January 4th, 2016 - Charles Ellinas
Any hopes that 2016 will be better than 2015 for the hydrocarbons sector may be dashed by lingering problems of oversupply and weak demand.
In the Eastern Mediterranean, 2016 will be dominated by the development of Zohr, and potentially the discovery of more gas, and the gyrations around the development of the Leviathan.
Developments in Cyprus will be dominated by and revolve around the solution to the Cyprus problem (Cyprob). Indications are good and expectations are building up. Aphrodite, further drilling and gas exports depend on this.
We review these in this article and attempt to predict what 2016 will bring.
The oil&gas industry
As a miserable year for the oil industry comes to a close, any relief oil companies might feel will be tempered by the knowledge that 2016 is shaping-up to be even worse. For oil&gas producers, 2016 will be a year of further cost-cutting, restructuring, refinancing when possible, and in some cases bankruptcy when it is not. For companies that are exclusively focused on production and have weak balance-sheets, such as Noble and ENI, 2016 will be tough.
The emphasis will be on production projects that have quick paybacks, while limiting exploration and longer-term developments. For Cyprus this means deferring expensive drilling as long as possible, probably into 2017.
The oil-price
We are not going to have any sudden changes in the oil-price, but producers will not keep producing and investing in oil at a loss. Maybe sooner than later excess supplies will dry-up and prices will stabilize, edging forward by the end of 2016.
However, the lifting of the US oil-export ban introducing American oil to the global market on top of Iranian oil, following formal lifting of sanctions, will keep any price recovery low. The consensus is that by the end of 2016 oil-prices may rise to $50-$60 per barrel.
The gas-price
2016 might be even more difficult for gas-prices, with huge quantities of LNG coming into what is already an over-supplied market. Gas prices will stay low, hovering around $6 per mmBTU, making life for the LNG industry very difficult. This will persist well into the 2020s.
Gas-producers in captive domestic markets, such as Egypt and Israel, will fare better as prices are less dependent on global factors.
In Cyprus we are told that a decision on the interim gas imports tender is imminent – oil&gas prices will be a major factor in this.
Further drilling
Cyprus has just granted a two-year extension to ENI’s lease of Blocks 2, 3 and 9, but further drilling appears to have been left well into 2017. ENI’s priority in 2016 will be appraisal and development of the Zohr field, while limiting spending to projects with quick payback.
Similar comments apply to Noble, who ended up selling half of its stake in Block 12, and Aphrodite, to BG on the cheap. It postponed drilling into 2016 - but Noble would probably prefer to defer it into 2017. This will depend on tits negotiations to extend the Block 12 lease beyond May 2016.
Total is faring better and has promised drilling in Block 11 late in 2016, provided of course there is port-base to support its drilling activities. The permit to use Larnaca Port expires next year and it may not be renewed. Other than general statements about making new land available at Limassol Port, Merras at Zakaki, nothing concrete has been done so far even though time is running-out.
Development of Zohr
This promises to be the East Med’s major highlight in 2016. ENI has already restarted drilling and it will embark on a fast-track development programme in 2016, with first gas expected in 2018.
Appraisal drilling will confirm that Zohr is a giant reservoir and it is likely to lead to the discovery of more gas beneath Zohr. There are also good indications that there is oil at greater depths, possibly extending into Cyprus' EEZ, into Block 11. This could more than justify Total’s readiness to extend their lease by two more years.
Egypt will be at the center of East Med oil&gas activities in 2016. With the newly-negotiated gas-prices BP and other gas companies will be progressing exploration and development of their assets. 2016 may see the emergence of new gas-fields helping Egypt achieve its goals of becoming self-sufficient by 2020 and to restart LNG exports by 2022.
Shell is expected to progress development of its shale gas prospects and following completion of its acquisition of BG we will know how it intends to operate in Egypt.
The fly-in-the-ointment may be Egypt’s ability to pay the debt it owes the oil&gas companies and more recently to its LNG suppliers. If this problem goes unchecked it will affect Egypt’s credibility. Combined with persistent terrorist threats it could affect further investment in 2016.
Development of the Leviathan
The gas regulatory framework deal in Israel will clear any hurdles from court actions and that will spur development of Leviathan. Despite news about gas sales contracts with BG in Egypt, commercial and geopolitical challenges may thwart this. The main, and preferred, market for Leviathan gas will be Turkey.
The current negotiations between Turkey and Israel are expected to bear fruit and diplomatic relationships should be normalized in 2016, enabling negotiations for gas sales to proceed. This would place Cyprus in a commanding position as such a pipeline will have to pass through its EEZ. It will also affect development of Aphrodite.
Cyprus and Aphrodite
The saga of exporting gas to Egypt will probably come to an end in 2016 challenged by the economics of low LNG prices in Europe well into the 2020s. Then it will all depend on the progress of Cyprob. In the following we examine the two scenaria:
No Cyprob solution: With the possibility of gas sales to Egypt gone and an LNG plant at Vasilikos being a long-term option, the only other options left may be FCNG or FLNG. But neither of these has been considered seriously so far despite their merits. So, 2016 may see development of Aphrodite back on the planning table, with gas exports receding well into the 2020s.
With Cyprob solution: First, there will be the ‘minor’ issue of setting up a federal system, and given that no preparation has been done for hydrocarbons much may be needed to arrive at a workable system. In the meanwhile, Israel and Turkey will progress subsea pipeline gas export negotiations more seriously in the knowledge that a deal with Cyprus may be possible. Cyprus will then need to negotiate itself into the deal so that it can export Aphrodite gas to Turkey through the same pipeline. Given Turkey’s needs for alternatives to Russian gas, it could accommodate all gas Israel and Cyprus are able to export to it. What an incentive for Turkey to help solve Cyprob!
To unlock the above, Cyprus and Israel will also need to finally conclude their long-standing negotiations on the Unitization Agreement. Who knows, the prospect of gas sales contracts might help focus the minds in 2016!
A lot of crystal-ball gazing, but we may still have our surprises in 2016. And if 2015 experience is anything to go by this is more than likely. I wish you all a happy new year – we can only hope.
Dr Charles Ellinas, 30 December 2015 - First published on Cyprus Weekly
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