Saturday, February 11, 2017

Connecting the East Med - IN CYPRUS / CYPRUS WEEKLY

February 11, 2017
Spyros Papavassiliou

Constantinos Papalucas is a former Associate with the Environment and Natural Resources Program (ENRP) at Harvard University’s Belfer Center for Science and International Affairs where he focused on the issues surrounding the gas finds and the emerging energy hubs in the Eastern Mediterranean.

Asked about the state of the global market for gas and oil, Papalucas says that the world has enjoyed a period of low prices of oil, but also low prices of natural gas, because of the existence of oil-linked natural gas contracts.

In addition, since the end of 2014, the liquefied natural gas (LNG) market is in an oversupply mode, creating an LNG glut.

“The demand from the world’s three largest players – Japan, Korea and China, which make for 60% of the global LNG imports – declined,” says Papalucas, who has also served on the US House Energy and Commerce Committee.

However, this trajectory is being offset by Pakistan, Egypt, Jordan and India, which now appears to be the world’s fourth-largest LNG importer.

“This prevented the overall LNG demand from falling sharply,” he adds.

Papalucas is certain that “LNG imports in Europe will increase significantly over the next decade, as the LNG supply glut provides the ground for the European import dependency to increase”.

At the same time, says Papalucas, “there is a shift from a rigid oil-linked gas price to a flexible gas-on-gas price competition, which is contributing to an increased global LNG demand”.

“This makes the case for countries that want to enter the LNG production still attractive, given the medium-term LNG forecasts.”

He makes special mention of the deal struck by OPEC (Saudi Arabia) and non-OPEC producers (Russia) last December to jointly cut oil output in an effort to deal with the global glut.

However, “nobody expects the oil price to recover back to $100/ barrel, but it won’t stay that low either”, he adds.

Regarding Cyprus, Papalucas sees the current low prices as a window of opportunity to produce electricity using natural gas turbines, pointing to the examples of neighbours Egypt and Jordan using Floating Storage and Regasification Units (FSRUs).

This, says Papalucas, would “make the Cypriot economy more competitive and greener as natural gas electricity production works much more efficiently with intermittent energy sources (renewable energy)”.

In addition, despite the fact that “Cyprus is still in the process of licensing rounds and far from the monetisation of its gas finds”, Papalucas says “the market trends should be monitored intensively”. He attributes this to “the right infrastructure decisions that need to be made, which will later offer flexibility to cope with market volatility, but also to hedge against other risks”.

I ask Papalucas about his compelling article entitled, “Why Turkey will not achieve ‘energy hub’ status: Erdogan’s delusions of energy grandeur”. It can be found online with a simple Google search, and is well worth the read, with Papalucas blending economic and political analysis in equal measure.

First, Papalucas explains what a gas hub is, as it is crucial to his argument: “It is a trading platform for either physical or financial transactions (or both) that facilitates gas-trading activities.

“And what a gas hub requires is a liberalised and a deregulated market where suppliers are free to import or produce energy and customers are free to choose their preferred supplier. But what’s essential for an energy hub to emerge is gas-on-gas competition.”

This is significant because, as Papalucas explains, “Turkey has a poorly-regulated energy sector with its vertically integrated state-owned Petroleum Pipeline Corporation (BOTAŞ) dominating the entire natural gas sector”.

In addition, “cronyism and Turkey’s self-serving interpretation of liberalisation”, have made it highly unlikely that Turkey has or will operate in conditions of a liberal free market in the form of a gas hub.”

Summing up, Papalucas says that the creation of a Turkish ’Transit Gas Hub’ entails significant risks for both sellers and buyers that should be included in the cost calculus.

He cites as examples the recent pipeline attacks that led to costly interruptions in oil and gas supply, leading to increased security costs.

Perhaps more significantly, “political uncertainty under Erdogan’s administration is constantly rising, and can rise even further since he would never hesitate to extract heavy concessions from the West by using energy as a weapon”.

This leads Papalucas to the question he argues must be answered: “Is a Turkish energy hub a realistic target that would help the West diversify its energy imports, or by turning the Russian monopoly into a Turk-Russian duopoly will this simply amplify Western dependency on countries that use energy as a weapon?”

The keystone in the arch

Papalucas makes mention of the ‘narrative of the East Med’, saying that: “After hundreds of years, (the region formerly known as Near East) is putting its pieces back together by rebranding itself as the East Med”.

“This time, the compositional glue for this geopolitical mosaic relies on two main components: security and hydrocarbons,” he says.

In response to the question of what it would take for the region to become an energy hub, Papalucas argues for a grand plan.

“There is an imperative need of a Grand Midstream plan that will connect and interconnect the countries to craft the necessary inter-dependencies (assuming that all players are rational) in a financial and/or physical level,” he says.

“If the interests of the rational players are vested successfully and fairly, any asymmetry should be dealt with effectively. If, however, each country decides to pursue a ‘zero-sum’ approach then the East Med will not reach its full potential and would be under-performing compared to other emerging hubs such as Singapore or other European hubs.”

As for Cyprus’ role in the East Med, Papalucas says that energy policy in Cyprus must maintain a regional outlook.

“Cyprus has a great role to play in the EastMed and should not limit itself to a producer or merely a transit country.”

At this point, Papalucas shares an apt metaphor from his time in the United States.

“Whenever I was asked about the East Med and Cyprus in the United States I always used to resemble the East Med as an arch, with Cyprus playing the role of the keystone of the arch,” he says.

“Despite its small size, if you remove that stone the whole arch will collapse.”
Constantinos Papalucas is a former Associate with the Environment and Natural Resources Program (ENRP) at Harvard University’s Belfer Center for Science and International Affairs where he focused on the issues surrounding the gas finds and the emerging energy hubs in the Eastern Mediterranean.