Hope yet for a Cyprus gas hub | in-cyprus.com (Cyprus Weekly)

Hope yet for a Cyprus gas hub

Fiona Mullen — 06/09/2015 - in-cyprus.com 

Officials are putting a brave face on the announcement by Italy’s ENI on Sunday that it had found an estimated 30 trillion cubic feet offshore Egypt. And judging from the latest news about the interest by British Gas (BG) in taking gas from Aphrodite in to its LNG plant in Idku, maybe it is not over yet.

But if, as some fear, it has put an end to both Israel’s and Cyprus’ hopes of exports to Egypt, it has indirectly opened up other opportunities.

Before outlining those, let us deal with the notion that ENI’s natural gas find might make Cyprus rich if the Zohr reservoir crosses the Cyprus Exclusive Economic Zone (EEZ). This is a red herring. The indications so far are that it is all on Egypt’s side. Even if the reservoir does stretch that far (more than 6.5 km), Cyprus might hope for only a small proportion of the total.

Most importantly, no one will know if there is any gas on the side until they start production drilling, which is some five years away. Something that is highly uncertain could therefore distract policy-makers from focusing on the real opportunities that have presented themselves.

LNG or pipeline?

If Israel cannot export gas to Egypt, then the land-based liquefied natural gas (LNG) in Vasiliko plant suddenly comes back into play.

According to my own calculations (detailed in my August report), combining the maximum exportable Leviathan gas (75%) with Aphrodite brings an LNG plant closer to viability. However, prices would still need to rise 15% from today to make it work.

Another problem with LNG is that it makes Cyprus’ export strategy reliant on the politics in Israel, which has so far prevented any exports from Leviathan.

The other option is a pipeline to Turkey, which of course depends on a solution of the Cyprus problem.

At today’s prices, according to my calculations, a Turkey pipeline might also be a commercial challenge if it exported only Aphrodite gas. One suggestion is that Turkey pays for the pipeline and a united Cyprus pays it back in gas, thereby locking Turkey into the deal.

With the above in mind, it seems that the government’s Plan A should be to solve the Cyprus problem and send the gas to Turkey. If that doesn’t work, Plan B would be to wait for Israel to get its act together, the gas price to go up and then jointly build and LNG plant.

The regional hub opportunity

Adam Lomas, Managing Director of Castor Partners, says that either an LNG plant or a pipeline from Vasiliko would help Cyprus become the regional gas hub that it has always sought to be.

“Cyprus is the only safe country in this region. It could become the secure transport hub for all the stranded gas in the Levant,” says Lomas.

This could be gas from Aphrodite, Leviathan, Tamar and, if the Eni gas find encourages Total to come back and look again at Block 11, gas from Block 11 too.

A solution of the Cyprus problem would make the opportunity even bigger, because it would bring in all those companies like Shell and Exxon that have kept away from Cyprus because they have big interests in Turkey.

The writer is Director of Sapienta Economics www.sapientaeconomics.com

Source: http://in-cyprus.com/hope-yet-a-for-cyprus-gas-hub/

Cyprus talks need rethink as gas hardens divides | Interfax

Cyprus talks need rethink as gas hardens divides

By Leigh Elston
Posted 15 October 2014 12:52 GMT

Cypriot President Nicos Anastasiades (centre) and Turkish-Cypriot leader Dervis Eroglu at peace talks in March. (PA)

While it has been hailed as a catalyst for re-uniting Cyprus, the potential gas bounty off the coast of the island has only entrenched political divides. The latest flare-up in tensions came when Turkey issued a Navigational Telex (NAVTEX) on 3 October stating it was reserving areas south of Cyprus for seismic surveys from 20 October to 30 December. In response, Cypriot President Nicos Anastasiades suspended peace talks. 

Cyprus and Turkey were in the same position three years ago. When Noble Energy started drilling in Block 12 offshore Cyprus in September 2011, Turkey also sent seismic ships to the area, observed by military vessels. 

“The only difference this time seems to be the NAVTEX notice and the stronger Greek Cypriot reaction by suspending the settlement negotiations,” said Fiona Mullen, of Nicosia-based energy advisory Strata Insight. 

Turkey’s stance

Turkey has two claims over Cyprus’s exclusive economic zone (EEZ). The first is on behalf of Turkish Cypriots, whom it believes have equal rights to exploit the island’s offshore resources. The second is its own claim its continental shelf stretches to the west of Cyprus and partly covers blocks 1, 4, 5, 6 and 7 as delineated by Nicosia. Cyprus has only issued licences for blocks 2, 3, 9, 11 and 12.

Turkey is one of only seven countries in the world not to have signed the United Nations Convention on the Law of the Sea (UNCLOS) – a treaty that has become customary international law for governing rights and responsibilities over maritime territory.

The law asserts the EEZ of a state – which includes islands – runs up to 322 km from its shore. This means that, although Turkey has a long coastline, under UNCLOS its access to the sea is limited by Cyprus and the archipelago of Greek islands, Marianna Charalambous, a Cyprus-based legal consultant with expertise in maritime boundaries, told Interfax.

But since Turkey has not signed UNCLOS and recognises neither the Republic of Cyprus nor the EEZ of islands, it divides its territorial waters using the median line between itself and the states it recognises (Egypt, Lebanon, Israel, Syria and mainland Greece).

“However, under international law Turkey has absolutely no legal right to the EEZ of Cyprus,” said Charalambous.

Turkey’s NAVTEX has not yet affected Cyprus’s latest exploration campaign. A joint venture between Eni and Kogas, which started exploratory drilling at Block 9 on 26 September, is continuing its activities, independent LNG expert Charles Ellinas told Interfax. Eni has not commented on the issue.

 However, even if operations continue as normal for now, the fear of an escalation adds another layer of investment risk in Cyprus. “I worry the way in which it has been reported – talk of sending warships when all ships have right of passage in a country’s EEZ – could put off anyone considering investing in gas export infrastructure,” Mullen told Interfax.

A new route to negotiation

Cyprus cannot afford further costly obstacles to exploiting its gas. It already has to address the challenge of its limited reserves, its junk credit rating and – if it misses the 2018-2020 window to market its gas – the prospect of falling global gas prices, according to a report by the PRIO Cyprus Centre.

However, the prospect of unilateral gas development seems only to have frustrated the prospects for a reunification agreement, meaning there is perhaps a stronger case than ever for negotiating a settlement under a different framework.

Under a proposal put forward by International Crisis Group, Greek Cypriots would give Turkish Cypriots independence and the EU would then offer them the right to join the EU – reunifying the island in all but name and government. In return, the Turkish side would give Greek Cypriots full rights over gas in the future Republic of Cyprus waters, offer full compensation for property, withdraw troops, return occupied territory and end the demand for ‘guarantees’ over the country that accompanied the island’s independence in 1960, Hugh Pope, Crisis Group’s Deputy Program Director, Europe and Central Asia, told Interfax.

While such a gas-for-land deal would allow Cyprus to exploit its reserves unhampered and – after normalising relations with Turkey –access to a large and lucrative gas market, the proposal has gained little traction. 

“I think that right now it would be political suicide for any Greek Cypriot politician to promote it,” said Mullen. “It is also likely to lead to inflation in property compensation so it would be a terrible waste of gas revenues.”

It looks for now as if both sides will continue with the status quo, meaning a stalemate in resettlement talks and an uncertain economic future for both sides.

Link to source: http://interfaxenergy.com/gasdaily/article/13927/cyprus-talks-need-rethink-as-gas-hardens-divides

Renewed Tensions Between Cyprus and Turkey | Natural Gas Europe

October 13th, 2014

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Cyprus calls for help. The island, eager to pursue and accelerate its offshore activities in the hope of encountering more natural gas that would allow the construction of an LNG facility, has found itself in a new conflict with Turkey. Turkey, an EU candidate state, sent a research vessel and two navy ships in the disputed waters off Cyprus to express its opposition to ENI and KOGAS’ drilling in Block 9 southeast of the island.

The Turkish had repeatedly stated that all revenues generated from successful drilling activities off the island should benefit both Turkish and Greek Cypriots and that Turkey would undertake unilateral drilling in the absence of an equitable distribution.

As a result to Turkey’s action, Cyprus President Nicos Anastasiades this week suspended peace talks with the Turkish-controlled north of the island. Peace talks aimed at achieving a settlement to end the division of the island are now in danger. Cyprus has been divided since a 1974 coup and all attempts to reunify the island have failed thus far. “Turkey has no logical or legal basis for its actions”, said Yiorgos Lakkotrypis, Minister of Energy for Cyprus to Natural Gas Europe.

Since the discovery of natural gas in the Levant basin, each of the Eastern Mediterraneancountries has been struggling with problems of its own. Neighbouring Lebanon has not been able to launch its first licensing round due to domestic political deadlocks. Israel allowed gas exports via Netanyahu cabinet decision dated 2013 but has since failed to achieve a finalisedexport strategy.

Cyprus is awaiting further natural gas discoveries off its coast to take a final investment decision for the construction of a multi-billion export terminal on the Vassilikos coast. TheAphrodite field discovered in 2011 by Noble Energy and believed to hold 3.6 to 6 Tcf of natural gas does not justify alone the commercial viability of the project.

The escalation between the Turks and the Cypriots may jeapordise peace talks but explorations activities are ongoing and will not be disrupted, according to a statement from the italian company.Fiona Mullen, director of Cyprus-based Sapienta Economics told Natural Gas Europe that Turkish-Cypriots were acting in a "tit for tat manner: You explore, I explore. You drill, I drill". Asked if Cyprus' offshore progress could be impeded due to Turkish complications, she said: “Turkey's actions raise investor risk perceptions, which can deter investors or raise company costs. As long as the Cyprus problem remains unresolved, this issue will not go away and may get worse, depending on political developments in Turkey.”

Dr Charles Ellinas, oil and gas expert with over 30 years of experience in the industry and previous Executive President of Cyprus National Hydrocarbons Company Ltd, Cyprus told Natural Gas Europe that Cyprus’ Exclusive Economic Zone was delineated in accordance with UNCLOS. He added that Cyprus’ delineation of its waters was recognized by its neighbours, Egypt, Israel and Lebanon as well as the UN and the international community. Ellinas said that ENI/Kogas were carrying on their exploration drilling programme as planned. “Noble also made it clear that its plan remained unaffected. In fact, Noble presented the government with the results of its detailed techno-economic studies on the possible export options, necessary for the preparation of the development plan for Aphrodite. They did this despite the threats from Turkey” added Ellinas.

If the immediate gas explorations are not threatened by the new conflict between Turkey and Cyprus, a permanent solution needs to be achieved. The Eastern Mediterranean, blessed with gas, seems hampered by historical discords that may jeopordise its long term growth and prosperity. In a discussion with Natural Gas Europe, Dr Alan Riley, professor of law specialised in the fields of energy and competition law commented on Turkey’s actions: "Legally, Cyprus has the right in international law to drill for offshore oil and gas. The issue here however, as ever with the ongoing conflicts in the Eastern Med is not law but politics".

Karen Ayat is an analyst and Associate Partner at Natural Gas Europe focused on energy geopolitics. She reads International Relations and Contemporary War at King's College London focusing on Natural Resources and Conflict. She holds an LLM in Commercial Law from City University London and a Bachelor of Laws from Université Saint Joseph in Beirut. Email Karen karen@minoils.com Follow her on Twitter: @karenayat

Link to source: http://www.naturalgaseurope.com/cyprus-turkey-renewed-tensions

Cyprus LNG plant: Ithaca or Calypso’s enchanted island? | Financial Mirror

Cyprus LNG plant: Ithaca or Calypso’s enchanted island?

30 September, 2014

By Fiona Mullen, Director, Sapienta Economics Ltd The ITE East Mediterranean Gas Conference in Paphos on September 9-10 underlined what a difficult job is faced by the energy minister, George Lakkotrypis, in making what is probably the single most important decision for the Cyprus economy in the next 20 years.
 
I count at least seven options for gas exports: land-based liquefied natural gas (LNG); floating LNG (FLNG); marine compressed natural gas (marine CNG); pipeline to Egypt; pipeline to Greece; pipeline via Turkey to the EU; or, end-product (electricity) to the EU via an electricity cable to Greece. 

One might think of Cyprus’ most popular minister as the Homeric hero, Odysseus, shipwrecked after Troy and trying to find his way home to Ithaca. For LNG fans, Ithaca is the land-based LNG plant; the sirens are all the other options. 

To avoid being lulled by the sirens’ beautiful calls and thereby dashed on the rocks, Odysseus has to stuff up the ears of his crew with beeswax and get them to tie him to the mast. The more he signals to them to let him free and follow the sirens, the tighter they have been instructed to bind him.

He gets past the sirens and eventually (after a lot of diversions), he finds his way home to Ithaca. 

But what if the land-based LNG plant is in fact Calypso, the lovely braided nymph who keeps Odysseus as a captive lover for seven years and thereby delays his journey home?

The reason why it is not easy to decide whether the LNG plant is Ithaca or Calypso’s enchanted island is because each of the significant uncertainties about the gas demand, gas supply and gas prices in the coming years.

The following paragraphs outline my take-outs from the conference. 

European gas demand will remain slack 
Despite the fallout from the Ukraine crisis, no one expected European gas demand to rise significantly, unless there were a change in carbon dioxide (CO2) emissions taxes to make coal less attractive than it is today. Germany, in particular, has been ramping up consumption of coal as it prepares to phase out nuclear power by 2022. 

Yet predictions are also shaky. Uwe Fip of E.ON Global Commodities said that scenarios for EU gas demand are extremely wide, ranging from 200 billion cubic metres (bcm) to 600 bcm, compared with demand of around 440 bcm today. 

“The future of the European natural gas market is highly uncertain," he said.

Nevertheless, Russia was still expected to remain the dominant supplier.

Jennifer Coolidge of CMX Caspian and Gulf Consultants said that the sanctions on Russia would not affect supply until after 2020. 

Doubts were also raised about Egypt as a long-term market for liquefying gas. Egypt has 77 trillion cubic feet (tcf) of proven gas reserves—far more than Israel and Cyprus. Changes in subsidies will reduce domestic demand and Egypt is seeking investors. 


Asia to remain the most attractive market 
The general consensus was that Asia will remain the most attractive market for gas in terms of demand. But there will be a great deal of competition on the supply side. 

US LNG is expected to reach 75 bcm per year, Australian LNG is expected to reach 80 bcm, while Mozambique is expected to reach just under 70 bcm. To give you an idea of size, German demand in 2013 was 84 bcm, while total EU28 demand was just under 440 bcm.
 
Competition means that there is an imperative to move fast. Speaking of the Asian market, Mel Ydreos of the International Gas Union said, “The market will not stand still. There is urgency to get involved and sign contracts." 


Gas prices: some price convergence but Asia will retain premium 
There was also agreement that the fall in Asian gas prices would continue. Most commentators talked about an Asia price of around $12/mbbtu—significantly lower than the peak of around $18 in mid-2012 but also lower than the latest spot price, which was around $14.5/mmbtu for November contracts, according to the ICIS East Asia Index. 

The fall in price will be for a number of reasons. Japan plans to re-start some of its nuclear reactors; Australia will start ramping up supply; and the recent agreement between China and Russia to supply 38 bcm via pipeline will temper demand for LNG. In addition, China has also commissioned 28 nuclear reactors to add to the 21 it already has.

LNG is the highest threshold for profitability 
Price matters because the cost of production affects break-even prices. According to Sergey Paltsev of MIT, the break-even prices vary from as low as $3.29 for a pipeline to Turkey and as high as $9.75 for (land-based) LNG sold to Europe and $10.25 for Asia. Ashna Rahman of Platts also spoke of a profitability threshold of around $9/mmbtu for winter sales to Europe. At the end of August, Europe LNG spot prices were only just over $9/mmbtu.

The threshold is higher for land-based LNG because the costs of construction are enormous: $6bn for the first train, $3bn for each train after that and, by some estimates, another $10bn in related costs including the 30% of gas gobbled up in the energy-intensive liquefaction process. The total cost of $20bn is close to Cyprus’ GDP in 2013 of $22bn (EUR 16.5bn). 

By contrast, the world’s first FLNG plant under construction, Shell’s Prelude, is estimated to be costing $12bn. Moreover, the smallest FLNG plant, Exmar offshore Columbia, is currently being built for as little as $300m, according to Olivier Benyessaad of Bureau Veritas. 

However, FLNG capacity is small compared with a land-based LNG plant. Even the mighty Prelude is only expected to be able to export 3.3 MPTA (million tonnes per annum), compared with 5 MPTA for a single-train LNG plant. 

Taking the low estimate of 3.6 tcf for the Aphrodite field in Block 12 and deducting 30% lost in the liquefaction process, I estimate that Aphrodite has the capacity for 2.6 MTPA. 

This is closer to the capacity off the INPEX Abadi FLNG plant, which Benyessaad cited at a cost of $5.4bn. This is in waters of 1000 m rather than 2000 m for Aphrodite. Add another 50% for the depth and one might be looking at a cost of around $8bn for an Aphrodite filed. 

According to my rough estimate (see table) that might bring the break-even price down to as low as $4/mmbtu for FLNG. 


Land-based LNG will depend on ENI-Kogas 
However, the land-based LNG option remains attractive because of all the other things that would come with it. 

Stavros Spanos of Hyperion Systems Engineering noted that a land-based LNG terminal has much bigger network effects. Not only would it create jobs for construction workers (who will probably not be Cypriots), it would also create jobs for service companies. 

More interestingly, it could create a whole new industry of gas industry products such as methanol, said Spanos. 

Thus, a land-based LNG plant will allow Cyprus to be a true regional hub for energy. 

The only way to beat the price uncertainty that affects the viability of a land-based LNG plant is with higher volumes. According to my own estimates published for Sapienta Country Analysis subscribers in June, the profitability threshold for a land-based LNG plant is 7 tcf if prices remain the same, but it rises to 10 tcf if they fall by 20%. 

This is why so much hope is being put on the ENI-Kogas drilling, which will start any day now. 

It is also why our Homeric hero Lakkotrypis will remain tied to the LNG mast until December or January, when the preliminary ENI-Kogas results are in. 
*For unrivaled monthly analysis of politics, policy, macroeconomy, banking and natural gas, try out a sample at www.sapientaeconomics.com

Link to source: http://www.financialmirror.com/news-details.php?nid=33230

Fiona Mullen "Cyprus Gas" Interview (minute 18) | Cyprus Mail

Listen at minute 18 Fri, 15 August 2014 Cyprus News Digest August 14th 2014 Energy security in the Eastern Mediterranean - as Israel decides to send gas to Egypt, what next for Cyprus gas, and can Gaza utilise its reserves? We talk to Fiona Mullen (pictured) from Sapienta Economics. From Fukushima to Cyprus: raising awareness about the fallout from the Fukushima nuclear disaster; the British Council holds the Education UK clearing exhibition.

Link to source: http://cyprusmail.libsyn.com/cyprus-news-digest-august-14th-2014