By Charles Ellinas
East Med has high gas potential but gas finds are deep-water and expensive to develop. On top of this, there are regional markets but with finite demand. As a result, there is an increasing need to export to global markets. This applies even more so to Cyprus. That’s where Floating LNG (FLNG) comes into the picture.
This was the key topic of a recent international conference in London, during which I made a presentation on potential developments in FLNG in the East Med.
Cyprus and Israel lack gas export infrastructure. They are also fast running out of export options. That’s why FLNG is coming back into the equation.
But what are these export options?
Exports by pipeline to Egypt for its own domestic use or for liquefaction and export to Europe:
This has been one of the key options for Israel and Cyprus on-and-off for the last three years, with various non-binding agreements signed, including the one between Cyprus and Egypt on August 31. But Egypt’s gas production industry has now turned the corner. New policies based on increasing gas prices, better management and regulation have reactivated the industry. Starting with development of Zohr, there are at least 13 new projects being executed, which collectively are expected to add about 60bcm/y by 2020 to the Egyptian gas-grid.
Egypt will have more than enough gas to cover its growing domestic demand by 2020 and will likely have surplus to export, utilising the existing LNG plants at Idku and Damietta. In a recent interview Claudio Descalzi, ENI’s CEO, said as much.
This means Egypt will probably not require long-term gas imports from Israel or Cyprus. The economics of such deals do not add up. By the time gas is produced, treated, transported to Egypt by pipeline, liquefied and transported by ship to Europe, the cost will be too high to compete with gas prices in Europe, which are expected to remain low for the longer-term. That’s why after three years of negotiations they have not progressed into signed, binding, gas sales agreements.
Exports by pipeline to Turkey for its own domestic use:
This is an option that has become quite serious recently following the rapprochement between Israel and Turkey. It is a likely, but by no means certain, export route.
Such a pipeline must go through Cyprus EEZ, which poses its own challenges. There is also resistance to this from within Israel and Turkey. And then there is Turkish Stream, which is back on the table following the rapprochement between Turkey and Russia.
Exports via Turkey to Europe through the Southern Gas Corridor:
If the previous option is challenging, this may be even more so. In addition to the subsea pipeline, another pipeline will be needed to connect it to the Southern Gas Corridor and then there will be additional fees getting the gas to Europe, making it difficult to compete with current prices.
Exports by pipeline from Cyprus to Greece to Europe:
This is what I call a pipe-dream. Technically it is challenging but feasible, but commercially it is prohibitive.
FCNG to regional markets:
Such markets include Turkey, Mediterranean and Aegean islands, Italy and southeast Europe. Marine CNG is now reality, with a ship operating in Indonesia. But it has not yet been considered seriously either in Israel or Cyprus.
Greenfield land-based LNG:
This option first surfaced in 2010 following the discovery of Tamar and then Leviathan in Israel. Delek proposed to Cyprus to build a facility at Vasilikos to export LNG jointly, but by the time this was followed up it was too late and the opportunity was missed.
It is still an option, provided Cyprus makes more gas discoveries to justify two or more trains, but commercially it is challenging, unless gas prices in Europe increase considerably.
FLNG to European and global markets
Should the above options not materialise and with potentially more gas discoveries to be made, it leaves FLNG as a longer-term option.
For one thing, FLNG units are easily redeployed and can be used offshore, combining gas production, treatment, liquefaction and export. There is no need for separate FPSO, deep-water pipeline and a land-based LNG facility with all its concomitant environmental and social issues. FLNG takes the entire process offshore far from populated areas.
In both Israel and Cyprus land access, delays to various permits, resistance and hostility from local populations can add years to an LNG project. The seaborne nature of FLNG units can help circumnavigate many of these fundamental stumbling blocks common to onshore developments. This leads to cost efficiencies.
FLNG can be a game-changer. It creates new opportunities for producing countries by unlocking access to isolated gas reserves which are not cost-effective for development by other means.
Unit costs vary, but a comparable project is ENI’s Coral FLNG in Mozambique. Lying in water depths ranging between 1,500m and 2,300m, with 5tcf gas, it has similarities to Aphrodite gas-field in Cyprus. ENI stated earlier in the year that it has achieved cost savings that make the 3.4mn tonnes/yr project “very viable”. It now estimates the cost to be about $1300 per ton LNG. Given that Coral’s LNG has already been bought by BP for the Asian market, the price must also be competitive, but perhaps still high for Europe.
The problem, though, with FLNG, is that it is capital intensive, requiring massive investments up-front. In the current depressed state of the industry this would be a challenge. And it is perhaps one of the factors delaying FID of the Coral FLNG project, expected end of 2016.
East Med gas-fields
Should the Turkey option not materialise, then FLNG may be the last option left to export Leviathan and Aphrodite gas. Otherwise the two fields run the risk of remaining stranded. Even if some of the gas is sold to Turkey, Leviathan will still have more gas to export. This is why, in an earlier development concept, Noble considered combining an FPSO, to support pipeline exports, with FLNG giving it flexibility for exports both to Europe and Asia.
Turkey would at best take 8-12bcm/y from the region. Between them Leviathan and Aphrodite have the capacity to export as much as 25bcm/y. And if more gas is discovered it would require other export options. As we have seen, FLNG readily lends itself to be one of the key options.
Total, in a recent presentation in Cyprus, said it is very hopeful to find gas when it drills in block 11 early 2017 and its preferred option is FLNG, provided gas prices increase.
However, the market is flooded with LNG and there is more to come. Estimates are that it will be after 2022 when this glut of LNG is absorbed and the market becomes balanced. With LNG continuing to be in demand, it is expected that demand will start increasing after 2022.
This coincides with the timing of any potential East Med FLNG projects.
Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council