Saturday, December 24, 2016

Eastern Mediterranean Developments - ATLANTIC COUNCIL

Global Energy Debates and the Eastern Mediterranean, Chapter 6 -  Joint Publication by: PRIO Cyprus Centre, Friedrich Ebert Stiftung & Atlantic Council
Charles Ellinas

During the last 16 months the oil and gas sector has undergone dramatic change. The price downturn is quite serious but in the East Mediterranean we do not seem to worry about this. We carry on as if price is not an issue. However, sooner or later any East Med gas export plans will have to face up to this situation and respond to commercial realities if they are to move forward and reach and pass the point of final investment decision (FID). And it must be borne in mind that banks and the industry will only support projects with low risk and clear commercial returns.

At The Economist’s 11th Cyprus Summit on 3rd November 2015, Noble Energy’s representative said the company was still in the process of agreeing the Aphrodite development plan with Cyprus government and hoped to complete this during the next few months. There are export markets available in Egypt, partly for Egypt’s domestic market and partly for export to Europe as LNG. Following Egypt’s discovery of Zohr, many said that this has killed the market for others. But Noble Energy considers these reports to be greatly exaggerated. According to Noble there are still markets in Egypt for Cyprus gas and it is working with the government of Cyprus on these. The market in Cyprus is too small and hence not sufficient to support the development of Aphrodite. But gas will come to Cyprus once an export project has been identified.
One of the observations made at the aforementioned conference was that there is a glutof LNG and gas coming into the global markets. Wood Mackenzie forecast that gas prices inEurope might come down to $5-6 per million British Thermal Units (mmBTU) by the year 2020 and rise slowly after that. They did not expect balance between LNG supply and demand to be reached before 2022. The question was: ‘How can East Med gas projects be developed and exports to Europe be competitive within such prices?’ Noble acknowledged that gas prices were challenging and deep-water project development costs high, but that Egypt was still talking about gas sales agreements with Cyprus.

It is clear that the currently preferred development option for Aphrodite, to export gas to Egypt is fraught with challenges, not the least being global and European gas prices. These have now settled within a $6-7 per mmBTU range and may stay low during the rest of this decade. Such prices could make the Egyptian option commercially very difficult, whichever way the gas is transported from Aphrodite to Egypt and then exported to the European markets.

As for the domestic market, the Egyptian minister of energy announced that the country expected to become self-sufficient by 2020, and with gas production by British Petroleum (BP) planned to start in 2017 and by Eni at the Zohr field in 2018, and peak by 2020, Egypt is well on the way to achieve this. Between BP’s North Alexandria and Atoll and Eni’s Zohr, total gas production can reach 40 billion cubic metres (bcm) per year by 2020.(1) And this is on top of Egypt’s proved gas reserves, which the IEA estimates to be over 2100 bcm.(2) McKinsey says that this can more than cover Egypt’s future domestic needs and allow exports to re-start by 2020.(3) And, of course, more production of these reserves will follow as exploration progresses, spurred by the new gas prices recently renegotiated between the gas companies and Egypt.

Any plan for gas exports to Egypt for domestic use will have to work within this window. Certainly developers of Tamar can achieve this, given that the gas framework deal has now been approved in Israel,(4) provided an export pipeline is secured. Tamar is already producing gas and it will be relatively easy to start exporting to Egypt within a short length of time, following political approvals.

But gas exports, both from Israel and Cyprus, to the unused LNG plants at Damietta and Idku will face commercial challenges. If we take the case of Aphrodite gas, the Egyptian Energy Minister said in July 2015 that the feasibility study into this concluded that gas can be delivered from Aphrodite to Idku at around $6 per mmBTU.(5) If one adds the cost of liquefaction, trans - portation to Europe and regasification, the cost of gas delivered to Europe could well be in excess of $10 per mmBTU. This is way above the gas prices in Europe of $6-7 per mmBTU that are likely to remain until 2020. Similar arguments apply to Israeli gas.

Eni’s CEO talked about a regional gas hub in Egypt linked to the development of Zhor. However, the price arguments and challenges are still the same. Any schemes based on export of East Med gas to Europe in the form of LNG will have to face the price barrier.

Now, the shifts in global energy production and consumption are having a profound and lasting effect on prices. Oil prices will remain low for the rest of this decade. IEA’s recently released annual review projected these will rise slowly reaching $80 per barrel by 2020,(6) but there are factors that may well keep it in the £50-$60 range. Others consider this optimistic. In the futures market Brent crude for delivery in December 2021 is trading at only $65/b and oil majors, such as BP, are preparing to live with $60 per barrel for the foreseeable future. ‘Lower for longer’ is the new mantra.

Gas prices are suffering similar problems and the glut of new LNG, expected to come to the market over the next 5 years, will keep these low. Wood Mackenzie said that the LNG glut is likely to be deeper and last longer than anticipated and will persist for some years.(7) In Asia LNG prices may bottom out by 2019 at $5 per mmBTU and in Europe at about the same level by 2020. And this assumes coal prices do not fall down further. Société Générale came up with similar projections.(8)

The Eastern Mediterranean, i.e. Israel and Cyprus, will have to compete with these low gas prices, of the order of $6-$7 per mmBTU, at least to the end of this decade, but very likely beyond 2020, if the various export projects currently being mulled are to become commercially viable.

When the vision of the future is uncertain, you’re better off being flexible, keeping all your export options open. Export ‘flexibility’ will be the master word for the years to come! Israel and Cyprus must do the same, and include floating LNG (FLNG) and marine compressed natural gas (CNG) possibilities in re-developing their export plans. Sooner than later they will have to face and meet commercial realities if they are to succeed.

The good thing is that the discovery of Zohr has brought the Eastern Mediterranean back into the limelight of exploration and production. Egypt is well on the way with new exploration licenses and new projects, and Cyprus and Israel are considering going for new licensing rounds. In Cyprus, Total and Eni have both decided to stay and are re-evaluating their geological models with renewed optimism in view of the Zohr discovery in a carbonate formation. Lebanon, another country in the region with offshore hydrocarbons potential, on the other hand, is still way behind, with no clear way forward yet.(9)

But what about regional cooperation? This can carry on at political level, as it does now. In terms of energy:
  • Egypt is well on the way to become self-sufficient by 2020 and possibly be in a position to start gas exports by 2022
  • In the interim, Israel and Egypt can enhance their cooperation by facilitating gas exports from Tamar to Egypt for about 5 years, to replace expensive LNG imports
  • Given political resistance to Israeli gas, Jordan may eventually get gas from Egypt and discussions between the two to that effect have already started. The idea of sending gas from Cyprus to Jordan is highly challenging, to say the least.
  • Cyprus and Israel can enhance cooperation first by sorting out the long lasting saga of the Unitization Agreement.10 The will appear to be there especially after the recent Anastasiades-Netanyahu meeting.11
  • But the biggest prospect is for Cyprus and Israel to cooperate in exporting their gas to Turkey and potentially to Europe through Turkey, by pipeline through Cyprus’ exclusive economic zone. This presupposes solution of the Cyprus problem and rapprochement between Israel and Turkey – negotiations for both are already well progressed and with a clear election result in Turkey hopes are rising.
What is clear is that the Eastern Mediterranean is a continuously evolving region both geostrategically and in terms of energy and gas development and therefore regional energy cooperation options need to be re-evaluated.

  1. Egypt’s hydrocarbons are produced in the Western Desert, Eastern Desert, the Mediterranean Sea, Upper Egypt, Nile Delta, Gulf of Suez, and the Sinai Peninsula. Gas reserves are expected to grow mostly due to discoveries in the Mediterranean and the Western Desert. While Zohr has grabbed the headlines, most of Egypt’s oil and gas is produced from relatively small fields that are tied into regional gathering systems.
  2. U.S. Energy Information Administration. (2015, June 2). Egypt. Retrieved from:
  3. Norlen, A. & Maddock, K. (2015, September). Giant gas field discovery in Egypt likely to impact global gas markets. McKinsey Energy Insights. Retrieved from:
  4. Zalel, Y. (2016, May 23). Israel Govt Approves New Gas Framework. Natural Gas World. Retrieved from:
  5. Egypt completes feasibility study into Cyprus gas imports. (2015, July 31). Cyprus Mail. Retrieved from:
  6. International Energy Agency. (2015, November 10). World Energy Outlook 2015. Retrieved from:
  7. Fisher, J. (2015, October 27). This LNG Glut Likely Deeper, Longer Than Last, Says Wood Mackenzie Analyst. Natural Gas Intelligence. Retrieved from:
  8. Shiryaevskaya, A. (2015, November 2). SocGen Sees European Gas Sinking Through 2020 on Supply Glut. Bloomberg. Retrieved from:
  9. Nash, M. (2016, May 27). What’s in store for Lebanon’s nascent oil, gas sector? Al- Monitor. Retrieved from:
  10. Disputes between Israel and Cyprus over Aphrodite reservoir. (2015, November 23). Sigmalive. Retrieved from:
  11. Shalev, T. (2015, November 13). High energy stakes as Cypriot president visits Israel. i24news. Retrieved from: