articles | 07 May 2015

Cyprus gas export opportunities: past, present, future

Cyprus’ government and Noble Energy announced in March 2015 that a declaration of commerciality will be made soon taking the Aphrodite gas field from the exploration phase into the exploitation phase.

Specifically the focus for gas exports is Egypt. But developments in the region may challenge this.  Here we review Cyprus gas export opportunities.

The past

Even before any gas discoveries in Cyprus’ EEZ, Delek proposed towards the end of 2010 to Nicosia the setting up of an LNG plant in Cyprus to liquefy and export Israeli gas from Leviathan and Tamar, and possibly any gas discoveries made offshore Cyprus. This was considered on and off in 2011 and 2012 but it has not progressed.

At a presentation in November 2012, Delek talked about a Dynamic Window of Opportunity.

They said that game-changing events in the East Med provided a unique opportunity for Israel and Cyprus. Tamar, Leviathan and Aphrodite gas could allow the creation of a regional energy hub in Cyprus, that would enable export of LNG to the Asian and European markets, but Cyprus needed to act fast as the window was closing fast.

Negotiations started in earnest in January 2013 with the setting up of KRETYK, based on a draft LNG Project Agreement and a Memorandum of Understanding (MoU) tabled by Noble and its partners, but the impending elections the following month put a stop to this.

Finally, the MoU was signed in June 2013 between Noble and Delek and the government.

Theobjective was to reach a final agreement by the end of 2013 to establish a joint special-purpose vehicle, which would seek investors for the plant. “On this basis, it is planned that the first LNG cargo would be delivered from the Vasiliko plant to international markets in late 2019, early 2020,” said an official statement.

However, negotiations for the LNG project agreement did not start until August 2013 but never really took off, especially after appraisal drilling downgraded Aphrodite’s gas reserves.

But by then, and after almost 3 years and a number of failed attempts of trying to enter into serious negotiations for the LNG project, the Leviathan partners lost patience and started looking into other options, concentrating on regional sales. After the summer of 2013 the ‘window of opportunity for the creation of an energy hub’ in Cyprus never again appeared in Delek presentations.

The ‘window’ closed! In August 2013 Delek announced talks with companies in Egypt for gas sales from Tamar and Leviathan fields. By mid-2014 they entered into a non-binding letter of intent to supply gas to BG’s Egyptian LNG (ELNG) plant at Idku and Union Fenosa’s Damietta plant.

For Noble and Delek that was the end of the road for the LNG plant in Cyprus.

A bit late in the day, by October 2013, Cyprus asked Israel to agree to allocate one quarter of the gas in the Leviathan reservoir for export via Cyprus. But it was too late. Eventually, towards the end of 2014 Cyprus’ government abandoned the idea of an LNG plant at Vasiliko and concentrated on regional gas sales to Egypt and possibly Jordan.

There was also Chinese interest. In March 2012 China’s third largest national oil company, CNOOC presented to the government of Cyprus its plans for the construction of an LNG plant to process, liquefy and export Cyprus gas.

In 2013/2014 CNOOC was also, reportedly, on and off in talks to buy 30-40% of the Aphrodite gas field operation and took the opportunity to renew its interest in an LNG plant.

But again this interest was not progressed. Noble proposed to the Cyprus government mid-2013 to bring a spar rig from the Gulf of Mexico to Block 12 to develop Aphrodite gas for domestic power generation.

Noble pressed this option, but it was not taken further, with one of the reasons given being that Aphrodite gas was reserved for the LNG plant. Noble received similar responses to Aphrodite development options they suggested at meetings with government in December 2013 and February 2014.

The present

All efforts at present are concentrating on gas sales to Egypt for liquefaction at one of the mostly unused LNG plants there and possibly for domestic consumption.

There may also be other challenges impacting current plans. With Noble being recently given a BBB+ credit rating, indicating that the company is a moderate default risk, and Delek ending 2014 with a net loss, and with both announcing major spending cuts in 2015, new investments in the region in the foreseeable future would be a challenge.

The future

Recent developments in the region and the acquisition of BG by Shell are again having a profound impact on East Med gas and its development and export. With the Egyptian option becoming increasingly challenging, both for Cypriot and Israeli gas, other options considered in the past but not pursued may now gain momentum.

Noble and its partners received more than 10 bids in March 2014 for a tender to export Leviathan gas to Turkey, and beyond that to Europe, via pipeline.  However, the pipeline would have to run though Cyprus’ exclusive economic zone (EEZ) – a route which is “not even an option as long as the Cyprus problem remains unresolved”, as the Energy Minister said at the time.

However, with negotiations between the two communities on the island toresolve Cyprob about to restart, should a solution be found, this may return as an option. Quantities may even be doubled if significant regional exports do not materialise.

It is conceivable that Aphrodite gas may also be exported to Europe using the same pipeline route. The commercial competitiveness of such a project may need to be demonstrated, particularly if, given potential gas quantities, a new pipeline corridor is needed to join Ceyhan to the Southern Corridor.

However, such an option also presupposes that Israel and Turkey mend their strained relationship, something that presents its own challenges.

Should the Egyptian option not proceed, there will be inevitable delays before other options are studied and followed. With pre-feasibility studies already done by Noble, this can be partly overcome if export of Aphrodite gas to Southeast Europe by CNG, is considered.

Given potential quantities, should Israeli and Cyprus gas be combined, LNG may also return as an option. Global LNG demand is on a continuous growth path.

Right now there is a glut of LNG coming into the market which, combined with low oil prices, has brought LNG prices down. However, the industry projects that with the slow implementation of new LNG projects, towards the end of this decade LNG supply will again lag demand encouraging the construction of new LNG plants.

As a result, in 2-3 years liquefaction in Cyprus might return as an option. The merits of such a project in terms of granting flexibility with regard to natural gas exports, and bringing about economic growth and enabling processing natural gas deposits from neighbouring countries, are still there.

What is clear is that the gas industry and regional geopolitics are in a state of flux. All options must be kept on the table and reviewed, particularly if inevitable delays create a window of low-level activity for the next couple of years.

Source: InCyprus

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