Cyprus' Export Options
The construction of an onshore liquefied natural gas terminal in the Vassilikos coastal side of Cyprus remains the Cypriot government’s top priority. The island was found hydrocarbon fertile when Noble Energy discovered the Aphrodite field in the Block 12 of the island’s Exclusive Economic Zone. Original expectations in terms of quantities contained in the field led to the planning of an onshore LNG facility that would ensure deliverability of the natural gas to lucrative geographical markets regardless of their distance from the island. The field, discovered in late 2011, has an estimated gross mean resources of 5 Tcf. The quantities do not justify at present the multi-billion dollar project, but the survival of the terminal depends on various factors.
A sufficient quantity of natural gas
For the LNG terminal to be commercially viable, sufficient quantities of natural gas need to be encountered in Cypriot waters. The quantity of gas needed depends on the price of natural gas in the market. Unlike oil, the price of natural gas is not uniform across the globe and depends on the geographical market where it is sold. The discrepancy in the price of natural gas is attributed to the complexity of its transportation (Asian markets are known to be the most lucrative). Reaching Asian markets from the Eastern Mediterranean requires the costly process of liquefaction the natural gas. Pipelines are less costly and require less funds and less time to be completed. However, while LNG offers the flexibility in the choice of the customer, pipelines are more vulnerable to regional political obstacles and have a limited reach.
How much exactly?
If a wide range of number has been given in regards to the quantities of gas needed for the completion of the project, it is because the answer is not straightforward. The reason for that is that once the construction of the LNG terminal begins, it will take some time to complete, as much as 10 years according to experts in the field. It is difficult to predict where natural gas prices will be at that time given the constantly changing market and the entry of new players that could affect competition. Based on current Asian prices, experts estimate that as much as 7 Tcf is needed for the LNG project to be commercially viable. Fiona Mullen1, director of Sapienta Economics, argues that in the event of a 10% price drop in Asia, 8 Tcf will be needed, whereas if prices in Asia were to drop by 20%, as much as 10 Tcf will be required. If the European market were to be targeted instead, the quantities needed to fund the LNG terminal and make it commercially viable would be much higher given that natural gas would be sold for cheaper and hence more gas will have to be sold to make the same kind of income, adds Mullen.
Further exploratory successes
Noble Energy plans to conduct further drilling in Block 12 of Cyprus’ EEZ. The ENI-KOGAS consortium, holder of licences for blocks 2, 3 and 9 will also commence exploration activities later this year. Total, licensed to drill in Blocks 10 and 11, is expected to begin in 2015. It will take a couple of years before results are revealed and confirmed by appraisal drilling and before the fate of the LNG project becomes clearer. Experts believe that in the scenario where numbers encourage a final investment decision, and when all other conditions are favorable, its completion is to be expected anywhere between 2026 and 2028.
Other sources of funding
Originally, Israel was thought to be interested in pooling costs with Cyprus and participating in the LNG project. Israel’s participation would have eliminated the urgent need to wait for additional successful encounters and precipitated the start of the construction. However, if Israel has taken, after a lengthy national debate, a decision in principle to export around 40% of its discovered reserves, it has not decided on its export routes, neither via Cyprus nor elsewhere. At the moment, Israel has expressed its intention to export to its immediate neighbours - Jordan, Egypt and the Palestinian Authority - and has entertained the possibility to use Egypt’s unused LNG export terminals to process Israeli gas.
The pipeline option
As mentioned previously, exporting gas via LNG is not the only possible option. If pipelines have to obey to the peculiar geopolitics of the Eastern Mediterranean, and be limited in terms of flexibility, they sometimes win on the grounds of commercial viability. A pipeline from Cyprus to Greece was studied and considered costly because of its depth and length. A pipeline to Turkey has a prerequisite: the resolution of the division of Cyprus. Reunification talks are being conducted in tandem. The outcome is difficult to predict given the failure of previous attempts. Whether the hydrocarbon element will alter the equation is yet to be seen.
Cyprus as an energy hub
The various obstacles exposed do not indicate that Cyprus’ transition into a net natural gas exporter will not happen, nor that the island will not realise its ambition to become an energy hub. Its Eastern Mediterranean neighbours also have hurdles on their own: Lebanon has been slowed down by domestic political rivalries and has not been able so far to launch its first licensing round, now expected to be opened in August 2014; Israel has made substantial discoveries but has not been able to find the ideal export route yet. Despite the current complications, Cyprus’ ambition to become an energy hub remains alive, and for good reasons. Halliburton, a leader in oilfield servicing, has recently announced it had elected Cyprus as its Eastern Mediterranean base. The latter is a good example that the island’s pacific relations with its neighbours offers a great advantage for major oil and gas companies looking to have a presence in the region. The hydrocarbon riches will no doubt reshape the regional landscape and allow for the entry of new players in the natural gas market. A lot will depend on the results of the activities taking place in the next two years.
1- Cyprus gas: Is it too late for LNG?, Fiona Mullen, 17 May 2014, Financial Mirror, http://www.financialmirror.com/news-details.php?nid=32549
Karen Ayat is an analyst and Associate Partner at Natural Gas Europe focused on energy geopolitics. Email Karen on karen@minoils.com. Follow her on Twitter: @karenayat