CYPRUS HYDROCARBONS: Challenges and Opportunities

CYPRUS HYDROCARBONS: Challenges and Opportunities


Βy Charles Ellinas, CEO, E-C Natural Hydrocarbons Company Ltd

 

The challenge for Cyprus is to plan the exploitation of its resources in what have become much more competitive and interactive global gas markets.

In the longer term, if Cyprus is to maximise benefits from its natural gas, it should retain flexibility in its export options so that it has access to both the Asian and European markets. Local markets are fast becoming saturated. This is the reason why in the longer term development of an LNG plant at Vasilikos may still be key.

But more exploration is needed to demonstrate that gas quantities justify such an option. At present, with gas quantities limited to the Aphrodite field, priority is given to regional exports, centred on Egypt, which has its own challenges. Collaboration with countries in Southeast Europe which are trying to diversify their supplies in the aftermath of the Ukraine situation, may offer another option and may be mutually beneficial. This would also support the EU’s drive for energy security and union, but it is not yet pursued pro-actively.

The way this sector is developed will also define what supporting services and infrastructure will be required.

 

Challenges

In January, Total declared that it could not locate any targets to drill in Blocks 10 and 11. In March this year, it signed an agreement extending its presence in Cyprus by one year to conduct geological and geo-chemical surveys, but no drilling, in and around Block 11.

Also in March, following drilling of two unsuccessful wells in Block 9, Eni-Kogas submitted a request to proceed with the re-evaluation of the geological model over a two-year period and postpone drilling in the meantime. The government is still considering this request and will probably grant it.

Noble and its partners are not carrying out any further drilling in Block 12 for the foreseeable future. In fact, earlier this month, it relocated its drilling team out of Cyprus and let go some of its staff. Even though this is part of action taken by the company to reduce costs worldwide, it is not the action expected of a company about to embark into the imminent development of Aphrodite.

As a result, all exploratory drilling in Cyprus’ EEZ has stopped and plans for future drilling will be delayed, possibly for two years. And if gas sales to Egypt do not proceed, all activities will cease during this period.

Given the above and low oil prices, going for a third licensing round and exploring other blocks is not advisable at present. It is best to use the next two years to prepare for this and thus ensure success. By that time, oil prices are also expected to recover and oil & gas companies may start investing again.

Development of Aphrodite requires long term, firm, gas sales agreements for most of its 4.5 tcf gas. Without these, finance of the project will be difficult.

Gas sales to Egypt face challenges:

– Egypt expects to become self sufficient in gas by 2020;

– Domestically produced gas would cost between $3.50-$5.00 per mmBTU, whilst gas piped from Cyprus would cost between $7-$8;

– In the foreseeable future, gas sales to the Idku or Damietta LNG plants will be challenged by the low LNG prices in Europe, which may make such a project uneconomical at least for the time being.

A new factor is the acquisition of BG by Shell. It remains to be seen how Shell deals with Idku, Israeli and Cypriot gas by the time the acquisition of BG is completed in mid-2016.

These challenges have implications on Cyprus and the development of infrastructure and supporting services.

They may also affect the planned sales of Leviathan gas to Egypt, even with the antitrust/regulatory issues in Israel resolved.

 

Implications

In Cyprus activities may, as a result, be low key over the next two years, which fortuitously creates a ‘window of opportunity’ to proceed with negotiations and concentrate on resolving the Cyprus problem.

With a government now in place in Israel, and the antitrust case against Noble/Delek resolved, they may have to look at other export options for Leviathan gas if the Idku deal is challenged. Such export deals affect what we do here in Cyprus.

It is worth looking into the Leviathan factor as it has implications for Cyprus and the future development of the hydrocarbons sector.

If the Leviathan deal with Idku goes ahead there may not be sufficient capacity to take Aphrodite gas as well. With this deal also challenged by the acquisition of BG by Shell, the four remaining export options may be:

– FLNG: depending on gas quantities and capital cost requirements this may be difficult;

– Pipeline to Europe through Turkey: Resolution of Cyprob makes this possible. It then opens the way for Cyprus gas to follow the same route. But this requires cooperation between Turkey and Israel, which at present is doubtful;

– Pipeline to Europe through Turkey, but this is challenging both technically and commercially;

– LNG plant in Cyprus as oil & gas prices recover over the next 3-5 years. This strengthens Cyprus’ case to become a regional hub.

 

Cyprus as a regional supporting services hub

Should the option of an LNG plant in Cyprus return, a regional supporting services hub becomes possible. Otherwise, it is more challenging for the following reasons:

– Egypt has a well-established oil and gas industry and the services sector to support it is already in place.

– The development and operation of Tamar has also created a supporting services sector in Israel. As and when Leviathan is developed it will probably be supported in the same way.

– Lebanon is far behind and it is impossible to say when it will reach the stage to require supporting services. But by that time, and possibly with security not being an issue, it may go its own way.

These may leave Cyprus on its own and consequently a much more limited scope for the development of a major supporting services sector.

Cyprus still has the potential to become the base for the service and support industries which are needed to develop, produce and export East Med hydrocarbons. This can be supported from centres developing around Limassol, Larnaca and Vasilikos. Aberdeen and Stavanger should be the examples, from which much can be learned. Cyprus within the EU has much to offer to such an industry, unrivaled by other countries in the region.

 

Learning from Aberdeen

Requirements and opportunities in Cyprus now are similar to the early days of the North Sea’s development, including establishment of service ports.

Geographical location and relationships with countries in the region mean that Cyprus can service most East Med operations.

Between Larnaca, Vasilikos and Limassol all the basic facilities, including ports and airport, are readily available. International companies are already here, some with operations not only in Cyprus but also countries in the region.

Aberdeen was a small fishing town before development of the North Sea. Cyprus still has the time and the opportunity to emulate this, but careful long term strategic planning is needed. Something we have not really done so far.

 

Long term structural change

In the longer term, a land based LNG plant increases the aspirations of Cypriots for employment and industrial opportunities in the hydrocarbons sector.

Cyprus is well placed as an EU country with a stable environment to become the centre for logistics, service and supply companies who will come to the region to support East Med production and operations.

We have already made a start, and much of what is needed is already available – even if uncoordinated – but much needs to be done to attract this industry here:

– Conducive regulatory regime and a regulator;

– Rigorous health, safety and environment, and public consultation;

– A separate petroleum directorate, cutting across government departments, to coordinate activities in the sector – NPD in Norway is a good example;

– A centralised and simplified permitting system;

– Ethics and transparency – we should embrace in letter and in spirit EU anti-bribery and anti-corruption laws;

– A long term strategic Master Plan.

A lot needs to be done to facilitate this, but if we succeed, the reward is that in the longer term this will create thousands of opportunities for new company start-ups and employment.

 

Looking to the future

The global energy and gas scene is undergoing rapid changes and future policies and development plans can become rapidly outdated unless reviewed and updated regularly. This also applies to Cyprus.

We may have a two-year window of opportunity to develop a long term strategic master plan and organise future coordinated and pro-active development of this sector. We should then be ready for the outcome of Cyprob negotiations.

Solution of the Cyprob will open up new opportunities, but also new challenges and changes, to which we will need to adapt rapidly, once the oil & gas sector comes under a Federal government.


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