Future Development of Southeast European and Mediterranean Natural Gas Reserves

by Athina Sylaidy

Energy security is a multifaceted issue, and one no longer restricted solely to the domain of the viability of energy supply, price appreciation and preservation of the environment, issues which are included in the ‘energy policy’ triangle. “Energy security”, as defined by the IEA, means ”adequate, affordable, and reliable supplies of energy.” Energy efficiency, stock-holding, alternative fuels, substitution options, diversification of supply sources, spare capacity, the need to create alliances, and to change energy ‘mixes’ particularly in times of energy crisis are all important concepts in energy security thinking, as well as includng the securiy of supply and security of demand.

Due to the facts that the EU gets 25% (2012) of its gas imports from Russia, two-thirds of Russia’s gas exports go to the EU countries (EU’s imports are of 8% of Russia’s GDP + EU is a regular customer with growing needs), and that Russia is the source of almost a third of the EU’s oil and a quarter of its coal imports, their relationship is based on interdependence. As a result, each of them aims to secure its supply and demand. Recently, the sensitive issue of energy security has been raised, particularly from the gas crises of 2006 and 2008-2009, because of the different energy policies (third energy package, Gazprom’s pricing policy and that Russia had signed the ECT but never ratified and has later withdrawn from it) and recently, Russia’s invasion of Crimea. So, currently on the one side, Russia is trying to find alternative routes (South Stream) to supply European countries, thus diversifying from unstable Ukraine and protecting supply security. On the other side, the EU is trying to find alternative sources, routes and suppliers to secure its supply (TAP, LNG, RES, Shale gas, Nuclear power). While the Eastern Mediterranean is unlikely to completely replace Russia as a major supplier of energy to Europe, it can at least contribute in loosening Russia’s grip over the European market.

Gas supply routes to the EU. Cyprus National Hydrocarbons Company.

Cyprus-Israel

Given that in the last decade the first two largest discoveries of hydrocarbons were made off the coast of Israel (Tamar field-280 bcm, Leviathan field 530 bcm) and the third largest discovery was in the coast of Cyprus (Block 12), we can understand that the upcoming development of the Mediterranean countries and Mediterranean Sea will contribute as alternative routes and sources for the EU. On 28 December2011, Noble Energy announced a natural gas discovery at the Cyprus “Aphrodite field-Block 12’’ prospect, offshore the Republic of Cyprus. Noble Energy operates Block 12 of Cyprus EEZ (exclusive economic zone) with a 70% working interest – Delek Drilling Limited Partnership and Avner Oil Exploration Limited Partnership each owns 15%. According to Noble Energy, the finally resource potential from the field is 5 tcf/145 bcm. The Cyprus Block 12 field covers approximately 40 square miles and will require additional appraisal drilling prior to development. Cyprus owns 12 Blocks, which all appear to be promising in gas and oil reserves, and the exploration activity in the Cypriot exclusive economic zone will continue in the summer of 2014 (The ENI – KOGAS consortium has signed a contract for hydrocarbons exploration in blocks 2, 3 and 9 within Cyprus’ EEZ, while Total has signed a contract for blocks 10 and 11). These have given Cyprus the ability to cover its own energy needs for many years and, moreover, become a supplier for EU. According to the Cypriot government’s aims, the short-term benefits will come from hydrocarbon operating in the energy industry, the mid-term from the exploitation of hydrocarbons reserves and the third and long-term vision will emerge from the creation and export of a knowledge-based industry.

Southeastern Mediterranean Energy Developments. ESCP.

Cyprus & Greece Dilemma in Energy infrastructure – Geopolitical Strategies and Economical Perspectives

Already, the European Commission has adopted and announced its “Project of Common Interest” to be the pipeline that will link the Greek and Cypriot deposits (East Med Pipeline). This pipeline will connect the Leviathan field offshore Israel to Cyprus and then the eastern part of the Island of Crete in Greece. Here are three possible routes that could then connect this to other European gas markets: from Crete to TAP, the Interconnector Greece – Bulgaria and the Revythousa LNG terminal close to Athens. The capacity of the East Med Pipeline will be around 8-10 bcm per annum and the cost estimates at least $20bn (as ENI suggests).

The IGB constitutes a gateway, providing access of diversified sources of gas to the SEE markets and creates synergies with smaller interconnectors in the region (e.g. Bulgaria-Romania).

The East Med Pipeline and possible connections. Defencegreece.com

 

Furthermore, there is on the table of discussions a proposal to build an LNG facility in Cyprus with the cooperation and support of Israel, with both countries aiming to supply equivalent quantities. Estimates for the cost for a new LNG terminal are $10bn, with the cost of building up to $8bn and $6bn, if there is a 2nd and 3rd unit added, respectively. The choice between the East Med Pipeline and LNG facility will directly affect the long term pricing structure and distribution options of the energy triangle Greece-Cyprus-Israel to the rest of EU and the regional markets, as well. Before making the final decision, the included parties have to calculate also the cost and compare it to the final selling price (the price for buyer).

If the LNG option means direct competition with the LNG coming from the Middle East and Africa, then Cyprus, as a participant in the Eurozone with lower transportation costs, will secure for itself a significant advantage over its competitors.

It seems that with LNG (liquefaction + regasification), the cost will be higher compared to the pipeline. Also, the pipeline supply route will be predetermined to exclude the possibility of targeting alternative markets. In any case, the main goal is to strengthen the energy security and region’s energy independence, possibly in combination with an increase of RES. In parallel with the EU’s institutional framework (European Roadmap 2050, 3rd Energy Packet and ECT), the European Commission could exploit the abilities of RES of Southern Europe, strengthening its alternative proposals for its energy supply.

East Med Natural Gas Exploitation—from CNG to LNG and Pipeline. nealrauhauser.wordpress.com.

From Cyprus’ perspective, selling LNG, instead of piped gas, will allow the country to sell gas to other markets when demand in the EU drops. Moreover, if this option means direct competition with LNG coming from the Middle East and Africa, then Cyprus, as a participant in the Eurozone with lower transportation costs, will secure for itself a significant advantage over its competitors. Furthermore, indirectly, in the long term, the LNG option will increase the activity of shipping, engineering and servicing companies in the region. As the LNG option is more favorable from Cyprus’ side, we conclude that the dilemma is more political and geostrategic than economical. From an economical perspective, from one side, the pipeline could bring cheaper gas in the long term not only for Greece (as it pays the 2nd most expensive price of any EU country) but for the European gas market as well, but from the other side, the LNG terminal could bring more short term benefits for the economy of Cyprus and Greece.

While today 20% of the EU’s gas supplies is transported through shipping, the EU is now encouraging investments in LNG as a means to boost liquidity.

In any case, large amounts of gas need to be proven first before the multi-billion dollar project can be brought to fruition. The current estimates of the Aphrodite field (5 tcf/145 bcm) do not commercially justify the onshore LNG terminal. Further exploratory activities off Cyprus’ coast in the two years to come will be key in determining the fate of the project.

Greece: Gas Supplies Options and Alternative Routes

From the Greek perspective, its geographical position and the new, alternative routes that offer diversification for the EU have resulted in the increase of European Commission interests and support in the country and the greater South East European area. Benefiting Greece are the TAP project, which consolidates Greece’s position as the EU gateway for Caspian gas and could boost the development of further infrastructure and the market, the possibilities for more supplies from the Caspian, the new explorations in Mediterranean Sea, specifically Cyprus and Israel’s sea and the possibilities for indigenous production of Mediterranean Member States. In addition to these routes and discussions, on the table is also the previously mentioned Interconnector Greece – Bulgaria (IGB), which will strongly impact the South East European market. The two governments have recognized it as a project of national interest. Moreover, the IGB constitutes a gateway, providing access of diversified sources of gas to the SEE markets and creates synergies with smaller interconnectors in the region (e.g. Bulgaria-Romania). Also, by working in reverse flow it significantly enhances the region’s energy security. Finally, it is ideally located to carry gas from the existing Revithousa LNG and planned Aegean LNG regasification terminals in Greece. The final investment decision is scheduled to be taken within 2014.

While today 20% of the EU’s gas supplies are transported through shipping, the EU is now encouraging investments in LNG as a means to boost liquidity. The Aegean LNG terminal (floating storage and regasification unit) is under construction from DEPA. DEPA holds the existing natural gas infrastructure, consisting of the main high pressure pipeline and its branches, and has the exclusive right to import and supply natural gas in Greece. It’s a 100% subsidiary company of DESFA-owner and operator of Greek National Natural Gas System. This project will facilitate the SEE (South Eastern Europe) region’s access to more LNG capacities and working in conjunction with the IGB has the potential to make a real contribution to the market’s integration and development. In order to benefit from the advantages of a competitive and liquid market – as it has many bid and ask offers, low spreads and low volatility – which prevail in North West Europe, the Balkans need to urgently develop infrastructure to increase market integration and deliver diverse supplies of natural gas.

The Role of Gas in SEE Countries’ Geopolitical Strategies and Relations

Through these discoveries and the continuing of exploratory activities off the coast of Cyprus, as well as the possible exploitation of hydrocarbons in Greece and generally in the Mediterranean Sea, the issue of agreements and corporations with neighbors’ countries has arisen. Cyprus and Greece could become an energy hub of the Mediterranean Area, and as EU member-states, contribute to the EU’s energy diversification.

A Turkish-Israeli rapprochement in March 2013 has also hinted that the two countries may be considering an energy partnership. A pipeline from the Leviathan to Turkey would allow Eastern Mediterranean gas to reach Europe with Turkey playing the role of a transit route. Such a pipeline would have to pass by Cypriot waters and a resolution of the Cypriot-Turkish conflict is hence a prerequisite.

Cyprus has been divided since the invasion of troops from Turkey in 1974. The Greek Cypriots control the southern two-thirds of the island and the Turkish Cypriots the northern third. The sovereignty of the Republic of Cyprus over the whole island of Cyprus is recognized internationally by the UN and all foreign governments except Turkey. One more significant issue is that Turkey is not a member of UNCLOS (United Nations Convention on the Law of the Sea), thus it doesn’t recognize the rules and borders of Mediterranean Sea and countries. This makes it more difficult to achieve a resolution to the differences between these countries, according to different positions on their sea borders. Efforts to solve the dispute have all failed in the past.

Although natural gas is now a major incentive in resolving the Cypriot dispute, changes may not happen overnight. Both Turkey and Cyprus must come to an agreement through their separate and common interests.

The gas factor now comes as a new element that could play a tremendous role in altering the equation. Turkey could also eventually play the role of a transit route for Cypriot gas should the division of the island end. Turkey, with an energy consumption expected to double in the next decade is in desperate need of energy from alternate sources. Like the rest of Europe, Turkey is looking to diversify its energy portfolio away from Russia. Although natural gas is now a major incentive in resolving the Cypriot dispute, changes may not happen overnight. Both Turkey and Cyprus must come to an agreement through their separate and common interests. This needs time and much effort from both sides as the conflicts between them have been in turmoil the last four decades.

The discoveries of natural gas and oil reserves create huge prospects in Cyprus, Greece and SEE countries generally: economic, political, national, geopolitical and investment opportunities from companies all over the world (Russia, China, Asia, Europe and America have shown interest in drilling and exploring NG). Taking into consideration the current uncertainty created by the financial-institutional crisis in Europe and worldwide, this perspective becomes the best possible option and should be fully exploited without delays and with suitable approaches. Specifically, Greece and Cyprus, aiming to achieve the goal of becoming a European energy hub and the EU’s gate to energy diversification as an alternative route supplier, have to focus on their national interests through transparency, no speculation and without delays to do their best for the future of their nations. Today’s ”vulnerable” EU, by strengthening its cross-border interconnections with isolated national networks and serving the main pillars of European energy policy, would fulfill its target of an internal liberalized energy market and hence, further its position in international events and play a leading role as a calculable global power.

Athina Sylaidy is an MA student in the ENERPO program at European University at St. Petersburg.

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