BMI View: In line with our long-held view, the proposition to pipe natural gas from the Leviathan and Aphrodite fields to the Idku LNG plant in Egypt represents the most compelling export scenario for the fields. The Egyptian option is both less politically sensitive and less capital intensive than the alternative scenarios.
Royal Dutch Shell is in discussions to buy natural gas from Israel's Leviathan field, combine it with output from Cyprus's Aphrodite field in which it owns a 35% stake, and pipe it to the Idku LNG plant in Egypt. The two train LNG terminal at Idku has a capacity of 7.2mn tonnes per annum and could accept gas deliveries of around 10bcm. Sufficient offtake from the LNG facility may allow for full-field developments at Leviathan and Aphrodite, unlike other export options where demand is lower.
Turkish Option Remains Mired In Political Risk
Whilst a more attractive demand market, an export route to Turkey remains politically charged, (see 'Further Pain For Export Ambitions', May 31). In particular, a lack of cooperation between the Turks and Cypriots will hamper any attempts to export via Turkey. Flare ups in political tension, as seen over May of this year, only further delay the build-up of trust between the two nations, needed in order to jointly approach energy supply issues.
Instead, in line with our multi-year view on the monetisation of Eastern Mediterranean gas, we see Egypt as an increasingly likely destination for Cypriot and Israeli gas (see 'Egypt Challenges Turkey For Leviathan Gas ' , April 28 2014 & 'Leviathan: Woodside ' s Loss Egypt ' s Gain ' , May 22 2014). Whilst Egyptian import demand is lessening due to the proliferation of several large offshore fields, the existing LNG plants on the coast represent opportunity for export of Eastern Mediterranean gas to Europe and beyond. A risk to this export option in the near term are the depressed global LNG prices and market oversupply, which can create headwinds to securing the necessary contractual offtake. However, as a large global portfolio player, this may be less of a challenge for Shell.
Leviathan To Combine With Cypriot Gas
Connecting the Leviathan and Aphrodite fields to the Shell-operated Idku plant in Egypt bypasses politically sensitive EEZ's in the East Mediterranean: such a route would only require permission to pass through the EEZ of Egypt. For the Leviathan and Aphrodite partners (Leviathan: Delek Group 45.4%, Noble Energy 39.6%, Ratio Oil 15%; Aphrodite: Shell 35%, Noble Energy 35% Delek Group 30%), a pipeline to existing Egyptian LNG capacity would be a faster and, potentially, a substantially cheaper option to monetise the resource base- compared to the proposed onshore or floating LNG options or the 'EastMed pipeline' to Europe.
The 'EastMed pipeline', for which the European Commission is currently undertaking a feasibility study, plans to supply East Mediterranean gas to the European market, flowing through Crete and ultimately into Greece. We remain sceptical over the realisation of the project, most notably due to the huge capital commitment required to undertake the pipeline. Whilst a longer-term EU sales contract would be supportive of large initial capital investments in these gas developments, the project would continue to face the burden of multi-lateral negotiations between partner countries. Furthermore, the capital requirement of the pipeline itself is likely to very high, with additional technical challenges of deepwater and terrain adding to project cost.
SOURCE / BMI Research
