12/04/2015
Last week we examined the current status of hydrocarbon exploration in Cyprus and gas exports options such as through a land-based LNG plant, floating LNG and by pipeline to Europe.
Here we examine the remaining gas export options which include exports to Europe by CNG, by pipeline to Egypt for its own domestic use and by pipeline to Egypt’s LNG plants.
Exports to Europe by CNG
The Russia-Ukraine gas transit crisis has brought to the fore central and southeast Europe’s need for supply diversification.
The East Med gas discoveries could help mitigate this significantly. Gas from Aphrodite could be supplied to these countries by CNG before 2020. Given current proven reserves, this could be 7-8 bcm per year, with the potential to grow, sufficient to make an impact. Cyprus gas is indigenous to the EU and could offer EU Member States in central and southeast Europe energy security and contribute to Europe’s energy union drive. These countries have already expressed interest in accessing East Med gas. This option merits further consideration.
Exports by pipeline to Egypt for domestic use
Talks are under way between Cyprus and Egypt for selling Aphrodite gas to Egypt. In March Cyprus Hydrocarbons Company (CHC) and the Egyptian EGAS signed a memorandum of understanding for a feasibility study into a subsea pipeline for exporting the gas to Egypt.
Egypt faces domestic gas shortages and has already entered into various agreements to import LNG over the next few years. An agreement has also been reached to sell gas from Tamar to Dolphinus Holdings Ltd, an Egyptian company, over the next three years.
However, Egypt sees this need to import gas for domestic use as short term. Egypt believes concessions awarded to IOCs over the past year, such as BP, ENI, Total and BG, underpinned by new discoveries in the Nile Delta, will restore the country to energy self-sufficiency by 2018 and stop the need for gas imports by 2020. In addition, domestically produced gas would cost from $3.50 to $5.00 per mmBTU, whilst gas piped from Cyprus would cost $7-$8.
On this basis, it is difficult to see how this could help the development of Aphrodite. Not only is it expensive gas in comparison to Egyptian gas, but by the time the Aphrodite project is completed (the earliest in 2019), Egypt will no longer require gas imports.
Exports by pipeline to Egypt’s LNG plants
Discussions are currently under way to export gas from Aphrodite to Egypt’s underutilised LNG plants at Idku and Damietta. This was covered extensively in the article on ‘Israel, Egypt gas and Cyprus’ in the March 27 edition.
There are two main challenges to the success of Cyprus gas sales to Egypt:
1. MoUs have been signed with Leviathan and Tamar to supply gas that will take about 70% of the capacity of the two LNG plants, with the remainder taken by BG and BP gas in Egypt.
2. Prices for LNG delivered to Europe and Asia are about $7 per mmBTU. The cost, excluding profits, of transporting Aphrodite gas to Idku, liquefying it, shipping to Europe and regasifying it may be of the order of $11 per mmBTU. This may make such a project uneconomical at least for the time being.
Noble has made great progress with the Israeli government in the last few weeks to create a framework to overcome regulatory hurdles, and with Netanyahu’s re-election this now looks likely. Noble expects that this will enable regional export deals to supply Egypt and Jordan with Israeli gas to be completed in the near term. Should this be the case, there will not be sufficient spare capacity left in the two LNG plants to accept Aphrodite gas. It would also make a deal between Cyprus and Jordan redundant, as Jordan would get its gas from Israel.
However, failure of the Israeli deals to materialise would leave the door open for Egypt’s Idku and Damietta LNG plants to explore alternative possibilities such as importing natural gas from Cyprus. But a new factor in this is the acquisition of BG by Shell. It remains to be seen how Shell deals with Idku, Israeli and Cypriot gas, especially given its major interests and investments in Turkey.
Implications
It can be seen from the above that Plan A, the preferred option, which at present relies on exporting Cyprus gas to Egypt, has many hurdles to overcome. There is no clear Plan B and this perhaps should be considered by including all possible export options in Noble’s forthcoming development plan. Given all developments described in recent editions of the Cyprus Weekly, it would be even better if Cyprus had its own Hydrocarbons Master Plan, something which underpins development in most countries embarking on such far-reaching exploration and exploitation of a national resource.
Whichever export option is finally implemented, there is much work still to be done, with the most important of all to find creditworthy clients and enter into gas sales agreements. This is a long-term process which may require several years to be completed. In the meanwhile, regional geopolitics and global oil and gas markets change and such changes may still influence final choices. As a result, all options must be kept open and reviewed on a regular basis.
An important aspect of the development of the Aphrodite gas field is the supply of gas to Cyprus for electricity generation. The quantities are small, less than 1 bcm per year, and this would be possible only if developed in conjunction with the chosen export option. However, with oil prices as low as they are now, and possibly to 2017 and beyond, the urgency for this may have gone.
With drilling perhaps delayed by two years and the ending of Turkey’s Navtex on April 6, the ‘window of opportunity’ diplomatically referred to by the Special Adviser to the UN Secretary-General on Cyprus, Espen Barth Eide, has now become a reality, enabling the stalled negotiations on the Cyprus problem, to be restarted. In an interview in Kathimerini on March 29, Sibel Siber, who is claiming the leadership of the Turkish Cypriot community during this month’s vote, said “if we do not find a solution to the Cyprus problem we will not be able to exploit the income from the natural wealth of the island” – an ominous statement.
There is still a long way to go, and we should be careful that what some have dubbed ‘the non-commercial exploitation of Cyprus hydrocarbons’ does not become a reality.
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