Cyprus Mail
Guest Columnist

Dreams versus reality in the push for Cyprus gas

The Stena IceMax drillship hired by ExxonMobil for exploratory drilling in the Cyprus EEZ block 10

By Charles Ellinas

 

Cyprus on the brink of big decisions on energy was the subject of the Sixth Energy Symposium organised by the Institute of Energy North-East Europe (IENE) and Financial Media Way (FMW) in Nicosia on December 4.

The key message was that hydrocarbons offer serious opportunities that with careful handling can benefit Cyprus geopolitics and economy as well as the wider region.

In their introductory speeches, the organisers of the symposium, IENE executive director, Costis Stambolis, and managing director of FMW, Iosef Iosef, said the symposium stressed the success and significance of the energy profile of Cyprus internationally.

President Nicos Anastasiades, in his opening speech described the three pillars that guide the government’s energy plans:

Development of hydrocarbons, that belong to all legal citizens of Cyprus

Overcoming Cyprus’ energy isolation and developing other energy sources, including renewables

Close energy cooperation with those neighbouring countries that are willing partners.

He talked about the drive to create an East Med Energy Corridor to connect East Med’s hydrocarbon resources to Europe. This includes LNG exports, as well as the East Med pipeline. He considers this to be key in terms of contributing to EU’s energy needs.

He emphasised the importance of the tripartite meetings in enhancing regional cooperation and that he hopes the US will confirm their interest in participating in the next scheduled meeting between Israel, Cyprus and Greece. There is also interest by France to participate in the next tripartite meeting between Egypt, Cyprus and Greece.

A permanent organisation is being set up to coordinate these meetings, with Nicosia as its base. This, he said, elevates Cyprus position.

He emphasised the need for peace and stability in the region and called on Turkey to contribute to this by helping establish Cyprus as a fully independent state. The target is to enhance cooperation of all countries in the region in developing East Med resources. He hopes that this can include Turkey as an active and benefiting member, provided it is prepared to cooperate. He confirmed that the resources in Cyprus belong to all its legal citizens.

Dimitiris Syllouris, president of the House of Representatives, delivered a focused and impassioned speech on climate change and on the need for government’s efforts to also be directed towards making renewables and clean energy central to its energy plans. Cyprus should strive to achieve EU targets and fully implement international climate change goals. Currently there are unacceptable delays in implementing projects that can help achieve this. He said that Cyprus should plan a timely transition from hydrocarbons to renewables.

In a message to the symposium Giorgos Stathakis, Greece’s energy minister, confirmed that the East Med pipeline inter-governmental agreement between Israel, Cyprus, Greece and Italy, with EU support, will be signed during the first quarter of 2019, calling it a project of strategic importance. In a veiled reference to Turkey, he said that Greece is prepared to work with all countries in the region that respect international law.

There were presentations by Mike Efthymiou and Dimitris Fesas about the Cyprus Hydrocarbons Company and its role in the development and exploitation of Cyprus’ finds and the monetisation of Cyprus’ share of discovered resources. They confirmed that the negotiations to develop Aphrodite’s gas reserves are in progress. They added that drilling in block 10 is proceeding to plan.

Andreas Poullikkas, president of the Cyprus Energy Regulatory Authority (Cera), spoke about the regulator’s work, EU’s new clean energy targets and progress so far in opening up Cyprus’ renewables market. He said that preparation of Cyprus’ 2030 energy plan and compliance with the new EU mandatory climate targets is being prepared by the energy ministry.

Symeon Kassianides, president of Cyprus Natural Gas Company (Defa), updated the symposium on the progress of the tenders for constructing facilities to import LNG to replace heavy fuel oil in power generation. He said that in addition to the €101million EU grant, EAC will participate in the facilities project with a 30 per cent share, with the remainder to be provided by European Investment Bank and the European Bank for Research and Development. Defa plans to seek expressions of interest for the supply of LNG soon, based on a combination of spot and medium-term supply contracts initially for a period of three to five years. He did not comment on the economics of the project or its implications on the price of electricity.

Professor Constantinos Papalucas, from the University of Cyprus, spoke about the setting up of Cyprus Sovereign Wealth Fund (SWF) and drew lessons from the ‘Norwegian model.’ He spoke about the management and oversight of SWF and its provisions regarding its use to pay off public debt, and its implications. There was lively discussion on the need to ensure the independent management of SWF, learning from Norway, and on the safeguarding of the rights of Turkish Cypriots and other minorities on the island.

There were also presentations on electricity interconnectors in Greece by IENE’s Dimitiris Mezartasoglou and in Cyprus by Masis Der Parthogh, representing the Euro-Asia Interconnector. The latter has now progressed into the preparation and issue of tenders for its construction.

Renewables and energy efficiency were covered extensively by Anthi Charalambous, manager of OEB, professor Despina Serghidou from the Cyprus Institute, Akis Ellinas, president of the Wind Power Association and Fanos Karantonis, president of the Renewable Companies Association. They described progress so far, challenges in meeting 2020 targets, use of renewable technologies, even bigger challenges achieving new 2030 targets and benefits of using energy efficiency and solar power for a sustainable future of Cyprus cities.

Energy market liberalisation and reduction of the unacceptably high electricity costs through the wider use of renewables remain challenges in need of urgent solutions. Timetables are set and then not followed – this requires urgently a fully impartial and independent system operator to take market liberalisation and wider adoption of renewables forward sooner than later.

I spoke about global LNG and natural gas markets and prices and their impact on the development and export of East Med resources. Europe is well supplied with natural gas. It benefits from many sources of gas supply and pipeline interconnections offer security.

Gazprom and the European Commission settled their differences last May, with Gazprom now complying with EU regulations and European gas-hub trading. As a result, since then concerns about security of gas supplies and the need for diversification have receded. This paved the way for Gazprom to increase sales of cheap gas to Europe, expected to exceed 200 billion cubic metres this year.

At important conferences in London in October, Gazprom confirmed that it could sell gas at $4/mmBTU and still make a profit. Also, US LNG companies believe they will increase their sales in Europe, with prices close to $6.50/mmBTU. Even at this price US LNG, despite political support, is struggling to achieve significant penetration of European markets. LNG from existing plants in Egypt may have a chance to do that because of low liquefaction costs.

In Europe, buying and selling natural gas is done by companies and not by governments or by the European Commission, and it is done for profit. East Med gas, whether by pipeline or LNG, will have to compete with these prices if it is to secure markets in Europe. Longer-term prospects are in Asia where prices are expected to be higher, around $8/mmBTU by mid-2020s.

LNG projects currently in progress in North America, Qatar, Africa, Australia and Russia are ahead of East Med plans and have access to lower cost gas. These will be providing stiff competition.

ExxonMobil is fully aware of these conditions but it cautiously optimistic that a big discovery in block 10, will give it a chance to compete – drilling will tell. The company has the technical, financial and commercial capabilities to do so, backed-up by political support, deriving from the US ‘America first’ policy.

However, as mentioned at the recent Economist Summit in Nicosia, there is also a need to find ways to reduce regional geopolitical risk. LNG projects require multi-billion-dollar investments, returns from which require decades to materialise. Such projects and investments need certainties, especially by financial institutions. Surveys and drilling that cost millions of dollars are one thing, production and export facilities requiring billions of dollars investments are quite another. Without certainty and acceptable risk, the necessary investments may be delayed.

Much is happening in the energy sector in Cyprus and the region, that with careful planning have the potential to lead to a promising future, but the dichotomy between politics and commercial reality needs to be bridged if we are not to carry on missing opportunities.

 

Dr Charles Ellinas is a nonresident senior fellow at the Global Energy Centre of the Atlantic Council @CharlesEllinas

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