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By Costis Stambolis
The current energy planning of the Republic of Cyprus appears to be under threat following a detailed proposal submitted last month by Greece-based Energean Oil & Gas, for the supply to the island of natural gas from the nearby Karish and Tanin fields – which Energean is now developing in offshore Israel – to Vassilikos in Cyprus.
The threat, which is really more of a challenge, lies in the fact that the state Public Gas Corporation of Cyprus (DEFA), the sole potential importer of natural gas to Cyprus, has already launched a plan for the gas supply through the importation of LNG and the installation of a floating storage and regasification unit, known as FSRU.
However, this plan remains in limbo following the Cypriot government's inability so far to present a comprehensive project, let alone publish an international tender. Only recently (last month) there was a clear commitment from Nicosia to promote the project. The ‘interim solution’, as it is known, on which the official government planning for the introduction of natural gas to the island is based on, relies on imported LNG supply until the successful exploitation of the Aphrodite gas field discovered in 2011, which has now been shifted to the distant future.
DEFA’s Chairman, Symeon Kassianidis, has described Energean’s proposal as unsolicited, as it was not submitted as part of a tender, which is expected to be launched shortly and will concern exclusively the supply of LNG. However, even if the international tender is published in the next few days, the project will not be launched before the end of 2019, which means that the FSRU will not be operational before the end of 2021 at the earliest.
In favour of the project is its financing, which appears secure through EU funding as a Project of Common Interest (PCI) through a grant of EUR 101.5 mln and a EUR 200 mln loan from the European Investment Bank (EIB). Nevertheless, the total cost of importing LNG in Cyprus is particularly high, since it includes around $250 mln for the building of the FSRU, plus $100 mln for the development of port facilities, submarine transit pipelines and environmental protection works. The FSRU will have a capacity of 80,000 to 150,000 cubic meters and will be able to supply 1.0 billion cubic meters (bcm) a year, which are necessary in order to fuel the power plants of the Electricity Authority of Cyprus (EAC), which have a total installed capacity of 1,478 MW.
Now comes the attractive proposal submitted by Energean Oil & Gas, which suggests the construction of a 200 km underwater pipeline (the cost of which will be fully covered by Energean Oil & Gas without any disbursement from DEFA) in order to transfer 0.5-1.0 bcm per year of gas from the Karish and Tanin offshore fields that Energean is currently developing, an investment of $1.6 bln. It has been estimated that Cyprus's gas needs will amount to 1.0 bcm per year with the market fully developed. The key advantage of Energean's proposal, apart from its highly competitive cost, is the fact that the construction of a separate onshore processing plant is not required as gas will be delivered “clean” following the necessary treatment in the special Floating Production Storage and Offloading (FPSO) facility that is now being built (see Map 2) and will be installed on the production platform.
Map 1: Karish and Tanin Gas Fields in Israel
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Map 2: Development Concept of Gas FPSO in Israel
Over the last four years, Cyprus has made three attempts to organise the importation of gas in the form of LNG, but these were shelved each time for technical or financial reasons. However, the lessons learned from these unsuccessful attempts indicate that the main issues that must be dealt with include duration, quantities and prevailing market conditions.
Regarding the Tanin and Karish gas fields, Energean acquired them from Delek Group in 2016 for about $148 mln. The combined resources of the two fields amount to 67 bcm of natural gas and up to 33 million barrels of oil equivalent of light hydrocarbon liquids. Energean’s field development plan was approved by the Israeli government in August 2017 and development work has already started. This is based on the development of the two gas fields using an FPSO and a 90 km pipeline to connect to the Israeli natural gas transmission system.
Energean had more good news recently. A review in June 2018 of the potential gas reserves has shown that Tanin and Karish may hold another 69 bcm of gas resources and 71 million barrels of oil equivalent of light hydrocarbon liquids. Once this is confirmed, through new exploration drilling, it will increase the availability of gas from the two fields for additional gas sales to the domestic market and for export.
Only three months ago, the company signed a $1.27 bln financial agreement with Morgan Stanley and other banks and has also raised $460 mln from its listing in the London Stock Exchange in March 2018, required to finance the development of Karish and Tanin. On this basis, it took a final investment decision in March, with first gas expected early 2021.
Why Does Cyprus Plan to Import LNG?
Cyprus is planning to import LNG for power generation as it is obliged to switch its electricity generation from burning heavy fuel oil to natural gas by 2020 in order to avoid hefty EU emission fines, as under an EU Directive all oil-fired power plants within the EU should be shut down by the end of 2020. Another reason is that EU member states must make climate change commitments by 2018 in support of the EU targets of at least 40% cuts in greenhouse gas emissions from 1990 levels, at least 32% share for renewables and at least 32.5% improvement in energy efficiency by 2030. Cyprus is nowhere near these targets and will not be able to achieve them without switching to natural gas, but also by liberalising fully its electricity market and promoting further renewables use for power generation.
A third reason is the uncomfortable realisation that the development of the Aphrodite gas field (or gas exploratory Block 12 in the Cypriot Exclusive Economic Zone (EEZ), as shown in Map 3) is not progressing and it is receding further into the future due to low global gas prices, but also because of the consortium’s inability so far to come up with a sustainable long-term plan for the field’s exploitation. As a result, any expectations that Cyprus will be able to satisfy its domestic needs from Aphrodite appear remote. So, for Cyprus to meet the 2020 EU deadline, it can no longer rely on Aphrodite’s gas.
As a result, a decision was made back in 2015 to proceed with the importation of LNG, initially for 1.0 bcm/year through two parallel projects; one for natural gas procurement and a second for infrastructure development, including acquisition of an FSRU. The tenders for these projects should have been issued by now, but for reasons not made clear so far, they have been inordinately delayed.
Why Energean’s Offer is Worth Considering
Energean Oil & Gas submitted the aforementioned proposal since the company is the operator of the Karish and Tanin leases in offshore Israel, with a 100% working interest and has already signed contracts with Israeli industrial customers for gas quantities of 4.5 bcm per year.
Given that Energean is offering gas to its Israeli clients at less than $4.50 per million btu, close to 30% lower than the price that Israel Electric Corporation (IEC) pays Noble and its partners for its gas from the Tamar field, such an offer could have been interesting and highly competitive with Cyprus’s LNG import plans. For this reason, Energean submitted a fully costed proposal to DEFA with an estimated cost of supply, which, according to company sources, ranges between $6.0 and $6.5 per million btu, including the construction cost of the transit pipeline from the FPSO to Vassilikos power station (see Map 3). For comparison purposes, the cost of LNG is estimated at $8.0 to $10.0 per million btu, with $1.5 per million btu to be added for the construction cost of the FSRU and the port facilities. Based on 1.0 bcm per year use over ten years, the saving could be as much as $1.4 bln. It will also lead to substantial reductions in the price of electricity, according to leading energy analyst Dr. Charles Ellinas.
Israel Will Stop Using LNG When Production From Karish and Tanin Gas Fields Starts
In the context of our discussion for the importation of LNG to Cyprus, it is useful to note that according to the Energy Ministry of Israel, the FSRU that currently serves Israel’s Electric Corporation (IEC) is expected to end its service in three years. The FSRU is anchored 10 km offshore Hadera and since January 2013 has been serving IEC as the only back up to the Tamar gas field.
The FSRU contains LNG that is bought by IEC from various suppliers around the world and is used mostly during summer and winter when the gas demand is extremely high or in case of a gas disruption such as the one that occurred at Rish Hashana last year with Tamar gas field. This is expected to bring gas savings of hundreds of millions of Israeli shekels a year for IEC and will positively affect the electricity tariffs.
FSRU capacities are not huge and can only meet the Israeli gas market’s needs for a few weeks. However, the Energy Ministry estimates that in three years the country will have enough production from three different gas fields, each of them with its own and separate gas transmission system. To be more precise, these gas fields are the following:
– Tamar, which is already in production phase,
– Leviathan, which is set to start producing at the end of 2019, and,
– Karish and Tanin, which are expected to be operational in 2021.
The LNG system was established by Israel Natural Gas Lines (INGL), the state-owned gas distribution company, as a national emergency project at a time when the Israeli market suffered from both the lack of Egyptian gas and a shortage of domestic gas supply. The construction cost of the FSRU amounted to 550 million shekels (EUR 130 mln), which were spread out among the gas consumers. If Israel has three different gas fields interconnected to the national grid by 2021, IEC could save hundreds of millions per year, simply by withdrawing the use of the FSRU. Therefore, such a decision facilitates the company not to purchase LNG volumes 3-4 times a year, which can lead to a reduction in the electricity tariffs, simply because the cost of IEC’s fuel mix will fall.
A Highly Competitive Financial Offer
Summing up, oil and gas experts, with experience of the East Med energy scene, regard the proposal submitted by Energean as a highly competitive financial offer since it totally avoids the increased CAPEX and OPEX of the FSRU solution. In addition, there is a fixed date for the delivery of the first gas quantities, a crucial parameter, given the strict EU regulatory framework in which all oil-fired power plants should be shut down by the end of 2020.
As several energy analysts in Greece and Cyprus note, in view of the unacceptable long delay of the government's implementation of the interim LNG solution, it was a matter of time before one of the companies operating in the wider region submitted an alternative, more realistic and cost competitive proposal. “It is high time that the citizens of the Republic of Cyprus start to benefit from the gas wealth, which has been found around the island”, said a senior political figure in Cyprus, as recently quoted by Greek energy portal Energia.gr.
Costis Stambolis is a Financial Mirror correspondent, based in Athens. [email protected]
