In the East Med, 2017 was a year during which Israel and Cyprus said a lot but achieved little, while Egypt said less but achieved most.
2017 was a good year for Egypt. It secured a $12 billion loan from the IMF, which led to floatation of the Egyptian pound, adoption of an energy sector reform programme – including liberalisation of the gas industry – and subsidy reductions. These reforms have already benefited the energy sector. Gas production has increased, with the giant 30 trillion cubic feet (tcf) Zohr gas-field becoming operational in December 2017 and already helping to reduce LNG imports by 30 per cent. The first phase of Zohr will be completed during the first half of 2018, adding over 10 billion cubic metres (bcm)/yr to the Egyptian gas grid, rising to about 28 bcm/yr by 2019.
With a number of other, smaller gas-fields, being developed over the same period, Egypt expects to become self-sufficient in gas by the end of 2018, allowing it to phase-out liquified natural gas (LNG) imports and resume LNG exports in the 2019-2020s. This is good news for the country but bad news for Israel and Cyprus that nurture hopes of exporting gas to Egypt.
These developments will make 2018 an even better year for Egypt’s energy sector. Increasing investments, attracted by the reforms and high gas prices, will lead to increased exploration and production activities and more discoveries. EGAS is planning to issue global tenders in 2018 for new Red Sea and western Mediterranean concessions.
In addition, with a new ambitious target to achieve 42 per cent of electricity generation from renewable sources by 2025, including hydro, and with a phase-out of subsidies and higher energy prices starting to impact consumption and bringing it under control, 2018 will be a turning point for Egypt.
The greatest challenge in 2018 will be to implement fully the new gas law and deregulation by completing liberalisation of Egypt’s gas industry, with the potential of creating a freer, more flexible and more efficient gas market. This should support Egypt’s hub aspirations and help attract more investment in a sector that is so crucial to Egypt’s economy.
In contrast, Israel’s sole success in 2017 was to achieve a final investment decision (FID) for Phase 1A of Leviathan, aiming to achieve production by the end of 2019. But even this has its own risks. The deal with the Jordanian National Electric Company (NEPCO), to supply 3 bcm/yr gas over 15 years, is still subject to political risks with resistance to it in Jordan, including from the parliament, still strong.
The lack of export routes and perceived regulatory risks have also affected a successful conclusion to Israel’s first offshore licensing round, launched at the end of 2016, with no participation by major international oil companies. Out of 24 tendered, five blocks were awarded to Energean and one to a group of Indian oil companies led by ONGC. Israel may launch another offshore licensing round in 2018, but unless conditions change it may not fair any better.
Phase 2 of Leviathan depends on securing exports and firm gas sales deals through exports to Turkey, Egypt and Europe. All these options face major political and commercial challenges. Even though a gas pipeline framework deal looked likely to be signed with Turkey, this is now unlikely to happen soon and 2018 will probably prove disappointing for this project. In addition, for commercial reasons, the EastMed gas pipeline to Europe may prove to be a pipedream rather than a pipeline, despite framework agreements signed between Israel, Cyprus, Greece and Italy and support by the European Commission, unless of course it receives a substantial subsidy from the EU. Gas exports to Egypt face commercial and also political challenges.
However, with low prices undercutting Leviathan gas, the development of Tanin and Karish gas-fields in Israel by Energean should achieve FID and proceed successfully to construction in 2018.
Cyprus’ third offshore round was concluded successfully early 2017, with three blocks awarded to Eni, ExxonMobil/Qatar Petroleum and Total. But that was the only success in 2017. Aphrodite gas-field, discovered in 2011, is still looking for buyers for its gas and even though a new drilling round started in 2017, Total’s first well in block 11 turned out to be a dud.
However, based on promising results from the assessment of seismic data, drilling started end of December by Eni in block 6. Eni’s plan is to immediately continue drilling in block 3 in 2018. In addition, ExxonMobil may have better chances of success when it drills in block 10 during the second half of 2018. By the end of 2018 Cyprus should know what quantities of gas exist in its licensed blocks. But this will not be without its challenges. Turkey will continue harassment of drilling activities and may increase the ante by drilling in Cyprus EEZ.
But finding gas in the East Med may prove to be easier than selling it. Exporting gas outside the region is still challenged by persistently low global gas prices, expected to stay low for the longer-term as global energy supply continues to outpace demand. The future for East Med gas exports may be through integrated projects to minimise costs, and LNG, and even then it will be challenging.
However, Cyprus should also consider other options, than just exports to utilise its gas. Such options could enable development of Aphrodite to supply gas to the island, and support petrochemical and power generation projects, rather than rely on importing LNG which may prove to be costly. This would require a major change of current thinking that may prove to be a challenge too far in 2018.
Source: Cyprus Mail