East Mediterranean gas developers may end up prioritising exports to Turkey over other options, despite an agreement struck last week between Greece, Cyprus and Israel to look into the feasibility of a pipeline to Europe.
Alongside talk of a pipeline to Greece, much has been made of the possibility of exporting either Cypriot or Israeli gas to Egypt – either for domestic use or for further export as LNG. However, that option is beginning to look less favourable because of production timelines and the cost of transporting the gas. Consequently, momentum is now moving towards gas exports to Turkey.
Charles Ellinas, (note: former) chief executive of Cyprus National Hydrocarbons Co., told Natural Gas Daily that normalisation talks between Israel and Turkey were progressing and Israeli Prime Minister Benjamin Netanyahu was driving that process alongside Turkish President Recep Tayyip Erdogan.
“I believe these discussions [last week] revolved, behind the scenes, around the idea that a pipeline will go [...] from Israel to Turkey to carry Leviathan gas, with the possibility that Cyprus joins the same pipeline,” he said.
Mona Sukkarieh, cofounder of energy advisory Middle East Strategic Perspectives, believes Turkey could become Egypt’s “main competitor” for monetising gas from the region.
“Pricewise, exports via Turkey could be more competitive. The Turkish market is in itself appealing: a large market with a growing gas consumption – expected to reach and even exceed 80 billion cubic metres by 2030 – and [it is] seeking to diversify its supplies,” she said during a presentation at Chatham House last week.
Cyprus talks
The project is reliant on a positive outcome from talks between Greek and Turkish Cypriots – something Ellinas believes is looking “very likely”. However, Sukkarieh was more circumspect. She noted that any pipeline would have to pass through Cyprus’s exclusive economic zone.
However, under Article 58 of the UN Convention on the Law of the Sea, there is a possibility Israel and Turkey would not need Cyprus’s agreement or participation to build such a pipeline.
The relevant paragraph says all states have the right to, among other things, lay “submarine cables and pipelines, and other internationally lawful uses of the sea” through other countries’ exclusive economic zones, providing they “have due regard” for the affected country’s laws – unless such laws are incompatible with the Article 58.
Although it is highly unlikely Israel or Turkey would bypass Cyprus in this way, a legal source told NGD it could be a way to put pressure on the island state.
Egypt loses its lustre
Exporting to Turkey or even Greece looks more appealing than Egypt given the North African country is expected to stop requiring gas imports by around 2022. The Zohr field is anticipated to be producing at capacity by 2020, and a variety of other fields from both major and minor operators will come onstream from 2017.
Ellinas said Israeli or Cypriot gas had a five-year window to fill Egypt’s current gas supply gap and replace expensive LNG. “I believe Egypt, by the end of this decade, will have the gas it needs,” he said.
However, little movement has been seen on the technical study into laying a pipeline from Cyprus’s Aphrodite field to Egypt. The study started in June last year, and the owners of the reservoir are yet to make a FID.
Exploration of Cyprus’s other fields is also slow, with Total preparing to start work on its licence area in September.
Potential exports from Israel’s Tamar field are being held up by political issues. Egypt has banned all private talks around gas imports from Israel, according to Egyptian newspaper Al-Watan.
Development is also being slowed by the owners of the already constructed East Mediterranean Gas Co. pipeline, who are unwilling to allow traders to use the infrastructure until an $8 billion arbitration case is settled.
Egypt’s plans to re-export gas to Europe as LNG also appear commercially unrealistic, given the bearish short-to-mid-term outlook for European hub prices.
“The [Cyprus-Egypt pipeline] project is challenged commercially. It cannot work. To take the gas from Cyprus to Egypt alone it will cost about $6[/MMBtu], and then to be liquefied it will be very expensive,” Ellinas said.
Gas prices of $5/MMBtu in Europe would appear to rule that market out as a destination for LNG from Egypt’s liquefaction plants.
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