The Starting Gun Has Fired For a New Pipeline Competition
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The Starting Gun Has Fired For a New Pipeline Competition

by | published January 3rd, 2019

There are some major developments emerging in the Eastern Mediterranean that may well change how the broader continent of Europe secures its natural gas.

It is for this reason that I have been watching the progress with some interest, in addition to rapidly emerging interest from Western financial sources.

When such a coincidence of factors happens just about anywhere in the world, it usually puts me in the mix. My next series of talks on Cyprus will take place in a few weeks.

Several years ago, significant deposits were identified off Cyprus, Lebanon and Israel. Some political concerns have been advanced by a disagreement between Lebanon and Israel over the right to develop some of the area.

Additional concerns come from the breakaway Turkish Republic of Northern Cyprus (TRNC) -since 1974, the northern third of the island has been a self-proclaimed enclave recognized internationally only by Turkey.

The TRNC has threatened to impede the project, or at least in those parts of the reserves having some connection to its avowed “sovereign water” offshore claims.

However, Ankara has never officially endorsed the TRNC position.

With the change in gas sourcing, Turkey wants to maintain its lynchpin connector between European energy needs and sources further east. Cypriot, Lebanese, and Israeli volume moves the continent further from Russian exports.

Nonetheless, as I will mention in a moment, Turkey is likely to lay down some demands…

A Rare Alliance between Two Opposing Nations

The key to all of this is a major pipeline project called EastMed.

As Viktor Katona put it last Friday in OilPrice.com, the activity has noticeably picked up. Israel, Cyprus and Greece are now pushing forward with EastMed as a major new diversification of European natural gas sourcing pipeline, providing a long-term reliable market outlet for all the recent Mediterranean gas discoveries.

The three countries reached an agreement in late November, about a year after they had signed a Memorandum of Understanding to lay the pipeline.

This engineering breakthrough has the potential to transform seemingly worthless plots of land into energy powerhouses

Initial cost projections put the pipeline at about $7 billion, or roughly the cost of TurkStream, the most recent gas pipeline beneath the Black Sea between Russia and Turkey.

EastMed is expected to start 105 miles off the southern coast of Cyprus and reach Otranto on the Puglian coast of Italy via the island of Crete and the Greek mainland.

Since most of its subsea section is projected to be laid at depths of 1.8 to 2.2 miles and have an overall length of some 1,180 miles, this is also likely to be the longest and deepest undersea pipeline ever built.

Initial plans expect annual throughput capacity to be 20 billion cubic meters (BCM, about 706 billion cubic feet). The current view puts determining administrative matters to take another year with four to five years needed to build EastMed, meaning that the pipeline would not be starting operations until at least 2025.

Of course, all of this has to take in the rather heavy risk calculations of this part of the world.

After all, while Lebanon and Israel may have agreed on a pipeline initiative, it hardly means the protracted political difficulties between the two have been overlooked.

The Eastern Mediterranean Gas Expansion

EastMed has been under discussion for a decade, following the first major gas discovery in the Eastern Mediterranean; that was Tamar in Israel’s offshore zone in 2009, holding about 200 BCM of recoverable gas. Then came the 535 BCM Leviathan Gas Field in 2010, and the huge 850 BCM Zohr discovery in offshore Egypt five years later.

The prospect of Eastern Mediterranean gas expansion was off and running.

However, much of the Leviathan has been directed to serve Israeli and Jordanian domestic needs, while Egypt has been concentrating on meeting domestic needs and phasing out liquefied natural gas (LNG) imports.


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Cypriot offshore gas is the most likely source, yet Cyprus is well behind both Israel and Egypt in developing a definable offshore gas field, let alone have a detailed pipeline strategy.

Thus far, only two appraised deposits are in the books – Calypso (operated by Italian major ENI) and Aphrodite (operated by Noble Energy). Together, these are too small to feed EastMed. Even then, Nole has signed a provisional agreement to send Aphrodite gas to Egypt’s Idku LNG terminal.

That leaves only the rather small Calypso and what is available from Israel’s Leviathan field.

With the EastMed finance coming from private sources, this is becoming a problem.

Geopolitics Are Always Involved in Oil

And the geopolitical is never far from such a project.

Turkey may still claim rights to Cypriot offshore deposits. After all, eleven months ago, Ankara dispatched cruisers to prevent an ENI drilling rig. That has effectively delayed further development at Aphrodite.

Further, Turkey has declared it would not allow “the extortion of natural resources” without the participation of both Ankara and the TRNC.

Then there are the problems EastMed is likely to create in Europe, the intended destination for the bulk of its exports. It creates competition for the Southern Gas Corridor.

So far, SCG has only the Trans Adriatic Pipeline (TAP) on board with about 10 BCM yearly throughput. EastMed might make SGP irrelevant and open another political can of worms.

Added to all of this are projections that indicate expanding Russian gas imports into Europe -creating its own controversy and political disagreements in Brussels at the EU headquarters – may be cheaper than importing on EastMed.

Most analysts of the region now believe that the future of EastMed may well depend on the next round of licensing auctions, scheduled for later this year. Some new major deposits may be required to get the pipeline project off the drawing board.

On the finance side, I have a proposal to lessen risk, now being circulated and comprising the focus of my next series of meetings.

That would still require that the politics be overcome.

And in this part of the world that remains a very tall order.

Sincerely,


Kent

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  1. January 8th, 2019 at 07:04 | #1

    All of good

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