Cyprus Mail
Energy Guest Columnist Opinion

Egypt’s natural gas reaches new highs, but Cyprus?

Eni’s CEO, Claudio Descalzi

By Charles Ellinas

ON THE sidelines of the EGYPS 2018 conference and exhibition this month in Cairo, Eni’s CEO, Claudio Descalzi, said that Zohr production would reach 2.9 billion cubic feet per day (bcf/d) by 2019. This is up from the initially announced 2.7 bcf/d, which many in the industry doubted.

Given the short length of time since discovery in August 2015, this is quite an achievement. Getting there, Descalzi also confirmed that Zohr gas production is expected to reach 1.8 to 2.0 bcf/d by the end of 2018.

In the meantime, the Egyptian Petroleum Minister, Tareq El Molla, said that gas production in Egypt today is 5.5 bcf/d. With domestic gas consumption expected to reach 6.4 bcf/d by mid-2019, clearly Egypt is heading for a substantial surplus even earlier than expected.

Not to be left behind, BP also announced that production from its Atoll gasfield, which started production in December 2017, has now reached 0.35 bcf/d, seven months earlier than originally planned.

BP says the Atoll is its first new project to come into production in 2018, adding to the series of higher-margin projects successfully brought online over the past few years. The 13 projects that started-up through 2016 and 2017 provided more than 500,000 barrels of oil equivalent a day (boed) of new net production capacity. Total net production from BP’s new projects is now expected to be 900,000 boed by 2021.

Bob Dudley, BP group chief executive, said: “The longstanding partnerships we have in Egypt allowed us to fast-track Atoll’s development and deliver first gas only 33 months after discovery.”

Adding Atoll’s production to that of Zohr, by mid-2019 Egypt’s total natural gas production is expected to reach 8.4 bn ft3/day. This would more than satisfy Egypt’s domestic gas needs, and could result in as much as 2.0 bcf/d surplus gas.

Given that the combined capacity of the two existing liquefaction plants at Idku and Damietta is 1.7 bcf/d, Egypt could be in a position to resume full capacity LNG exports before the end of 2019. This would allow the country to fulfill its contractual obligations under its interrupted LNG contracts, mostly to Europe.

This is momentous news for a country that until now has been forced to import LNG due to gas shortages caused by past short-sighted policies. Stopping such imports and resuming LNG exports will provide a major boost to Egypt’s economy.

The good news for the region does not stop there. Descalzi also confirmed at EGYPS 2018 that ENI’s new gas discovery Calypso 1 in block 6 in Cyprus could even exceed 6 to 8 trillion cubic feet (tcf). He said “It could be more, it could be in that range, but for sure it cannot be less… It’s good news for the East Med hub, which could become powerful if they all put their resources together.”

Descalzi also said one option for monetising the Calypso gas would be a connection to the Zohr infrastructure “It could be connected to Zohr…it depends on the dimensions.”

Another option, of course, would be, in combination with Aphrodite’s 4.5 tcf, to revive the idea of a liquefaction plant at Vasilikos. The combined quantities would be sufficient to justify two and possibly three 5 million tons/yr liquefaction trains, thus improving the economics of such a facility. This could be reinforced further by a discovery in block 10, when ExxonMobil completes drilling by the second half of 2018.

The other option would be to take all discovered gas to Egypt, expand its liquefaction facilities and export the gas as LNG, thus fulfilling its aspiration to become East Med’s gas hub. With Egypt’s existing gas infrastructure, and favourable regional geopolitics, this may be a more cost-effective option.

ENI can also consider FLNG by transposing its successful experience with the Coral gasfield offshore Mozambique to Calypso 1 and Cyprus. The LNG from Coral has already been sold, even in the current low-price environment, allowing the project to achieve final investment decision (FID) last year.

All these options of course depend on the state of the global gas market and regional geopolitics. Low gas prices pose a challenge to East Med gas exports. Most offshore gasfields in the region are deepwater and expensive to develop.

Cyprus gas prospects could improve through further drilling planned for this year. The next target to be drilled was in block 3 and has been dubbed Cuttlefish, but Turkey’s actions appear to have thwarted this.

Should that have gone ahead, expectations were for a moderate size find. But because Cuttlefish is closer to Cyprus’ coast, about 80 km offshore, and in shallower water and target depth, the cost of production and transportation of any natural gas find to Cyprus could be very competitive. This could have opened up serious opportunities for the transportation of such gas to Cyprus for power generation, instead of importing expensive LNG as currently planned. Unfortunately, this has to wait until as and when ENI would be able to resume with its plans.

The current exploration campaign will now proceed with ExxonMobil’s much awaited drilling in block 10, during the second half of 2018. Minister Yiorgos Lakkotrypis said that the first drilling target in block 10 has already been fixed under the name ‘Delphinus’. A second target named ‘Anthea’ is at the stage of final definition.

However, development of Cyprus’ gas is not without problems. Intervention by Turkey has increased the risks and stakes in the region and is challenging further exploration and development in Cyprus’ EEZ.

Turkey, emboldened by the inability of the US and Russia to stop its incursion into Afrin in Syria, appears to be using a similar tactic in Cyprus’ EEZ. Turkey appears determined to use its navy to stop drilling in areas which it claims belong to its continental shelf or have been claimed by Turkish Cypriots as part of their ‘EEZ’. This is despite the fact that neither claim complies with UNCLOS, accepted by the rest of the world, and neither claim is tenable.

These are claims Turkey has launched with the UN and on this basis its position is that there is a ‘dispute’ on EEZs. In addition, until there is a solution of the Cyprus problem, Turkey claims it is safeguarding the interests of Turkish Cypriots.

This is why Turkey did not intervene during drilling of the Calypso well in block 6. Turkey is claiming that the northern half of the block lies on its continental shelf, but not the southern part where Calypso lies.

However, block 3 where Saipem’s drilling rig was sailing to before it was stopped, is claimed by Turkish Cypriots to be within their ‘EEZ’. This could be another reason why the Turkish navy stopped the rig, in addition to Turkey’s declared Navtex.

Turkey has been attempting to justify that its actions have a ‘legal’ basis, and they are not just acts of belligerence. The ‘legal’ basis, in their interpretation, derives not just from the declaration of Navtex, but also from its ‘EEZ’ claims which it now appears determined to pursue using its navy.

On this basis it is not likely that Turkey will intervene in the planned drilling by ExxonMobil in block 10 during the second half of 2018, not just because ExxonMobil is American, but also because this block is not included in the areas claimed by Turkey and the Turkish Cypriots. By the way, neither is block 11 where Total drilled last year without any intervention by Turkey, but unfortunately also without success.

However, blocks 2 and 8, where ENI might be planning to drill next, are claimed by the Turkish Cypriots. As a result, Turkey may intervene in these blocks as well, should ENI proceed with drilling plans.

The escalation of Turkey’s actions in Cyprus’ EEZ brings a new dimension that Cyprus can only confront through diplomatic and legal means.

Italy and France are using diplomatic means to defuse the situation, but they are highly unlikely to take stronger action. And it is not for ENI or Total to take any action other than wait and see. This is a problem to be resolved at state level. After all, their contracts are with the Republic of Cyprus, who they would expect to provide secure conditions for exploration and production to proceed safely. Their business is strictly exploration and production of hydrocarbons – not confronting Turkey.

It is possible that once Turkey feels it has made its point, it may back-off provided that drilling in ‘disputed’ areas is avoided.

In the meanwhile, with a new government in place in Cyprus, it may be possible to restart the process to resume negotiations on the Cyprus problem. The new Turkish Cypriot administration also seems to be interested on renewing negotiations. Let’s hope that this new-found interest moves in the right direction. This is where Cyprus’ future lies – solution of the Cyprus problem.

Dr Charles Ellinas, Nonresident Senior Fellow, Global Energy Center, Atlantic Council @CharlesEllinas

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