Cyprus may have what it takes to become an important gas supplier and energy hub for Europe. Natural gas discoveries in the country’s offshore areas could form the foundation of a large liquefied natural gas (LNG) terminal in Cyprus, additionally supplied by gas from Israel. The creation of such a “second Southern Corridor” would give an important economic boost to southeast Europe, significantly improve European security of energy supply and provide a common point of interest for regional actors. That is why Brussels should consider giving the LNG project in Cyprus its full support, argue Constantine Levoyannis, Political Advisor at the European Parliament and Mathieu Labrèche, Business Communications Manager at a major North American securities exchange group.
The European Union’s dependence on energy imports, while already large, will continue to mount as indigenous production of oil and gas in the North Sea declines. Oil imports will reportedly increase to 95% of EU demand by 2030 and gas imports from 63% in 2010 to 80% by 2030.[1] As reliance on non-nuclear energy increases in the post-Fukushima world and following Germany’s decision to phase out nuclear power by 2022, the EU will need to double down on new sources of energy to complement its focus on renewable energy. Natural gas remains the best partner for balancing intermittent renewables in Europe’s total energy mix. Furthermore, increased use of natural gas would go a long way towards helping the EU achieve its headline targets for cutting greenhouse gas emissions, as gas-fired power emits 50% lower greenhouse gas emissions than coal power. Unfortunately, given the low price of carbon in Europe, coal is currently the fossil fuel of choice for most EU member states.
The recent decision by the Shah Deniz consortium in Azerbaijan to select the Trans Adriatic Pipeline (TAP) as the energy project of choice will move forward the Southern Corridor initiative and, as such, presents a major milestone in EU energy policy. The project relies on the Trans-Anatolian gas pipeline (TANAP), which will go through Turkey, and the connecting TAP pipeline which begins at the Greek-Turkish border. TAP represents an important stepping stone to more energy diversification and increased energy security in Europe. However, it will not solve the whole problem. According to current estimates, TAP and TANAP will only provide about 10 billion cubic metres (bcm) annually to Europe – a relatively small contribution to European demand, which totals roughly 500 bcm a year. Clearly additional sources are needed. Recent hydrocarbon discoveries in the eastern Mediterranean and the Levantine basin can provide one such source. They could become the basis for a second Southern Corridor, for which Cyprus seems the logical hub. If a new regional LNG facility is built at Vasiliko, as is currently the plan,[2] Cyprus could be exporting about 7 bcm by 2020, 35 bcm by 2025 and ultimately 50 bcm. This means the eastern Mediterranean, with Cyprus as the key point of export, could end up supplying 50% of the EU’s additional gas needs.
East Mediterranean gas glut
So far the most significant discovery to be made within Cyprus’ Exclusive Economic Zone (EEZ) is the Block 12 offshore concession, also known as Aphrodite. Until recently, the U.S. Geological Survey estimated that Aphrodite could hold more than 10 trillion cubic feet (tcf) (280 bcm) of recoverable natural gas. To put things in perspective, that is 2.5 times the annual production of Norway. However, on 3 December, the Israeli company Delek Energy, which works together with U.S. based Noble Energy, announced that the latest appraisal of Aphrodite had confirmed only 4.1 tcf. An LNG terminal typically needs at least 5.5 tcf as a supply source to be economically viable, which means Cyprus cannot build a terminal on the basis of Aphrodite alone.
This is where a regional, integrative approach may help form a new energy hub in Europe’s Mediterranean near abroad. There are other hydrocarbon sources to be found, both in Cyprus’ other offshore concessions and in its neighbours’ EEZs. The U.S. Geological Survey has estimated that the Levantine Basin, as a whole, contains nearly 122 tcf (3416 bcm) of recoverable gas, which would make it one of the world’s larger deposits. Even if not all recoverable gas is produced, it would make the area a very significant resource globally.
Israel has up to now led the way in terms of exploration and production in the region. The country is already producing gas from its Tamar[3] field, with 10 tcf of recoverable deposits, while also moving forward with its plans to capitalize on its Leviathan[4] field, which is even bigger at 18 tcf of recoverable reserves. It’s also worth mentioning that an Israel court recently confirmed that 40% of its recoverable offshore gas can be exported, with Europe as one of several target markets.
The good news for Europe is there are other offshore areas in its south periphery left unexplored. Greece, for instance, is about to start exploration in the Ionian Sea and South of Crete. According to the Technical University of Crete’s Anthony Foscolos, a wealth of hydrocarbons in the sea area south of Crete could generate huge revenues, to the tune of $437 billion and approximately 300,000 direct and indirect jobs flowing from energy projects. [5]
Transport routes and getting to market
If offshore gas resources in the south and east Mediterranean can be successfully extracted and commercialized, the next question is how they will be transported to markets in Europe and elsewhere in the world.
Cyprus has already confirmed its commitment to build an onshore liquefaction capacity in Vasiliko to refine its own resources, some of which will be destined for Europe and other global export markets including Asia. The Cypriot Minister for Energy, George Lakkotrypis, earlier this year confirmed that negotiations between Cyprus, Noble Energy and Delek Energy for a liquefaction capability[6] have entered a substantive phase.[7] The group is also considering working with other “strategic partners”, such as Australia’s Woodside, an oil and gas company whose expertise is liquefaction and downstream marketing. Woodside also retains important links to global markets and established relations with customers worldwide.
For its part, the European Investment Bank (EIB) has stated that it would consider investing in the proposed LNG terminal in Cyprus. According to the EIB’s screening and assessment criteria, the EU’s lending arm would finance the extraction of hydrocarbons if opportunities arise which are technically, financially and economically justified, while also taking into account environmental[8] and social impacts.[9]
The Cyprus National Hydrocarbons Co. estimates the first phase of the LNG facility, including infrastructure and as many as five production lines, or trains, will cost more than €9 billion.[10] Cypriot authorities are said to be considering several different options to help fund the large scale project, including possibly using projected LNG sales agreements as collateral for loans.[11]
Expectations are that construction of the onshore LNG facility and production lines will start in early 2016, with international exports reported to begin as early as 2020. If all goes according to plan, this could help Cyprus meet its bailout commitments, spark economic growth and generate returns worth having for the country, both financial and political.
If all goes according to plan, this could help Cyprus meet its bailout commitments, spark economic growth and generate returns worth having for the country, both financial and political
To make an LNG terminal feasible at this stage, Cyprus will have to work together with its coastal neighbours, primarily Israel. Together with Israeli resources, Cyprus has the potential to become an important energy exporter – the EU’s east Mediterranean energy hub in the making. It is reported that Cyprus will need less than 10% of its offshore gas for domestic use, thereby leaving significant quantities for export.[12]
In order for Cyprus’ energy hub aspirations to be realised, global investors will need more clarity in some respects. For one, more certainty over actual quantities of gas in the region is needed. Also, a political agreement with Israel on gas exports would help inform decisions at the investor level. In addition to Noble Energy, which owns 70% of Block 12 and led appraisal drilling at the site, two European companies, Total and ENI, and South Korea’s Kogas, have already received licenses for exploration and production of Cyprus’ other offshore blocks. An increasing amount of oil and gas companies will be willing to invest as Cyprus’ energy plans begin to crystallise and the resource base in the region is proven and quantities have been confirmed.[13] Oil and gas companies in Russia and China are also reportedly showing interest.
It is important to note that there are alternatives to building an LNG terminal in Cyprus. For instance, Israel could export its gas to Jordan or build a new pipeline to Turkey, a country whose need for energy is rising exponentially. For its part, Greece would like to see a pipeline connecting it to Israel and Cyprus via Crete to insert itself firmly in the south east European gas market. Bearing in mind the recent decision on TAP, adding the ‘East Med gas pipeline’ option to the equation would further enhance Greece’s geopolitical standing, especially if it becomes a producer as well.
Another option which is being examined is linking Israel, Cyprus and Greece via high-voltage direct current (HVDC) transmission grids, or simply put: underwater electricity cables that would link the three countries together, while also providing extra advantages for maritime geographies. It is worth mentioning that other countries outside the newly forming Greece-Cyprus-Israel triangle are closely following the progress of this project, with Bulgaria most recently showing interest.
Depending on the level of ambition and the degree of cooperation between the countries involved, the HVDC grid option could prove an interesting one in terms of cooperation on energy security and energy interdependence in Europe’s southeast corner. Interestingly, the electricity option would also mean that renewables could be easily integrated into the transmission system, thus also taking advantage of the geographic characteristics which favour countries surrounding the Mediterranean. The potential wind energy in the Aegean is second only to the North Sea and the potential for solar energy in Greece is the best in European according to many irradiation studies.
However, it remains to be seen how feasible any of these options are. Following the severe disruptions to the Egyptian pipeline to Israel and Jordan caused by militia bombings in the Sinai, Israel and Jordan entered discussions to secure an agreement over exports of natural gas. Yet a deal between the two neighbours has not materialised fully despite debilitating gas shortages in Jordan.
With respect to an Israel-Turkey pipeline, various commentators say that gas reserves would eventually find their way to Europe through Turkey; yet the likelihood is high that it would be used mainly to feed Turkey’s voracious domestic consumption.[14] Furthermore, the situation in Lebanon and Syria will make this pipeline very difficult to materialise as it will inevitably have to go through their territorial waters, contiguous zones or EEZs.
It has also been suggested that one of the most economical solutions for east Mediterranean gas to arrive to markets would be through the construction a Cyprus-Turkey pipeline infrastructure. It is reported that the cost of gas piped through a Cyprus-Turkey pipeline[15] would be about $7-8 per MMBTU. However, this will remain a ‘pipe dream’ as long as Cyprus remains divided and diplomatic relations between the two countries remain non-existent.
If the EU is serious about doing what it takes to exploit its own resources and diversify its routes and sources, it will eventually set its own gas prices
Cyprus’ LNG terminal plan could allow it to export both to Europe and other global markets. This gives more flexibility as opposed to being locked into pipeline politics. Peace pipelines start with good intentions, yet they are easily prone to disruptions caused by geopolitical complexities (e.g. the Egyptian pipeline). Moreover, the LNG option would make more sense in terms of security, as the security threats in Cyprus are considerably less than those in Israel or Turkey. Cyprus is a country that traditionally retains good relations both with Israel and the Arab world.
As it stands, the pressure is currently on Cyprus. If the country wants Israel to buy into a joint venture, it has to move fast on an LNG agreement with Noble Energy and other stakeholders and investors. Moreover, linking Cyprus and Israel’s adjacent gas fields together and jointly exporting gas could prove to be the most economically efficient and lucrative strategy for both countries. If Cyprus does not move fast, however, Noble could move to its Plan B option of investing in a floating LNG plant jointly with Israel.
European energy diversification
In terms of diversification for Europe, the option of piping east Mediterranean gas to Turkey and then on to Europe could be seen as the easiest option. However, this would go against the very concept of diversification, and instead it would potentially create another transit monopoly.
An LNG terminal in Cyprus, by contrast, would serve to complement the Southern Corridor project as well as the goals set by the meeting of the European Council on energy in March 2013. Not only in terms of exploring and extracting indigenous resources[16], but also helping to complete the internal energy market and developing more interconnections to help avoid energy isolation or dependence.
A new energy corridor would also have a huge impact on southeast European countries[17] including Bulgaria, Greece and Slovakia, which each receive about 85% of their domestically consumed gas from Russia. In addition, if the east Mediterranean gas rush were to be connected with any potential success story with hydrocarbons in Greece[18], a more competitive energy market could be established in Europe’s southern peripheries. The LNG plant (storage), a proposed pipeline linking Cyprus and Greece[19], and the HVDC option have all been approved as Projects of Common Interest (PCI)[20] by the European Commission.
The EU should fully support the development of its own indigenous resources and the creation of a new energy corridor to provide enhanced energy diversity and security for itself and its neighbours. If the EU is serious about doing what it takes to exploit its indigenous resources responsibly and diversify its routes and sources, it will eventually set its own gas prices.
The new global energy landscape precipitated by the U.S. shale gas revolution can also benefit the European Union. If European hydrocarbons were linked to future U.S. gas exports, for instance, Europe could see the end of long term contracts priced according to the crude oil index and, as a result, a steady convergence of global gas prices. Additionally, the more we begin to see natural gas being used in the transport sector, the more likely it will be that Europe will be able to set its own prices according to spot markets and hub-based pricing, thereby paving the way for a more liberalised and competitive energy market.
[1] Delivering Growth, Security and Sustainability, EIBs Screening and Assessment Criteria for Energy Projects, 25 July 2013
[2] Dr. Charles Ellinas, Cyprus and the energy developments in the eastern Mediterranean, South Europe Studies, St. Anthony’s College Oxford, Cyprus National Hydrocarbons Company 17 May 2013, p.31
[3] Proven resources: 10tcf
[4] Noble owns 39.66% of the Leviathan field and Delek Group owns 15% and the proven gas resources amount to 19tcf
[5] Scientific evidence in Greece suggests that a wealth of hydrocarbons in the sea area south of Crete could generate huge revenues to the tune of $437bn and create 300,000 jobs. See Anthony Foscolos, Implementation of the Greek Exclusive Economic Zone and its Financial and Geopolitical Benefits, Technical University of Crete, June 2, 2011
[6] Reports suggest that an agreement will be reached by the end of 2013, yet it remains to be seen if such an ambitious timeline can be reached.
[7] See http://www.financialmirror.com/news-details.php?nid=30637, Accessed on: 16 August 2013
[8] It is also mentioned that any fossil fuel power plant with a specific emission in excess of the Emission Performance Standard can only be financed where it contributes to security of supply on isolated energy systems such as small islands with no feasible mainland energy connection
[9] Delivering Growth, Security and Sustainability, EIBs Screening and Assessment Criteria for Energy Projects, 25 July 2013
[10] http://www.bloomberg.com/news/2013-07-12/cyprus-studies-lng-export-expansion-beyond-12-billion-terminal.html, Accessed on: 14 July 2013
[11] See “EIB says would consider backing Cyprus LNG terminal”, http://www.reuters.com/article/idUSL5N0EB2D620130530?irpc=43, Accessed on: June 2 2013
[12] Sir Michael Leigh, A Recovery Strategy for Cyprus, Cyprus Weekly, 8 June 2013
[13] Cyprus has so far leased 6 blocks. Noble owns the rights to Block 12; ENI/KOGAS have blocks 2,3 and 9; TOTAL has blocks 10 and 11
[14] The 6bcm from Azerbaijan is not enough for Turkey.
[15] In its report Aphrodite’s gift, International Crisis Group described this as the most economic option if political circumstances permitted it. See: http://www.crisisgroup.org/~/media/Files/europe/turkey-cyprus/cyprus/216-aphrodites-gift-can-cypriot-gas-power-a-new-dialogue.pdf
[16] Both onshore and offshore,
[17] Greece and Cyprus have the highest electricity prices in the EU and rising energy poverty. Energy accounts for 50% of household bills
[18] Scientific evidence in Greece suggests that a wealth of hydrocarbons in the sea area south of Crete could generate huge revenues to the tune of $437bn and create 300,000 jobs. See Anthony Foscolos, Implementation of the Greek Exclusive Economic Zone and its Financial and Geopolitical Benefits, Technical University of Crete, June 2, 2011
[19] Since Israel is not a EU Member State it is not mentioned in the PCI proposal concerning the pipeline, but it is broadly recognised that they would be part of this project. This project was given support by the Israeli Minister for Energy recently in October: see: http://www.naturalgaseurope.com/greece-israel-cooperation-east-med-pipeline-revival
[20] See: http://ec.europa.eu/energy/infrastructure/consultations/20120620_infrastructure_plan_en.htm, for lists of proposed projects of common interest
Pedro Moraleda says
Why not considering the alternative of an offshore pipeline to the Egyptian idle LNG terminals in Damietta and Idku?
Shared interest will help to work out a commercial agreement that overcomes current political obstacles and save a lot of money and time to all.