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By Costis Stambolis
The positive reports earlier this month from the latest drilling activity at the Calypso location, within Block 6 of the Cyprus Economic Exclusion Zone (EEZ), has once again catapulted Cyprus to the centre stage of developments in the East Med hydrocarbon exploration theatre.
Initial analysis of the drilling operation conducted by Italian firm Eni, which has the license to explore within the specific offshore block, has shown the existence of a substantial gas deposit and a rich petroleum play confirming earlier prognosis of the existence of several secondary deposits in the vicinity of the giant Zohr field in Egypt’s EEZ.
According to Cyprus Energy minister George Lakotrypis, the Calypso finding is the first major finding in the Republic’s offshore concession areas, since the first Aphrodite gas field discovery in 2011, and is likely to prove much larger corresponding to almost 35% of the capacity of nearby Zohr field in Egypt’s offshore East Nile Delta area. Interpreting the numbers, this means that Calypso could hold as much as 200 billion cubic metres (bcm) of gas or 7 trillion cubic feet (tcf). Speaking lately at a Cairo energy conference, Eni’s CEO, Claudio Descalzi confirmed the Calypso finding’s major importance when he said that the field had a capacity estimated between 6-8 tcf.
Ever since its discovery in August 2015, it seems that Zohr, which is located in the Shorouk block, about 180 km north of Port Said at a 1500m depth, and has 850 bcm in place, has been spearheading exploration efforts in the East Med. The reservoir is in a carbonate location and lies at a total depth of 4130m, covering an area of about 100 sq.km. with a 630 thick hydrocarbon column.
According to Dr. Charles Ellinas, a well known commentator on East Med hydrocarbon affairs, “the Zohr discovery has been a game changer for the region, creating massive international interest in Egypt and the East Med”.
Cyprus also benefited from this, licensing three blocks during its successful 3D licensing round, and more recently Greece with interest shown for blocks west and south-west of Crete. Interpretation of seismic data using the Zohr-model has identified a number of potential targets in carbonate formations, both in Cyprus and in Greece, which helped attract interest from oil majors such as Total, ExxonMobil and predictably Eni.
The importance of the Zohr field
“It is not an exaggeration to call the development of Egypt’s Zohr gas field one of the most remarkable and fastest major gas projects ever”, says Dr. Ellinas. “It was developed in the space of 27 months, as production commenced last December, a notable record by global standards. Eni achieved this by working in parallel on further exploration appraisal, following discovery, while also working on the engineering and procurement to develop the field, focusing on cost reduction. Apparently, Eni’s goal was time to market”, noted Ellinas. Supportive of Zohr’s huge importance was Egypt’s Petroleum Minister Tarek El Molla, when he said that “as Zohr ramps-up production, Egypt will stop importing LNG in 2018 and by 2019 any surplus can be exported from its two existing liquefaction facilities at Idku and Damietta”.
We should note that Egypt was exporting LNG until 2014, but by 2015 it had to stop all exports in order to meet rising domestic demand as gas production declined. Eventually, the country ended up importing LNG to cover the deficit.
This tariff imbalance was caused by political instability and past short-sighted policies which led to fixing the price of gas paid by state companies to the gas producers to the uneconomical level of $2.65 per mn btu. This discouraged further investment and stopped the development of new gas-fields, especially offshore. It eventually led to the decline of gas-field production not being replaced through new discoveries, forcing Egypt to import LNG.
According to analysts, this was remedied only after President Fatah El Sisi’s government introduced a flexible gas-pricing formula, by increasing gas prices in July 2015 in the range $3.75 to $5.88 per mn btu, which encouraged investment and boosted supply. In addition, it placed emphasis on resuming and expediting new projects, by signing and ratifying concession agreements that had been put on hold for years. Consequently, more than 74 new or amended agreements were signed during the last three years. This spurred new exploration and production (E&P) activity, leading to new major gas discoveries including those of west Nile Delta, Atoll, Nooros and Zohr, with more on the way. BP’s latest Qattamaya discovery in the summer of 2017, off the East Nile Delta, is further proof of the region’s importance.
Geopolitics at play
Back in 2015, when the existence of Zohr became known and its geology was fully understood, Dr. Dinos Nikolaou, a prominent Greek petroleum engineer, following, detailed analysis of the Zohr field and having studied the geology south west of Cyprus, speaking at a IENE conference in Nicosia, quite successfully predicted the existence of several secondary gas fields with similar geological and deposit characteristics as those of Zohr, with many of them located within Cyprus’s EEZ. Now, following the latest exploration drilling conducted by Eni at Calypso and the subsequent announcement of the positive findings, we have a totally new situation in terms of resources and geopolitics.
For Cyprus not only faces new challenges with the country now finding itself at the forefront of hydrocarbon activity in the East Mediterranean, but we clearly witness a shift of the axis of exploration activity away from the east part, (i.e. Israel), where the equally large Leviathan deposit (of some 650 bcm) still awaits to be developed, to the west side along the Egypt-Cyprus-Greece axis. This is where the action now lies and Cyprus is in the middle of it.
The emergence of this new energy resource-rich axis changes the geopolitical equation in the East Mediterranean.
On the one hand we have increased interest by international companies to develop and exploit further the region’s rich hydrocarbon potential and on the other we have Turkey’s growing isolationism which sooner or later is bound to engross Israel’s hydrocarbon export potential as Ankara, for reasons of lessening its energy dependance from far away sources, is keen to tap and develop oil and gas inputs from the immediate vicinity.
Meanwhile, Turkey will apparently continue its assertive, gun boat type, diplomacy in the broader region as latest incidents in Cyprus’s EEZ clearly show. With the new hydrocarbon resource axis under formation it remains to be seen whether Turkey will continue to challenge its EU and UN backed status quo.
Costis Stambolis is a Financial Mirror correspondent, based in Athens.
