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What COP28 developments mean for Cyprus

The commitments made at COP28 will not impact oil and gas consumption, not for a while yet
The commitments made at COP28 will not impact oil and gas consumption, not for a while yet

Natural gas will continue to be part of the energy mix for some time to come, giving the island breathing room to sort out the challenges it faces

COP28, the UN climate summit in Dubai, concluded last week with unanimous approval of the Global Stocktake Agreement (GST). It “signalled” the “beginning of the end of fossil fuels” by laying the ground for a just and equitable transition, underpinned by deep emissions cuts. The exact wording is: the COP recognises the need for “transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net-zero by 2050 in keeping with the science.”

Even though this is a historic decision, transition will not be swift. The GST leaves a role for oil and gas in future energy systems for a long time to come. It acknowledges that natural gas has a role to play as a transition fuel. The exact wording is that the COP “recognises that transitional fuels can play a role in facilitating the energy transition while ensuring energy security.” The reference to “transitional fuels” is interpreted as a code-name for natural gas.

The reference to energy security is particularly important, given the intermittent nature of renewable energy sources (RES). Gas, as the cleanest fossil fuel, is seen as supplementary to renewables during energy transition, ensuring energy security.

Provided it tackles its methane leakage problem, it is also a cleaner replacement for the much dirtier coal. Most credible outlooks show natural gas demand growing all the way to 2050, except for the International Energy Agency that shows demand peaking by 2030.

Bank analysts said “the COP deal emphasises an important role for natural gas in the energy transition, which the industry has long said was necessary to reduce use of coal as RES capacity ramps-up.”

Saudi Arabia and other OPEC countries accepted the COP28 deal because it allows countries to follow their own pathways in its implementation. The GST “calls on Parties to contribute to…global efforts, in a nationally determined manner, taking into account the Paris Agreement and their different national circumstances, pathways and approaches.”

These developments provide breathing space for Cyprus that continues to face challenges developing its own gas discoveries.

A boost for natural gas demand

2024 is expected to be the last year of global LNG market tightness. Based on LNG demand forecasts, the market will be balanced in 2025 and shift into an oversupplied market in 2026. As prices come down, it should boost natural gas demand further, strengthening its case against coal.

China expects its own natural gas production to carry on increasing to meet rising demand, forecast to increase from 365 billion cubic metres (bcm) in 2022 to about 550bcm by 2030. Gas helps deal with urban air pollution caused by coal use. Coinciding with COP28, China released an action plan early December committing to control coal use to improve air quality.

Over the last decade oil and gas majors have been making big investments into natural gas assets and projects. In addition, major economies, such as China, India and Japan, see increasing investment in gas as necessary to ensure future energy security.

Gas industry participants at COP28 said they expect that, with emission and methane leak control, natural gas will continue to have a role as a transition fuel well into the future, especially as long as solar and wind intermittency remains a problem. As a result, the GST will not impact oil and gas consumption, not for a while yet.

Even the US, despite its leading role at COP28, is still expanding its oil and gas production and exports. And so are Canada, Norway and Australia. Europe is building new LNG import terminals, driven by energy security concerns.

The longer-term transformation of global energy systems has just begun, but it will take decades. As long as energy security and reliability are not guaranteed, flexible fuels, such as natural gas, will have a role to play.

Impact on Cyprus gas

Cyprus is still facing delays in moving Aphrodite into the development phase. But the outcome of COP28 means that even if Aphrodite gas production is delayed to 2029, at the earliest, Cyprus is not risking ending-up with a stranded asset. Gas will be part of the global energy equation for a long time to come.

The latest exchange of letters with Chevron and its partners, Shell and NewMed, and the new deadline to submit an ‘updated’ development plan by 31 March, still leaves many questions unanswered. What does all this mean?

In addition to the extension, the important thing is that the minister accepted Chevron’s proposal to formulate “an optimal development plan,” not just an ‘updated’ plan.

Chevron insists on optimising the plan, that is, it will consider alternative ways of development, with the paramount aim of reducing costs. All options remain.

In his briefing to the Parliamentary Energy Committee on December 12, the minister accepted that “from 2019 until today, energy in the East Med has changed a lot, both geopolitically and in energy terms. We thought it right that perhaps we should also accept an update of the specific plan.”

He also clarified that updating means that the plan becomes more functional in the current energy environment of the East Med and also in the environment of Cyprus’ EEZ. This opens the window for, perhaps, a somewhat different plan from that agreed in 2019.

NewMed, in its annual report on March 28, 2023, pointed-out that the 2019 agreement allows for and is “subject to changes arising from, technical, commercial and economic conditions”. This explains Chevron’s insistence on continuing to consider alternative options in order to reduce project costs.

With the new timetable, Chevron and the ministry might come up with an acceptable development plan by mid-2024, with FEED starting later in 2024 and completion in the second-half or end 2025. This will be followed by detailed design, final investment decision, financing and finally construction, which will take about four years. That is, without further delays, production will not begin until 2029.

The important thing is that the negotiations did not end in an unwelcome collapse. The development prospects of Aphrodite remain intact – even if delayed.

First quarter 2024 will see completion of the Cronos appraisal well. If successful, which is likely, it will be followed by submission of a development plan by Eni, very similar to Chevron’s, ie without an FPU, but linked to Zohr facilities in Egypt. With some flexibility, 2024 may be the year Cyprus gas sees progress.

 

Dr Charles Ellinas is a Senior Fellow at the Global Energy Centre Atlantic Council

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