10 January 2016, by Charles Ellinas
As we enter 2016, potential gas exports from the East Med are again attracting attention.
With the gas regulatory framework deal in Israel approved, there is talk about gas exports to Egypt, Jordan as well as Turkey.
Cyprus has been negotiating with Egypt for over 15 months now to export Aphrodite gas for Egypt’s own use or for liquefaction at Idku and export to Europe. There is talk about Egypt becoming a hub for the region, exporting its gas to Europe and the world.
For some time now, both Israel and Cyprus have been in negotiations to export their gas. Gas sales contracts are normally for 15-20 years. Their commercial viability depends on gas prices, project costs, risks and the ability to ensure uninterrupted exports over the contract period.
But the East Med is a volatile region with complex geopolitical problems, amidst a global oil and gas price crisis. This article addresses the key risks associated with these export options.
Gas exports to Egypt
Egypt has gone through turmoil over the last few years. The government of President Abdel Fattah al-Sisi has brought a degree of stability, but terrorism and security risks remain and have a serious impact on tourism.
In addition, foreign government grants declined. As a consequence of the resulting foreign exchange shortages and fiscal deficits, Egypt was unable to reduce its debt to the international oil companies and to maintain payments for its LNG imports in 2015.
These problems and Egypt’s inability to keep up payments continue.
In the past, terrorism was directed to sabotaging the gas pipelines crossing Sinai. The shutting down of the EMG gas pipeline to Israel in 2012 led to the decision by the International Chamber of Commerce to award $1.76billion compensation to Israel Electric Corporation, and the immediate suspension by Egypt of gas negotiations with Israel.
When Egypt ran into gas shortage problems it unilaterally diverted all gas going to the LNG plants at Damietta and Idku to support its domestic consumption. This is still the case. As a result of this Union, Fenosa and BG have resorted to international arbitration, which is still pending.
Terrorism, government stability, arbitrary decisions, adherence to formally-signed contracts and ability to maintain payments are some of the key risks to be considered when committing to gas exports to Egypt.
This is particularly important when one considers that project viability and profitability require export certainty over the 15-20 year contract period.
Gas exports to Turkey
Some of these risks also apply to East Med gas exports to Turkey. A pre-requisite of course is that the Cyprus problem is resolved in 2016, making such exports possible.
As a result of the Mavi-Marmara incident, Turkey severed all links with Israel.
Even though negotiations for normalisation of ties are progressing well, Turkey still says that there will be no renewal without Israel opening-up Gaza to unlimited access.
Should there be a gas pipeline between Israel and Turkey, what would be Turkey’s reaction to possible future flare-ups between Israel and Gaza?
As a result of disagreements with Turkish Cypriots about who would manage water distribution, Turkey for a while shut-down the water pipeline it built to the north of Cyprus. Would similar actions be taken with gas pipelines in response to disputes with the gas-supplying countries?
Internally there is increasing instability within Turkey and its problems with Russia and its neighbours, particularly with regards to Syria, introduce a degree of volatility. How reliable a partner would Turkey be in the future?
Syria strife
The Syrian problem looked as if it was going towards containment and possible solution towards the end of 2015, but with recent flare-ups between Saudi Arabia and Iran it is in danger of being set back. And Syria is at the centre of the East Med, with potential instability impacting on Turkey and Lebanon and the wider region.
Cyprus problem
As indicated earlier, solution of the Cyprus problem is a pre-requisite for gas exports from Israel to Turkey, as the pipeline will have to pass through Cyprus’ EEZ. The same applies to potential gas exports from Cyprus to Turkey.
Without a solution, Turkey also appears to be determined to disrupt exploration and exploitation of hydrocarbons by Cyprus, as it demonstrated when Noble was drilling in Block 12 in 2011 and more recently when ENI was drilling in Block 9.
What would happen when further drilling resumes this year, as currently planned? Also, what would happen if Cyprus actually reaches agreement and proceeds to export its gas to Egypt, given Turkey’s views about Cyprus and Egypt’s government.
The global oil and gas prices
Global oil and gas prices are expected to remain low into the 2020s, with oil just gone below $35 per barrel.
In particular, with huge new quantities of LNG coming into global markets, LNG prices are expected to go down further, with no rises forecast until after 2022.
Low oil-prices have also impacted the investment capability of oil companies operating in the East Med. In addition, it remains to be seen what Shell does with BG’s assets in Egypt once the acquisition is completed.
The agreement just made by Qatar to renegotiate its long-term LNG sales contracts with India and lower the price by 50%, to $6.50 per mmBTU, and wave any penalties has sent shockwaves to the rest of the global LNG-industry.
Long-term contracts, which so far have been the corner-stone underpinning commercial viability of LNG projects, are no longer sacrosanct. LNG buyers have the upper hand and will demand and get new terms reflecting current reality.
Any exports in the form of LNG will have to compete with such low prices if they are to succeed and be commercially viable. This makes gas exports from Israel and Cyprus to Egypt – for liquefaction and re-export as LNG – a challenge.
Conclusions
Exporting East Med gas through pipelines is subject to the above-discussed risks. Only options under the full control of the exporting country, such as FLNG and FCNG, are less risky. These could potentially unlock the full potential of East Med hydrocarbons.
FLNG and FCNG could also be commercially viable, limiting costs so as to compete in the southeast Europe and Turkish gas markets. They offer export flexibility, not limited to fixed destinations.
The region is volatile and experience shows that regional geopolitics and instabilities undergo frequent upheavals.
The commercial development of East Med gas can attract the necessary investments from oil and gas companies and banks only if the type of risks identified in this article are satisfactorily addressed. Political will alone will not make projects happen.
Charles Ellinas is a hydrocarbons business consultant
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