New Realities Surrounding Offshore Drilling in the EEZ

A slightly modified version of the article appeared in Sunday Mail, Aug. 17, 2014

By Constantinos Hadjistassou*
ENI-KogasTwo and a half years elapsed since the official announcement of the discovery of natural gas in offshore Block 12, and a great deal has changed here in Cyprus, in the region and also in the global natural gas market. No doubt expectations ahead of the second cycle of prospecting within Cyprus’ Exclusive Economic Zone (EEZ) are cause for excitement. The next two years will be key to the energy (and economic) future of Cyprus and of other countries.

During this time no major hydrocarbons prospecting— aimed at increasing countries’ indigenous reserves— is expected in Europe, with the exception perhaps of the United Kingdom and Poland. Cyprus can therefore potentially play a part in boosting EU energy security through the discovery of major natural gas quantities, of the scope of 50 to 60 trillion cubic feet (tcf). The recent interest displayed by Deutsche Bank and by China’s CNOOC in a mooted Cypriot liquefaction terminal also opens up new exciting opportunities for implementing infrastructures and seeking buyers.

What developments have taken place in the space since late 2011 that are relevant to future energy planning?

Whereas initial estimates spoke of an average of 7 tcf in Block 12, the latest prevailing estimate of 3.6 tcf has upset export planning, rendering a land-based liquefaction terminal commercially non-viable— at least for the time being. The rising costs of building and operating liquefaction terminals have in turn led to an increase in the export capacity of LNG trains. With the exception of Qatar, the capacity of the latest trains is around 5.5 million tonnes of LNG per annum (mtpa). The expanded capacity of LNG trains has led to an increase in the amount of natural gas reserves needed to justify such mammoth investments.

Another significant and more recent development has been the construction of the world’s first floating LNG (FLNG) facility. Though the facility is still not complete, it has nonetheless paved the way for tapping into more stranded gas and for allowing this technology to take root. At the moment, water-based LNG operations are perhaps the only profitable choice for exporting natural gas from the ‘Aphrodite’ field. That is, unless some form of partnership is struck with Israel for jointly developing a land-based terminal, but this is a remote possibility for the time being.

The Ukraine-Russia conflict is another development with major ramifications. The Ukraine crisis has come to be tied to Cyprus, in the context of boosting the EU’s energy security by supplying the EU with Cypriot natural gas, thus diversifying the bloc’s energy supplies. This is a policy strongly backed by the United States, which is seeking alternative sources of natural gas as a counterbalance to Russian gas, not just for the EU but for the region in general.

In this context the comments made by Amos Hochstein, who heads up the Bureau of Energy Resources at the US State Department, are of particular significance. In a first, Mr. Hochstein decoupled the Cyprus problem from the development of Cyprus’ energy resources.

Meanwhile Israel has approved exports of up to 40 per cent of its natural gas reserves, giving concession holders there the green light to seek export routes. The most important preliminary deal with BG, involving the channelling of some 3.6 tcf from Leviathan to BG’s LNG terminal in Idku, Egypt, creates a whole new state of affairs where Cyprus is concerned. It’s now clear that the same companies active in Cyprus are opting for the most cost-beneficial, least time-consuming, and politically acceptable solutions. Israeli natural gas is to be exported to Egypt via subsea pipelines. But despite Egypt’s huge demand for natural gas, the methane will not be sold on the local market for the time being.

In practical terms, should this agreement materialise, the companies would secure their interests, but it would strip Cyprus of an option. It’s worth clarifying that any business or commercial action by the companies is jointly decided with the host state. From a commercial standpoint, the companies have more leverage and usually take the lead in business ventures.

Moreover, on a political level, the option of exporting natural gas through Turkey has been definitively rejected over the past two and a half years. This approach restricts Cyprus’ bargaining scope in the peace talks by ruling out the transport of natural gas to the Turkish market and then onto the EU via Turkey. Despite the transit risks, natural gas pipelines are still one of the most cost-beneficial options as far as liquefaction is concerned, and thus it is not wise to rule out this option.

Another important development, in the wake of the appraisal drilling at ‘Aphrodite’, is Egypt’s conversion from a net exporter to a net importer of natural gas, despite the fact that the country has 65 tcf of proven reserves. Considering the longstanding good relations between Cyprus and Egypt, Egypt is a potentially significant trade partner that can absorb major quantities of Cypriot natural gas, provided that payments are guaranteed.

In the interim, recoverable natural gas exceeding 100 tcf has been discovered offshore Mozambique and Tanzania. And some of the companies involved in prospecting there are the same ones operating in Cyprus.

With the land-based LNG terminal now pushed back to the year 2024 (or even later) from 2022 initially, Cypriot gas will likely face increased competition in global markets, particularly in Asia. It is estimated that by 2018 Australia may overtake Qatar as the largest exporter of LNG in the world. Due to its proximity to the LNG markets of China, Japan, India and South Korea, Australia has an advantage given the comparatively lower transport costs to these markets. Increased production of shale gas, coupled with the LNG export prospects of the United States and Canada, are expected to drive down LNG prices, particularly in the Asian and EU markets. Yet even if the timing is not on our side, the possibility of oil discoveries offshore Cyprus is something else to look forward to.

*Constantinos Hadjistassou is a lecturer at the University of Nicosia and a researcher with the KIOS Centre, University of Cyprus.

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