By Charles Ellinas
With drilling in Cyprus coming to its climax early in the year, Egypt forging ahead, Leviathan coming on stream in Israel and exploration in full swing in Lebanon, 2019 promises to be another bumper year for East Med natural gas.
Egypt will carry on building on the success of the last three years, with more gas discoveries and exports of liquefied natural gas (LNG). Eni is expected to announce a major new gas discovery at the Noor prospect, about 50 km offshore Sinai. Together with a number of smaller gasfields, this will bolster Egypt’s gas production and support LNG exports.
Eni will raise production at the Zohr gasfield to 32 bcm/yr by the end of 2019, up 5 bcm/yr from the originally planned production plateau, in the final phase of this remarkable project. This additional gas from Zohr will be destined for liquefaction and export through the Damietta LNG plant, mostly to Italy.
Shell is already exporting 3 bcm/yr from its Idku LNG plant and is in advanced negotiations with Noble Energy to bring gas from Cyprus’ Aphrodite gasfield to fill the remaining 7 bcm/yr unutilised capacity of the plant. However, the fraught political situation in Cyprus and the increasing intensity of threats from Turkey may yet delay this.
Shell will complete development of West Delta Deep Marine 9B gasfield in 2019, bringing onstream 4 bcm/yr of natural gas. Edison will carry out new offshore exploratory drilling, particularly in the promising North Thekah concession, close to Zohr.
Egypt will launch new offshore licensing rounds in the Red Sea and in the western part of its exclusive economic zone (EEZ) in the Mediterranean, both coming with great expectations. Demonstrating its confidence that much more gas will be discovered, the country’s petroleum ministry has developed a new oil and gas production contract to encourage investment and exploration. Under the new contract, international oil companies (IOCs) will bear exploration and production costs, but in return they will get a bigger share of the output, which they will then be free to sell as they wish, including exporting it.
This is the sign of a country confident that its gas supplies will not only meet demand well into the future, but will also support significant exports, generating much needed revenues. This may also be assisted by Egypt’s increasing diversification into renewables and coal-fired power generation, bolstering energy production and freeing gas for export.
A big achievement for Egypt in 2019 is to end fuel subsidies and catch up with repayment of the debt owed to the IOCs. This remarkable turnaround will be capped by continuing recovery of the country’s economy, with GDP growth approaching six per cent.
These developments, and energy industry reforms implemented by the government, have encouraged ENI, Shell, BP and Edison to announce plans to expand their existing investments and activities, demonstrating their faith in the country. As a result, the petroleum minister confirmed that it expects inwards oil and gas investments to exceed $10 bn in 2019.
This includes BPs $1.8 bn investment commitment in 2019 to speed up gas production. It will bring the Raven gasfield, in its West Nile Delta concession, onstream adding another 3.5 bcm/yr to the Egyptian gas grid.
Egypt may also benefit from gas imports from Israel, helping it realise its aspiration to become East Med’s regional gas hub. Noble Energy and Delek may yet be able to sell gas to Egypt’s domestic market, which will be a major achievement in many different ways. It will be one of the first projects to overcome regional geopolitics that beset energy developments in the region. It will also usher closer cooperation between Israel and Egypt. But the project still has challenges to overcome.
Israel’s major success in 2019 will be the completion of Leviathan’s phase 1A, delivering first gas by the end of the year, destined for the domestic market, Jordan and possibly Egypt. But securing export markets for the follow-up phases will continue to be challenging.
Another success will be Energean’s remarkable progress ever since it acquired the Tanin and Karish gasfields in 2016. Having achieved a final investment decision in 2018, it will move smoothly into the construction phase, with the likelihood that additional drilling will confirm increased gas reserves in 2019.
Israel will also launch a second offshore licensing round. But without obvious export routes, its chances to succeed in attracting major IOCs will be low.
Despite December’s inter-governmental agreement promoting the much-talked-about EastMed gas pipeline, this will carry on proving to be more of a pipe-dream. Its gas will be too expensive to secure gas sales agreements in Europe to justify making the jump from a political project to reality. But this will not stop the political hype from carrying on throughout the year.
2019 will also see the formation of an East Med Natural Gas Cooperation Forum comprising Israel, Egypt and Cyprus, early in the year. This could foster closer cooperation and act as the precursor to a more peaceful and cooperative future for the East Med. Newfound US interest for the region may provide additional encouragement for the successful launch of such a much-needed initiative. In 2019 the US will broaden its strategy and increase its presence in the region, providing support to US companies participating in East Med gas projects.
Lebanon has launched its first exploration phase successfully, with the Total-Eni-Novatec consortium planning to drill its first well in block 4 in 2019. This leaves the disputed block 9 until 2020, by which time hopefully the EEZ delineation dispute with Israel will be resolved. Lebanon will also be launching a second licensing round, with results to be expected mid-2019.
In Cyprus much hangs on restarting negotiations in 2019 for a last-ditch attempt to find a solution to the perennial Cyprus problem. Going into it, signs are not that promising. The positions of all sides to the dispute are quite far apart, needing external developments to focus minds.
This may come in the form of a big discovery early in 2019 at block 10, where ExxonMobil started drilling late October. Seismic data is promising and the proximity of the drilling target to the Zohr and Calypso gasfields confirms its potential. Should a significant discovery be made and depending on quantities, ExxonMobil’s preference is to construct an LNG plant in Cyprus. Its location makes it ideal, both for exports to Europe and to Asia through the Suez Canal, provided these are commercially viable. However, this may yet prove to be a challenge, depending on global gas market conditions.
But there is also an additional requirement. There is a need to find ways to reduce regional geopolitical risk – the tripartite meetings that have been taking place so far, and the setting up of the Gas Forum, have the potential to do this, provided that eventually they lead to wider cooperation encompassing all major players in the region.
Clearly investments on gas production and export projects run into billions of dollars and are made for decades. As such they need certainties. Continuing geopolitical risk may cause delays. Financial institutions normally avoid investing where risk is considered to be significant.
A major discovery by ExxonMobil and the potential of LNG exports could alter Cyprus’ and regional geopolitics irrevocably. ExxonMobil came to the region specifically because of the prospect of such a major discovery. Should that become reality, the company is likely to pursue realisation of LNG exports by all means available to it – technical, commercial and political. Such a discovery could act as a game-changer to find a way out of the current political morass and allow the two sides in Cyprus, Greek and Turkish Cypriots, to benefit.
In the meanwhile, Turkey will continue its increasingly threatening rhetoric and may even escalate this into bolder actions to enforce its arguments, by expanding its drilling activities in the East Med to include Cyprus’ undeclared EEZ, west, north or east of the island. But, hopefully, such aggressive actions will have no place in commercial activities. Turkey is an important player in the region, but it can do better by abandoning its adversarial role and cooperating.
With the certainty of energy developments continuing at a rapid pace in Egypt, 2019 is promising to be a busy year for East Med gas.
Dr Charles Ellinas is a senior fellow at the Global Energy Center of the Atlantic Council @CharlesEllinas