LNG ex­plo­ration on hold, at­ten­tion turns to de­vel­op­ing Aphrodite

Financial Mirror (Cyprus) - - FRONT PAGE - ANAL­Y­SIS

The third well drilled in Cyprus’ Ex­clu­sive Eco­nomic Zone (EEZ) failed to re­veal com­mer­cially ex­ploitable nat­u­ral gas re­serves. Ital­ian multi­na­tional Eni’s Saipem 1000 drill­ship drilled to a depth of 5,485 me­ters in Amath­usa, in Block 9, with­out yield­ing pos­i­tive re­sults.

This is the sec­ond failed at­tempt by the Eni-KOGAS con­sor­tium in Cyprus’ EEZ. The con­sor­tium is hop­ing to get s im i la r treat­ment to that given to To­tal, and sub­mit­ted a re­quest to ex­tend its ex­plo­ration li­cense. As it stands to­day, the li­cense ex­pires in Fe­bru­ary 2016, with the con­sor­tium ne­go­ti­at­ing with Nicosia for a two year ex­ten­sion. Eni re­port­edly plans to use this pe­riod to form a more pre­cise pic­ture of the pre­vi­ously un­ex­plored area and reeval­u­ate the ge­o­log­i­cal model and data col­lected in both drills.

With To­tal and Eni’s fail­ure to lo­cate com­mer­cially ex­ploitable quan­ti­ties of nat­u­ral gas, all five blocks awarded in the sec­ond li­cens­ing round to big fanfare in 2013 yielded dis­ap­point­ing re­sults. Of course, this does not rule out pos­i­tive re­sults in the fu­ture with the pos­si­ble ex­ten­sion of the ex­plo­ration pro­gram — granted for To­tal, and hoped for by Eni.

If Eni’s fail­ure in Onasago­ras and Amath­usa, both in Block 9, is in it­self a set­back for Cyprus (although not en­tirely un­ex­pected given the suc­cess rate for drilling at such depths), it does not mark the end of bad news for Nicosia. The Eni-KOGAS con­sor­tium, which holds ex­plo­ration rights in Blocks 2, 3 and 9, is legally bound to drill at least four wells in its cur­rent ex­plo­ration pro­gram. But, af­ter two un­suc­cess­ful wells and over $300 mil­lion spent, the pro­gram is shrouded in doubt. No ex­ploratory drilling is ex­pected this year in Cyprus (the Saipem 1000 drill­ship is sched­uled to un­dergo main­te­nance last­ing around five months) and could pos­si­bly be de­layed for much longer. In­deed, with cur­rent oil prices, the Ital­ian com­pany has suf­fered sig­nif­i­cant losses in the last quar­ter of 2014, lead­ing to cut­backs and the de­ci­sion to sell up to ?8 bil­lion ($8.9 bil­lion) of as­sets. Its pri­or­i­ties seem to lie a bit fur­ther south, af­ter pledg­ing to in­vest $5 bil­lion in Egypt. Sim­i­larly, Noble has sus­pended fur­ther drilling plans in Block 12 due to the slash­ing of its ex­plo­ration bud­get.

The dis­rup­tion of off­shore ex­plo­ration, which is not ex­pected to re­sume be­fore 2016 or even 2017, in ad­di­tion to the ex­pi­ra­tion of Tur­key’s NAV­TEX (nav­i­ga­tional telex warn­ing) and the with­drawal of its seis­mic re­search ves­sel Bar­baros Hayred­din Pafla from Cyprus’ EEZ, opened a win­dow of op­por­tu­nity to re­sume ne­go­ti­a­tions be­tween Greek and Turk­ish Cypri­ots. The elec­tion of Pres­i­dent Mustafa Ak›nc› — seen as a mod­er­ate — in North­ern Cyprus on April 26, brought hope, for the first time in years, that the Cyprus prob­lem can ac­tu­ally be set­tled.

Con­tacts re­sumed on May 15. Greek Cypri­ots would have headed to the ne­go­ti­a­tion ta­ble with a stronger hand had they made a new dis­cov­ery, which would have made them much more at ease in mon­e­tiz­ing their gas re­sources. In­stead, de­vel­op­ing the ± 4 tcf Aphrodite gas field is in it­self a chal­lenge in the cur­rent con­text. This seems to have brought the Turk­ish op­tion back to the ta­ble as one of the means to mon­e­tize Cypriot gas, even faster than ne­go­tia­tors.

With the break in ex­ploratory drilling, Aphrodite re­mains the only Cypriot gas dis­cov­ery to date and will re­main so in the short to medium term. Noble Energy is ex­pected to sub­mit its de­vel­op­ment plan in the next few weeks.

The plan is likely to in­volve a float­ing pro­duc­tion, stor­age and of­fload­ing (FPSO) unit pro­duc­ing 800 mmcf of gas per day, and sub­sea pipe­lines to pos­si­ble des­ti­na­tions, which in ad­di­tion to Cyprus may in­clude Egypt. Al­ready, there are dif­fi­cul­ties. It ap­pears Noble Energy and Delek, the own­ers of Aphrodite, are hes­i­tant when it comes to con­tribut­ing to in­fra­struc­ture work be­yond the de­vel­op­ment of the field, which would ul­ti­mately leave it to the buy­ers and in­ter­ested par­ties to trans­port the gas to its fi­nal des­ti­na­tion.

Noble is also ob­li­gated to find ex­port mar­kets to pro­ceed with the de­vel­op­ment of Aphrodite, since the lo­cal mar­ket is so small (re­quir­ing less than one bcm of gas per year) that it does not, on its own, jus­tify de­vel­op­ment costs. Egypt, with its idle LNG plants and vast lo­cal mar­ket, emerges as the most log­i­cal op­tion. The Egyp­tian Nat­u­ral Gas Hold­ing Com­pany (EGAS) is ne­go­ti­at­ing to im­port ap­prox­i­mately 700 mil­lion cu­bic feet of gas per day from Aphrodite. Gas will be trans­ported via a pipeline that would be com­pleted “within two and a half to three years,” ac­cord­ing to a state­ment by EGAS chair­man Khaled Ab­del Badie to Daily News Egypt.

But Egypt is set­ting 2018 as a tar­get year to be­come self suf­fi­cient in gas, and plans to stop im­ports by 2020. In ad­di­tion, the Egyp­tian LNG op­tion also comes with its own sets of chal­lenges, although they can be man­aged in a way so as to al­le­vi­ate their im­pact and make the Egypt op­tion more vi­able. First, the com­bined ca­pac­ity of the two LNG plants in Egypt is 12.2 mtpa and the op­er­a­tors are in dis­cus­sions with other po­ten­tial providers, in­clud­ing the Le­viathan and Ta­mar part­ner­ships, BP and BG (for sup­plies from Egyp­tian gas fields). This means not all of these sup­pli­ers can be ac­com­mo­dated. It is not ex­clu­sively a mat­ter of ‘first come, first served’, as other el­e­ments such as geopol­i­tics and prices are also taken into ac­count, but tim­ing is very im­por­tant. Sec­ond, there is a risk Cypriot LNG might not be com­pet­i­tive in Euro­pean mar­kets where LNG is now de­liv­ered at around $7 per mmBtu (or even Asian mar­kets, with sim­i­lar prices). Tak­ing into con­sid­er­a­tion the price of gas at the well, and adding the costs of trans­port to Egypt, liq­ue­fac­tion, trans­porta­tion to Europe, re­gasi­fi­ca­tion and prof­its, the en­duser price could end up at $12 per mmBtu. Granted, LNG prices regularly fluc­tu­ate and can­not be pre­dicted years in ad­vance, but the LNG glut whose im­pact we are be­gin­ning to feel is ex­pected to con­tinue with ad­di­tional sup­plies hit­ting the mar­kets in the next few years, and an ex­pected re­turn to grace for nu­clear energy in Asia. Bar­ring a ma­jor catas­tro­phe, these de­vel­op­ments may in­di­cate that prices are un­likely to re­turn to their all time high in the fore­see­able fu­ture.

There might still be another op­tion, namely marine trans­port of com­pressed nat­u­ral gas, al­low­ing ex­ports to Europe, although it doesn’t seem to gen­er­ate much en­thu­si­asm given it is still untested (the first ever car­rier cur­rently be­ing de­signed for In­done­sia’s PLN is ex­pected to be­come op­er­a­tional in May 2016).

Chang­ing mar­ket con­di­tions, in­flated ex­pec­ta­tions, a sub­jec­tive as­sess­ment of geopol­i­tics and po­lit­i­cal risks, un­rea­son­able bets and so on might ex­plain why Cyprus had to aban­don grandiose am­bi­tions and make the most out of what it al­ready dis­cov­ered — in it­self sig­nif­i­cant — all while, right­fully, brac­ing for more. Un­for­tu­nately, these are symp­toms we are all too fa­mil­iar with in Le­banon.

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