BY FIONA MULLEN
It is perhaps a sign of the times that the announcement to an analyst conference by Noble Energy on November 15 that Cyprus’ Block 12 “has an estimated gross mean resource range of 3 to 9 Tcf and a 60% probability of geologic success” was greeted with disappointment, even though 3 trln cubic feet is enough gas to supply Cyprus for over 100 years.
And if we end up with 9 Tcf, or if we hook up with the giant Israeli 16 Tcf Leviathan gas field that is 50 km from Block 12, then we shall have more than enough gas to export.
To export gas, we have several options, all of which have their own challenges.
Option 1: Pipeline to Turkey
By far, the cheapest option in terms of construction is to pipe the gas to Turkey.
Pete Wallace, an international energy consultant who has worked on four of the biggest LNG projects ever built, says that the kind of pipeline capable of carrying the volume required to produce 15 mln tonnes per annum (MTPA) of LNG would cost around $750mln per 100 kilometres.
Since you have to pipe gas from the well to Vassiliko, the marginal cost of a pipeline to Turkey is just the distance from Vassiliko in the southern coast to probably Morphou on the northern coast, plus another 40 nautical miles to the coast of Turkey, which, including allowances for seismic movement could add another 40km to the route.
If we pin the cost at $750mln per 100 km for marine pipelines (in practice land pipelines cost considerably less) then a pipeline to Turkey will cost less than $1.1bn—a fraction of the cost of an LNG plant.
There are of course a few problems with the pipeline option. First, without a solution to the Cyprus problem or with no Turkish Cypriot involvement in gas exploitation, Turkey will never agree to buy gas from Greek Cypriots. Nor will Greek Cypriots trust Turkey not to switch off the taps at the other end.
Second, pipelines tie you to one market, whereas LNG can be delivered anywhere in the world.
Option 2: Pipeline to Greece
A pipeline to Greece has been mooted but would be far more costly. The flight distance from Larnaca to Athens alone is 1,000 km, so you can imagine that a pipeline would be even longer.
At the above price ticket of $750mln per 100 km, you are looking at $7.5bln of investment just to go in a straight line.
And that assumes that anyone wants to get involved these days in any investment that includes Greece.
Option 3: Land-based LNG plant
The third option is a land-based LNG production plant.
At a lecture on November 1, Noble’s Cyprus Manager, John Tomich, said that this was their current preferred option for Cyprus.
They are looking at a two-train, 5 mln tonnes per annum (MTPA) plant, ie. a 10 MPTA plant at an estimated cost of around $10bln. Tomich emphasises that this was a rough estimate of cost in advance of feasibility studies.
However, Wallace, notes that there are several issues to tackle with a land-based plant, including size, safety and economies of scale.
He notes that a plant should ideally run for 25 years—the usual life of the capital equipment.
The life of the plant depends on both the volume of gas reserves and the amount of LNG being produced.
He says that with only 3 tcf—the lowest end of the scale estimated by Noble—a 5 MPTA plant would run for less than 12 years.
But with either more gas from other Cypriot fields or some gas from Israel, you could get to the optimum configuration.
“A 20 tcf gas reserve suits a 15 MTPA configuration perfectly,” he says.
However, there are several issues with a 15 MTPA plant. First, Wallace says this would cost around $18-24 bln to build, including all associated field development costs, such as dealing with the substructure around Vassiliko.
Second, with a 15 MPTA plant, for access and safety reasons you would ideally need 10 square km to work with. Vassiliko has only 2.5 sq km.
“A 10 sq km site allows a decent perimeter corridor around the site, good access generally, and provision for future expansion and associated plant,” he says.
Noble urges more caution about making estimates.
“Building an LNG plant is a very complicated technical and economic undertaking that can only begin after detailed engineering studies have been completed to understand the project risks and to refine the estimated project costs,” it said in a statement.
“Making judgments about the viability (or otherwise) of an option based on preliminary ‘rules of thumb’ can be misleading and may well lead to incorrect conclusions.
“It is suggested that caution be exercised while more detailed studies are completed so that a well-informed decision about the viability of an LNG project at Vasilikos can be taken in due course.”
Option 4: Offshore LNG plant
One way of getting round the space issues is to build an offshore LNG production plant.
This has the advantage of not being as unsightly as onshore plants and does not have to go through cumbersome planning permissions. But it is inevitably more costly.
Wallace says that an onshore 5 MTPA plant would be around $1,600-$2,000 per tonne, while an offshore one would be $2,200-$2,500 per tonne.
Option 5: Floating “FPSO” plant
An emerging option is floating, production, storage and offloading (FPSO) facilities, of which there are two types. The first type is a vessel that sails to the buoy which is linked to the gas well, extracts the gas, compresses it but does not liquefy it, and sends it back for further processing at a land-based production plant.
Wallace says that “this is not an export option”, since it requires further processing.
But it could be a possibility if Cyprus only wanted to produce for domestic consumption.
The second type of floating facility is one in which the LNG is produced offshore and then the entire vessel sails off with the LNG to its market.
Daewoo Shipbuilding and Marine Engineering announced last week that it had signed a preliminary agreement for this kind of LNG-FPSO facility for the 9 tcf Israeli Tamar gas field, in which Noble has a 36% interest.
Wallace says that the advantage of this kind of facility is that you take your cargo directly to market and cut costs.
“One-third of the cost of LNG is shipping,” he says.
However, with the production facility setting sail every time it has a full cargo, you lose production time unless you go to the expense of building two.
Need for a strategy
Clearly, there are multiple options should we find enough gas to export.
The key, says Wallace is to consider all of them carefully.
“They really need a strategic group of people to look at all the options,” he says.
Fiona Mullen is Director of Sapienta Economics Ltd.
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