Costis Stambolis
Highly complex and conflicting circumstances make it difficult for long term plans
The question is not rhetorical and alludes to the fact that ten years after the discovery of the gigantic Leviathan field offshore in Israel and six years after the finding of the smaller, but significant nevertheless, Aphrodite reservoir within Cyprus’ EEZ, not a single cubic foot of gas has been exported, nor is it likely any time soon. And this is not because of the limited size of the reservoirs discovered so far or lack of interest on the part of investors or even the difficult seabed terrain, but rather because of the highly complex, and often conflicting, circumstances which currently exist and make it difficult for the laying out of adequate long term plans for the exploitation of the extensive hydrocarbon potential of the region.
To start with, this vast potential cannot be easily disputed since following the first gas discoveries offshore in Israel, starting with Noa, and Mari-B in 2007, we had significant findings almost every year since then. Just to remind our readers, we had Tamar and Dalit in 2008, and Leviathan in the same year, followed by Dolphin (2009), Aphrodite (2010), Tanin and [Karish] (2011) and the huge Zohr field in Egypt in 2015, which lies within the same geological basin.
Highly complex and conflicting circumstances make it difficult for long term plans
The question is not rhetorical and alludes to the fact that ten years after the discovery of the gigantic Leviathan field offshore in Israel and six years after the finding of the smaller, but significant nevertheless, Aphrodite reservoir within Cyprus’ EEZ, not a single cubic foot of gas has been exported, nor is it likely any time soon. And this is not because of the limited size of the reservoirs discovered so far or lack of interest on the part of investors or even the difficult seabed terrain, but rather because of the highly complex, and often conflicting, circumstances which currently exist and make it difficult for the laying out of adequate long term plans for the exploitation of the extensive hydrocarbon potential of the region.
To start with, this vast potential cannot be easily disputed since following the first gas discoveries offshore in Israel, starting with Noa, and Mari-B in 2007, we had significant findings almost every year since then. Just to remind our readers, we had Tamar and Dalit in 2008, and Leviathan in the same year, followed by Dolphin (2009), Aphrodite (2010), Tanin and [Karish] (2011) and the huge Zohr field in Egypt in 2015, which lies within the same geological basin.
The region’s proven reserves amount to almost 3.0 trillion cubic meters of gas (106 trillion cubic feet) and 10 tcm (353 tcf) of both proven and contingent. In the Leviathan basin alone (read Israel- Cyprus- Lebanon), proven reserves today amount to 0.75 tcm (26.5 tcf) and together with contingent stand at 3.75 tcm (132 tcf). This is on par with the much touted Caspian gas reserves, which the US and EU energy boffins are pushing hard for energy security reasons in order, as they say, to help diversify EU’s gas supply and lessen Russia’s grip on European energy demand.
The bottom line of the above exposé is that East Med gas reserves are more than enough to amply satisfy local needs in Israel, Cyprus and Lebanon combined, and hence the question arises as what to do with the excess gas that can be produced.
In view of the fact that the major gas consumption centres are way off East Med’s waters, one has to think of various export options which involve hundreds if not thousands of kilometers of underwater pipeline networks or the construction of capital demanding liquefaction plants, which produce LNG, which could then be loaded for export worldwide, and not just to Europe.
However, the economics of building lengthy pipelines and/or LNG plants are complex to say the least and most of all they require actual customers at the other end who will be willing to commit themselves through long term contracts to purchase sizeable gas quantities. Such types of contracts, normally oil-indexed, require clear cut demand needs from the purchasers’ side which will need to be satisfied by the gas to be shipped from the production centre, the East Med complex, in our case.
World and Europe currently facing oil glut
There lies the problem since the world, and Europe more specifically, are currently facing an oil glut situation with global energy markets undergoing a period of low gas prices.
As far as Europe is concerned, which because of its proximity appears to be the most promising destination for East Med gas exports, gas demand over the last years is stagnant, down 20% from a peak of ten years ago. The key reasons being cheap coal and subsidised renewables with no prospect any of these factors being reversed any time soon.
Meanwhile, as indigenous European gas production drops every year (as North Sea reservoirs decline), Russian gas imports take their place mainly due to access and availability and their low price ($4/mm BTU).
Meanwhile, as indigenous European gas production drops every year (as North Sea reservoirs decline), Russian gas imports take their place mainly due to access and availability and their low price ($4/mm BTU).
It is quite indicative and became known only two weeks ago, when Gazprom’s Deputy Chairman Alexander Medvedev spoke at the annual European Gas Conference 2017 in Vienna, that Russian gas exports to EU-28 reached an all time peak of 180 bcm in 2016 (covering almost 40% of European gas demand), up by 20 bcm compared to the previous year.
With the Nord Stream II Russian-owned pipeline in the Baltic soon to be built and the Gazprom-backed Turkish Stream pipeline, underwater construction of which in the Black Sea is scheduled to start later this year, Russia will strengthen enormously its gas export regime to Europe. And it is against this reality that East Med gas will have to compete.
European energy demand to recover at a slower pace
In spite of European gas demand decrease over the last few years, eventually as latest analysis by the IEA in Paris and by BP in its latest Global Energy Outlook suggest, European energy demand is set to recover over the next years (but at a slower pace).
At the same time, as indigenous oil and gas production is reaching it's limits, and already declining, there will be a need for gas increased imports and therefore export opportunities for East Med gas can be identified. Today, the EU 28 is more than 53 per cent energy import dependent, with this figure set to increase, as in addition to oil and gas there is going to be a further decrease in locally produced coal and lignite in view of stringent environmental considerations.
In view of the above, Europe will remain a very promising gas export option for East Med gas, but negotiations with interested parties will need to be speeded up in order to secure firm contracts of actual quantities to be shipped.
However, a number of other quite pragmatic options also exist, such as by means of pipeline to Egypt, for partly meeting fast rising local demand or for export via LNG from the currently idle liquefaction plants at Idku and Damietta.
An export route to Turkey is also on the table as Ankara is trying to diversify its gas import in view of rising demand (45 bcm consumption annually) and the need to strengthen its energy security. To this end, Israel has embarked on lengthy negotiations with Turkey’s BOTAS in order to determine prices and technical specifications.
One more option is the construction of the East Med pipeline to Greece and from there to Italy, promoted by Greece’s DEPA and Italy’s Edison. A latest economic feasibility study has revealed a cost competitive CAPEX of EUR 5.0 billion for 10-12 bcm/year export volume.
Unable to wait any longer, Israel’s Delek, Leviathan’s operator, has secured 10.0 bcm/year gas sales to Israeli industrial customers and to a Jordanian potash plant from the first phase of Leviathan, while actively exploring the Turkey option for the second phase of Leviathan’s development.
But even with Turkey, Leviathan I and II will still be left with more gas to export. Between them, Leviathan and Aphrodite have a capacity to export as much as 30-40 bcm/year, says Charles Ellinas, a well known gas expert and former head of Cyprus National Hydrocarbons Company.
For Cyprus, which so far has only Aprhrodite’s limited reserves to consider, the export option is more difficult and hence, as many industry executives argue lately, priority should be given to using its gas for local use and to building up its domestic gas market. The same executives say in no uncertain terms that if an export strategy is not soon in place, East Med gas, and Cyprus gas particular, will run the risk of remaining stranded for many years.
Costis Stambolis is an Athens-based columnist for the Financial Mirror. info@iene.gr
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