Competition for Israel’s gas could hurt Cyprus

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By Fiona Mullen, Director, Sapienta Economics Ltd

On February 25, Gazprom’s Marketing & Trading arm signed a heads of agreement with Levant LNG Marketing Corporation to export liquefied natural gas (LNG) from Israel’s Tamar gasfield.
The LNG, to be produced using a floating LNG plant, a fairly new technology, will be sold by Gazprom to Asia, the fastest growing market for LNG.
Russia is not the only big country after Israel’s large gas reserves, now estimated at 800 bLn cubic metres.
Turkey is also toying with the idea of importing Israel’s gas. In November, Ambassador Mithat Rende, Director General for Multilateral Economic Affairs at the Ministry of Foreign Affairs of Turkey, said, “Construction of a pipeline to Turkey is the best way to export Israeli gas, both in terms of economics and in terms of energy.”
It seems that powerful personalities in Israel agree with him.
On January 29, Globes reported that Shaul Tzemach, the Director-General of Israel’s Ministry of Energy and Water, as saying, “Among the companies in east Mediterranean basin, there is at least one anchor customer big enough to receive gas from Israel.”
It was clear that the big customer was Turkey and not little Cyprus.
Business interests are also adding their voices. On February 14, Haaretz reported, “the Turkish conglomerate Zorlu Group has been working in recent months to convince the Israeli government and the Israeli Leviathan gas field partners to approve energy exports to Turkey”.
The plan is to build an undersea pipeline to Turkey’s southern coast.
Why do these developments matter for Cyprus?
Because it underlines that Cyprus is not the only country competing to cooperate with Israel on gas.
At present Cyprus has only an estimated 198 bcm (7 trillion cubic feet) of natural gas reserves. As noted out in a just published report of which I am a co-author*, this is not quite enough to build an LNG plant with the right economies of scale.
And in the context of uncertainties about the future of gas prices, this also matters a great deal when it comes to finding finance for a $10 bln LNG plant.
You only have to glance at www.NaturalGasEurope.com to see how many European countries are joining the shale-gas bandwagon. After the US found shale gas, it saw prices fall from a peak of $12.69 per million British thermal units (MMBtu) in June 2008 to $3.49 today.
If future prices are uncertain, this can be offset by higher volumes. A 2-train or 3-train LNG plant would be far more cost-effective than a 1-train plant that is probably only possible with 7 tcf.
But to build a bigger plant Cyprus either has to find more gas in the second licensing round (the sooner the better, given price trends) or it has to hope that Israel will decide to export gas in the Leviathan block via an LNG plant located in Cyprus.
Given Israel’s concerns about security and Cyprus’ weak National Guard, one can speculate that this could only happen if the Cypriot government accepted the support of the Israeli air and perhaps ground forces. But with two big armies already on this island, one wonders how politically acceptable that would be.
In a best-case scenario, the very strong confluence of interests—Turkey’s high energy demands, the need for Israel and Turkey to improve relations because of Syria among others, and the economic crisis affecting both sides of Cyprus—should act as a powerful incentive for all countries to cooperate on gas exploitation.
We found that a pipeline to Turkey would generate EUR 15 bln more net revenue, after major investment costs, than revenue from an LNG plant. With the Republic of Cyprus about to borrow some EUR 16-17 bln from the troika and some eurozone leaders promoting alarming solutions to tackle the debt pile, these kinds of numbers suddenly matter.
But cooperation on gas, which of course is not possible without a resolution of the Cyprus problem, will not happen as long as all sides view it as a zero-zum gave, as an “I win you lose”.
To date Greek Cypriots and Turkish Cypriots have not even been able to discuss how to divide the revenues, something on which they both agree and about which the international community has strong expectations.
The gas issue is therefore likely to fester, and continue to have a negative impact on the negotiations to resolve the Cyprus problem.
For this reason, among the future scenarios we considered, our baseline scenario was a continuation of the status quo, with little progress in the negotiations.
This will have an impact on the speed with which the Republic of Cyprus can earn hydrocarbons revenue.
It will depend to a large extent on factors that are out of its control, namely on whether Israel decides to export gas, whether it is comfortable exporting it from an LNG facility located in Cyprus and, most importantly, on Israel’s evolving relations with Turkey.
Assuming there is no outright military confrontation, we found that gas revenue flowing to Greek Cypriots would be most vulnerable if Israel and Turkey bridge their differences and they decide to build a subsea pipeline to Turkey.
In that case, the Republic of Cyprus might find that its only option is to earn less money by piping its gas to a Turkish end-market via Israel.

www.prio.no/cyprus/publications )