By Charles Ellinas
Total is at last off the blocks. After a number of delays and uncertainties the drilling rig is now at location. Cyprus is watching developments with great expectation.
Following the recent disappointments in Switzerland, a successful gas discovery by Total-Eni at the Onesiphoros prospect will certainly lift spirits. Drilling in Cyprus’ EEZ is entering a definitive period, with as many as four and possible seven wells to be drilled over the next 12 or so months.
But the inevitable euphoria that will come with discoveries should be tempered by the challenging global gas markets and prices. Finding gas is only the beginning of the process. We must also sell it to realise the benefits.
Drilling starts as planned
After arriving on Wednesday, the drilling vessel West Capella is now at the well location, about 180km south of Limassol and within 8km from the Cyprus-Egypt EEZ boundary. Drilling follows completion of preparatory work.
Cyprus’ government has already declared two NAVTEX, effective between 10 July and 15 October, securing the area around Onesiphoros West-1 (OW-1), as the well has been named. These set up a safety zone against any shipping activities during the drilling period.
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The water depth at OW-1 is about 1,700m and the reservoir is expected to be 3,500-4,250m below that. This will be reached early September, after which it will be known whether a discovery has been made. If successful, it will be followed by data acquisition and logging to assist Total to estimate potential gas quantities and quality, which will probably last another three weeks. The well will then be sealed. Appraisal drilling will follow at a later stage. Preliminary results are expected to be announced September/October.
But this could be a crucial and critical period depending on what Turkey does.
Following the failure of the Crans-Montana negotiations, there have been veiled warnings already from Turkey’s President and Prime Minister. They warned Cyprus to refrain from taking ‘one-sided measures’ after the re-unification talks failed, going on to say “with regard to the fait accompli they [Greek Cypriots] are trying to create with the natural sources around Cyprus, we will never accept them”, and will protect the rights of Turkish Cypriots to the end. They also made threats against the oil and gas companies drilling in Cyprus’ EEZ and spoke of heightening tension in the region. It is unlikely, though, that these will escalate into a ‘heated’ incident.
Even though the Turkish survey vessel Barbaros has been withdrawn from Cyprus EEZ, the expectation is that Turkey will not abandon its well-known positions and may interfere, having declared a NAVTEX in an area which includes Blocks 4,5,6,7.
The area where drilling will take place is not part of Turkey’s claims, but Turkey disputes the right of Cyprus to search for hydrocarbons in the absence of the Turkish Cypriot participation.
Cyprus’ President Anastasiades is right to separate between Cyprus’ energy programme and Cyprob negotiations and to confirm that drilling will progress as planned. Nevertheless, the government is concerned, especially after the declaration on Tuesday of a NAVTEX by Turkey south-west of Cyprus for naval exercises.
On the other hand, when asked by Reuters at the World Petroleum Conference in Istanbul this week whether drilling could alienate Turkey, Arnaud Breuillac, Total’s president of exploration and production, said the company had “no concerns”. Total also has the full support of the French government.
ExxonMobil, Noble Energy and other oil companies interested in the East Med are watching drilling in Block 11 with great interest. A successful discovery of hydrocarbons in carbonate formations will confirm that Zohr is not unique and that other such reservoirs may exist in the East Med, but also south of Crete. Hence, ExxonMobil’s and Total’s interest and acquisition of exploration rights in blocks offshore Crete last month.
Given such strong American interests, it is not surprising that 36 members of the US House of Representatives, with Hellenic American Leadership Council and American Jewish Committee support, requested US Secretary of State Rex Tillerson to continue the active engagement by the State Department in the East Med, including against Turkish threats in Cyprus’ EEZ.
Both the US and the EU have confirmed Cyprus’ right to develop its hydrocarbons for the benefit of all Cypriots. But unfortunately this may not carry much weight with Turkey.
However, with the presence of so many warships due to Syria, the UN expressed concern about continued tension in the region, adding that they do not want to see any incidents.
Seismic data have already indicated that the prospect for a hydrocarbons discovery in block 11 is very promising. Total’s expertise combined with Eni’s detailed knowledge of the geology of the region and proximity to the Zohr gas-field bode well.
Eni data acquired from drilling Zohr have helped pinpoint where the best prospects lie in Block 11. Onesiphoros is just the start. Total is positive about the chances of a reasonable size discovery. But of course only drilling can confirm that.
Prospects for an even bigger discovery in Block 10 are even better, There are also prospects for discoveries in Blocks 6,7,8. A positive outcome in Block 11 will reinforce these.
Should a discovery be made, it is very likely Total will continue drilling to test other prospects, which have already been identified in Block 11, and to ascertain what the full gas potential of the block is before it starts considering how best to develop these.
Total is also likely to wait and see the outcome of drilling by Eni in Blocks 2,3,9, to start late this year, and especially by ExxonMobil next year in Block 10, before it formulates development plans.
The prospects for new gas-field discoveries and substantial quantities of gas in Cyprus EEZ look good. The key issue, though, following such discoveries, is to secure firm sales agreements, something which so far has not been possible for Aphrodite. Gas discoveries are good, but we need sales to realise benefits.
In addition, the relentless penetration of renewables in global energy, and regulations to enforce stringent reductions in carbon emissions, are putting fossil fuels into permanent retreat. The global energy mix is undergoing permanent changes towards low-carbon energy.
The LNG market has entered an era of rapidly increasing new supplies and a glut of LNG, keeping prices low. Global supplies are on the way to increase by 30% by 2020 based on committed projects. With the recent announcement by Qatar that it will increase its LNG production by a third, to 100 million tonnes/year, within five to seven years, and the US granting a large number of new licenses for shale gas exports, the pressure on global markets will only increase.
As a result, prices are likely to stay low for the longer term, precluding East Med gas exports to Europe.
Gas discoveries in the East Med are deep-water and expensive to develop. They are also far from the likely markets in Asia. Collaboration will be key to keeping development costs down. In a low price environment, only integrated projects which minimize costs from well-to-export will stand a chance to become financially viable and secure export markets. And even then it will be challenging.
Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council