Cyprus offshore gas deal a step forward in regional energy structure

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Cyprus offshore gas deal a step forward in regional energy structure

By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk

The East Med offshore gas situation remains in a state of flux. After a diplomatic push by US officials to link the region to US interests, with an emphasis on offshore pipeline links to South East Europe, the need for regional cooperation however has again been given a boost.

The Cypriot government has concluded a deal with US Noble Energy, Dutch-British oil and gas major Shell and Israeli operator Delek to develop the offshore Aphrodite gas field.

Cypriot Minister of Energy Giorgos Lakkotrypis stated to the press that the parties have agreed on the distribution of revenues from the natural gas field, while possibly linking the field via offshore pipelines with Egypt?s Idku LNG liquefaction plant.

The latter option is the most effective option. Charles Ellinas, CEO of Hydrocarbons Company, however, stated that it will depend on how much Idku is willing to take, but some volumes could be sold to local Egyptian parties.

The current deal effectively means that Cyprus dreams of setting up its own LNG plant must be put on ice, as not enough volumes are available in the coming years to make it commercially viable.

Even with the expected reserves of Calypso and Glafcos, set to be around 198BCM, it is not enough for an LNG plant in Cyprus. The only option, Ellinas indicated, is to wait for new offshore discoveries before the decision can be made for the Vassiliko LNG plant.

The deal between Cyprus and the consortium is expected to bring around $520 million per year as state revenue, or around $9.4 billion for the agreed 18-year contract duration.

Even though the costs of the new deal are higher than setting up its own LNG plant, for Cyprus it means that it can start to monetize its gas reserves in the short term. The latter is economically more interesting than to gamble for its own approach.

The underlying success, however, is much more than only the monetary rewards.

By combining, and directly linking, Cyprus-Israeli exploration and production, real economic-strategic cooperation is being created.

To include additional non-East Med players, such as Shell, into the constellation, security is also being covered. Some would even be able to argue that the new deal is a direct and functional answer to the continued threat by Turkey to implement its own offshore projects.

At the same time, developments at present between Cyprus and Lebanon also can become a major supporter of regional integration.

Since the April meeting between Cyprus and Lebanon, where cooperation was discussed on energy issues, Beirut has sped up its efforts offshore.

Specifics were discussed regarding joint development of resources and offshore oil-gas reserves, as some are located on the mutual economic maritime border.

In the coming weeks, a joint Lebanese-Cypriot-Greek summit is scheduled to take place. The latter will be focusing on mutual efforts to entice foreign operators to take part.

The Cypriot approach, looking at the latest Cyprus agreement which involves an Israeli firm, could be substantial with regards to the above. A full-scale Cypriot-Egypt-Israel-Lebanon approach should be taken into account, not only to open up the offshore hydrocarbon reserves but also to set up the still needed security and maritime agreements.

The trilateral meeting in June between Cyprus-Greece-Lebanon could be and should be targeted as a stepping stone for the establishment of a five-country approach in the near future. By holding such a meeting in Cyprus or Greece, the cooperation of Lebanon and Israel could be on the table too.

This current constructive approach by Lebanon with regards to Cyprus could open the door for others too.

By combining the regional and domestic economic future of the respective participants, a functional framework is being set up.

Financial and energy links are the bloodline needed, also to change or address existing issues in security or bilateral relations. A multilateral approach also will increase the market impact of the East Med offshore gas developments.

By Dr. Cyril Widdershoven for