Benefits from Oil Could Accrue Earlier than Gas

Article appeared in Cyprus Mail, on May 3rd, 2013.

By Constantinos Hadjistassou, PhD

Strikingly enough, energy developments in the Eastern Med have garnered sustained international attention. To put things into context, if the Aphrodite gas field, is appraised to say 225 billion cubic metres (bcm) or 8 tcf it will surpass the UK’s proved natural gas reserves of 7.1 tcf (201 bcm). Without factoring in any future natural gas discoveries, block 12 alone has enough gas to supply the Cypriot energy needs for several decades to come still leaving an appreciable leeway for exports. But while virtually all the limelight focuses on natural gas as a way to prod Cyprus out of the economic crisis, it is easy to lose sight of the prospect for oil.

Oil and natural gas despite naturally occurring together usually in the same geological formations, serve two distinct energy markets. Natural gas is predominantly destined for electricity generation whereas oil is the prime transportation fuel. Worldwide, oil makes up about 30% of the primary energy supply. Transportation fuels including diesel, gasoline and aviation fuel (kerosene) are 96% derived from oil. Oil by virtue of its ease of being hauled, chemical stability, high energy density, and safe nature dominates the transportation energy mix. This hegemony is unlikely to be challenged any time soon, unless alternative and cost-effective transportation fuels emerge or hybrid/electric vehicles become more economically competitive circumventing technical limitations. Natural gas is more environmentally friendly than oil. Mainly due to its gaseous nature and relatively low volumetric energy density, natural gas is less fungible than oil meaning that it is cumbersome to transport from source to end-users.

Deepwater offshore oil production is expected to undergo phenomenal growth accounting for 11% of the global oil production in 2015, up from 1% in 2000. In relation to natural gas, oil does not only fetch a higher price it is usually exploited within shorter time frames. On an energy equivalent basis meaning that a barrel of oil contains 5.8 times the energy of natural gas and at a natural gas selling price of $10 per million BTU, oil is worth three times as much as the price of natural gas.

Prospecting for oil
Expedited by the presidential elections, the second licensing round culminated in the award of five offshore licences, namely, blocks 2, 3 and 9 to Eni SpA and Kogas and blocks 10 and 11 to Total SA. Disclosed sources revealed that Total SA will prioritise the quest for oil in blocks 10 and 11. For this purpose, the French supermajor is believed to be making the necessary preparations for oil exploration. These steps comprise gathering all the pertinent geological information and analysing it in the context of the already two-dimensional seismic data, conducted by PGS, and the interpretation reports issued by Beicip Franlab. Subsequently, a seismic survey vessel will acquire three-dimensional (3D) seismic measurements in the promising acreage.

Next in line will be to source the semi-submersible drilling rig or drill ship which will attempt the exploration well(s). Each well is expected to cost about €80m. As of February 2013, the average chartering rates for drill-ships amounted to $450,000/day while semi-sub rigs cost about $370,000/day. Oil is usually found in reservoirs found at greater depths than natural gas. Only in-situ drilling can unravel the mystery of the existence of oil in the Cypriot EEZ. Interestingly, no well—in the Eastern Med— has yet to reach the desirable depth at which oil is believed to reside. If successful, such an oil borehole is anticipated to extent to a total depth, including the water column, of about 7,500m. Indeed this will be an engineering feat. Developing such a deep offshore oil field will represent another engineering marvel. Such ultra deepwater developments were literally unheard of a decade ago.

Prior to embarking on such an ambitious endeavour oil companies piece together all the geological evidence within reach. Considering the Southern area of the Cypriot EEZ we have strong indications to be optimistic that oil lies below the sea floor. Suffice to mention that Beicip Franlab in its interpretation reports of the seismic data, acquired by PGS, identifies 14 oil plays, 6 of which are located in the vicinity of the Eratosthenes sea mount close to blocks number 10 and 11. Proved working hydrocarbon systems offer another line of evidence. Last but not least the natural gas discovered in the Aphrodite field is thermogenic in nature pointing to the presence of oil.

Timeframe for exports: natural gas versus oil
Given the state of the Cypriot economy, time is of the essence. Put simply, the faster Cyprus exploits a portion of its fossil fuels the better—provided that benefits spill into the economy. However, this pace is governed by a host of factors chief among which are technical and economic considerations. The Tamar gas consortium prides itself of developing the gas field within a record time schedule spanning just four years from discovery to commercialisation. Essentially, the time it takes to extract natural gas or oil from a subsea reservoir of cognate geological complexity requiring similar equipment does not fundamentally differ, or at least the first phases of the field life cycle (see figure). That is, for oil companies to gain access and complete the exploratory drilling it usually takes 3 to 4 years. Once hydrocarbons have been encountered the next phase is to appraise them. The appraisal phase, which accurately assesses the potential of the oil or gas field and hedges against risk, takes about 2 years.

Subsequently, the development phase could extend from 2 to 4 years depending on the complexity of the hydrocarbons field, extraction rates, availability of equipment, etc. Field production of oil or gas usually lasts about 20 to 30 years. Finally, offshore field decommissioning and abandonment could take 2 to 3 years. When it comes to exporting oil or natural gas what matters most is the time it takes to construct the export terminal. Stranded gas resources with no immediate access to markets can be exported in liquefied form usually requiring a liquefied natural gas (LNG) facility and a subsea pipeline to siphon the gas to shore.

Offshore oil on the other hand has the advantage that it can be processed in-situ onboard a Floating, Production, Storage and Offloading (FPSO) vessel. As it name implies, an FPSO partially processed the oil, stores it onboard and offloads it onto a shuttle tanker. Hence, the FPSO solution obviates the need to construct expensive submarine pipelines. Compared to the construction of an LNG plant of about 5 million tonnes of export capacity per year (5 mtpa), which could take about 8 years to complete and cost about €7 billion, an FPSO costs around €1bn and can be ready in, say, 2.5 years. Overall, natural gas exports can commence the earliest after 2022 while oil exports as early as 2021.

Prior to any exploitation, however, the prerequisite is the discovery of oil. Despite significant advances in 3D seismic techniques encountering extractable volumes of hydrocarbons remains a risky business. The chances of striking oil in the Cypriot EEZ are probably on the order of 40% i.e. 4 out of 10 wells. However, as of 2010, the world average success rate for commercial discoveries represented dropped to 18%.

Indisputably oil can be a game changer if discovered in sufficiently large quantities for commercial exploitation. If additional gas quantities are discovered, Europe stands to benefit from Cypriot exports as well. Hypothetically if oil is found, it will mark a new era for Cyprus and the region. Until then maintaining sovereignty over our resources is of paramount importance.

Relevant articles:

Egypt’s gas bonanza sourced in Cyprus’ EEZ

Explanations for Downsizing the Aphrodite Gas Field

Maximising the Benefits From the Third Licensing Round

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