Saturday, November 26, 2016

The future of East Med gas - IN CYPRUS / CYPRUS WEEKLY

November 26, 2016
Charles Ellinas

The future of East Med gas was the subject of a conference in Nicosia. It was organised by the Atlantic Council, Friedrich-Ebert-Stiftung, Istituto Affari Internazionali, PRIO and Strata Insight.

The conference considered both the global realities and trends, in terms of energy supplies, supply security, markets, demand trends, prices, availability of financing for projects, new technologies, but also geopolitical factors and risks.

The aim was to discuss how these have so far influenced offshore gas field development in the East Med, and how they will do so in the future.

The state of the global oil and gas markets and prices and where these are going and their impact are key issues for the development of East Med gas.

Global energy market
Global primary energy consumption is peaking. Even OPEC now says oil consumption is expected to peak before 2030 and decline after that. Gas demand in Europe is now at best stagnant, and is down 20% from its peak 10 years ago.

Plentiful energy, renewables, energy efficiency and climate change have driven oil and gas prices low and they are expected to stay low.

The Paris Climate Change Agreement has now been ratified and COP22 currently in progress in Marrakesh is putting it into action. It has altered energy production and consumption globally and permanently, moving away from fossil fuels to cleaner forms of energy.

Donald Trump’s election to the US presidency and his ‘America first’ policy will mean more shale oil and gas, impacting global prices even more. His questioning of the Paris Agreement, though, may lead to a reality check.

In addition, coal is not going away in Europe or Asia. On average, it is about 50% cheaper than gas. Also, renewable investment and market penetration are going strong, with unit costs going down. There is no prospect for these factors to be reversed anytime soon.

Meanwhile, Russia is a formidable competitor, intending to remain the largest supplier to Europe in the foreseeable future. Not only is Russian gas cheap, at $4/mmBTU in 2016, but Gazprom can reduce the price further. It also has over 100bcm/y spare production capacity at marginal cost. This gives Gazprom flexibility to supply more and reduce prices to defend this market. Gas price matters. US LNG is trying to get in, but with limited success.

There is also plenty of LNG available globally, keeping prices low until at least 2025 and probably beyond. LNG is becoming a commodity.

These factors, and with the Paris Agreement in place, may eventually mean that gas-fields sitting at the high end of the cost curve, and dependent on exports to Europe, may remain stranded.

East Med – time for realism
Cyprus and East Med need to find buyers for their gas, but low oil and gas prices are making this increasingly difficult, with export options dwindling.

Egypt is moving forward, developing its internal market, expected to achieve self-sufficiency by 2020. Lebanon is stagnant, but with a new President in place, it might start seeing progress in its hydrocarbons sector. Turkey may be the catalyst to finding export routes for East Med gas.

There is a bright future for gas in Egypt, with Zohr at the forefront. There is also the potential that Zohr will lead to new discoveries. ENI has embarked on a fast-track programme to develop the project and produce 10 bcm/y by end of 2017, and increase it to 27 bcm/y by 2019. Production from 13 projects already in progress will add 62bcm/y to the existing production of 46bcm/y by 2020, with total gas production possibly reaching 120bcm/y by 2035. This, together with increasing use of renewables and energy efficiency, will enable Egypt to become an LNG exporter by 2021. These developments are much needed to help Egypt’s economy to recover from the challenges it faces now.

But these developments also impact the hopes of its neighbours Israel and Cyprus and their plans to export their gas to Egypt. Not only is this commercially challenging, but the markets for it may no more be available, with Egypt no longer being a window of opportunity. A view was expressed that probably both Israel and Cyprus missed the boat for gas exports by taking too long in decision-making.

The main, and preferred, market for Leviathan gas could be Turkey. The two countries are now examining the feasibility of such a project. Meetings are in progress. This could also affect development of Aphrodite, but it requires solution of the Cyprus problem.

But there was scepticism that Turkey will need additional gas. It is aiming for future energy mix diversification, with natural gas demand being revised downwards through increasing use of coal, hydro, renewables, nuclear and LNG imports, and it is already on the way to achieving this. In fact, gas imports this year may total 45bcm, in comparison to 48.4bcm last year.

Turkish Stream is back on track and is a game-changer for the region. If a second string is built, it will make gas imports to Turkey from other sources that much more difficult. Depending on how this develops, Turkey’s need for East Med gas may no longer be an urgent priority.

Cyprus, meanwhile, is dominated by the negotiations for a peace settlement and, at present, this issue over-shadows all others.

Nonetheless, the results of the third offshore licensing round are expected soon, with awards possibly during the first quarter of 2017.

Total is planning to drill in Block 11 April next year, if its problems with access to port facilities are finally sorted out, and prospects for gas discovery look reasonable. ENI was bullish that, over the next few years, drilling may lead to new discoveries, which will alter the prospects for Cyprus.

Otherwise, gas exports from Aphrodite are stalled due to the very low gas prices prevailing globally.

With East Med export options dwindling, marine-based developments, such as FLNG, may gain prominence. FLNG is coming of age, proving to be a viable gas export option even in the present low-price climate.

The EU is interested in the East Med through Cyprus, whose sovereign rights it supports. The EU looks at the East Med for its own security, for diversification and as a bridge for greater cooperation. But, mindful of price limitations, the priority for the EU is to see the new gas opportunities turn into a blessing and not into a curse, and wants to help the region and regional markets benefit.

Opportunities for the region to export its gas are, thus, becoming more challenging. In the longer term, FLNG may become a serious option. In the meantime, the region needs to plan with realism and pragmatism if it is to successfully develop its gas.

Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council