The discovery of the supergiant gas-field Zohr in Egypt by ENI sparked a lot of interest, much press coverage and introspection here in Cyprus.
Where should Cyprus go to from here in the quest to develop and benefit from its hydrocarbon resources.
What this discovery reinforced is the knowledge that the East Med, with Cyprus at the center of it, has substantial hydrocarbon resource potential, still to be discovered.
A lot of the publicity surrounding the Zohr discovery concentrated on this and played up the potential for Cyprus and no doubt over the next few weeks this may be hyped even more.
It may be hoped that the euphoria created by the promise of future riches from potentially vast quantities of hydrocarbons will lessen any potential disappointment from the plan to sell gas to Egypt.
That Cyprus potentially has substantial quantities of hydrocarbons is well known, starting from the PGS seismic investigations to the 2010 USGS study and findings.
It is hoped that Total’s further study of the data in and around Block 11, expected to be submitted soon, will add to this knowledge and provide further support to this contention.
However, we need to tread with caution, avoiding building expectations, until discoveries are actually made.
The hype that preceded ENI’s and Total’s exploration of Blocks 2, 3, 9, 10 and 11 should be a lesson. There were high hopes that some of these blocks, and especially Block 9, may hold vast quantities of gas only to be thwarted by drilling.
ENI’s negative results in Block 9 were a rude awakening and a reminder that in oil and gas no matter how good indications are nothing exists until you actually find it by drilling.
And it is only by doing more drilling that new discoveries can be confirmed. At this stage and for the foreseeable future all drilling activity in Cyprus’ EEZ has stopped and there are some question marks about its future resumption. Hopefully Total’s report next month on its re-evaluation of exploration data will spurn them to stay and continue with a drilling programme – but will it? As far as ENI is concerned, despite its stated strategy to concentrate its future activities in mature hydrocarbon provinces, such as Egypt and Mozambique, it is hoped that it will resume drilling in Blocks 2 and 3 and perhaps go back to 9, but it remains to be seen. Yesterday ENI’s CEO Claudio Descalzi confirmed to President Anastasiades the interest of ENI in Cyprus. Noble still has an obligation to drill at least one more well in Block 12 – but this has been delayed.
However, with less than half of the declared blocks in Cyprus EEZ leased there is room for more drilling. The discovery of Zohr has created renewed interest in the region. The areas around and west of mount Eratosthenes always showed good prospects. Even though this is an area disputed by Turkey, now is the time to think about a third licensing round.
This needs careful preparation given the negative results by Total and ENI so far and the low oil price, but may have a lot going for it given the two major discoveries in the region: Zohr and Leviathan. Timing is also critical. Right now companies are cutting on spending as a result of the oil price crisis. And there are the ongoing Cyprus problem negotiations which should not be disturbed and must be given priority. With careful preparation now the road-show could be aimed to take place towards the end of 2016 or early 2017.
Re-focus export options
Should Aphrodite gas exports to Egypt not materialise, which now looks to be more and more likely, Noble and Cyprus need to reconsider their options. The more immediate choices are marine CNG and Floating LNG. Both are included in Noble’s Development Plan. Marine CNG can be implemented faster and investment by Noble only involves a floating, FPSO, platform and subsea completion, as the CNG ships will be funded by the shipper. FLNG is more capital intensive and will take longer to implement. As no preparation has been done for either option, the key issue is to determine commercial feasibility which depends on project costs, remembering that Aphrodite lies in deep water and therefore more expensive to develop, markets and gas prices. The latter may prove to be a challenge given the depressed global oil and gas prices.
Israel is in a similar situation given their regulatory problems and the likely loss of the Egyptian market. Israel’s export choices are more limited and include potential exports to Turkey and Europe via a pipeline through Cyprus’ EEZ or return to the option of an LNG plant in Cyprus.
Cyprus can benefit by cooperating with Israel and encouraging Noble and Delek to put both of these options back onto the table for more detailed investigations. Both have their advantages and disadvantages, but will take longer to implement than CNG or FLNG.
Market considerations
In considering the above, it should be noted that global hydrocarbon markets evolve continuously and opportunities available now may not be there later. The world has experienced major market upheavals very vividly since the discovery of Aphrodite in 2011.
With the likely loss of the Egyptian market, the next nearest markets are in Turkey and southeast/central Europe. However, many competing gas, mostly pipeline, projects are now under consideration, materialisation of which will influence future availability of this market. These include:
- The Southern Corridor, with Azerbaijani gas through Turkey to Europe
- Turk-Stream, with Russian gas to Turkey and possibly Europe
- Iran gas to Europe through Turkey
- The Trans-Caspian gas pipeline joining the Southern Corridor
- Kurdistan gas to Turkey
All these projects are being considered at a time when gas utilisation in Europe is actually declining, being displaced by renewables.
The longer it takes for East Med projects to get off the ground and secure a slice of this gas market the more the risk that when eventually they are ready it may be too late.
That will then leave markets further afield, such as Asian gas markets. The only way to reach these is by LNG. But there are also timing and cost risks and strong competition from North America, Australia, Russia, East Africa, Qatar, Iran.
And on top of this gas demand in China is declining as it adjusts away from a manufacturing/export driven market.
If Cyprus and Israel miss the opportunities they have to develop and export their gas it may take another ten years at least before demand outstrips supply and such opportunities re-appear. They need to act now.
Charles Ellinas is a hydrocarbons business consultant
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