Exploration Intensifying for East-Mediterranean Natural Gas

Publication: Eurasia Daily Monitor Volume: 9 Issue: 87

(Source: Ahram Online)

The Republic of Cyprus, a European Union member country, is proceeding with development of the Aphrodite offshore field. This is the first of 12 offshore gas and oil blocs that Cyprus plans to tender out to international companies. Bidding for the other 11 blocs was announced in February 2012, with a deadline for submitting applications by May 11 (www.cyprusprofile.com, May 7).

Aphrodite is the southernmost field in Cyprus’s exclusive economic zone, contiguous to Israel’s zone and the Leviathan deposit within the Israeli zone. Cyprus and Israel last year delineated their respective exploration rights and exclusive economic zones in the Mediterranean Sea. The offshore Tamar and Tanin deposits, along with a few smaller ones are located closer to northern Israel’s coast.

These deposits form parts of the wider, under-explored Levant Basin in the Eastern Mediterranean. Gas reserves at the four main deposits are tentatively estimated at 200 billion cubic meters (bcm) for Aphrodite, 500 bcm for Leviathan, 300 bcm for Tamar, and 400 bcm for Tanin. Further discoveries are deemed probable. In Israel, according to Energy Minister Uzi Landau, produced gas would initially be used to meet Israel’s domestic demand, with the surplus to be offered for export (RigZone, May 3).

The Texas-based Noble Energy discovered these deposits during 2010-2011. Noble Energy is the lead shareholder in Aphrodite, Leviathan, Tamar and Tanin, alongside Israeli minority partners in each project. The Delek Group of Israeli tycoon Yitzhak Tshuva is the main partner to Noble Energy in these four projects. The Tamar project is optimistically expected to start commercial production in 2013; and Leviathan, in 2016.

The geological complexities and value of investments remain to be determined (or announced) for each project. The existing shareholders are expected to invite larger companies into these projects for field development, and certainly for transportation. Several West-European and other international companies are known to be interested. For their part, Russia’s Gazprom and Novatek seek to enter the Cyprus projects; and Gazprom, the Israeli projects. Turkey alone opposes exploration off Cyprus before a political settlement to reunify the divided island (see “Russia Backs Greece-Cyprus-Israel Triangle against Turkey on Offshore Gas, EDM, May 8).

Israel and Cyprus hope to become significant gas exporters on the strength of these projects. In Israel’s case, however, the security of its own supply ranks first in the order of priorities. Egyptian gas deliveries to Israel became politically and physically insecure as a result (unforeseen in the West) of the “Arab Spring.” With Libyan arms-smuggling and fighters infesting Egypt’s Sinai peninsula after August 2011, and Cairo disabled from policing it, the Egyptian gas pipeline to Israel has repeatedly been sabotaged with bomb blasts. Concurrently, Egypt’s election-winning parties pressured the government to end the gas deliveries to Israel. Last month (April 2012), Egypt’s state-owned company suspended the gas supply agreement with Israel, citing a dispute over payments. The case is now in arbitration (Bloomberg, May 1, 6).

The Egyptian supply gap raises the Mediterranean offshore projects’ economic significance to Israel and the political stakes involved. Israel expects offshore gas production from the confirmed reserves substantially to exceed the lost Egyptian supplies, generating export surpluses even without taking possible new discoveries into account.

Export routes and transportation modes currently under consideration seem, however, exorbitantly costly in relation to the likely volumes. One option would involve a pipeline on the Mediterranean seabed, from Israel’s Leviathan project to Cyprus, onward on the seabed (possibly via Crete) to mainland Greece, and by overland pipeline(s) into European Union territory. Another option would entail liquefying the gas in Israel and/or Cyprus (both countries are vying to host this operation), shipping the liquefied product by tankers to mainland Greece for re-gasification, and delivering the product through Greek pipelines to EU countries. Under both of those scenarios, Cyprus has ambitions to host a strategic gas storage site. A third option would consist of exporting liquefied natural gas (LNG) from these fields directly to consumer countries in the Mediterranean, or through the Suez Canal to East Asia.

Those three options involve high shipment costs for bringing relatively limited volumes to markets, there to compete against suppliers with larger volumes or lower transportation costs. This would remain a disadvantage unless new offshore discoveries in Israel and Cyprus exceed the scale of the already confirmed reserves. Even in that case, high costs of trans-Mediterranean pipeline construction or gas liquefaction would necessitate aggregating Israeli and Cypriot gas volumes, so as to generate price-competitive exports. On currently declared reserves, however, the commercial viability of international exports from these projects might be difficult to substantiate.