Energy prices have fallen sharply in the last 18 months and oil is likely to hover around $50 a barrel for the foreseeable future. Gas prices too have plunged to a point where developing the East Mediterranean gas finds hardly seems worthwhile, as energy expert Charles Ellinas told a recent Mediterranean energy conference. Chief Editor Gary Lakes reports from the meeting in Rome.
A global surplus of oil and falling demand for it had been making 2016 a difficult year for the energy sector. The world is actually entering a new era, marked by an abundance of low-cost energy, Charles Ellinas, the CEO of the Nicosia-based e-CNHC energy consultancy, told the Mediterranean Oil and Gas 2016 Summit in Rome last week.
Ellinas told the international delegates: “Today’s hydrocarbon fundamentals are unlike previous demand-supply cycles. This time the changes will be structural and long-term.” The changes will have a special impact on plans to develop Israel’s Leviathan field and Cyprus’ Aphrodite field, he added.
Both countries initially focused on securing sales contracts with Egypt, but eventually they will have to look at supplying LNG to Europe through two idle LNG plants 200 km away on the Nile Delta. But LNG spot prices are down to $4-5 per million BTUs and Ellinas thinks that East Mediterranean may not be able to compete in Europe, or possibly even in Egypt. The Cairo government has been trying to revive domestic gas exploration by offering foreign operators higher prices for domestic production.
Even US shale gas, at $2 per million BTUs, is facing a tough time as its new LNG business developers try to find buyers in Europe, he said. Meanwhile, Russia has made it clear that it intends to fight for its European markets and Gazprom claims it can make a profit on a gas price of $3.50. “How can the East Mediterranean possibly compete with that?”, Ellinas wondered.
This so-called “era of plenty”, developing since 2008, is attributed to the arrival of shale oil and gas, a widening use of renewables, increased research into energy efficiency and a decline in energy-intensive manufacturing, he said.
US shale has had a significant impact on the market and the driving force behind Saudi Arabia’s tactic of boost production to defend its market share. Growing output from Iran and Iraq has added to the market glut, even though much conventional oil is shut out because of conflicts in Libya, Nigeria, Syria, Yemen and South Sudan.
The low oil prices have forced some shale producers to halt production, but when prices reach a new shale-profitable level, unconventional oil will bounce back on the market, creating another surplus to hold prices back or push them into another decline. India and China are also expected to develop their own large shale resources. This will probably cap oil prices around $50-60 a barrel, Ellinas said. Experts say shale should account for 27 percent, and renewables for 18 percent, of the rise in energy production over the next 20 years.
Israel and Cyprus will therefore look first to regional markets. A regulatory dispute between the state of Israel, its US operator Noble Energy and Israeli partner Delek group, was recently resolved. These partners in the Leviathan and Tamar offshore gas fields will now proceed with negotiating sales contracts with Egypt – but this will be no slam dunk.
Eni’s recent discovery of the giant Zohar gas field in deep waters offshore of Egypt (and close to the Cypriot maritime border) has revolutionized prospects for the gas market in Egypt – once a gas exporter it has faced severe energy shortages in recent years.
Egypt produces 42 billion cubic meters a year and Zohar production should add 10 billion by the end of 2017, rising to 27 billion a year by 2019. Other gas deposits are being operated by by Eni, BP, Apache and others. The boost in Egyptian exploration and production derives from new price agreements Cairo has signed with foreign operators that pays their companies $4-5.88 per million BTUs. The question is whether Israel and Cyprus can get their gas out of the ground for less than that. Egypt’s reversal of fortune will affect its two neighbors and Elinas wondered if markets in Egypt might vanish as new domestic gas comes on-stream.
“If Cyprus and Israel are prepared to sell very cheaply, I’m sure there will be buyers in Egypt,” he said.
But how cheap? Israel’s Tamar field now supplies its local market and could supply gas to Egypt through existing infrastructure after phase two development. But the Israeli market alone does not justify investing $6 billion to develop Leviathan. The partners have one gas contract in Israel, but more will be needed, almost certainly with foreign buyers.
Ellinas said the real market for Leviathan gas is Turkey, but the long-running Cyprus problem would have to be resolved first. Any pipeline between Leviathan and Turkey would have to pass through Cypriot waters – not an option in the existing East Mediterranean political climate. Israel and Turkey also have sour relations, requiring a diplomatic solution before any new gas deal.
Turkey is paying $10 per million BTUs for piped gas, so the East Mediterranean siren beckons as a sexy option. Turkish companies and the Leviathan partners have been in contact for several years, and if there is a Cyprus settlement, Aphrodite gas could be part of the mix. In this complex web of relations, much needs to be resolved before East Med gas can find a way to Turkey.
Indeed, there are many aspects of the East Mediterranean hydrocarbon industry that have to jell and commercial contracts and project financing will determine its course. Politics aside, a good many more wells need to be drilled to enable the region’s true potential to be analyzed.
“The region is volatile and experience shows that regional geopolitics and stabilities undergo frequent upheavals,” Ellinas said. “The region’s gas dynamic is changing rapidly as global markets and prices face a long-term structural shift. The East Mediterranean needs to plan with realism and pragmatism if it is to succeed in developing gas at a profit.”