ANALYSIS: European Gas, from One Sea to Another…

The decline in production in the North Sea finds an offset in the rising production potential from the eastern Mediterranean. In a previous piece[1] published on this site in June, the author Raffaele Perfetto discussed potential drivers shaping the European gas scenario in the near future and here he focuses on one in particular: the Mediterranean Gas Hub (MGH) and how it can fit with European energy needs.

The last energy scenario[2] presented by the European Commission contained interesting points worthy of further examination.

The scenario is based on assumptions about: population growth, technology breakthroughs, oil prices, and macroeconomic developments. As with all forecasts, outcomes must be reviewed with criticism. The energy mix from 2015-2050 foresees solid fuels decline by 11%, oil by 4%, nuclear by 3% but renewables to grow by 18%. Gas is practically steady, accounting for a quarter, for the next 35 years. Turning our attention now to how much gas the EU produces and consumes and finally the net imports, according to forecasts demand should stabilise around 420bn m³/year by 2015. Domestic production will decrease steadily, tumbling from around 130bn m³/yr to 60bn m³/yr.

The decrease in production is ongoing: another interesting report, the quarterly update on the gas market³”that was released by the EU Market Observatory for Energy, shows a fair drop in gas production over the last two years. The EU gas production is expected to be halved in 35 years.

How will the EU fill this gap?

The abovementioned quarterly report[3], shares also the data about last year gas supplies: Russia with 40%, Norway 37%, Algeria 7%, Libya 2% and LNG with13% (5 points up from 2015). Will the same quotas remain in future?

The Financial Times’ energy editor Andrew Ward in a piece[4] last September quoted the Israeli energy minister introducing the idea that the MGH could support the replacement of declining North Sea production.

For the EU, the development of the Med Energy Hub (not only gas) seems to be important. Indeed in the Ten Year Network Development Plan[5] point number 8 contemplates the usefulness of a further linking of the energy network between Italy and north Africa. Regarding the MGH a lot of discussion is revolving around this topic.

A recent analysis published by Atlantic Council[6] (AC) clearly presented all the main stakeholders and challenges in their path. The resource base is big; but further explorations could bring more. Assuming a 70% recovery factor for the reserves and a life of 30 years, we could get  a gas production of around 25bn m³/year (from Israel & Cyprus) and 20bn m³/year from Egypt.

We need to ask now how much of this gas could be available for exports, in other words what is left after subtracting the domestic demand.

Data from BP shows clear trends. Growing population is a major factor: Turkey and Algeria have the steepest trends. Algeria could easily stop exporting in the next 12 years, if there are no changes.

The short-fall between gas supply and demand in the area ranges from between 10bn m³/yr and 20bn m³/year. The upper end of the range assumes nothing from Libya. Indeed the country is not connected to the eastern Med (no pipes, no LNG) and struggling with political turmoil. But the new discoveries can rebalance the area and even more, generate a surplus.

Egypt could export the gas but like the others, has to deal with its growing internal demand. Before 2011 demand rose about 10bn m³/year in 3 years.  

Recently, Saleh Heba, correspondent at Financial Times in Cairo, mentioned[7] the increased need for investing in desalination processes to preserve the per capita fresh water parameter. This parameter indeed, is threatened by urbanization plans, which aim to reclaim acreage from desert.

Israel thanks to the new discoveries, is already in the position to export but unclear is the way the Israeli (plus Cypriot) gas will take to reach the EU: Turkey or Egypt?

Israel is already connected to Egypt through the Arab Gas Pipeline (AGP), used before to get gas from Cairo but now, as reported last July by a local newspaper the Daily News Egypt[8], the arbitration between East Mediterranean Gas Company (owner of the pipe), and the Egyptian and Israeli authorities, could put an end to the AGP solution.

Going back at how to get connected with EU, the same paper above⁸ mentions that during a press conference in June, the Israeli prime minister said his country, could supply both Turkey and Egypt.

The three big discoveries in Egypt, Cyprus and Israel are within a 100-km radius. Then you have to add the 150-km pipe to get onshore. Cyprus and Israel could therefore have access to another alternative to Europe. The Egyptian LNG facilities (Damietta and Idku) are a valid way to Europe.

This last hypothesis is getting some traction. In August, Yaacov Benmeleh, reporting for Bloomberg, wrote[9] about advanced talks regarding “a non-binding agreement” among the operating companies of Tamar field (Noble and Delek) and Union Fenosa Gas (UFG), that owns 80% of LNG Damietta’s facilities. The agreement would cover gas deliveries from Tamar field to Damietta’s LNG facilities.

What goes up must come down… and vice versa.

In the last three years the European market has not been so attractive. Quarterly data³ released by EC show for the wholesalegas price at around $5/mn Btu.

High stocks, low demand, energy efficiency and oil-indexed contracts are reported as main causes of what has been the lowest price since 2009.

However, Israeli gas could allow Egypt to boost its exports, diverting to EU the Israeli gas, and using its own to cope with internal consumption (or vice versa). So, the Egyptian LNG facilities, with a capacity of around 17bn m³/yr, could be revived.

If the LNG capacity is fully used, every $/mn Btu of price movement results in a gain or loss of about $600mn.

As we argued at the beginning of this paper, the EU can easily absorb the gas surplus  and even more in the next years.

The gas is available and to conclude, as a proverb says, it takes two for tango: we need gas but, we need price as well. For instance Cedigaz, the international gas research organisation, foresees a price of $7/mn Btu in 2020[10].

Raffaele Perfetto has been working for nine years in the upstream department of an international oil company in Italy and abroad. The views expressed in the paper are his own.