Cyprus gas: is it too late for LNG?
17 May, 2014
* Depends on Asia prices – 8-10tcf needed to make Vassiliko viable - * ENI-Kogas to drill in August – could be searching for oil
By Fiona Mullen, Director Sapienta Economics
At the Energy Stream CMG conference on May 8 and 9 in Nicosia, it became clear that the natural gas market is becoming more complex by the day, with competing suppliers, changing priorities of buyers and lots of politics in between.
This raises a number of questions about the ideal gas export options for Cyprus and whether land-based LNG is still a viable option.
LNG: time is money
The government’s official line is to build a land-based liquefied natural gas (LNG) plant as Vassilikos. The main argument for LNG is that it provides flexibility. With an LNG plant you can export to anywhere that has regasification facilities.
The second argument for is that bolsters Cyprus’ position as a regional hub.
The third and probably most important argument is that it allows for exports to Asia, where prices can be around USD 7 per MMBTU higher than in Europe.
But an LNG plant will cost at least USD 6 bln to build. Add other costs, such as pipeline from Block 12, liquefaction costs, transport costs, and so on, and you are looking at a cost to the producer of approaching USD 30 bln.
To make that kind of expenditure commercially viable you have to sell an awful lot of gas.
It is no longer a secret that the estimated 3.6 to 6 trillion cubic feet (tcf) in Cyprus’ Block 12 is not enough to make an LNG plant viable. Last week the energy minister, George Lakkotrypis, admitted that 2020 was no longer a likely date for finishing the plant.
If the price moves we need even more than the 6 to 7 tcf that industry sources generally is needed to make it viable.
My own estimates, to be published in a report by PRIO on May 28, suggest that if the Asia price drops by 10% you need 8 tcf. If the price drops by 20% you need 10 tcf. And if you want to sell to Europe, the volume threshold is even higher.
Noble is due to do more drilling in Block 12 this year and we learned at the conference that the ENI-Kogas will spud its first exploratory well in August. Total will not begin until 2015 but the word on the street is that it is going for gold—black gold.
In the words of Andy Varoshiotis, the head of the Cyprus Oil and Gas Association, “if we hit oil, we hit the jackpot”.
But if we do not hit the jackpot, we have to rely on gas.
Even If Noble and Eni-Kogas get past the 6 to 7 tcf threshold, it will then be another couple of years before this is confirmed with appraisal wells, then add another year or two before they can get the finance and sign the final investment decision (FID).
First LNG export not before 2026-2028, at who knows what price
We are looking at 2016 to 2018 before construction even starts. Then it could take ten years to build. It is just about possible to build an LNG plant in six years, but with all the political interference in Cyprus, it will take longer.
So we should not expect our first LNG export before 2026-2028, by which time we have no idea where gas prices will be.
If Russia bumps up supply to China, if the US exports a lot to Japan, additional supply will push the Asia prices down. This suggests that financiers might use a lower price for gas in their assumptions and will therefore demand higher volumes to make everything viable.
The Israeli gas boat may already have sailed
There has been much talk of adding Israeli gas into the mix in order to reach the required volumes. However, this is becoming an ever more distant option.
In the past few weeks, the partners in Leviathan and Tamar, who also hold the licence for Block 12, have received ten bids for the supply of gas from Leviathan to Turkey by pipeline, have signed a preliminary agreement for the supply of gas to an unused LNG plant in Egypt and have signed a contract to send gas to Jordan and the Palestinian Authority, although the latter deal is less certain.
It is questionable, therefore, whether there would be enough to send to a Cyprus LNG plant given that Tamar may already be supplying Cyprus’ domestic needs and that Leviathan is only allowed to export 50% of its 540 bln cubic metres.
Gina Cohen, an energy expert based in Israel, noted that Leviathan could raise its export quota to 75% by swapping quotas with the smaller Karish and Tanin fields. But, she noted, “no country has ever agreed to sell gas via an LNG plant in another country”.
She also said that a floating LNG (FLNG) plant was gaining ground. Prices were coming down and in terms of timing it would be quicker than easier than using a land-based facility.
FLNG is also good for smaller fields, so could end up being the only viable option for Cyprus.
If Israel will not supply an LNG plant in Cyprus, maybe it would help fund it. This was an idea put forward by Matt Bryza, a former US diplomat who sits on the board of Turcas, a Turkish energy company.
In exchange for allowing Israel to send gas via pipeline to Turkey, the Leviathan partners could pledge to help fund an LNG plant in Cyprus, he suggested, thereby giving Cyprus its much desired LNG plant.
Still, it is difficult to see this happening without a solution of the Cyprus problem.
CNG: the chicken and the egg
If Cyprus has to wait up to 14 years before it can sell LNG, then there are two other options in the meantime: pipeline and marine compressed natural gas (CNG). CNG is good for small fields and short distances, so it would be a Mediterranean market that could either be supplied directly or into pipelines.
Adam Hedayat, Vice-President of SeaNG Canada, said that the “netback” for companies exporting CNG was USD 6.9 for CNG, compared with USD 4.88 for LNG and USD 6.77 for a pipeline.
CNG does not require the construction of pipelines or LNG plants, so is also greener than other options. In addition, unlike the Israel-Turkey or Cyprus-Turkey pipeline, it does not require a solution of the Cyprus problem.
The only thing holding CNG back is the fact that no one has done it before. SeaNG has obtained all the requisite international safety licences but so far no one has taken the leap to use it, although Hedayat hinted that SeaNG could be signing an agreement with a buyer by the end of the year.
Turkey pipeline: a bridge too far?
A pipeline to Greece is currently considered far too expensive given the depth and length of the pipeline, although a technical feasibility is due soon.
That leaves the other option in addition to CNG that could be funded with today’s volumes, namely a pipeline to Turkey. It costs less to build so revenue would be generated far earlier than LNG.
But the Turkey pipeline option is of course dependent on a resolution of the Cyprus problem.
Diversification is key
Given all of these difficulties, it is clear that Cyprus is not going to make money from gas any time soon.
Perhaps, instead, we should be focusing, not just on selling the commodity, but using its existence as a way to generate income in other ways.
Toula Onfouriou, the president of the Cyprus Hydrocarbons Company, is clearly already thinking along these lines.
She talked of an energy hub not only for producing and exporting “but also a centre of training and education and technological development”.
Cyprus has already been damaged by overdependence on the UK for tourists, on Russia for financial services and soon on China for real estate investors.
The gas market is too changeable to depend on one option. Diversification of the entire “Cyprus energy story” is our best way forward.
Fiona Mullen is Director of Sapienta Economics Ltd www.sapientaeconomics.com and partner at Strata Insight energy advisory www.stratainsight.com .
Link to source: http://www.financialmirror.com/news-details.php?nid=32549
