Cyprus gas funding a peace deal was a hot topic with statements and counter-statements by the President, the Foreign Minister and many others, such as:
Studies in progress to fund settlement from proceeds from natural gas Natural gas to contribute to the funding of the cost of settlement;
Cyprus FM says gas could partly fund reunification;
Government denies Foreign Minister statements on gas;
President: We will not use natural gas to pay others’ obligations;
President: A minor part from the natural gas proceeds could be used to fund the solution, The President confirms in all respects that the Foreign Minister statements are in-line with government thinking;
However, the government has also stated that the only decision it has made so far is reflected in the bill approved by the Council of Ministers on June 13 that specifically provides for the establishment of a National Investment Fund, still to be ratified by the House of Representatives.
Nothing else has been decided yet. Nevertheless all recent discussions are based on the premise of realising and utilizing potential profits from natural gas.
The funny thing is that nobody commented or questioned how these natural gas profits will come about, how much and when. It appears to be taken for granted that it will just happen – through ‘deus ex-machina’ perhaps!
Timing
Not many expect the current negotiations on the Cyprus problem to be concluded during this year. Even those with a degree of optimism believe that if a settlement is to be achieved it will probably come during the first half of 2017.
In anticipation of this, funding of such a settlement should at least be identified by the end of 2016. One of the recent articles stated that the cost of settlement could be over €30billion. So, presumably the expectation is that natural gas will contribute a few billion euros to this.
Even if Aphrodite gas sales are identified and firmed up this year, signed agreements enabling a final investment decision (FID) to be made will not be possible until 2017 at the earliest. Signed gas sales agreements (GSA) are of course a pre-requisite to reaching FID and without FID Aphrodite cannot proceed to construction and production.
It will then take 3 years to construct the required facilities, with gas exports starting at the beginning of 2021. Most of the proceeds over the first 3 years will go towards paying for these facilities, which means that any serious income to Cyprus will not start until 2024 at the earliest.
In addition, such GSAs are normally for 15-20 years, with payments made on actual delivery of gas. Cyprus profits from selling Aphrodite gas will be spread over this period. Even assuming a 15-year period, it will be 2032 before Cyprus accrues at least half the profits from Aphrodite.
Cyprus could of course use the signed GSAs as security and borrow money from financial institutions to fund settlement. But the amounts would be limited and would be at a cost. In fact the Foreign Minister indicated that ‘future gas finds could possibly underwrite funding’, presumably on the basis that signed GSAs can be used as security.
Profits from natural gas
So what are the potential profits from gas? Assuming that whoever buys the gas, buys it from the platform, ie the delivery point is at the FPSO over Aphrodite, the cost of producing and delivering such gas would be about $2.50 per mmBTU.
If the gas sales price is $4.50 per mmBTU (the lowest Noble is prepared to accept at least for now), it leaves a profit of $2.00 per mmBTU.
Assuming that all of Aphrodite’s gas, 4.5tcf, is sold at this price, the potential profit is $9billion over the life of the GSA, ie 15 years, corresponding to $600million per year. Cyprus share would be just over 60%, ie about $5.5billion (€4.8billion), starting 2024. By 2032 Cyprus would have accrued about half the profits, ie $2.75billion (€2.4billion). With gas prices expected to remain low for a long time, these estimates are not expected to increase significantly over this period.
Even though this should be welcome, it would only make a small dent to the cost of settlement even if the full amount is diverted to it. Contributing a ‘minor part’ of these profits would be of little benefit to the cost of settlement.
One could of course say that there are hopes that more gas will be found, contributing more profits. However, even if Total is successful with drilling in Block 11 early next year, and indications are reasonable, it will be 2026 before Cyprus sees any benefits at the earliest.
All of the above presupposes that markets will be secured for Cyprus gas, with GSAs signed and FID achieved in a timely manner. What are the chances of this?
Gas sales
Expectations that Israel and Cyprus will take their gas to Egypt to be liquefied and exported to Europe, competing with Russian gas and American LNG, looks unattainable. And any gas sales to Turkey require solution of the Cyprus problem.
In an era of plenty and low prices, commercial viability of expensive-to-develop East Med gas is becoming a challenge. It is becoming increasingly difficult to secure gas-sales contracts and where that might be possible prices will be very low. East Med gas sellers may have to consider selling very low, at $3-$3.50 per mmBTU at the FPSO. That would leave even less profit for Cyprus. At $3.50 the profit would be half of what was estimated earlier on in this article, making it less worthwhile.
The risk of Israeli and Cypriot gas becoming stranded is increasing. Urgent and proactive planning is needed, considering all available options including FLNG and FCNG.
The era of plenty is with us and low prices are here to stay. Cyprus needs to plan with realism and pragmatism if it is to succeed developing its gas and make profits.
The notion that natural gas will fund the solution looks fanciful at best.
Even if gas sales were possible, the contribution to the funding of a settlement would be small. It is best to look for other, more credible, funding sources and use any future proceeds from gas, if they ever come, to support strategic development of the island.
Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council
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