Wednesday, January 18, 2012

Cyprus Hydrocarbons - A Presentation

We provide herewith extracts from the Presentation:

The confirmation of significant quantities of hydrocarbons in Cyprus, (the Levantine Basin, the Nile Delta Cone, the Eratosthenes Continental Block and the Herodotus Basin) may prove to be a tremendous opportunity not only for the island but for the EU as a whole. The U.S. Geological Survey estimates that the aforementioned areas hold an estimated 13.8 trillion cubic meters (tcm) of natural gas. Also as per the BEICIP/FRANLAB and the Institut Français du Pétrole, the Cyprus Exclusive Economic Zone alone holds an estimated 3 tcm of natural gas.

Cyprus – an EU member country, strategically located in the Eastern Mediterranean is a long established international business and financial center with the lowest corporate tax in the EU and about 50 double tax treaties; an established gateway to the world of international trade with tested legislation and more than adequate infrastructure of all sorts – has now the potential to becoming a guaranteed primary natural gas source and transit route to the EU.

Can Cyprus become a guaranteed primary gas source and transit route to the EU?

EU and Natural Gas

According to Eurogas the share of natural gas in the EU is expected to reach 30% of the primary energy consumption in 2030 while demand for the same period will increase by 43%. Domestic production however will decrease. At end-2010, European production accounted for 59% of supplies to EU gas markets and is expected to drop to a third by 2020 and to a further quarter by 2030. By 2015 a substantial gap emerges between demand and supply coming from European production or imported from outside Europe. The European gas industry must focus its gas procurement especially for the period after 2015.

For the depending on imports European natural gas industry, the sufficient gas reserves available in the medium to long run are in countries which are NOT so accessible in terms of transmission distances or exist in fields that are increasingly difficult to develop (with the consequence of rising production and transport costs). Taking into account the growing gas demand worldwide and the decreasing indigenous production in Europe, it will require huge efforts and substantial investments of the suppliers to mobilize this gas in time. Besides, when assessing supply options, it has to be kept in mind that competition for supply will become far stiffer especially from North America and the emerging economies of South-East Asia.

Solution to EU Natural Gas shortage

The annual NG consumption of the EU amounts to about 500 bcm. Almost half of it is imported from Russia, 160 bcm from Algeria and 90 bcm from Libya. By 2020 the demand for natural gas in Europe will increase by another 225 bcm. The total energy deficit (Oil & Gas) of the EU will therefore reach 845 bcm. These EU requirements for NG can neither be satisfied by Russia – which has 44 tcm of NG resources and an annual production of 600 bcm – as 2/3 of its reserves and production are allocated for domestic uses, nor by Algeria and Libya as their reserves amount to only 6.2 tcm. Now however, the demand deficit can be satisfied from the newly discovered and expected NG deposits of the Eastern Mediterranean.

According to the USGS, besides the NG deposits already discovered in Egypt and Israel (~3 tcm), the deposits that lie in the EEZs of Cyprus, Israel and Egypt alone are conservatively estimated to another 10.8 tcm. This brings the total of proven and potential reserves to 13.8 tcm; an amount that is almost 12 times more NG than what Europe expects to receive via the Nabucco Pipeline (1.2 tcm). If 3 tcm is generously subtracted in order to satisfy the domestic needs of Cyprus, Israel and Egypt over the next 30 years, the remaining amount of 10.8 tcm could satisfy the EU’s natural gas requirements by 2020 for 35 years!

Scenario optimum

Up until the liquefaction plant is constructed in Cyprus, the export of the Eastern Mediterranean NG surplus can by facilitated via compressed natural gas vessels (CNG) loading directly from the offshore field floating production systems to EU ports. In the short- to medium-term and after the liquefaction plant is operational, NG can be transported to the EU via the more efficient LNG vessels (CNG’s volumetric energy density is estimated to be 42% of LNG’s).

In the long-term following further offshore discoveries in the region, the ability to build two or more pipelines to transport natural gas from Haifa (Israel) via Cyprus to the island of Crete (Greece) and then to Western Greece and Italy into the European NG network makes only sense. The “East Med-EU Pipeline” could provide energy security for the EU for at least half a century.

It is also important to note that the estimated giant shale gas reserves located in the area of Shefla onshore Israel and those in the offshore south of Crete basins and the rest of the Greek EEZ can only enrich the already estimated substantial volumes. In the longer term, natural gas from Iraq, Iran, Saudi Arabia and Qatar and even from the Caspian Sea could only make sense to connect to the “East Med-EU Pipeline” when the political environment allows. 

Challenging considerations

Complex challenges lie ahead for both Cyprus (and the EU):

  Is a natural gas liquefaction plant too expensive an option for Cyprus?

  Should the natural gas liquefaction plant be considered at all or should Cyprus consider only the pipeline solution to mainland Europe?

  Up until the natural gas liquefaction plant is constructed or pipeline to mainland Europe is installed, is CNG transportation a feasible option?

  Is CNG transportation a long-term solution?

  Is the installation of the pipeline from Cyprus to mainland Europe feasible, or the water depth and the underwater terrain forbid such a task?

  Would Cyprus alone be in the position to safeguard the valuable pipeline from terrorist activities?

  What if a JV is structured between Cyprus and the EU for the exploitation of the hydrocarbons in Cyprus and the Eastern Mediterranean (along with the participation of Israel, Lebanon, Egypt and Syria)?

  Will the countries in the Levantine Basin, such are Israel and Lebanon, manage to put aside their differences and cooperate for the real benefit of their people or would this be the cause of more tension?

  Should a pipeline running from Cyprus gas fields onto Turkey and then to the proposed Nabucco Pipeline be a Cyprus (and EU) consideration at all?

  Is granting companies of Russian interests gas concessions for Cyprus and the EU a wise decision? If yes, how could Cyprus’ and the EU’s interests be safeguarded?

  Does Cyprus have the appropriate expertise on board to monitoring and overseeing the existing and future drilling operations?

  Should Cyprus develop a domestic natural gas distribution network or not?

  What about the oil deposits (when Block 12 alone is estimated to have a huge 3.7 billion barrels)? What is the infrastructure required?

Conclusion

The vulnerability of the EU to energy supply risks is a fact but this can be no more. If the most conservative data is taken into account in regard to the natural gas reserves discovered in the exclusive economic zone (EEZ) of Cyprus (and the Eastern Mediterranean), for the first time ever in European energy history, the EU is guaranteed an uninterrupted supply of a traditional energy source.

Conservative estimates of reserves in the Eastern Mediterranean can satisfy EU’s NG requirements for at least half a century. Results of hydrocarbon exploration in Cyprus so far exceeded all expectations. Note that recent findings of Cyprus’ Block 12 (or Aphrodite) along with those of Israel’s in the Leviathan block, rank among the largest discovered worldwide in the last 10 years. The amount of gas from these two parcels alone is estimated to equal half of the known reserves of those of the U.S.; a country with a population of 310 million, whereas the total population of Cyprus and Israel is less than 9 million.

Most interestingly, seismic surveys indicate that the other blocks in the Cyprus EEZ are expected to reveal much more NG deposits, e.g. Block 4, in the Herodotus Basin, is believed to contain three times more natural gas than Block 12 and a lot more oil…

It is also important to note that the oil deposits are also significant. The 3.7 billion barrels of recoverable oil deposits estimated to lie within Block 12 alone can be with current crude oil prices roughly translated into US$330 billion.

As the findings one after the other are confirmed Cyprus will attract more and more foreign direct investments. Required long term investments in infrastructure, maintenance, support services, financing and banking, suggest that also job creation will be long term. It is estimated that during the next decade an additional 300,000 jobs will be required to satisfy the needs of the Cyprus’ hydrocarbon industry; a phenomenon that will positively affect not only the Cyprus economy but those of the neighboring countries as well.

The hydrocarbon discoveries in the Eastern Mediterranean are bound to serve as a catalyst toward greater cooperation amongst the participant countries. The joint exploitation between these countries and the launching of joint projects has the potential to change the whole political and economic scene of the entire region to the better.

Most importantly the gas-starved EU has to seize this opportunity for a guaranteed energy source supply. Cyprus, Israel and the EU (with the lead coordination of the EU and Cyprus) but also Egypt, Lebanon and Syria should jointly work to ensure that an appropriate framework and solid plan are in place in order to complete exploration drilling and commence exploitation as quickly as possible. What if a JV is structured with the EU for the exploitation of the hydrocarbons in the Eastern Mediterranean along with the participation of Greece? Note that the participation of Greece is not only important because of the envisaged pipeline route but also for the substantial hydrocarbon deposits that are estimated to lie within its EEZ.

Such a venture will minimize both sovereign and financial risks for all parties involved. The transit route that should avoid non-EU countries, via a pipeline to mainland Greece and then to the rest of Europe as described herewith in Scenario Optimum is the only way for an uninterrupted and guaranteed energy source supply for the EU.

The damaged Iraq-Syria Pipeline when reinstituted and when the closed Trans-Arabian Pipeline reopened, can both become an additional source enhancer (and when the political environment allows); Saudi Arabia, Iraq, Qatar and not only could also connect to Cyprus in the longer term…

Cyprus, an EU member country, a regional business and financial hub (and an established investment gateway to and from Russia) is firmly on its way to becoming an energy superpower and a guaranteed primary natural gas source and transit route to the EU, of the EU; a hub of reconciliation and regional stability!



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