Global oil and East-Med natural gas

Global oil and East-Med natural gas

Business Monday, 14 December, 2015

This article is based on a presentation I made at the fourth Energy Symposium organised by the Institute of Energy for South East Europe (IENE) and Financial Media Way (FMW) on December 7-8 at the Hilton-Park in Nicosia.

The symposium was opened by President Nicos Anastasiades, who called for regional cooperation for the development of East-Med gas resources.

It started with a review of Cyprus’ energy sector, followed by presentations on strategies for the exploitation of natural gas, operation of the liberalised electricity market, renewables and energy efficiency.

East-Med overview

Israel is hoping to overcome its regulatory problems soon and reconsider development of Leviathan in the light of the discovery of the huge Zhor gasfield. But the award of an arbitration settlement by the International Chamber of Commerce (ICC) of $1.76 billion to Israel Electric Corporation, and Egypt’s immediate response of suspending any gas import negotiations with Israel complicates the East-Med picture, unless things are resolved soon.

The eventual decision may also complicate the resolution of the regulatory problems in Israel as it is based on invoking Article 52, which can only be used to bypass the Antitrust Commissioner in cases of national security and importance. Israel’s Energy Minister Yuval Steinitz is already considering other gas export options from Israel to other countries in the region, thought to include Turkey.

The discovery of Zhor by ENI has given Egypt a massive boost but has turned East-Med plans and thinking upside-down. Given the favourable prices it has secured for its gas, ENI will proceed with development of Zhor as a matter of priority.

And together with BP’s North-Alexandria and Atoll, Shell’s shale-gas finds, and Egypt’s 77tcf of proven gas reserves, there is enough gas to supply Egypt’s additional future domestic needs, and replace liquefied natural gas (LNG) imports, and also to supply the two idle LNG plants at Damietta and Idku. Egypt plans to stop LNG imports by 2020 and resume LNG exports by 2022.

And then there is Turkey

It was stated last month in conferences in Istanbul and Tel-Aviv that Turkey expected to obtain 10-12bcm of gas per year from the East-Med for its future needs.

That was before the recent incident and the standoff between Turkey and Russia. As a result of this, Turkey is now looking for alternative gas supplies from the East-Med to lessen dependence on Russia. It has, for example, signed preliminary agreements to import gas from Qatar and Kurdistan.

Should the Cyprus problem be resolved, Israel and Cyprus could jointly supply more than 20 bcm per year to Turkey, should this be acceptable and provided the price is right. And markets and prices matter, given the glut of oil and gas now in the global markets.

Oil markets

The International Energy Agency (IEA) released last month its annual World Economic Outlook (WEO-2015), covered in the Cyprus Weekly on November 20, and it makes grim reading as far as oil prices are concerned.

The IEA expects oil demand to rise by less than 1% per year between now and 2020, and only by 0.7% thereafter, a slower pace than necessary to quickly mop up the oil glut that has driven prices to such lows. As a result, prices will stay low for longer, leading to major cuts in spending.

East-Med is not immune to this. Investment by oil and gas companies is expected to be selective and only projects with strong commercial viability and low risk will be funded.

The decision by OPEC last week to maintain its current policies is reinforcing low prices. As a result, the price of Brent crude is now hovering near $40 per barrel and Goldman Sachs predicts it could go substantially lower before it goes up again.

Impact on natural gas markets

Similar arguments apply to gas prices, through oil-price linkage in long-term sales contracts and a glut in the global supply of LNG. By 2018, global liquefaction capacity is set to grow by over 140 bcm per year, which is 28% over 2014 levels, and another 40-50 bcm per year is expected by 2020, mainly from Australia and the USA.

This is in addition to a glut of LNG already in the market, which has led to global LNG prices tumbling to current very low prices. It is now a buyers’ market, with buyers renegotiating unfavourable long-term contracts and dictating supply terms.

Wood MacKenzie expects the LNG-glut to be deeper and last longer than anticipated and to persist for some years. In Asia, LNG prices may bottom-out by 2019 at $5 per mmBTU and in Europe by 2020 at about the same level and recover slowly after 2022. Societe Generale makes similar forecasts.

European gas prices are subject predominantly to the actions of Gazprom. Its low gas cost base and the devaluation of the ruble allow it to compete and dictate prices. Russian gas exports can be viable even at $5 per mmBTU. And in Europe LNG imports have to match piped gas to be competitive.

Russian piped-gas prices in western-Europe are now down to $6.2 per mmBTU and are expected to remain low for quite some time.

The reduction of Gazprom prices has led to a massive increase in Russian gas imports to Europe over the last six months – 41% up year-on-year in October – and a drop in LNG imports from other countries.

And that despite sanctions and the EU drive for diversification away from Russian gas to other suppliers.

It is no wonder that Germany, in addition to supporting Nord-Stream 2, is now pushing for EU rapprochement with Russia in the investment and energy sectors.

Gas buying in Europe is carried out by gas-traders and gas-companies and it is evidently driven by commercial factors, not by EU politics. Something the East-Med must be aware of and aim to be competitive at such prices if it is to be able to export gas to Europe.

Impact on East-Med gas exports

Europe is a market which in terms of gas usage is stagnating, at least for the foreseeable future. In recent meetings with ministries in Berlin and Brussels it was made clear to us that prices and timing matter. East-Med gas must meet these to gain firm sales.

East-Med, and Cyprus, will have to compete with these low gas prices, $6-$7 per mmBTU, at least to the end of this decade, but very likely beyond 2020, if the various export projects currently being mulled are to become commercially viable.

When the vision of the future is uncertain, you’re better off being flexible, keeping all your export options open. East-Med and Cyprus must do the same, and, while negotiating with Egypt, leave their options open and include floating liquefied natural gas (FLNG) and marine-compressed natural gas (CNG) in re-developing future export plans.

And in the longer term, possibly in 10-years, with more gas discoveries and a price recovery, LNG exports from Vasilikos may return as an option.

If and when the Cyprus problem is resolved it may open up exports to Turkey, possibly in cooperation with Israel. But this should not end up being the only option as it could make negotiations one-sided.There are opportunities for the region to export its gas, but not at any price or at any time!

Sooner than later, East-Med and Cyprus will have to face and meet commercial realities if they are to succeed.

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