Sunday, March 12, 2017

Good news but realism should prevail - IN CYPRUS / CYPRUS WEEKLY

March 12, 2017
Charles Ellinas

The long-awaited confirmation of Cyprus’ third licensing round awards was made on Tuesday, March 7. As expected, these awards were as follows:

Block 6: ENI-Total consortium
Block 8: ENI
Block 10: ExxonMobil and Qatar Petroleum

The signature bonus to be paid to the government totals €103.5 million.
This was good news and a successful conclusion to a bidding round that saw three of the world’s oil and gas majors committing to Cyprus’ Exclusive Economic Zone (EEZ). The signature of the Production Sharing Agreements is expected by the end of March.
The other equally important news was confirmation that ENI and Total have agreed to extend their cooperation in Block 11 on a 50:50 basis, with Total as the operator. The farm-in deal has been approved by Cyprus’ Council of Ministers.

In the following I analyse these developments and their implications for Cyprus and the region.

Zohr has raised expectations

Behind these important developments towers the discovery of Zohr in the Egypt’s Shorouk block, opposite Block 11, in 2015. It was discovered in 1,450 metres of water depth and extends over an area of about 100 square kilometres. It is estimated to contain 850 billion cubic metres (bcm) of gas and it is the largest gasfield discovered so far in the Mediterranean.

But what makes Zohr of unique interest to the region is its geology. Unlike Tamar, Leviathan and Aphrodite, which were discovered in sandstone formations, Zohr is a carbonate reservoir lying at a total depth of about 4,150m, with over 600m of continuous hydrocarbon column.

It was formed 5-7 million years ago in lagoons south of Cyprus and investigations since the Zohr’s discovery have led to strong indications that other similar reservoirs may exist around this area, with Cyprus’ Blocks 10 and 11 being strong candidates.

This huge potential for more major gasfield discoveries is what lured the oil and gas majors to participate in licensing rounds in Cyprus and Egypt last year.

Exploratory drilling could take until 2020

The normal process following such awards is to carry out desk studies by gathering and evaluating all available data, including seismic data made available to the bidders by the Ministry of Energy.

It is understood that additional 3-D seismic surveys have been completed since the start of the bidding round, particularly around Block 10, and will be made available to the successful bidders. No doubt they will assist speed-up the evaluation process.

The next stage will involve identification of additional data that might be needed to complete the geological models of the three blocks, and in particular the need to carry out additional 3-D seismic surveys.

Depending on the availability and quality of data, such complete geological models enabling the identification of drilling targets may become available between 2018 and 2019. It has been reported that the availability of extensive data might enable ExxonMobil to start drilling in Block 10 in 2017, but this is optimistic.

Once a drilling target is identified, the company will need to obtain environmental approvals, secure and establish a drilling support base, presumably at Limassol port, go through a bidding round and place all required contracts, including the drilling vessel. This process alone could take the best part of a year.

At the earliest any drilling could start by 2018, and, depending on the completion of the 3-D seismic surveys, the drilling campaigns for all three blocks may not be completed before 2020. And that assumes that the operators of the three blocks give priority to Cyprus. Given their global commitments, this is not assured.

Price is key even for ExxonMobil

I covered ExxonMobil’s interest in Cyprus in an earlier article in the Cyprus Weekly. The interest in Cyprus is two-fold.

Firstly, it has been attracted by the prospect of making a significant gas discovery in a stable region, within the EU, with established regulatory, taxation and fiscal systems. A discovery of a Zohr-size gasfield could add over 20% to ExxonMobil’s proved reserves, which is of particular importance to the company given its recent write-off of about 4.8 billion barrels of oil equivalent (boe).

Secondly, a sizeable discovery can be used to develop exports of liquefied natural gas (LNG), particularly if gas prices recover in the mid-2020s. ExxonMobil and QP have a successful partnership in developing and exporting LNG to global markets.

They also have the financial and technical capabilities to develop such a project.
But a word of caution: even mighty ExxonMobil will need gas prices in Europe to recover well above last year’s average of $4.7 per million British thermal units (mmBTU) to make such a project commercially attractive, which will take time.

It will also have to compete for funding with all the other projects ExxonMobil has identified for development around the world. So, it may be well into the next decade before any discovery progresses to gas sales and development.

FLNG synergies for Total-ENI

This is perhaps an even more important development. Total is the 4th largest international oil company and ENI the 10th. Together they make a formidable consortium with the technical knowledge and financial might to complete any project they decide to develop.

But even more important are the opportunities such a consortium opens up for the discovery and development of hydrocarbons in the region. ENI’s extensive knowledge of regional geology after their surveys in Blocks 2, 3 and 9 and drilling in Block 9, even if unsuccessful, and the discovery of Zohr, are invaluable in developing accurate geological models and identifying potential gas reservoirs in Blocks 11 and 6.

The immediate benefit, with the best prospects, is to drilling planned to start in Block 11 in June. ENI’s knowledge can help Total improve its chances of success.

In addition, ENI’s quest for a base to support its forthcoming drilling programme in Blocks 2, 3 and 9, planned for the end of this year, could be assisted by ENI sharing Total’s base in Limassol port.

However, it is the synergies between the two companies once discoveries are made which are exciting. A number of options open up.

As I indicated in previous articles, if Total is successful with drilling in Block 11 this summer, floating LNG (FLNG) may become a serious option for gas exports to European and Asian markets. Not only is Total highly experienced in LNG trading, it also has its own FLNG technology.

ENI is about to launch an FLNG project for the development of the Coral gasfield offshore Mozambique. This is well advanced, expecting final investment decision (FID) approval. All LNG has already been sold to BP for the Asian market. This demonstrates that the project is commercially viable.

The undoubted strengths of the two companies could possibly combine to successfully bring FLNG to the East Med and open up gas exports. None of the other options considered so far have progressed due to prevailing low global gas prices. Coral FLNG may unlock this.

Given the close proximity, the other potential option is to combine the development of Zohr with any discoveries in Block 11. Two possibilities come to mind. One is to take Block 11 gas to the Zohr platform for treatment and onward transportation to the Damietta LNG plant, partly owned by ENI.

The other would be to bring gas from Zohr to a Block 11 FLNG platrform for liquefaction and export. However, ownership and cross-EEZ issues may be complicating factors and gas prices may still be a challenge.

It is evident that this week’s developments in Cyprus’ EEZ have opened up new opportunities.

However, given that global and European gas prices are expected to remain low well into the next decade, and probably beyond, gas sales and project development may take time. We need to plan with realism and pragmatism.