Cyprus has reasonable prospects of discovering more gas to become an exporter, but the global market is challenging while climate change and Turkey’s gunboat diplomacy make it a riskier venture.
Moreover, Cyprus’ aspiration to export gas to Europe are facings the headwinds of low prices and renewables, said analyst Charles Ellinas in a recent presentation on East Med gas.
“We tend to think like islanders, isolated from the world – monetising our gas is not in our hands, but global markets, we can easily mess it up,” said Atlantic Council expert Ellinas.
He believes the likelihood that it may not become possible to export Cyprus gas to global markets is increasing.
“Even if Cyprus were to be successful to export some of its gas, given low global gas prices profitability is likely to be marginal.
The perception of future riches from gas risks remaining a perception. Such projects and investments require viability, certainty, long term stability and acceptable risk.”
A major discovery in February by ExxonMobil in block 10, ENI was successful last year in block 6 with Calypso plus Aphrodite means Cyprus has three gas fields with exploitable gas of 10 tcf, said Ellinas.
“Seismic data show more potential prospects in ExxonMobil’s block 10 and adjacent blocks 6, 7, 8, 9 and 11 with 7-9 drills expected in 2020, so Cyprus still has reasonable prospects for more gas discoveries.”
Ever since the discovery of giant gas-fields Tamar, Leviathan and Egypt’s giant Zohr, the East Med has been the focus of attention for energy exploration and the hope that Cyprus has such natural riches.
But the global energy market is a tough one where prices dictate the state of play.
Cyprus is looking to be an export player and US-based Noble, Israel’s Delek and Shell renegotiation of a production sharing contract agreement with the government has paved the way for Aphrodite gas sales to Shell’s Idku plant in Egypt.
First exports via a pipeline to Egypt are expected by 2025 but Ellinas said “challenges remain if it goes ahead profits will be marginal”.
He said ENI also has the option to tie-in its Calypso field to nearby Zohr in Egypt.
“Success with ExxonMobil, further drilling in promising block 10 next year can transform Cyprus’ fortunes leading to LNG exports, provided total discoveries exceed 15 tcf and provided it is commercially viable.”
Egypt, Greece, Cyprus, Israel, Palestine, Jordan and Italy have established the East Med Gas Forum based in Cairo to promote regional cooperation and development of gas markets, but it does not include Lebanon, Turkey and Syria.
“At this stage EMGF in nothing more than a talking shop,” said Ellinas.
Meanwhile, Egypt has become self-sufficient starting LNG exports with gas from Zohr expected to reach a plateau of 33 bcm/y by 2020.
Ellinas argues that Egypt expects LNG plants Idku and Damietta to be fully utilised by next year.
“There may not be room for Cypriot gas…there may not be room for it unless it is sold at a competitive price, profitability will be low. Export of Aphrodite gas to Egypt not certain – if achieved, profits will be low.”
Renewables
The world has an abundance of fossil fuels and with the relentless penetration of renewable energy the competition to secure markets is intense, said Ellinas.
“The EU has strengthened its climate targets to 2030 – promoting renewable sources affecting fossil fuels. Renewables are contributing more than 26% of global electricity and are growing.”
He said demand for fossil fuels is expected to peak around 2030, while expensive gas could accelerate the penetration of renewable energy sources and lead to a faster transition.
“This is leading to low prices and tough competition, global markets are driven by commercial factors, low risk, quick returns – not by political assertions, as in the East Med.”
Ellinas sees the rise of renewables and the shift to clean energy progressing rapidly, “and as we approach 2030 challenges to the use of fossil fuels are multiplying”.
Under EU targets, by 2030, 32% of primary energy will come from renewables, energy efficiency must reach 32.5% and the reduction in carbon emissions will have to reach 40% compared to 1990 levels and become carbon-neutral by 2050.
“These changes will have a dramatic impact on the use of fossil fuels by 2030 and after – already leading to a glut of energy resources, with the result that prices remain low.
The longer we delay the exploitation of Cypriot natural gas, the more we are in danger of losing the opportunity again.”
East Med gas is expensive to produce, where sales are possible, profit margins will be small, said Ellinas.
“There is a need to reduce regional geopolitical risks. LNG projects require multi-billion-dollar investments, the returns of which require decades to realise.”
Ellinas advises that emphasis should be placed on resolving problems, thus unlocking regional gas market potential.
“If this becomes understood by East Med countries, including Cyprus and Turkey, it could defuse the impact hydrocarbons have on regional geopolitics. A solution to the Cyprus problem could go a long way in improving regional geopolitics.”
He called for East Med oil and gas plans to be tempered with a dose of reality.
“Cyprus still has strong prospects for more gas discoveries but securing export markets remains a challenge. I hope we do not end up messing up the Cyprus problem for gas we cannot sell and won’t make us rich!”
