2016 EMF Conference Part 14: Hydrocarbon Developments in the Eastern Mediterranean – Gary Lakes Director ERPIC Energy Program 5-7 December 2016

by on January 08, 2017

EMF Conference Part 14: Hydrocarbon Developments in the Eastern Mediterranean
Gary Lakes – Director ERPIC Energy Program
EMF Conference 5-7 December 2016
Larnaca, Cyprus

Gary Lakes puts forward some predictions regarding the hydrocarbon developments in the Eastern Mediterranean in 2017. How will the recent discovery impact Egypt’s hydrocarbons sector? Does Cyprus still have a chance to become an East Mediterranean gas hub? What will be an outcome of Israel’s recent licensing round? Is Lebanon getting back into the game in the energy field? What are the options for monetisation of the East Med gas resources?

Transcript

Christodoulos Pelaghias (C.P.): Good morning and welcome again to the East Mediterranean Forum. My co-host is Marta Murzanska and with us is Mr. Gary Lakes, Director of the Energy Program at the European Rim Policy and Investment Council. Gary, welcome.

G.L.: Thank you, good morning.

C.P.: Gary, we were hoping you could give us an update on the latest regional developments on the energy front.

G.L.: All right. I think the thing to do at this point is to talk about what might happen in 2017. There have been some developments in Egypt which are good and, you know, they point towards an improvement in the whole situation in the East Med. The big thing was of courses the discovery in August 2015 which was made by ENI – the Italian – company and they are going full out to develop that field by 2017. I think it will come up with 1 billion cubic feet bcm, and that (inaudible) in the end of this year, hopefully. Also, BP is involved with developing one of the fields there. They’ll come on with about the same capacity sometime during 2017. And so there’s a lot of work going on in Egypt. That’s basically because there’ve been some changes in the way the Egyptian government’s approached its energy problem and so you know things are looking up there.

In Cyprus things are going to take some sort of shape. We don’t know what yet. There’s been rumors of a commercial agreement to send the Aphrodite gas to Egypt to have it liquefied at the Idku facility which is basically idle right now because the Egyptians simply can’t supply the gas it needs for the process of LNG. There’s been some recent effort to try to get that back on track but it’s like one cargo a month, maybe, from what I’ve seen and there’s also the bidding round which the government is expected to name preferred bidders in the next week. They said early in 2017, I’ve heard. Maybe it could come a little earlier than that. But that will be for the Blocks 6, 8, and 10. And participating in that is Eni, and Total, and Statoil, and ExxonMobil, and Qatar Petroleum. And that should be quite an interesting outcome to see who they select and how it proceeds from there.

There’s of course the pending drilling in Block 11 by Total. They’ve stalled because they are unable to arrange logistics base in a Cypriot port. Larnaca was used initially in the early days when there was some drilling offshore Cyprus, but that has been, now, it’s been shifted to, I think, a tourist development. And so Total was wound up making an agreement with the EDT service company in Limassol and the day after they signed the agreement and were getting ready to take further steps towards the drilling, it was discovered that the privatization of Limassol port, which included the BP sort of excluded all other sorts of operations in the port. And that meant that the contract that EDT and Total had signed was somewhat in question. So now there’s an effort underway to resolve that and hopefully it will be resolved soon and Total can start drilling. They had originally planned to start drilling in April 2017. Clearly, that’s going to face a delay now. If their original plan had worked, they had plan to work out of Larnaca and they would have started drilling in last September. So it’s an unfortunate delay, and it’s sometimes difficult, you know, to try to understand why the Cypriot government isn’t a little better prepared to deal with something like this, when you consider that there’s so much emphasis placed on turning Cyprus into an East Mediterranean gas hub, and these discussions have gone on for years now, really. A thing like not having a logistics base for drilling, you know, leaves a lot of things in question.

There’s also Israel. Israel recently announced licensing round for twenty four offshore blocks. And that’s due to close in March. They plan to, I think, announce preferred bidders shortly after that during the first half of next year, which will mean that the Israeli offshore should open up considerably. So far it’s just been Noble Energy of the US and Delek that’s really made any sort of significant, made any significant discoveries there. Other companies have drilled a couple wells but they haven’t really come up with anything, and they haven’t been really major outfits. So hopefully this Israeli round will bring in some big companies.

Mentioning Noble and Delek, I might go back to the Cyprus offshore and say that Noble and Delek, Noble in particular, discovered the Aphrodite field in December 2011, and that reserve has 4.4-4.5 trillion cubic feet (tcf) of gas. But that’s the commercial deal that may happen with Egypt. So, we’ll be waiting on that.

In the meantime, let’s go to Israeli Leviathan gas field. That’s probably going to get a final investment decision early next year. It’s been delayed by a number of things going on in Israel, and it’s been somewhat frustrating for Noble. But if they’re signing contracts with different companies and one particular, the Jordanian Electric Power Company, for the sale of gas. And so based on those things, hopefully the Leviathan will get to go ahead soon for early 2017. We know that Delek has arranged loans. I don’t know exactly where Noble is regarding that its financial arrangements with its share of development. But Leviathan’s 22 trillion cubic feet, and it’s a lot of gas. And I guess Israel’s finally pretty keen to get that moving. Of course, the impetus for all of this was the Zohr discovery in 2015 that got everybody excited, that would launch the new Cypriot licensing round. That’s the island’s third round. And now with the regulatory issues in Israel solved, the government has launched a round there.

So an interesting development has been the fact that Lebanon seems to be getting back on track somewhat. The parliament managed to elect a president about a month ago, Michel Aoun. He’s a former head of the military and I think he was prime minister back in the nineties, at the very closing days of the Lebanese Civil War. He’s now in his eighties, I think, and was elected president. Just so happens that his Christian political party has a support of the Shia Muslim Hezbollah. So that’s Lebanese politics, so, you know, it’s complicated. In the meantime, Saad Hariri – who’s the son of the assassinated Rafik Hariri – is in the process of trying to put together a government. Now, Lebanon’s situation was complicated by the fact that they started a licensing round in 2013. They started with a pre-qualification round, and then went on to name the companies that pre-qualified, were allowed to bid. But these companies couldn’t bid because there were two decrees that the government needed to pass in order for the licensing round actually be able to close. So that means they couldn’t place any bids because the round couldn’t close. So those (inaudible) rather pertain to the model agreement that would be used to negotiate contracts, and also the demarcation of the blocks, delimitation of the blocks. And there are ten blocks Lebanese petroleum authority’s identified offshore Lebanon. And Lebanon has a lot of seismic work done. Most of the area offshore Lebanon has some sort of seismic data available on it. And according to company that’s done it, and I think (inaudible) most of it, there’s some very attractive and prospective sites there. So the fact that this has been on hold since 2013, I mean it says that Lebanese politics is very, very cumbersome. It’s been very difficult. And hopefully they will resolve that soon, they will form a government, they’ll pass the decrees and the licensing round in Lebanon will get back on track.

Also, in Lebanon there is a disputed area between Lebanon and Israel – it’s 854 square kilometers. It’s like a little wedge going down to the sea. I don’t know how that’s going to play out. The Americans have tried to negotiate some sort of a deal between the two. I don’t think either side has been very cooperative, but of course it is Lebanon and Israel, and technically they’re still in a state of war. So the other issue, I think, is perhaps about monetizing all these East Med stuff. All this is still rather theoretical but there’s a lot of speculation about a pipeline from Leviathan to Turkey. And I guess this is coming because after quite a few years, and it’s about five years or so, the Israelis and the Turks have made a regional rapprochement, I guess you could say, and I think they’re exchanging ambassadors now. Things are sort of back to normal. But for a while there things got very bad. And just reading in the press today, I mean, there’s a lot of statements coming from Turkish President Erdoğan that are still rather negative about Israel. So the talk about a pipeline to Turkey – I don’t know, I don’t think that the companies involved, Noble and Delek, although they’re keen to do business, have a great deal of faith in this project. We’ll have to see, you know, we’ll just have to see on that, like all of them. There are experts who claim that this is the best way to monetize East Med gas, to ship it to Turkey. Personally, I don’t really agree with that, and I think that there’re, you know, a lot of options. And it seems to me that there are a lot of other people – business people – who don’t really agree with that either. I mean, I was at a conference last week where the representative from Eni was speaking, and he was saying, “Well, you know, let’s see how much gas we got and then we can look at what options there are to monetize gas in East Med.” This was an Eni representative. And some of you may know Eni was drilling in Block 9 in 2014, and it had a four-well drilling program there. It drilled two dry holes and stopped, and said okay, you know, we’re going to recalibrate our seismic and take another look at this. And so that was suspended. And then they went off, and in a year later they discovered Zohr, which is like 30 tcf. They found it at a carbonite built-up which is different geology from where they have been finding gas. The other gas has been discovered so far, like Leviathan and Aphrodite, in sandstone, to my understanding. And so Eni is planning to come back and start drilling again in the Cypriot waters in a second half of 2017. And depending on how the bidding round goes, because I think they’ve bid on 6 with Total, and on 10 with Total, and I think they’ve bid on 8 by themselves. So there’s a chance they could come back in a big way depending on (inaudible) more blocks.

This is going to be interesting, because ExxonMobil Qatar who runs a big LNG operation in Qatar, it’d be interesting to see if they get Block 10 and how they proceed with that. But again, it’s all speculation.

The one thing that’s still banging on, and we’ll see – I mean, it would be many years from now – is this East Med gas pipeline which is sponsored by Italy and Greece. It’s called IGI Poseidon, I believe, is the name of the joint venture they formed. And they want to build an underwater pipeline from Leviathan to Cyprus, then to Crete, and then on to the Greek mainland, and over the Greek mainland, and on into Italy. And so I think they’re planning to have a pipeline about 16 bcm a year. And it would require quite a lot of gas.

So the whole situation here in the East Med is that there has to be a lot more drilling. There have been some very exciting discoveries, especially with Leviathan and Zohr. But it is like the gentleman from Eni said: it needs to be a lot more drilling done and then take a look at what the resources are, where they’re located, if they’re large or small. You can find the synergies to put them all together. So what’s going to get to happen here, especially in Cyprus, is more drilling. For you get more drilling, you’ve got to have a logistics base to work from. It would be beneficial to the island, I mean, it could serve as a service center for the entire region. It’s great place to work out of, provided you do have a place to work out of. So that’s something the government really has to bear in.

So apart from that, I think that’s basically where the East Med is for the time being.

C.P.: Gary, on your last point. Apparently Noble has decided to move its place of operations out of Cyprus, and Eni is thinking about it. Total, as you mentioned, for the time being is still able to conduct its business out of one of the Cyprus ports. But, I mean, it seems that things don’t look good for Cyprus as an operating base?

G.L.: It’s kind of ridiculous. I heard that Noble would shift on Haifa and that Eni would operate out of Port Said. And it kind of boggles the mind, really, because here we are. Since 2011 at least Cyprus has been talking about being an East Med energy hub, the service center, the rest of it. And you know, what can you say? They can’t provide the facilities for these companies to work out of. I’m lost of words.

C.P.: What do you think the problem is? I mean, it’s not political, is it? ‘Cause technical issues can be bridged and overcome. But if it is a political will, that is…

G.L.: It’s been political. I mean, this situation with Larnaca was really unfortunate. Essentially the government turned over to the Larnaca municipality a very serious decision about the country’s hydrocarbon policy. As simple as that. And why? It seems as if it was strictly political reasons. And you just can’t operate like that. The government has to really, really make a decision if it does want a hydrocarbon industry here or not. And I can appreciate the fact that the talks with the Turkish Cypriots are extremely important. There’s the other problem of the energy sector that needs to have drilling work. That’s the only way that it’s ever going to live up to be any sort of an energy center. Whether or not there are gas resources out there, apart from 4.5 tcf in Aphrodite. Now, the thing is, there’ve only been four wells drilled offshore Cyprus. So there was Aphrodite discovery, there was the Aphrodite appraisal which actually resulted in the initial volume of gas (inaudible) the discovery actually being taken down to 4.5, and it was 5.8 originally (inaudible). Then there were the two dry holes in Block 9. And there hasn’t been any drilling since, I think, was it August 2014? So it’s time to get the show on the road here. There are branches of government that can deal with this. There is of course the ministry of energy, and then there’s the ministry of, I think, transport that’s dealing with this port’s issue. And they’re just going to have to make a commitment on this and get it rolling. So that’s what happens. If you can’t provide the facilities, Noble will go someplace else, and then Eni will go someplace else. What if Exil or Statoil… I mean, they get contracts here, you know. Where they’re gonna work out of? These are really heavy duty companies. You don’t have time to play around with this sort of stuff. It’s time to get pretty serious, really serious about this and move it on. Otherwise we just let it drag and drag.

C.P.: Gary, another question, unrelated, in some ways. I mean the conspicuous absence of Russia and Russian companies in in the region. What’s your take? Are they concentrating on potentially going to Syria, or they’re not interested in the Eastern Med?

G.L.: I don’t know, I don’t know about that. Russia has always been very involved with Cyprus, but I don’t know what that’s all about. It may have something to do with relationship with Turkey. I don’t know. I think Syria is a long shot. We’ll have to see how things play out with the Israeli drilling around they made in there. I don’t know. There may be some indication as to what they plan to do in the future, if Lebanon should… The licensing round should open or…

C.P.: Did they show any interest for Lebanon?

G.L.: Pardon me?

C.P.: Did the Russian companies indicate an interest for Lebanon?

G.L.: I don’t know, I haven’t seen any of it. All things are possible. I mean, it’s just such a very early time, you know, for all of these. Everything’s been sort of hanging midair for quite a long time. And hopefully 2017 will settle things, things will begin to gel a little.

Marta Murzanska (M.M.): Speaking about Russia and Turkey. Have there been any developments regarding the Turkish Stream, maybe?

G.L.: Well, I guess it’s on the planning board. They seem to be wanting to move forward with that. I think that initially there’s going to be one pipeline that would go to, basically supply Turkey. There’s the second stream to that pipeline system that will be directed toward the Greek border. I’m not sure how that’s going to work. The Russians want the European contractors to shift their connections out of Ukraine and then to this TurkStream thing. Whether the Europeans are going to be crazy about that or not, I’m not sure. So it’s always, you know, there’s a lot of plans. Some of them work, some of them don’t. It’s just a matter of time.

M.M.: I’d like to ask you about Iran. A year and a half after the Iran deal, Iran is in the process of being accepted back into the international community. What role could it play in the energy market in the future, and what effect could it have on the Eastern Mediterranean, possibly?

G.L.: Iran’s got three LNG projects that’ve been stalled because of the sanctions. And I think that if this deal with Iranian (inaudible) holds and foreign investment comes back in, you’ll begin to see those things come back. They were very keen to develop the South Pars field, which is basically their half of the north field that Qatar draws its gas from in its LNG (inaudible). So it’s a very real possibility. I don’t know, the LNG market… It’s interesting, and now if it’s going to be complicated by the fact that OPEC has at least agreed to some sort of up-cutting production yesterday, the day before. We’ll see. Personally, I don’t think the price of oil is going to go way high, because you’ve got to have producers in North America coming back. And once the price hits a certain level, it’s going to be very profitable for them producing again. But I don’t know how it… Again, with the East Med, and if there’s enough gas there, there could be prospects for more LNG coming out of the East Med. There’s the plan to send Aphrodite gas to Idku, and there’s also a plan to send Leviathan gas to Idku, and I get the impression that Eni is thinking of… Eni holds a share in the Damietta plant with Spain’s Unión Fenosa, and that’s idle. I get the impression that Eni is looking at that as a possibility to ship LNG, and I think it’s kind of focused on Europe.

C.P.: The development will depend on the prices, right? On world prices. So what’s a benchmark price that sort of below which there’s no development, or limited development? Is there some level?

G.L.: Right now, you know, price (inaudible) is down as far as I understand, maybe at five or something. But there’s a lot coming on in the US, there’s going to be a lot then in Australia, and there’s other places around. And I think that what a lot of the producers are doing with the gas resources are looking to sort of create markets by setting up the floating storage and regasification units. I think that Total has been involved in this in one of the African countries recently. It’s the plan to sort of set up a regasification unit and (inaudible) system. The idea is to create markets for the LNG, not wait until the market sort of develops on its own, but just sort of to move the energy production and to create markets themselves. The prices – I don’t know. I’ve heard the gas maybe at some point try to establish its own sort of pricing structure that doesn’t totally closely, so closely mate with the oil. It’s an evolving situation, we’ll see. But I think there’s going to be a lot of LNG available at some point. I think the next decade – that’s going to be the way that a lot of energy (inaudible) are going. It’s also dependent upon the agreement, the Paris Agreement about climate change. If they have the taxes on carbon and also demand for energy which people… There’s more conservation and more use of renewables. There’s a lot to be seen yet. As far as the East Med is concerned, I think there is a good opportunity for it, and especially in Europe. I think Europe is going to be the target market for delivery. And you just got to find out how much gas there is in the Eastern Med. There’s a lot of work to be done yet. And it’s at the initial stages. It’s all really upstream.

C.P.: Gary, thank you very much, it was very interesting.

G.L.: Thank you.

 

See: Cyprus, Israel, Lebanon, Egypt – Energy Developments in the East Mediterranean

See: Recent Energy Developments in the Eastern Mediterranean

See: East Mediterranean Energy: A Discussion of Possibilities

See: Energy Videos

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