Fiona Mullen
When energy consultant Gina Cohen first visited Cyprus about five years ago, shortly after the Aphrodite field had just been discovered, she advised the group gathered at the time to “think small”.
Unfortunately the opposite happened. We had politicians suggesting that $80 billion (about four times GDP) was on its way to government coffers, grand designs for a regional hub centred on a land-based liquefied natural gas plant (LNG) and more recent proposals for a long pipeline from Israel to Italy.
Meanwhile, five-and-a-half years after the discovery of the Aphrodite field, Cyprus is still importing diesel and polluting heavy fuel oil to feed its power plants. This means that electricity prices are still subject to large swings in oil prices. This year electricity prices are on the rise again, eating into disposable incomes during a year in which people might see their first pay rise in five years.
Cohen notes that Cyprus is the odd one out among the three countries that discovered gas: Israel, where she is based, Egypt and Cyprus.
“Israel is meeting all of its demands from local gas, currently Egypt is managing to supply four-fifths of its own gas needs. Not only has Cyprus made a discovery that has remained underdeveloped, it has not even managed to import gas, not via a pipeline and not as LNG, and exports are potentially further away than ever,” said Cohen.
Meanwhile, the large Leviathan field of around 22 trillion cubic feet (tcf), which was discovered one year earlier than Aphrodite, reached the all-important final investment decision (FID) stage in February. Production will start in in 2019 for about 12 billion cubic metres per year.
Start local
One factor that distinguishes the approaches of Israel and Cyprus is the priority in securing domestic supply. One of the first fields to be discovered offshore Israel was the Mari-B in 2000.
It was only 1 tcf (compared with 4.5 tcf for Aphrodite and an initial estimate that was even higher) but that did not stop Israel from using it for domestic consumption. Since then Israel has consumed gas from the small Noa and larger Tamar fields (about 11 tcf) and will soon be taking gas from Leviathan.
The strong desire for energy dependence is partly explained by geopolitics. But it has also brought about a significant change to Israel’s economy.
“Israel has been consuming gas since 2004 and consumption has increased steadily since 2013 when Tamar came online,” said Cohen. Last year Israel consumed 9.4 bcm of gas.
Around 80% goes to the power sector and industrial sector and about 15 factories like cement plants.
Cohen says the use of Israel’s gas has had a significant impact on the economy.
“Using gas domestically makes a big difference environmentally as we used to import coal. It makes a difference to the trade deficit as we don’t have to export dollars any more to buy fuel. It means tax money for the government as well as security of supply,” she said.
While Israel’s economic performance cannot be explained entirely by gas, it is worth noting that in 2007-2016 Israel averaged real GDP growth of 3.5%, compared with just 0.8% for the EU28 and 0.2% for Cyprus. The OECD predicts real GDP growth of 3.25% in 2017-18.
Now Israel is concentrating on diversifying gas supply. Only then will it really focus on exports. Most of the first phase of Leviathan production will go to the local Israeli market, with a small amount going to Jordan and the Palestinians if the latter sign a contract, with potential supplies also going to the local Egyptian market. Only the second phase will concentrate on greater volumes of exports to either Egypt or Turkey.
“Everything is dependent on one field, Tamar, so Israel is very keen to have sustainability, to have competition, to have security of supply, to have extra income to increase the market consumption to other users and to have financial and geopolitical benefits of exports,” said Cohen.
“In order to achieve this, it is doing three things. It has encouraged and pressurised the development of Leviathan. It has forced the owners of two small fields Tanin and Karish to sell them to another company, Greece’s Energean. And it is doing its offshore licensing round in which it is offering 24 blocks for further exploration.”
Keeping nimble
The market for gas is changing rapidly, however, as LNG production soars and price contracts start to de-couple from oil.
“The price of LNG is converging around the world. As there will be more and more LNG coming onstream, the difference in price will probably be limited to the liquefaction, transport and regasification costs … gas prices in Asia can no longer be five times higher than in the US for example, when there is more LNG in the market,” explained Cohen.
On the other hand, pipeline gas still remains the easiest and most cost-effective way to transport gas and thus gas markets will still remain very regionally focused.“Prices in our region are quite attractive for companies to be able to supply gas into these Eastern Mediterranean markets. Currently they are between $4.7 and $6.7 per mmBTU. This is the minimum kind of price that is needed to develop fields because they are almost all offshore except for parts of Egypt.”
With Israel supplying itself, Egypt heading for self-sufficiency within a few years and even Turkey doing all kinds of gas deals with neighbours (including potentially with Israel), Cyprus faces stiff competition.
“Things are changing all the time. Prices, options, problems are changing all the time. Therefore, it is important for the stakeholders, the companies, the buyers, the governments to keep their eye on the ball all the time and keep all their balls in the air,” said Cohen.
Her advice for Cyprus: “Not to be focused on one option. They have to ensure they have adaptability … maybe move ahead with smaller, scalable, flexible projects rather than what used to be the norm of mega projects. … Whatever they have been doing they are doing wrong. I would advise them to move ahead to the optimal solution rather than the perfect solution. This is important also for the international companies that are involved in the Cypriot market. Do something already!”
Fiona Mullen is Director of Sapienta Economics and author of the monthly in-depth Sapienta Country Analysis covering politics including the Cyprus problem, natural gas, the banking sector, and fiscal and macroeconomic performance
