Sunday, May 14, 2017

An LNG plant is still the best option for Cyprus - IN CYPRUS / CYPRUS WEEKLY

May 14, 2017
Panayiotis Tilliros

The Eastern Mediterranean (East Med) energy resources constitute a credible alternative source that can help Europe diversify and reinforce its energy supply and transit security, given that indigenous gas production in Europe is on a declining trend and demand is on a rising trend.

Besides its traditional gas supply routes from Russia, Norway (indigenous production) and North Africa, Europe is seeking new gas supplies via the Southern Gas Corridor, comprising the ‘Fourth Corridor’ in the Caspian sea (Azerbaijan and probably Turkmenistan) and the ‘Fifth Corridor’ in the East Med. According to an official EU website, the EU aims to import initially 10 billion cubic metres (bcm) of gas per year when the new corridor opens in 2019-20. This is predicted to rise to 80 to 100 bcm per annum in the future.

The Caspian gas resources will not be sufficient to diversify European gas supply. Moreover, gas transportation via the Trans-Anatolian Pipeline (TANAP), across precarious Turkish territory, where the pipeline network has been subject to repeated attacks causing serious outages, entails grave transit security risks. If East Med gas was also transported via Turkey, transit security would be detrimentally compromised, as the Ukraine 2006 and 2009 gas transit crises have proved. Another issue is whether the EU would allow Turkey to snatch East Med gas resources and gain leverage over Russia, or whether it wants this advantage for itself.

Liquefied natural gas (LNG) imports to Europe are accepted by the EU as increasing energy diversification and security, lowering the heavy dependence on Russia. Towards this end, the EU is targeting the improvement of its energy security and competitiveness by tapping into the global LNG market. In fact, competitively-priced LNG is forecast to claim a much larger share of the European gas market. Additional gas supplies are necessary for long-term economic development, especially of the less developed south-eastern Europe.

The benefit of an LNG plant

Given the East Med energy potential, Cyprus can play a pivotal role in reinforcing the energy supply and transit security of the EU. First, as analysed above, it would be wise for the EU to have separate routes for the Fourth and Fifth Corridors. Second, pipeline dependence should be avoided. Pipelines render the exporter hostage to the importer and give intermediary states inordinate power, at the expense of both. Geopolitical developments can be as fluid as gas and such long-term commitments may be regretted.

This is why an LNG plant at Vassilikos in Cyprus would serve the best interests of both the EU and the Republic of Cyprus (RoC) itself. Moreover, a Cyprus-based LNG plant is the principal, if not the only, way of achieving targeted and specified results concerning the country’s energy future. This has become even more imperative following the illegal bank bail-in/haircut imposed by the Eurogroup on March 25, 2013 that destroyed the country’s economic model.

The development of the energy sector around an LNG plant, and the multiplier effects from the implementation of the required infrastructure, are key components for the country’s economic future for many reasons. A dynamic energy sector can lead to job creation across the entire industry value chain and help develop technical expertise, applied research and innovation. It can create inter-sectoral synergies and economies of scale.

The fastest possible introduction of gas into the electricity sector is a most important priority, which is bound to exert a significant positive microeconomic and macroeconomic impact. Electricity production costs will decline substantially, with evident benefits for both households and industrial users. This will exert downward pressure on inflation and render the enterprises and the economy more competitive. In addition, the substitution of oil by gas and LNG exports will correct chronic macroeconomic imbalances, like the trade and current-account deficits. Moreover, if the RoC becomes an energy centre, it will gain substantial strategic advantages and geopolitical leverage, thus rendering possible a fairer solution of the Cyprus problem.

In the light of the foregoing, a two-train LNG plant is fully justified, provided at least 10 trillion cubic feet (tcf) of proven reserves become available, including the existing 4.5 tcf (127 bcm) of reserves of Aphrodite in Block 12 of the RoC Exclusive Economic Zone (EEZ). LNG offers maximal flexibility and zero transit risk, while reinforcing the possibility of market selection and price negotiation.

Several exploratory drills are planned in 2017 and 2018 by the international oil companies (Exxon Mobil, ENI and Total) and independents operating in the EEZ of Cyprus. The probability of success, according to the revised exploration model based on the game-changing discovery of the Egyptian Zohr carbonate reservoir, is rated to be considerable. Future liquefaction capacity can be expanded with gas field discoveries, cooperation among the companies involved, the East Med countries joining in (such as probable future producers like Lebanon and Syria and currently-producing Israel), other potential investors, and, of course, European and world demand.

East Med regional cooperation

The East Med gas constitutes a viable, secure and independent alternative corridor for European demand and diversification needs. In fact, the Cyprus objectives are in line with the main dimensions of the EU’s Energy Union strategy. Cyprus can serve as the axis and trading junction that boosts the energy partnership between the Southern European and Eastern Mediterranean countries, so as to contribute to the achievement of Energy Union goals. The development of a Mediterranean gas hub with regional supplies from a Cyprus-based LNG plant will reduce EU dependence on specific energy suppliers, routes and fuels and contribute significantly to Europe’s energy requirements and energy security goals. Furthermore, the exploration and development of East Med gas reserves present an excellent opportunity for regional co-operation and contribution to regional political stability, peace and economic growth.

The writer is a a doctoral student and a senior official in the Ministry of Finance. The views expressed here are personal.