The needs in the region are substantial but it seems that there will be a potential for export and possibly the development of a regional gas hub.
Gas trading hubs are well established throughout Western Europe but elsewhere the concept is often misunderstood, especially around the East Med.
Gas trading hubs
In the East Med there is neither a market mechanism to buy or sell gas in an efficient manner, nor apricing mechanism to determine spot prices. Gas sales are still based on traditional long-term oil-indexed bilateral agreements. The lack of established market conditions, as well as physical interconnectors hampers market liquidity and increases the potential for these markets to be coerced by dominant players. The development of a regional natural gas trading hub can prove critical to overcoming such inefficiencies. A key element of such a hub is pricing indices that reflect regional/EU supply and demand fundamentals, rather than the traditional oil-indexation.
Trading hubs can help prevent the emergence of dominant market players keen to dictate their terms or serve political interests.
In fact, under the energy hub trading framework, players become more inter-dependent, hence the former can foster cooperation, economic and political stability in a region and limit conflicts. Against the backdrop of the EU energy security debate and the discussions over new infrastructure projects, there is growing interest to establish a gas hub in the region. Adoption of and compliance with EU regulatory systems can help harmonise the operation of such a hub with European energy markets.
Beyond political strategies, from the market perspective there are some fundamental questions that have to be considered as far as the establishment of a gas trading hub is concerned.
A hub requires a deregulated gas market, where suppliers are free to produce or import energy and buyers are free to choose their suppliers. This is not the case today in East Med countries. A gas hub is a trading platform for physical and/or financial transaction of gas, which offers a range of services and facilitates trading activities. But it also requires flexible gas supplies, adequate infrastructure and storage.
Gas hubs can be virtual or physical:
In the case of virtual gas hubs, e.g. NBP (National Balancing Point) in the UK, TTF (Title Transfer Facility) in the Netherlands, the hub provides a trading platform for the entire county or a trans-regional zone, which allows gas to enter at any point within the zone. The exit points therefore do not matter. In a virtual hub, the whole gas transportation system is defined as being the hub.
Physical hubs, e.g. Zeebrugge in Belgium, are established at a physical intersection of pipelines and therefore the traded gas has to pass through a precise location. An advantage of a physical gas hub is that it has the capacity to transport large volumes of gas.
Of the countries in the East Med region only Cyprus and Egypt can be considered as candidates for the establishment of a gas trading hub. Israel, Lebanon and Syria have constraints and problems which would not permit this in the foreseeable future.
Egypt is already producing 46bcm/year and has substantial proven gas reserves, about 2.9tcm according to IEA, with Zohr still to come. It also has extensive infrastructure in place, with two LNG export plants at Damietta and Idku capable of liquefying and exporting 16bcm/year, but at present lying idle.
Egypt it is not an EU member-state and lacks all else required to establish a virtual-hub. However, it has the potential to become a physical trading hub, with gas exported in the form of LNG. ENI’s CEO Claudio Descalzi has already made such a proposal based on the development of the giant gas-field Zohr.
The geopolitics of the region and commercial challenges will need to be overcome to attract Israeli and Cypriot gas for liquefaction in Egypt and export to Europe and beyond. Such discussions have been in progress for a while now, but they are facing hurdles both political and commercial.
The cost of taking gas from Israel and Cyprus to Egypt, liquefying, transporting it to Europe and re-gasifying it, make it difficult to compete with piped Russian gas.
If this does not succeed, once the various gas development projects – North Alexandria, Atoll and Zohr gas-fields progress – by 2022 Egypt will be able to resume LNG exports.
Apart from the discovery of the 160bcm Aphrodite gas field, Cyprus has neither the gas volumes nor the infrastructure required to establish a gas hub. However, there is potential in the longer term, especially given its strategic geographic location. Cyprus is the only EU member-state in the East Med region, fully aligned to EU regulatory systems.
The East Med potentially holds substantial amounts of natural gas, some already discovered but with a lot more to come. Even though substantial quantities of this gas can be consumed within the region, mostly by Egypt, Israel and Turkey, potential discoveries are such that eventually there will be exports to Europe and beyond. Cyprus has already designated an area at Vassiliko as an energy-centre for the eventual development of an LNG plant.
It is feasible to establish a gas trading hub in Cyprus. But with limited infrastructure and no gas trading platforms, lack of pricing transparency and liquidity, and no market culture there is a long way to go to achieve this, may be over 10 years. And it will require concerted effort and support from the EU to turn the East Med into a gas trading hub. The good news is that during his visit Sefcovic confirmed that such a concept would be of interest to the EU and has the potential to obtain support.
Requirements and cooperation
Creating an East Med gas hub could benefit all countries of the region to better exploit their gas reserves. It is in EU’s interests to support such a scheme.
Cooperation between countries in the East Med region is absolutely crucial to lift the trans-national projects, and it would then be possible to utilise the strategic positioning of Cyprus by forming a regional gas trading hub jointly.
Clearly, the political benefits of cooperation in the energy sector would be immense for the East Med, which has always been characterised by inherent political fragility and tensions.
(Based on a paper on Gas Hubs in Southeast Europe and the East Med co-authored by Daria Nochevnik of Greek Energy Forum)