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Energy turmoil and pipe dreams

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By Dr Charles Ellinas

The East Med is in a period of increasing turmoil. On the one hand, Turkey with its aggressive and intimidating actions, and on the other, the constant references to gas exports to international markets with the promise of huge profits, fuel extreme anxiety and expectations.

The recent agreement between Turkey and Libya brought it all to the fore. First, let’s make it clear that this agreement is not compatible with the internationally recognised law of the seas UNCLOS. And when it eventually reaches international courts, it will not stand.

EastMed gas pipeline

But it pushed Greece, Cyprus and Israel to speed up the signing of the EastMed gas pipeline inter-governmental agreement on 2 January. But without Italy, which still faces strong opposition from environmental activists.

The idea of ​​the EastMed pipeline first emerged about seven years ago, with the discovery of the Leviathan and Aphrodite gas-fields, and has been the centre of attention for politicians, the media and people in the three countries ever since, with an international appeal. Indicative of this is that a Google search yielded more than 10 million results!

The pipeline is intended to carry gas from Israel and Cyprus to Europe via Greece and Italy. But as with many such projects in our region, the idea was right when it first surfaced, even if challenging but has now been rendered outdated due to significant developments in European energy and gas markets.

The increasing penetration of cheap renewable energy has led to a glut of energy and gas supplies in Europe at very low prices – less than $4/mmbtu (per about a thousand cubic feet) in December. With the adoption of the European Green Deal this year by the EU – expected to accelerate the transition from fossil fuels to green energy – problems for East Med gas will be increasing.

Due to the high cost of the pipeline, $7-10 bln, and gas in Israel, $4.50/mmbtu, the price of gas in Europe must exceed $8/mmbtu to make the pipeline commercially viable – a price which is not likely.

As I have often said, the EastMed has ended up being more of a pipe-dream than a pipeline. It is based on political expediency, but not commercial reality – without finding buyers for its gas and attracting the interest of companies and markets, that are necessary for it to become reality.

Global markets and prices

In Cyprus we do not keep up to date with developments, we are ignoring reality and promoting policies driven by political expediencies and expectations, not based on hard market data. We are following a direction entirely based on exporting gas to global markets, with no reference to the state of these markets and prices.

We ignore the fact that these are moving away from us and as time goes on the situation becomes more and more difficult.

We have also been advised of this by international, independent, experts that we brought to Cyprus during the last three years.

One was Professor Jonathan Stern, chairman of the Oxford Institute of Energy Studies, a renowned gas expert in Europe and worldwide.

Another was Nick Butler, professor at King’s College and president of the King’s Policy Institute – previously a vice president in charge of developing BP’s Strategy and Policy. But unfortunately, their interventions and suggestions have not been heeded.

With an abundance of energy and gas supplies worldwide, prices will remain low making it difficult for East Med gas to secure sales to international markets.

And even if we have some success, the profits will be low – we won’t become rich.

With the abundance of gas, very low prices and the rapid transition to green energy and renewables, European markets are already inaccessible to East Med gas.

What remains are Asian markets, where demand for gas is expected to continue to rise.

But it is a highly competitive market, very difficult to penetrate. To do so, the price of liquefied natural gas (LNG) from the East Med and Cyprus must be below $7.50/mmbtu at the destination – quite challenging.

Selling East Med gas

Discovering more gas during the next drilling round in Cyprus’ EEZ in 2020-2021 is not the problem. On the contrary, new discoveries are very likely. The problem is to sell it.

Selling is not in our hands; it is down to global markets – but we can easily mess it up. The likelihood of not being able to export gas to world markets increases with time.

The European Commission (EC) plans to issue a new policy document called the European Green Deal by March, promoting green energy and renewables.

It also aims to reduce emissions by 50% by 2030 and to achieve net-zero emissions by 2050. These goals will affect the use of fossil fuels in Europe.

It is not possible to achieve a 50% reduction in emissions, 32% renewables and 32.5% energy efficiency and at the same time carry on increasing consumption of fossil fuels.

This information was presented at recent conferences that I attended in Europe. EC experts expect the use of unabated gas to fall by 20% by 2030, and by more than 75% by 2050.

So, with such developments, gas prices will remain low in the longer term. This is what makes it very difficult to export expensive gas from the East Med to Europe.

Besides, two new gas pipelines are now being completed, TurkStream 2 from Russia through Turkey to SE Europe and Nord Stream 2 from Russia to Germany.

Gazprom and Ukraine have also just announced a new deal allowing Russian gas to continue flowing to Europe for another five years. These offer natural gas at low prices that gas from the East Med cannot compete with.

The second major market is Asia where due to rapid population growth and quality of life improvements, there is a growing need for energy.

Studies show that gas demand may increase by about a third by 2050. But Asia also has access to an abundance of competing, low-cost, natural gas sources.

Due to energy supply security concerns, resulting from the trade war with the US, China is developing domestic energy resources, and is increasing the use of coal, renewable energy, and nuclear power at the expense of gas imports.

All of these have the effect of limiting growth in LNG imports and keeping energy prices low.

These market and price developments make it challenging for East Med gas to compete and secure sales.

Challenges

In the East Med and Cyprus, the cost of producing gas is high. For example, Noble Energy expects $4.50/mmbtu at the Leviathan platform and a similarly high price for Aphrodite gas.

By the time such gas reaches its destination, it will be expensive in comparison to prices prevailing in Europe and Asia. This makes it difficult for East Med gas to compete and penetrate these markets.

However, here we are sold dreams that Europe needs us, that it wants to become independent from Russia.

Russian gas is not only cheap, but it can make a profit even when gas prices drop down to $4/mmbtu. The EC may take a supportive view in Brussels, but it does not buy gas.

In Europe gas is bought and sold by companies for one purpose, to make a profit. Why should they forego cheap gas and buy expensive gas? This is why the European markets are closed for East Med gas.

Of course, we cannot rule out the possibility that one of the oil and gas companies, such as ExxonMobil, may find large quantities of natural gas, another Zohr, reviving the idea of an LNG plant at Vasiliko.

Then things may change as unit costs will drop due to the large quantities of gas, opening up windows of opportunity to produce and sell LNG to Asian markets, provided it can compete in Asia’s low price environment.

There may also be other opportunities, even if we cannot export to the world markets and become rich. Gas can be used for the needs of Cyprus as a whole. It can also be used as feedstock to produce petrochemicals for export.

It can be traded in regional markets of the East Med. All possibilities must be examined. But to take advantage of local and regional markets requires the solution of the region’s problems. Without this, we will not benefit.

The key is not for gas to contribute to a solution to the Cyprus problem, but a solution to the Cyprus problem is the key to opening up regional energy markets.

We need a solution to benefit all Cypriots, both Greek Cypriots and Turkish Cypriots.

@CharlesEllinas Nonresident Senior Fellow Global Energy Center Atlantic Council