With respect to energy and hydrocarbons in Cyprus and the wider region, 2015 turned out to be something of a roller-coaster ride. The year commenced with quite a few setbacks on this front, but thereafter ended on a more hopeful note, albeit without really seeing substantial progress – with Egypt being the notable exception.
Aphrodite
The development of Aphrodite has been the ongoing saga of 2015. A plan was submitted by Noble to the government mid-summer, but this is still being negotiated even though it should have been approved within three months. The problem is identifying feasible exports, or lack thereof. Cyprus and Egypt have been investigating the feasibility of gas exports to Egypt for over a year, either for its own use or for liquefaction and onward export to Europe.
The Egyptian Energy Minister announced the results in July, but as far as Cyprus is concerned this is still … ongoing. To land gas in Egypt will cost $6.50 per mmBTU, already higher than prices in Europe. To get there, the costs of liquefaction, transportation and regasification must be added on-top, making such exports commercially challenging.
Meanwhile, five years on, marathon negotiations regarding the Unitisation Agreement between Israel and Cyprus are still continuing! The last technical committee meeting was in late November. It came and passed with nothing said, in other words no progress. Without this in place, development of Aphrodite will be difficult, as Israel has now formally declared that the gas reservoir extends into the Israeli EEZ, and in commercial quantities.
As a result of these problems and delays, and its own weak financial situation, Noble and its partners have postponed further drilling in Block 12 into 2016.
But BG came to the rescue. It ceased the opportunity to buy 35% of Block 12 and Aphrodite on the cheap and renewed hopes that it could spur its development. But this has to wait until BG’s acquisition by Shell is completed, expected early next year, and Shell decides on future investments and divestments.
So for the foreseeable future, Aphrodite will have to wait before she can emerge from the deep.
Isreal’s regulatory turmoil
Ever since Israel’s Anti-trust Commissioner declared Noble/Delek’s operations to constitute a monopoly in late 2014, Israel has been thrown into turmoil which also saw plans to develop Leviathan cease. Following a protracted campaign, a new gas regulatory framework deal was signed by the Prime-Minister earlier this month which should bring this saga to an end in early-2016.
Earlier this month, Israel’s fast-diminishing hopes to export gas to Egypt were dealt a blow by Egypt’s response to the decision of the International Arbitration Court to award $1.76billion to Israel’s Electric Corporation against Egypt’s EGAS as compensation for halting gas supplies in 2012. Egypt promptly launched an appeal and stopped all gas import negotiations with Israel.
Soon after, there was another twist to the story.
Drilling in Cyprus
At the end of March, ENI, after drilling two unsuccessful wells under the threat of the Turkish navy and Barbaros, decided to leave further drilling until later. It asked for a two-year extension to its licence so that it can re-evaluate its data and refocus its exploration.
Similarly, Total declared that it could not locate targets to drill and relinquished Block 10. However, it asked and has now received, an extension to its licence for Block 11.
The discovery of Zhor was a major factor in this. Based on Zhor geological data, Total revaluated its own and has now identified a target in Block 11 and plans to drill next year. Total probably regrets relinquishing Block 10.
Discovery of Zohr
At the end of August, ENI made a major gas discovery offshore Egypt and only about 6km from Cyprus’ EEZ. The aptly named Zhor gas-field (diamond in Arabic) is estimated to hold 30tcf gas, with possibly more beneath it.
Production of Zhor may start in 2018 and by 2020 it may make Egypt self-sufficient and, with other discoveries, may enable LNG exports to restart by 2022. This is a complete turnaround of events, from the current situation where gas shortages have forced Egypt to start importing expensive LNG, despite its own substantial proven reserves of 77tcf. This was the result of previous governments’ short-sighted policies, which the present government has managed to completely reverse.
The discovery of Zhor has led to renewed optimism that the East-Med does indeed hold substantial quantities of hydrocarbons and is spurring new interest for further exploration in the region, including Cyprus. But Zhor and commercial factors are challenging Cyprus’ and Israel’s plans to export their gas to Egypt for liquefaction and export to Europe.
As usual in the oil&gas sector, other fast-developing factors may be overturning these plans.
Oil price
2015 started with an oil-shock. The oil-price, which started tumbling down mid-2014, carried on falling until it reached a bottom in early February 2015. And the oil-world breathed a sigh of relief when into March the price carried on rising. Little did we know. We are now in December and we have a new low, with Brent crude finishing the year close to $36 per barrel, an 11-year low.
The world is now learning to live with ‘lower for longer’. The IEA forecasts that oil prices will remain low for the rest of this decade and possibly beyond.
Gas price
Similar problems apply to the natural-gas price. There is already too much LNG in the market and much more is coming during the rest of this decade. This is creating an LNG-glut, with prices down to £6-7 per mmBTU. This glut is expected to be deeper and last longer than anticipated and to persist for some years. In Asia, LNG prices may bottom-out by 2019 at $5 per mmBTU, and in Europe by 2020 at about the same level and recover slowly after 2022.
This makes Aphrodite gas exports to Egypt for liquefaction and export to Europe challenging.
Turkey’s search for gas
Until last month Turkey was energy-secure and at the centre of a number of potential pipeline routes to supply gas to Europe, including Turkish-Stream. The downing of the Russian bomber-aircraft over Syria on 24 November turned these plans upside-down. Russia stopped Turkish-Stream and Turkey is now scrambling to find alternative gas supplies.
Within weeks this led to rapprochement between Turkey and Israel and fast-developing normalisation of diplomatic ties. At the centre of this lie negotiations to export Leviathan gas to Turkey. Given the problems with Egypt, Israel is keen to proceed with this deal so that it can develop Leviathan within the planned time-frame 2019-2020.
Turkey needs the gas and Israel wants to sell it, but Cyprus is in the middle. Any pipelines from Leviathan to Turkey will have to pass through Cyprus EEZ. Let’s hope that this will be an incentive for Turkey to help resolve the Cyprus problem.
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