proving up commerciality in the offshore blocks that were recently licensed to Total and the ENI-KOGAS consortium under the country’s second licensing round will at any rate be necessary, if Cyprus is to export more than the 5 mmtpa currently envisaged by Noble Energy for block 12. Their own initial assessments are positive.
Importantly, any attempt to mix (real) political problems or goals relating to the Cyprus dispute with what ought to be commercial decisions aimed at monetising these resources as efficiently as possible, could end up undermining progress, which may be fully achievable on technical/commercial terms. For example, Turkish attempts to condition development of Cypriot hydrocarbons on a solution to the long-standing Cyprus dispute can result in considerable delays, whilst these political negotiations last. Meanwhile, calls for Cypriot exports via a subsea gas pipeline to Turkey are based on the (erroneous) premise that this is necessarily a commercially superior monetisation option compared to liquefaction. Preferred options need to be defined by scoping/costing of development options and market feasibility including discussions with potential customers, led by Noble Energy and other licensees/investors. This is already happening.
The EU has three main reasons to take an active interest in Cyprus and help it make the most of its upstream potential as soon as feasible, and without unnecessary delays imposed by extraneous factors:
First, as a means of stimulating growth and facilitating successful transition of the Cypriot economy; second, as a direct corollary of the involvement of France’s Total and Italy’s ENI in Cyprus upstream; and third, as a result of the EU’s commitment to supporting competition on the gas supply level. Support from Brussels and European capitals should thus be aimed at allowing relevant commercial decisions to be taken on the appropriate commercial (i.e. not political) levels, including licensing, exploration planning, exploration and production operations, commercialisation, and export markets. Failure to meet these objectives could impact negatively on the economic sustainability of Cyprus; market effectiveness and profitability potential of major European energy companies Total and ENI; and the EU’s own stated goals of security of supply and competitive energy markets.
From my side having convened both of the South East Mediterranean hydrocarbon seminars of this term – the first one by Deputy Energy Minister of Turkey Murat Mercan and this one by Charles Ellinas, I can only conclude that both countries would stand to benefit if there was direct dialogue between them. The encouraging thing is that both speakers indicated that there was a willingness at least to exchange ideas and to explore possible cooperation.