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An East Med gas renaissance

After years of inertia, the prospects for the region's gas finally moving towards markets are improving

Sometimes even a seasoned oilman has to take a deep breath and adopt the tone and demeanour of a diplomat. This was the case recently with Luca Bertelli, head of exploration at Eni. Addressing Gulf Publishing's Eastern Mediterranean Gas Conference in Nicosia, Cyprus in March, he cautioned about over-optimism in forecasting when gas exports might begin. He said "the area is geopolitically complex".

You can say that again. If Bertelli and Eni didn't know it before, they certainly knew it in February when their company found itself eyeball-to-eyeball with geopolitics. Eni's drillship was prevented by the Turkish navy from reaching the target site in Cyprus' offshore Block 3. Turkey argues that some areas around Cyprus lie on its continental shelf and that in any case there should be no drilling until the divided island is reunited and the spoils can be shared equally. The issue remains unresolved. Eni is waiting for real diplomats to do their stuff.

The dispute over Cyprus is one the elements in the cocktail of geopolitical disputes that push and pull the countries of the East Med in a number of directions. But if political tension characterises the climate at one end of the spectrum, the prospects at the other end could hardly be more different. In the same speech in Nicosia, Bertelli reviewed some of the developments of the previous few months "to show everybody that things are moving, and that new and important events are occurring".

Things are certainly moving in several areas. But there's no doubt that the centrifugal force in the Eastern Med is Egypt, fast becoming the energy hub for the region. This is in large part because the Egyptian government has put its full political and economic support behind the fast-track expansion of its natural gas sector. With a proven domestic gas infrastructure in place (unlike in any other East Med country) and with two liquefied natural gas plants hungry for gas (there are no other LNG facilities in the region), Egypt is ready to receive gas—its own and that of its neighbours.

Eni's sensational Zohr discovery offshore Egypt in August 2015 changed the complexion of the East Med as a whole. With gas in place of at least 30 trillion cubic feet in a previously unknown carbonate layer, possibilities suddenly seemed immense—for Egypt and other countries bordering the Mediterranean. Working in close collaboration with the Egyptian authorities, production from Zohr—via the vast onshore facilities just west of Port Said—began in December 2017, two years after the discovery. A record-breaking achievement. Today, Zohr is producing 400m cubic feet a day, and by the end of 2019, this figure will have reached 2.7bn cf/d.

To help offset the massive development costs, Eni has sold minority stakes in the venture—to BP (10%), Rosneft (30%) and, most recently, the UAE's Mubadala (10%).

Egypt is now ready to end temporary LNG imports and think again about exports. But this is by no means the conclusion of the Egypt energy boom story. Petroleum minister Tariq al-Mulla said in April that the government was planning a further 16 gas projects in the Mediterranean over the next four years, with investment totalling $25bn. A centrifugal force, indeed.

A Cyprus Zohr?

The Zohr success renewed IOC interest in Cyprus' offshore, with some blocks situated next to the boundary with Egypt's waters. Several major IOCs flew in and opened offices on the island. Eni, with its Zohr experience, knew what it was looking for when it began drilling in Block 6. Sure enough, it found an extension of the Zohr play and in February announced a discovery it called Calypso, with estimated gas in place of 6-8 trillion cubic feet. The gas is lean, with 99% methane. An appraisal well will now be drilled. "If the Calypso discovery is positively appraised," Bertelli said, "the joint venture [Eni 50%, Total 50%] will evaluate viable options for commercialisation of the reserves."

The concern for Cyprus, though, is that further offshore success may be stunted by geopolitics. ExxonMobil is set to drill in Block 10 later this year. Will Turkey send its navy to stop it? Will Eni eventually be able to get its drillship to Block 3?

Even if all these issues are ironed out, there's still the question of finding a market for Cypriot gas—including the 5-trillion-cubic-feet Aphrodite discovery, undeveloped since 2011. The obvious potential customer, neighbouring Turkey, isn't an option. Various suggestions of a pipeline link to Europe don't make commercial sense. So a pipeline link to Egypt seems the most likely option, if and when conditions are right. "The security of long-term gas supply must be ensured before the pipeline can be considered feasible," Bertelli told his Nicosia audience. "We need more exploration, more gas and larger volumes."

Israeli gas to Egypt

Getting gas to market has also been a headache for Israel. Its giant Leviathan field has an estimated 21 trillion cubic feet of gas in place, and smaller Tamar 7 trillion. This is far more gas than the relatively small Israeli market needs. A surprise breakthrough came in February when the partners in these two fields, Delek and Noble Energy, announced a deal to supply Dolphinus Holdings, a private Egyptian firm, with 226bn cf of gas over a 10-year period, half supplied from each field. There are still many questions to be answered over the exact terms of the deal and how and where the pipeline will be built.

But once again, the focus is on Egypt—with an eye on those LNG plants and the prospects of finding buyers in Asia and other destinations to the east. The idea of East Med gas ever finding its way to western markets is fading. It is just too expensive to get the stuff there.

Israel and Egypt have plenty of history of geopolitical problems, not to mention wars. Despite the years of peace between the two countries, many Egyptians will be furious if the deal goes ahead. But with the support of Abdel Fattah Sisi, recently re-elected as president and feeling increasingly confident, public opinion won't be allowed to stand in the way of the venture if it finally gets a green light.

By contrast, there's plenty that could stand in the way of Lebanon developing its offshore. A consortium comprising Total (40%), Eni (40%) and Novatek (20%) is committed to drill at least one well in Blocks 4 and 9 within three years. So far, so good. The problem is that Block 9 is in the southern part of the Lebanese offshore, bordering Israel's economic exclusion zone. An even bigger problem is that because the two neighbours have no diplomatic relations, their joint maritime boundary has never been settled. Worse still, the two sides differ sharply over where the line should be. A perfect geopolitical storm. With rising tension in the region, it will be surprising if gas is produced from Lebanese waters any time soon.

So Bertelli was right on both counts. Lots is happening, but the area is still "geopolitically complex".

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