EastMed Oil & Gas: 2016 promises renewed dynamism

 

Tamar Field

After a year riddled with difficult market conditions, dry holes, regulatory hurdles, the oil and gas sector in Eastern Mediterranean countries finally have good reasons to look forward to 2016.

In Egypt, the discovery of Zohr could not have come at a better time for Egyptian authorities. Zohr is hoped to bring some balance between supply and demand and extricate Egypt from its energy crisis. That said, and based on what we currently know, more gas is needed to restart exports. All the more reason to ensure a favorable climate for investors, and encourage exploration and production. Although tempting, it would be unwise for Egypt to halt reforms at this stage. Zohr gave a much-needed boost, but the sense of urgency has not dissipated. Pricing reforms, plans to phase out subsidies, paying out debt owed to international companies (now standing at $3 billion, down from $6.5 billion) have all contributed to restoring confidence in the sector. But there is still room for improvement, and already policymakers are backpedaling on some promises. On December 14, Prime Minister Sherif Ismail reverted the decision to fully eliminate subsidies within five years, now we are talking about a much less ambitious 30% reduction.

The Zohr effect was also felt in Cyprus. After relinquishing Block 10, Total looks set to extend its license in Block 11 for another two years. Total, and other companies, have been inquiring about areas along the Cypriot-Egyptian borders. This renewed interest has prompted some to consider the possibility of organizing a new licensing round. After a mostly disappointing year, the end of 2015 brought another good news for Cyprus: On November 23, BG announced it was acquiring a 35% stake in Block 12. This is a major development, which will see the entry of another big player in the Cypriot gas sector (BG is about to complete a merger with Shell). But its main advantage could well be the stake that BG holds in the Idku export facility in Egypt, improving the prospects of sending Aphrodite gas to Egypt, although some difficulties could persist. A breakthrough in the negotiations between Greek and Turkish Cypriots, resumed in May 2015, could lead to gas cooperation with Turkey, and the laying of a pipeline carrying Cypriot (and possibly Israeli) gas to Turkey and European markets, if conditions are right.

In Israel, and after a year-long battle, Prime Minister Benyamin Netanyahu, in his capacity as Minister of Economy, approved the gas framework on December 17, after invoking national security. The Antitrust Authority’s decision to renege on a previous agreement, exactly a year ago, brought the Israeli gas sector into a halt, and delayed (and complicated) Leviathan’s development plan. The gas framework still has to sail through the High Court of Justice, which will examine the case in early 2016. Once the process is complete, it is hoped to bring some stability to the regulatory framework. The authorities are building on that to resume offshore exploration, and are hopeful to organize bid rounds in 2016 or 2017.

Also, on December 17, a major breakthrough in the negotiations between Israel and Turkey was announced. The normalization of relations between the two countries will pave the way for gas cooperation. The laying of a gas pipeline however will have to go through the Cypriot Exclusive Economic Zone, a considerable obstacle for now, unless progress is indeed registered between Greek and Turkish Cypriots, which will result in an improvement of Cypriot-Turkish relations.

Despite recent complications, the main export options are all still on the table. Each has its challenges, many of these can be overcome.

Meanwhile, the vulnerability of offshore installations is still a matter of concern for Israeli authorities. Israel is reportedly planning to install the Iron Dome missile defense system on navy vessels, a temporary measure until German OPVs are delivered in 2019.

For its part, Lebanon stands exactly where it was a year ago, with only negligible progress, beside data interpretations and re-interpretations. The offshore tender, launched in the absence of basic documents, is still on hold. Largely a part of the overall political deadlock, a possible breakthrough in the Presidential election would have positive ramifications elsewhere and contribute in unlocking the oil and gas file. However, the time factor was entirely neglected. International interest, currently at its lowest, would have to be revived. In current market conditions, this is easier said than done.

Although the war is raging in Syria, post-war reconstruction and opportunities, including in the energy sector, are on everyone’s mind. Identifying prospects is a process that takes place before the arms are silenced. The opportunities on the other hand depend on the outcome of the war. In December 2013, the Russian State-controlled Soyuzneftegaz was awarded an exploration and production license in block 2. In September 2015, its chairman Yuri Shafranik decided not to proceed with the project because of the risks involved at this point, and announced that the project will be passed to another Russian energy company. The current Syrian regime would like a Russian involvement in offshore Syria, but does not perceive this involvement as exclusive.

All told, 2016 looks like a promising year for offshore oil and gas in the Eastern Mediterranean.

 

Source: Executive Magazine