Conclusions on Eni's Zohr Discovery Should Wait Until January, Says Expert
Natural Gas Europe had the pleasure to speak with Theodoros Tsakiris, Assistant Professor for the Geopolitics and Economics of Hydrocarbons at the University of Nicosia, and South Europe Programme Associate LSE IDEAS at London School of Economics.
We spoke about how ENI’s discovery is changing the regional balance, and what the critical aspects are to keep in mind - geopolitics and prices first. “It is not clear if these prices are sufficient to justify the cost of production and delivery of Zohr's gas to Egypt and it is also not clear whether these July 2014 higher prices will be sustainable over the long run given the critical situation of the economy and the country's continuing - although manageable - political upheaval” he said, also making the case for a coordination of Cyprus, Egypt and Israel. He concludes claiming that there are several export alternatives for Eastern Mediterranean gas - pipeline to Italy through Crete, LNG terminal in Cyprus, LNG exports from Egypt’s idle terminals or exports to Turkey - but all of them are somehow critical.
How does ENI’s Zohr discovery off Egypt alter regional dynamics? In other words, will the discovery have any impact on regional gas deals, and ties in the Eastern Mediterranean? Which country will be affected the most?
The initial estimates of the Zohr field indicate the existence of an in situ potential reserve close to 30 Tcf (trillion cubic feet). If this estimate is confirmed by the upcoming assessment drilling scheduled for January - although more drillings are likely to be required for a field of that size - then ENI would have made the largest gas discovery ever made in the Eastern Med that would equal the entire Israeli reserves basis. Such a discovery will be developed over a phased time period lasting over several decades but the initiation of production is neither imminent nor assured given the current domestic prices conditions in the Egyptian gas market and the potential cost of upstream development for a discovery which is not yet confirmed.
What’s your reading of the situation? How do you see other companies’ involvement?
The size of the potential discovery suggests that ENI may not be the only developer and could share the risks and rewards with other Majors and Super-Majors already active in Egypt's Exclusive Economic Zone such as BP and Total. It is unlikely that any meaningful production would start from Zohr before 2020 at the earliest so the impact is not direct for these fields who are already producing gas and would be competing with Zohr for Egypt's domestic market. Unfortunately for Leviathan's developers and even more unfortunately for Cyprus, the only consortium still able to make immediate use of Egypt's existing and prospective domestic gas demand as well as the country's under-utilised LNG facilities, is the Tamar consortium.
If Cairo decides to direct the entire production of Zohr to domestic consumption, then gas from Leviathan and Aphrodite would remain a competitive option for the owners of the Idku and Damietta LNG facilities. It is not yet clear what the Egyptian government would choose to do with Zohr despite statements to the contrary given the fact that BP has also made significant discoveries in the Nile Delta. Would Cairo also direct BP's entire production to domestic demand? How would the prospective privatisation of BG by Shell affect the corporate balance of power? These are also two questions which remain unclear and their answer would influence the direction of Zohr's development. Overall we should exercise patience.
Are there any political developments within Egypt we should look at? How are these developments related to prices?
The perception cultivated that Zohr is the golden bullet that would resolve all of Egypt's gas problems is inaccurate. Discovery of a deposit does not guarantee per se its monetisation. Discovery is not production. From January 2010 to January 2015 Egypt discovered 18 Tcf of gas, primarily in its offshore Nile Delta areas, but did not produce a single cubic meter of gas. Market prices in Egypt were too low to justify production. Al-Sisi made in July 2014 a courageous decision to partially curtail domestic gas subsidies increasing the price offered for new gas fields from $2,65/mbtu to $4,10/mbtu-$5,88/mbtu. It is not clear if these prices are sufficient to justify the cost of production and delivery of Zohr's gas to Egypt and it is also not clear whether these July 2014 “higher” prices will be sustainable over the long run given the critical situation of the economy and the country's continuing - although manageable - political upheaval.
Turkish customers are willing to pay more. It comes as no surprise that experts converge more and more on the idea that the discovery increases the importance of Ankara in the region, as Israel could be forced to sell its gas to Turkey. Do you share this viewpoint? Some of these experts also told me that Israel’s ability to sell gas to Turkey depends on the resolution of the Gaza issue. Do you agree?
If Leviathan's developers do not get to export their gas to the LNG facilities of Idku and Damietta it is certain that the pressure they will put on the Israeli government to allow them to export their gas to Turkey will certainly increase. It is not clear that Mr. Netanyahu will succumb to that pressure which by the way predates Zohr's discovery. The domestic Israeli gas scene is not dominated by the gas companies. The way regulatory hurdles have delayed by almost 18 months the development of Leviathan - overturning in December 2014 a very mature deal for the export of gas to Jordan - is indicative of its complexity and the fact that the gas companies do not always get what they want. If the government allows Tamar a greater export quota so as to export “immediately” to Jordan and the Idku/Damietta LNGs then Leviathan could come on stream as a replacement of existing Tamar sales contracts to Israel's domestic market and follow a less aggressive development plan producing no more than 10bcm/y compared to the existing target of 16 bcm/y.
Do you see regional hurdles, apart from Gaza? Are there other geopolitical aspects in the region to take into consideration?
Even if the Israeli companies decided to sell their gas to Turkey tomorrow Mr.Erdogan is most likely to demand “reparations” for the Gaza Marine issue on behalf of the Palestinians but this is not the most important obstacle. In general, the most important obstacle is the non-resolution of the Israeli-Lebanese EEZ dispute and the non-resolution of the Cyprus Issues since the pipeline would have to cross also through the Cypriot EEZ. Therefore this project would have to overcome three very intransigent political problems before it can begin to materialise.
You are Greek and you worked for quite some time in Nicosia. What’s the Greek interest there? What’s the position of Nicosia?
If Israel, Egypt and Cyprus or even if only Israel and Cyprus pool their known reserves in a single development plan an new 16 bcm/y-capacity LNG in either Israel or Cyprus could become a reality. Another more economically challenging but technically feasible option is a large 16 bcm/y gas pipeline across the Mediterranean Sea from Cyprus to Crete and then directly offshore to the Italian pipeline system bypassing mainland Greece. What I am saying is that there are other commercial options than the Turkish domestic market for Israeli gas exports including measures that would increase domestic Israeli demand.
Speaking about buyers, are Egypt and Jordan still Cyprus' main potential customers? How ENI’s Zohr discovery change the cards on the Cyrpus’ table? Is it good or bad news for Nicosia?
The discovery of Zohr presents a major challenge to Nicosia. Aphrodite is ideally placed to service the needs of the Egyptian facilities and Egypt's domestic market. Personally I do not think that Jordan is such a viable option given the small size of demand and its proximity to the Israeli pipeline system. Given the situation in the Sinai, Cypriot gas to Jordan would have to use the Israeli network and I do not think that the Israeli developers would make room for Cypriot gas when they can meet Jordanian demand entirely through Tamar or Leviathan. There is still a viable yet closing window of opportunity for the export of Aphrodite' gas to Egypt and I sincerely hope that Nicosia and the Cyprus Hydrocarbons Co. make the best out of this opportunity by moving ahead with due haste.
Several Italian newspapers recently wrote that ENI’s discovery could make the case for stronger ties between Cyprus, Israel and Egypt - something you somehow mentioned before. Can you elaborate on it?
I do agree with the above mentioned assessment in the sense that we now have more than enough gas between the three Exclusive Economic Zones (EEZ) in the Eastern Med to build either a major underwater pipeline to Italy via Crete by promoting a plan slightly different than the existing route under study by DEPA and EDF/Edison or construct a 16 bcm/y LNG export facility in Cyprus. I do believe that there is the political good will and motivation to support the materialization of either or even both projects.
What are the obstacles there?
There are two obstacles. First, that there is a resurgence of EU gas demand and prices over the next five years. Second, we need a more serious EU engagement in the region that would also allow major EU companies already present in the region such as ENI, Gas Natural, BP, Shell and Total to pool resources and expertise so as to expedite the monetisation of very significant but also very expensive to develop resources.
Speaking about complicated processes and changes, could Cyprus sell gas to Turkey too? How long would the entire process take? Apart from the political and diplomatic issue, do you think there are also technical and financial hurdles?
From the moment the developers of Aphrodite or Leviathan sign a binding Sales Agreement with an importer they need at the very least 36 months to produce the necessary gas volumes and no one can accurately predict when an export agreement can be signed. With regards to Cypriot exports to Turkey, I believe Ankara has made it very clear that it would not want any Cypriot gas before the Cypriot issue is settled according to its own preferences. Even if the Cypriot problem would somehow be resolved tomorrow by some magical act I would not put all my small eggs in somebody else's very large basket. If Cyprus sells to Turkey it presently does not have enough gas to sell to anyone else and it would cover a very small portion of Turkish demand. Turkey has a multitude of importers and Cypriot gas would be very easy for her to replace. If there was a viable option to transit the gas via Turkey to Europe this could offer Cyprus some small level of export diversification but there isn't that there will not likely be in the near future given the fact that a. TANAP's current capacity is almost entirely booked for Azeri gas exports to Europe from Shah Deniz and b. that there is no pipeline to get the gas to Europe from the Greek-Turkish border since TAP is entirely dedicated to Shah Deniz and there is no Nabucco West on the table.
Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci