Hydrocarbon Developments in the Eastern Med – Dr. Charles Ellinas, Non Resident Senior Fellow, Atlantic Council Global Energy Center, 10 July, 2018

by on August 13, 2018

Hydrocarbon Developments in the Eastern Med
Dr. Charles Ellinas
Non Resident Senior Fellow, Atlantic Council Global Energy Center
10 July, 2018


First of all, in Cyprus it is hoped that when the Turkish elections are over, the Cyprus negotiations will start. And we’ve had some developments recently, and hopefully that will lead to the resumption of the negotiations, which is going to help, eventually, hydrocarbons, especially if there is a solution. The big event will be the drilling by Exxon Mobile in Block 10, in October or November. We will talk about it later on

In Egypt, development of Zohr gas and market liberalization have been the big events in this year and they will continue being the big events later this year and next year. In addition to that, though, Egypt is embarking on new licensing rounds, in the Red Sea and the Mediterranean, and even the Nile of Delta, which will increase exploration and lead to more gas finds. In fact, in August ENI intends to start drilling in a new prospect called Nour, which all indications show that it may be very big – as big as Zohr. But obviously, the drilling needs to be done to see what happens.

In Israel, there was a deal to export gas to Egypt, but will it happen? That’s a question.

In Lebanon, exploration has started but there are EEZ disputes.

On top of all these things the global energy markets and prices are very challenging.

So, let’s start with the developments in Egypt. Egypt has just issues its last LNG import tender. And the second half of this year will be the time when LNG imports will stop, and beginning of 2019 Egypt will start exporting LNG using surplus gas from various gas fields led by Zohr. Zohr – the first gas was developed in December and production is increasing this year, and it’s expected to reach a plateau sometime next year, and achieve much as 27 billion cubic meters (BCM) per year or a bit more, maybe even 30. Yet to find gas in Egypt, it’s estimated to be between 50 – 150 trillion cubic feet (TCF) of gas. This can more than double production. If that happens, the chances for Egypt exporting large amounts of gas increase dramatically. Egypt has also liberalized its gas market. And a program has already started to achieve that, and it will be fully in place by 2032. This has led ENI, SHELL, EDISON, BP to announce plans to expand existing activities and investment in Egypt. Egypt also aspires to become East Med’s energy hub, and in that respect it has a support of the European Union, which in May signed a MoU (Memorandum of Understanding) to support Egypt. The EU is quite interested in the idea of LNG imports from Egypt, but also interested in helping Egypt to develop its renewables resources.

In terms of impact of all of these developments on Egypt’s gas sector, Egypt’s gas production will reach close to 80 BCM of gas per year by 2019, exceeding consumption by over 10 BCM of gas. That is the basis of resuming exports. So that will happen next year. An organization based in Paris, OME, whose members are all the international oil companies operating in Egypt, has gathered all the data, and according to them, gas production can reach 120 BCM per year maybe by 2035, but it will keep increasing between now and then. That will also mean that the surplus gas in Egypt will keep increasing and could be as much as 20-30 BCM per year surplus gas which will feed exports. That means that the two LNG plants in Egypt, Idku and Damietta, will reach a full utilization probably early 2020s. And that utilization, the capacity of the plants is 17,5 BCM per year. And this is what is of interest to the European Union. Because these plants were feeding gas to Europe before they ran out of gas. And now, once the surplus happens, they will be able to resume export to Europe. That has been confirmed by Egypt’s Petroleum Minister, who said that the priority is to resume uninterrupted LNG supply contracts to Europe. So, Egypt is underway to achieve all of these things, with more investment, with more exploration, with more development of renewable resources, and so on.

All these things will have an impact on Israel and Cyprus. Both Israel and Cyprus have been aspiring to export their gas to Egypt for liquefaction and export. And more recently, we’ve heard that SHELL is negotiations to buy Aphrodite gas and the Leviathan gas for liquefaction at Idku and exports. The problem is commercial. By the time gas from Cyprus and Israel comes to Egypt, is liquefied and exported to Europe, it will arrive in Europe at prices higher than the average prices in Europe and as a result it will be difficult to find buyers of that gas. This is why, despite the fact that these negotiations have been going on for a while now, they have not concluded. And now, with Egypt’s opportunity to sub-export its LNG itself they may not be concluded, unless they find a cheaper way of getting the gas to Egypt.

NOBLE and DELEK signed an agreement to sell to Egypt 64 BCM of gas over  a 10-year period for an Egyptian company called Dolphinus. And this deal was supposed to be completed fairly soon. But it is facing major challenges. One of the challenges is how do you get the gas to Egypt? There is still a need to find a credible pipeline. The second is that a few years ago there was an arbitration award against Egypt for stopping gas supplies to Israel in 2012 and that arbitration award was over 2 billion dollars. Egypt has made it clear that nothing is going to happen until that is resolved, which hasn’t happened yet. There are also security issues and political issues, and as a result, even though the deal has been signed, it has not been put into place yet.

Success, when Exonn Mobile drills in Block 10 in October in Cyprus, can transform our fortunes, and I will talk about that in a minute.

Let’s talk briefly about Israel. Leviathan’s phase 1A construction is about two-thirds complete. It’s progressing well, and they still expect to start producing gas by the end of next year. However, ENERGEAN has come into the equation in Israel, acquired two fields called Tanin and Karesh, and they have proceeded to develop these fields. And there have been undercutting Leviathan gas on price. Tamar and Leviathan gas is being sold to customers in Israel at about 6 dollars per Mbtu. ENERGEAN is selling its gas at less than 4.5 dollar. Very low. So as a result it has been very successful in signing deals for all the gas from these two gas fields, 4.2 BCM per year, and they have secured finance, they have secured investments from Israel and they went for an IPO (Initial Public Offer) in London, and they’ve got another half a billion dollars – more than enough to fund the project. As a result, earlier this year they reached FID (Final Investment Decision), and they are proceeding with developing these two gas fields, with exports expected to start in 2020.

On the part of this, actually ENERGEAN has also made an offer to Cyprus to export gas from these two gas fields to Cyprus cheaply. It could reach Cyprus at 6.5 dollar per Mbtu. This is quite cheap in comparison to Cyprus plans to import LNG, which will be announced very soon. LNG imports, by the time they are completed and the gas arrives to EAC (Electricity Authority of Cyprus) for electricity generation, it will cost between 10 and 11 dollars, which is substantially more than ENERGEAN offers, which should be taken more seriously.

The idea of exports from Israel to Turkey has receded. With political problems and the animosity between Netanyahu and Erdogan it’s not going to happen. In any case, it is commercially challenged as well. And so is the famous East Med gas pipeline – I call it the East Med ‘pipe dream’. It probably won’t happen, simply because it is commercially non-viable. If it will become commercially viable, the prices of gas in Europe reach 8 dollars per Mbtu – something highly unlikely to happen.

As a result, Israel has limited export options, this is the reason why its first licensing round was more or less a flop. They are talking about another round, I think they will face similar problems. Unless there are secure export routes, convincing export routes, customers won’t be interested to come and invest in Israel.

Prospects in Lebanon are better. However, and Lebanon, as you know, have allotted Blocks 4 and 9 to TOTAL, ENI and NOVATEK, however part of Block 9 is in an area disputed by Israel, and that has led to a lot of threats exchanged between Israel and Lebanon, and it could be a problem in future exploration.

TOTAL has approved plans to start exploring and drilling, and these plans have been approved, and the first well is expected to be drilled next year. Lebanon is also preparing for a second offshore licensing round. But they need to have, first of all, political stability within Lebanon, no more changes in government. And second, the differences that between Israel and Lebanon with regard to the EEZ boundary need to be resolved. Hopefully, they will be resolved to enable peaceful development of the gas. Without it, there may be future challenges.

In Cyprus the news has been good. ENI has been successful in drilling in Block 6 with Calypso, which probably has between 6 to 8 TCF of gas – that’s what the ENI’s CEO has said. It is a sizable amount of gas. However, the bad news is that Turkish intervention stopped ENI drilling in Block 3, in February, and Turkey itself may drill in Cyprus EEZ with its new drilling rig called Fatih. These are difficult times, it remains to be seen what happens after Erdogan’s win in Turkey and hopefully as he sets up his new government and settles down into his new term, he will see light and cooperate with countries in the region to develop resources of the region peacefully. I’m not very hopeful. Turkey also has threatened to stop all activity in Cyprus EEZ, simply because they say they are supporting Turkish Cypriots’ interests in the region, and that remains to be seen as to how it is converted into action.

ENI said in April that it is evaluating data so far, and it will be considering a resumption of drilling in 2019. However, they have not given us a firm timetable as to what exactly they are going to do and when.

And TOTAL, positively, is interested in farming-in in ENI’s Block 8, and possibly 2, 3 and 9. That is a vote of confidence that TOTAL has that there is future for gas in Cyprus and they want to be part of it. However, all of these things still depend very much on how the Cyprus problem can be negotiated and can be resolved. Without it harassment by Turkey probably will continue and will make it difficult. The big news is expected to come later in the year or probably early next year, with EXXON MOBIL’s drilling in block 10. There are good indications of a possible sizable find in Block 10. If that is confirmed, and it is quite substantial, then all games are on, basically it would change prospects in Cyprus EEZ. As you’ve probably heard, EXXON MOBIL said last year they are very keen to develop an LNG plant in Cyprus for exports of LNG. And that is how Exxon Mobil operates – they like to operate independently, develop their own projects, they have the technology, they have the might, and they have the finance to do it. The difficulty will be, first of all, to discover a substantial gas field – hopefully they do – and the second would be the political problems. Even mighty Exxon Mobil requires finance to proceed with major projects. A discovery in Block 10 and building a sizeable LNG plant will probably need 15 billion dollars finance. Substantial part of that, two-thirds, will have to come from investors, and banks and financial institutions. They are risk-averse. If Turkey threatens the project, it may have an impact on securing the finance and as a result it may cause delays in developing the plant, even though the plant will benefit all Cypriots: Greek Cypriots and Turkish Cypriots. So the sooner we sort out the Cyprus problem, the better it is for the future of these possibilities and these projects.

Cyprus is going to import LNG, as I said before, and I think it’s misguided, it’s not the right way forward taking on ENERGEAN’s offer. Liberating renewables and expanding the development of renewables would be a better way to go forward.

The global markets and prices are challenging. Even though prices have gone up recently, they are still very difficult. For example, during the International Petroleum Week in London in February, BP’s CEO said specifically, that there are abundant global energy resources and supplies, and as a result low oil and gas prices will continue in the longer term. That is an important factor that effects the development of the East Med gas, which is expensive to develop, and if it is going to succeed, it means to be able to reach these markets and sell at the prices that prevail globally on average, and not just the high prices that develop that we have now. The world is awash with oil, gas and LNG. And with US shale coming up and up, and the preparation of renewables is unstoppable. And coal is holding its own – the use of coal in India and China is increasing, not decreasing. As a result, competition to secure markets will be fierce. Prices will be dictated by renewable, which are become cheaper, and by coal, which is much cheaper than gas. And we need to be aware of these things. The international oil companies are aware of these things. We need to be patient, we need to work with international companies to make sure that development of the gas in Cyprus and the East Med is competitive to benefit from the potential export markets.

So in conclusion, the East Med and the Middle East regions are geopolitically volatile. Developing and exporting oil and gas is a challenge, especially in the prevailing low-demand, low-price environment globally. Disputes are often the result of competing oil and gas interests and unresolved borders and EEZ disputes, particularly in the East Med. And more often than not diplomacy is sidelined by aggressive action. Turkish warship introversion in Cyprus EEZ has now altered the balance and has increased the risks in the region. With the US reinforcing sanctions on Iran it may complicate the picture even further. Egypt is successful in exploiting its hydrocarbon resources and liberalizing its energy markets. The solution of the Cyprus problem could go a long way in improving regional geopolitics in the East Med. With Turkish elections over, negotiations are hopefully expected to resume, and hopefully they will lead to a solution. As we saw earlier, we need that to develop the resources in the region. East Med oil and gas plans need to be tempered with a dose of reality. Fierce competition to secure markets is there, and will stay and not go away. Low gas prices are imposing their own challenges and aspirations to export the East Med gas, and we need to find ways to work within this low-price environment. The key conclusion is that the East Med still has reasonable prospects for more gas discoveries. But securing export markets and prices will be the key factors.


See: Recent Hydrocarbon Developments in Cyprus

See: Greece: An Emerging Energy Player in the East Mediterranean

See: Recent Hydrocarbon Developments in Lebanon

See: Energy Videos

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