06 Sep 2015 Hope yet a for Cyprus gas hub

By Fiona Mullen

Officials are putting a brave face on the announcement by Italy’s ENI on Sunday that it had found an estimated 30 trillion cubic feet offshore Egypt. But it might just have put an end to both Israel’s and Cyprus’ hopes of exports to Egypt, for reasons explained at more length in this newspaper by Charles Ellinas. At the same time, however, it has indirectly opened up other opportunities.

Before outlining those, let us deal with the notion that ENI’s natural gas find might make Cyprus rich if the Zohr reservoir crosses the Cyprus Exclusive Economic Zone (EEZ). This is a red herring. The indications so far are that it is all on Egypt’s side. Even if the reservoir does stretch that far (more than 6.5 km), Cyprus might hope for only a small proportion of the total.

Most importantly, no one will know if there is any gas on the side until they start production drilling, which is some five years away. Something that is highly uncertain could therefore distract policy-makers from focusing on the real opportunities that have presented themselves.

LNG or pipeline?

If Israel cannot export gas to Egypt, then the land-based liquefied natural gas (LNG) in Vasiliko plant suddenly comes back into play.

According to my own calculations (detailed in my August report), combining the maximum exportable Leviathan gas (75%) with Aphrodite brings an LNG plant closer to viability. However, prices would still need to rise 15% from today to make it work.

Another problem with LNG is that it makes Cyprus’ export strategy reliant on the politics in Israel, which has so far prevented any exports from Leviathan.

The other option is a pipeline to Turkey, which of course depends on a solution of the Cyprus problem.

At today’s prices, according to my calculations, a Turkey pipeline might also be a commercial challenge if it exported only Aphrodite gas. One suggestion is that Turkey pays for the pipeline and a united Cyprus pays it back in gas, thereby locking Turkey into the deal.

With the above in mind, it seems that the government’s Plan A should be to solve the Cyprus problem and send the gas to Turkey. If that doesn’t work, Plan B would be to wait for Israel to get its act together, the gas price to go up and then jointly build and LNG plant.

The regional hub opportunity

Adam Lomas, Managing Director of Castor Partners, says that either an LNG plant or a pipeline from Vasiliko would help Cyprus become the regional gas hub that it has always sought to be.

Cyprus is the only safe country in this region. It could become the secure transport hub for all the stranded gas in the Levant,” says Lomas.

This could be gas from Aphrodite, Leviathan, Tamar and, if the Eni gas find encourages Total to come back and look again at Block 11, gas from Block 11 too.

A solution of the Cyprus problem would make the opportunity is even bigger, because it would bring in all those companies like Shell and Exxon that have kept away from Cyprus because they have big interests in Turkey.

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