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Cyprus dreams again

Developers working offshore the island think they may be about to unlock vast new reserves. Taking them to a depressed market will be much harder

Cypriots are hoping that 11 turns out to be their lucky number, having become disillusioned with 12, their previous favourite.

Total, with Eni recently farming in as a half-share partner, will later this year begin drilling in Cyprus's offshore Block 11. While the island's 2011 discovery and big hope at the time, the Aphrodite gasfield in Block 12, still awaits development, the belief now is that a major find in Block 11 will finally kick-start Cyprus's energy sector and energise the entire East Med.

Expectations are high because Block 11 borders Egypt's Shorouk concession, where Eni in 2015 discovered the supergiant Zohr field, with reserves of 30 trillion cubic feet of natural gas, eclipsing the earlier Leviathan discovery offshore Israel (22 trillion cf). The find was made in a previously unknown carbonate layer extending well into Cyprus' economic exclusion zone (EEZ).

"The discovery of Egypt's massive Zohr has revamped interest in the East Med basin," Luca Bertelli, Eni's head of exploration told Gulf Publishing Company's East Mediterranean Gas Conference (EMGC) in Nicosia, Cyprus in mid-March. "Large discoveries are possible as several of Cyprus's exploration blocks share borders with Zohr." Most of the prospectivity akin to Zohr, he added, lies in Cyprus's EEZ.

Zohr broke boundaries in several ways, not least in the discovery of the carbonate play in the first place-—the result, Bertelli says, of "geological intuition and powerful Eni proprietary seismic imaging technology". The awareness that there are huge and hitherto hidden reserves of gas under the Mediterranean has changed the nature of hydrocarbons exploration in the region and whetted the appetite of major players. The third Cyprus Licensing Round in 2016, after several years during which the island's energy prospects seemed to be fading, resulted in Block 8 being awarded to Eni, Block 6 to Eni and Total and Block 10 to ExxonMobil and Qatar Petroleum.

Another significant factor with Zohr is the speed with which it is being developed. After its discovery in August 2015 the final investment decision (FID) was taken in February 2017. First gas is expected in December this year, only 22 months after FID. Bertelli admits that Eni "took some risks with Zohr because there was a strong political commitment from the Egyptian government to start gas flowing as soon as possible. So we moved full speed ahead with the project."

Eni, alongside BP and Rosneft since December 2016 (which holding 10% and 30% respectively in the project), has drilled seven wells so far and says the construction of an offshore processing platform is on track. The first phase of production will target 1bn cubic feet of gas a day. According to Bertelli, the large field has been easy to bring to production, with minimal associated liquids and high reservoir pressure making the gas easy to transport.

Managing expectations

Given the smooth progress thus far of the Zohr discovery and the knowledge that it is tapping into vast gas reserves, the excitement in Cyprus is understandable. But Cypriots associated with the energy sector know that they need to manage public expectations. Wildly exaggerated and over-optimistic media coverage of the Aphrodite find suggested that the island would enjoy overnight prosperity, solving all its economic problems. As the years passed, with Aphrodite all the while awaiting FID, public hopes faded. Now the media frenzy has resumed. "The local community has huge expectations because of the dream that was communicated to them," said George Pantelides, head of consulting at Deloitte in Cyprus.

Cypriot officials are doing what they can to present a realistic vision of the island's planned emergence as an energy player. "We have to be patient and look at the big picture, instead of short-term success or failure," Panos Kelamis, chief executive of the island's state energy firm Cyprus Hydrocarbons Company, told EMGC. "We have to determine how we can create an oil and gas culture."

Stelios Nicolaides, head of hydrocarbon services in Cyprus' energy ministry, was guarded in his assessment of what the coming months may reveal in Block 11 and other new zones, saying that "expectations for 2017 are that it will be an important year for understanding the exploration area". He added that "the commercialisation of gas remains a priority for the government".

But for all the talk of potential pipeline exports of East Mediterranean gas to Turkey or Europe, current global prices mean this is commercially unrealistic. "Gas cannot be developed unless it's sold," Charles Ellinas of E-C Natural Hydrocarbons Company told the conference, referring to the thus-far stranded Aphrodite discovery. "The region must plan with realism and pragmatism."

The Cyprus government's preferred market for gas is Egypt. But Ellinas is not convinced that this is a realistic objective, pointing out that Egypt expects to be self-sufficient again in gas in 2019 and resume exports the following year. Zohr's capacity is expected to hit 27bn cm (953.5bn cm) a year in 2019 and 12 new projects are under way to add 55bn-65bn cm/y over the same period. "Egypt has enough gas of its own for domestic consumption and export," Ellinas said.

Bearish Med prices

At the same time, Turkey is changing its energy mix, with greater emphasis on coal/lignite, renewables, nuclear and liquefied natural gas, and less on pipeline gas. Gas demand has fallen significantly over recent months. Also, Turkey is paying $5 per million British thermal units for gas from Russia and Azerbaijan, and Europeans are paying about the same for Russian gas, which leaves the East Med out of the frame. Producers in this region would need a price of around $8/m Btu before they could compete. But, Ellinas said, "with a glut of gas and Russia determined to defend its markets, prices will stay low".

Ellinas is more hopeful, however, for the long-term prospects for LNG, believing that supplies of this "will grow rapidly to account for about half the globally traded gas by 2035. Floating LNG may become a viable option for gas exports to European and Asian markets, particularly if Total is successful in drilling in Cyprus's Block 11 this summer."

Major discoveries in Cyprus's carbonate layer, with the possibility of similar discoveries offshore Israel and Lebanon, could change the whole complexion of the East Med energy scene. Eni's Bertelli said there were "still a lot of untested plays in the Eastern Med". Estimates of undiscovered reserves range from 100 trillion to 300 trillion cf, and "we believe that 100 trillion cf is a solid number that we must target". If this assessment is on the mark, then one can expect expanded interest from major international oil companies, raising the possibility of sufficient volumes of gas being discovered to justify investment in a land-based LNG project—with Bertelli seeing Cyprus as the most likely location for it.

LNG ready to launch

A site for a three-to-five-train LNG facility has been cleared at Vasilikos on the southern coast of the island. It was made ready when plans were drawn up for Aphrodite gas to be processed there. But they were put on hold when the Aphrodite reserve estimates were downgraded.

In the short term, Bertelli said, it was "logical to maximise first the utilisation of existing liquefaction facilities in Egypt". But the Eni executive also doesn't rule out the eventual establishment of pipeline exports from the region. This would require "further investments in exploration are to secure additional volumes before an export route to Europe via pipe can be considered a viable option. We have to explore more."

While all the possibilities of monetising East Med gas are considered, the opportunities for investment in upstream activities and the development of the support and services industries, in Cyprus and elsewhere in the region, are huge. While Egypt and Israel have energy infrastructure in place in their offshore waters, Cyprus and Lebanon will have to start from scratch if they reach a point when gas can be produced.

Cyprus is already developing its service sector, with Limassol port, the island's main trading hub, the base for much of the offshore exploration. This arrangement is far from perfect because of growing congestion at Limassol as more companies move in. Deloitte's Pantelides told EMGC that one of the challenges facing the government as it seeks to develop an oil and gas culture is to establish a separate designated port to serve the energy industry, especially if Cyprus is eventually to become an LNG hub for the region.

Such a prospect is still distant. Cypriots will have to be patient a little longer. For the moment, all eyes are on Block 11, as the island waits to find out whether 11 really is the lucky number.

Waters of plenty: Cyprus's offshore blocks
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