Cyprus Mail
Guest Columnist Opinion

Maybe the best is yet to come

By Constantinos Hadjistassou

IT TOOK the drilling of just one well to put the eastern Mediterranean back on the world map of hydrocarbons. The timing could not be better for Egypt, currently experiencing power cuts due to insufficient electricity production. The announcement of the Zohr find by ENI has manifestly upset the plans of the Noble-Delek consortium which holds the concession on Israel’s Leviathan gas field. In Cyprus, government sources were meanwhile focusing exclusively on the positive prospects of the discovery.

Perhaps the most positive development as far as Cyprus is concerned, is the size of the Egyptian Zohr prospect as well as its proximity to Cyprus’ offshore block 11, currently licensed to French oil major Total. The size of the gas field, in the order of 30 trillion cubic feet (tcf), or 5.5 billion barrels of oil equivalent, in conjunction with the fact the well is located just 6.5km from block 11, is a potential game changer.

If one considers that oil and natural gas reservoirs know no geographical boundaries, there are strong indications that the reservoir may extend into Cyprus’ Exclusive Economic Zone (EEZ). A similar situation holds for a plethora of oil and natural gas fields around the world, notably the 800 tcf North Field/South Pars gas field in the Persian Gulf, shared by Qatar and Iran. Another example, closer to home, is Cyprus’ Aphrodite reservoir in block 12 which extends into the Israeli EEZ.

But a single well alone is not sufficient to give a full picture of a reservoir’s potential, its production capacity, composition of the hydrocarbons, the scale of the field or the formation’s geological attributes. Depending on the geological structure of the field, it will take at least one to two appraisal drills to reduce uncertainties and narrow down the quantities present in Zohr. It is even possible that the estimated amounts may be upgraded at a future date although, as experience with the Aphrodite reservoir has shown, the opposite cannot be ruled out.

At this stage it would be wise for the government and Total to reassess the 2D and 3D data from seismic surveys for block 11, seeking clues as to whether the Zohr prospect does extend into Cyprus’ EEZ. But what if it does?

The benefits to Cyprus might turn out to be more significant than developing Aphrodite. Naturally this will depend chiefly on how much of the Zohr gas is located within block 11. But before production of natural gas from Zohr can commence, the inter-state agreement between Cyprus and Egypt, signed in 2010, delineating their respective EEZs, will be activated, as also the unitization agreement concluded between the two countries in 2013.

Thereafter, negotiations would take place between the Egyptian government and ENI on the one hand, and the Cyprus government on the other, to determine the respective quantities. The fact that ENI operates both in Egypt and in Cyprus, in conjunction with the close relations between the governments of Cyprus and Egypt, should act as a catalyst for achieving a mutually beneficial agreement within a reasonable timeframe.

Such an initial agreement would allow for the speedy development of the Zohr field and the extraction of natural gas for Egypt’s domestic market but also for LNG exports, possibly via the LNG facility in Damietta, Egypt, in which ENI owns 50 per cent of the shares.

The norm in the petroleum industry is that, once hydrocarbons production has begun, the parties usually hammer out an updated agreement that factors in the recoverable quantities as well as the new state of affairs emerging from a better understanding of the geology and how much gas can be actually recovered.

Essentially, should Zohr turn out to be a shared reservoir, then Cyprus may benefit financially from natural gas production by investing almost nothing in the project. Naturally the distribution of the proceeds would factor in the investment expenses. Moreover, cooperation between the parties is key to the successful joint exploitation of the natural gas.

Cognizant of Egypt’s natural gas needs, ENI has conveyed its readiness to speed up development of the Zohr field. Considering the time needed to carry out appraisal, or follow-up, drilling, laying subsea pipelines and putting in place other infrastructures, the production of natural gas could begin, under the optimistic scenario, by 2020.

One may reasonably ask, how will Egypt cover its energy needs until then? In all likelihood it will continue to import LNG, while at the same time seek to develop other reservoirs. There is also the possibility of importing natural gas via subsea pipelines, either from Israel or Cyprus.

What the Leviathan and Aphrodite fields have in common is that their development is 1.5 to 2 years ahead of Zohr, since the gas quantities have already been confirmed and the companies have come up with the field development plans. A major obstacle to providing Egypt with Israeli natural gas is Egyptian public opinion, which will not easily accept such an arrangement, particularly now after the discovery of the Zohr field.

As far as a pipeline from the Aphrodite field to Egypt goes, this would be quite a expensive project due to the greater distance (some 200km) and the cost of a pipeline. Until the Zohr field is developed, the alternative interim solution for Egypt would be to generate electricity from heavy fuel oil, coal, or importing natural gas from Jordan.

The other positive development from the Zohr discovery will be the heightened interest by energy companies in the eastern Med, which has now been upgraded into an energy-rich province. Right now, perhaps the biggest factor holding back further prospecting for hydrocarbons are collapsing oil, and consequently natural gas, prices.

Industry watchers are meantime waiting with bated breath a possible future announcement by ENI on the presence (or not) of hydrocarbon condensates (light oil) within Zohr. The liquid form of the condensates, and primarily the ease of use – as no pipelines or liquefaction are needed – make them more valuable compared to natural gas.

Meanwhile, the presence of hydrocarbon condensates in Aphrodite is an important discovery, however the relatively small amounts do not allow for developing the field exclusively for their extraction.

In closing, the discovery of the Zohr field may overall be called a positive development, despite the fact it has caused consternation over the development of Aphrodite. That said, it will take more drilling and synergies in order to evaluate the find and elucidate the gas potential within the Cypriot EEZ. Let’s hope that, with a little luck, the best is yet to come.

 

Constantinos Hadjistassou is assistant professor at the University of Nicosia and a researcher with the KIOS Centre, University of Cyprus

Twitter: @EnergySequel

 

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