East Med Gas: Hype, Hope and Politics
The big hype surrounding gas in the Eastern Mediterranean, recalls Sohbet Karbuz, Director of Hydrocarbons, Mediterranean Observatory for Energy (OME), was partly because of the discovery of the Tamar field in 2009. He calls it it one of the biggest offshore gas discoveries in the first decade of the new millennium.
East Med, as it's known, looks like an emerging gas province, according to Mr. Karbuz, who lists the contributions to the mix: according to Lebanese officials, 700 bcm – 2.8 tcm of gas are available offshore; Cyprus says there is 1.7 tcm in 13 blocks; Israeli officials estimate an undiscovered gas potential of 1.4 tcm offshore Israel, while the USGS estimates 3.5 tcm of technically recoverable undiscovered gas potential in the Levant basin.
Mr. Karbuz warns of taking such estimates too literally, as sometimes they just increase on paper without any wells having been drilled. He offers, “For Lebanon, we've been hearing big numbers – a few years ago, it was 700 bcm (25 tcf), but recently it became 2.8 tcm (100 tcf), so it's all political and we should take that into consideration.”
So far, 1.2 tcm of natural gas has been discovered offshore Cyprus, Israel and Gaza.
“Based on this, people were saying there is a 'gas bonanza' in the East Mediterranean. True for some countries it was a game changer, but in reality the rules of the game have changed. The true regional game changer was the discovery of the Zohr field offshore Egypt, at least from a geological point of view.”
ENI's Zohr gas discovery is a game changer for Egypt as well as in the context of natural gas developments in the Eastern Mediterranean (“East Med”), he says, explaining, “It will enable Egypt to satisfy its gas demand in a shorter time than expected.”
This means, says Mr. Karbuz, that Egypt can become an LNG exporter in the next 5 years, by the early 2020's. “It's a big relief for Egypt.”
As for how the Zohr discovery affects other natural gas developments in the East Med, he says, “The clock is ticking; timing is very important, as Egypt will start using its LNG plants again. The more they use them, the less room there will be available for Israeli or Cypriot gas.”
Meanwhile, Israel's natural gas framework, he explains, still has not received a full go-ahead, so it is an outstanding issue that could affect the future of Israeli imports.
He recalls the Aphrodite discovery in Cyprus, where there was a big hope – but reserves have been downgraded twice. “At the moment, it's less than 130 bcm; the expectation was that they'd build an LNG plant on Vassilikos and would sell to Asia and make a lot of money,” he says. “Now, this amount of gas doesn't justify an LNG plant.”
Meanwhile, other hopes remain as five blocks have been awarded in the second offshore bidding round there, but there was more bad news to come in the last few months. Mr. Karbuz offers, “The ENI/Kogas consortium drilled two wells – two dry wells. Total gave up its interest in Block 10 but kept Block 11 to conduct additional surveys.
“ENI/Kogas originally had promised to drill six wells, but after these two dry wells they don't have any planned and will continue to look at the logs, core data, analyzing samples, and then they will decide if they will drill or not,” he adds.
All hopes are gone for the moment, according to him.
Noting that Cyprus is expected to have 1 bcm/annum of demand, if the country produced 5-6 bcm/year it would need to export, he says, but where to and how without any transport infrastructure?
“There is a discussion going on to develop the Aphrodite field, construct a pipeline to the Mediterranean border with Egypt, and from there to Egypt onshore and sell the gas, either to one of the two LNG plants in Egypt, which are empty for the moment because there is no gas, or to supply to the domestic Egyptian market,” he explains, adding that providing the gas to Egypt may be the most viable option today.
What does BG's stake in the Aphrodite field bring to the table? One thing is apparent to Mr. Karbuz is that BG's decision reflects Shell signing off on the deal, given the latter's plans to acquire the former. “The moving of BG into Aphrodite means first, that they see the value in it and secondly, they bought it at a good price, seeing as prices are low.
“The development of the field will go ahead because no one would acquire something that will stay in the ground; BG is the operator of one of the LNG plants in Egypt, so that increases the possibility of developing Aphrodite faster,” he observes.
The company set to develop Aphrodite, Noble Energy, says Mr. Karbuz, has been experiencing financial difficulties, so BG's involvement may now make it easier to raise the needed $3.5 billion.
“Suddenly,” he remarks, “Aphrodite became more important for East Med than Leviathan, because of the ongoing hurdles and problems regarding Israel's regulatory framework.”
Israel, he says, is losing a big chance. “When you look at the original plans, Noble and Delek Group should have already started developing the project, which should have been up and running by 2017-18 at the latest.”
According to Mr. Karbuz, there is no hope of FID for Leviathan this year, but it's likely to be taken next year, and implementation should take place within 3-4 years. “If they had finished the project by 2017, they would've had 5 years to utilize Egypt's LNG capacity,” he adds.
Previously, the plan was to export the gas to export the gas to Egypt to sell as LNG for 15 years, but, he says, any agreement is now unlikely.
Regarding Israel, between 1948 and 2010, says Mr. Karbuz, more than 500 wells had been drilled, “and almost all were empty, and finally they found giant fields.”
Following the Arab Spring, he explains that Egypt stopped gas deliveries to Israel. In the meantime, he says, the Noble Energy and Delek Group consortium developed the Tamar field in a very short time, and started producing gas. “Last year, 7.4 bcm of gas was produced at average sale prices of $5.45/mm Btu,” he reports.
Tamar, he says, has 145 bcm of reserves to be sold. “All the rest is contracted.” However, he says, there has been both good and bad news for the explorers and producers in offshore Israel.
Security of regulation, he opines, is what should be stressed in Israel, superseding security of supply and demand. “The companies that discovered the fields have to develop them and enter them into production. But the Israeli government said, 'wait a minute – we're changing the tax law, you'll be taxed more.'”
Then, Mr. Karbuz recalls, Israel told the E&P companies they couldn't export whatever they wanted, placing restrictions on that. “Then came Israel's antitrust authority – and said that Noble and Delek constitute a monopoly, so rules of the game have to be changed again,” he explains.
Keeping investors there, not to mention attracting new ones, should be challenging, he opines.
Regarding Cyprus, he says another decision is forthcoming regarding the development of the Aphrodite field, and sending that gas, either to Egypt's domestic market or selling it via LNG.
Despite a recent trilateral meeting between Cyprus, Greece and Egypt, Mr. Karbuz opines that there's still to much talk and no action. Now, he says he doesn't expect any big news in the East Med before next year, adding 2016 should be a “determining year” for natural gas development in the East Med.
“Leviathan will take a final investment decision, determining the nature of exports, but a longer delay could kill that possibility,” he says.
Meanwhile, Mr. Karbuz says another issue is an obstacle to the development of the Leviathan discovery. He recalls the decision of a Swiss court demanding that Egypt pay $1.7 billion in compensation to an Israeli company. Although Egypt plans on appealing the decision, the dispute may likely influence discussions between the Egyptian government and Delek, regarding the company's plans to liquefy gas from the Tamar and Leviathan fields in Egypt; other arbitration cases may also be in the way, he points out.
“Without these cleared up, it will be difficult for the Egyptian government to give these companies the go-ahead. All legal obstacles need to be cleared away, and when the go-ahead is given, things should go forward and swiftly, otherwise the future is unclear,” he offers.
It's not only gas from the Zohr discovery, Mr. Karbuz points out. BP is doing the most it can do to bring discovered fields the recent Atoll gas discovery into production as soon as possible. He says, “The more gas that comes online, the faster Egypt will have the option to start exporting.
Getting all that gas online will be good both for Egypt and for the companies involved.
“ENI will get a price of $5.88/MmBtu,” he explains, “and this is a good price in today's market conditions, where gas prices are dropping very quickly.”
For some countries in the East Med, the game has not changed yet. In Syria, for example, an offshore bidding round was scheduled for 2011, but has been scuttled by war; meanwhile, Syria did make an agreement for exploration, development and production with a Russian company, but nothing has happened.
For Lebanon, he recalls, the first bidding round had been announced in May of 2013, still with no result: “It has been postponed five times, because Lebanese cabinet has delayed issues two crucial decrees: demarcation of the blocks and the second is the final model contract.”
Because Lebanese official appear unable to come to an agreement, Mr. Karbuz says it's unlikely much will happen this year. Still, he cites the optimism in Beirut regarding the possible benefits of an oil & gas bonanza: free education, high speed metro, free social care, medical insurance, etc., but no wells have been drilled, and politics is playing a big role.
In Turkey, observes Mr. Karbuz, a lot of 2D and 3D seismic has been shot in the Mediterranean, and so far 13 wells have been drilled since 1966 and 2014. “The last well was drilled in 2014 and, unfortunately, these are 13 dry wells. There is still hope, but drilling offshore exploration wells costs a lot of money that Turkish Petroleum cannot afford alone, preferring to spend its resources in the Black Sea.”
Citing agreements to sell gas to Jordan, Palestine and the Egyptian domestic market, or the country's LNG plants, Mr. Karbuz says that Palestine had cancelled a gas sales purchase agreement; the one with Jordan is unlikely to go ahead; sending gas to Egypt's LNG plants makes sense if it is commercially viable and if decision is taken today; and the public is not ready to accept gas from Israel for Egyptian domestic market.
“Five years from now things will change in Egypt, because there are several field development projects going on including the supergiant Zohr field, but until that time it would be very useful if Egypt got gas from Israel.”
For Europe, Mr. Karbuz says it could easily receive Cyprus and Israeli gas from the Egyptian LNG terminals.
“The amount would be more or less what Europe will get from the Southern Corridor,” he says. “We are talking 10-15 bcm of gas.”
But, it's not that easy, he says, explaining that politics are once again an obstacle. He says, “No one knows how these political problems should be solved, but politicians should have vision.
“In summary, you have a lot of opportunities and challenges, but geopolitics and politics play a big role in the region, and regulation plays a bigger role than underground factors in the region,” concludes Sohbet Karbuz, who adds that dialogue in the region is imperative.
-Drew Leifheit