Comment: The promise of gas in the Mediterranean

Following the discovery of the first noticeable gas reserves; Noa and Marie-B, a large field named Tamar – bearing 238bn cubic meters (bcm) of recoverable gas reserves – was found in the East Mediterranean region, in part of the Levant basin, in January 2009. These discoveries made it possible for the region to steadily increase gas consumption from nearly zero in 2003 to 30% of its energy mix by 2015.

Electric power plants and large industrial facilities are gradually converting their energy consumption to natural gas and presently more than 50% of power generation comes from gas.

The discovery of the giant Leviathan field, with 535 bcm of usable gas reserves, was announced in December 2010 by a partnership headed by Noble Energy. Leviathan’s huge reserves, which remained the largest in the Mediterranean until 2015, opened great prospects for the East Mediterranean region to become a net gas exporter in the coming years.

Combined with the Karish and Tanin fields, which were discovered later, the total amount of offshore gas reserves in the East Mediterranean region are now estimated to 900 bcm. Setting a balance between domestic need and future revenue from export, the East Mediterranean region limited gas export to 40% of total production. This measure insures that today’s discovered gas reserves will be sufficient to cover domestic gas need for a 25-year period.

In the expectation of the coming gas supply, private companies have already agreed several frame export contracts. However, the development of the Leviathan field and further gas export were significantly delayed by a number of challenges.

Due to uncertainties with their relation with Russia, Turkey expressed keen interest in importing natural gas from the East Mediterranean region via a pipeline across Cypriot waters. This initiative was opposed by Cyprus – stating in July 2016, that it could not allow any gas pipeline connecting the East Mediterranean region and Turkey in its exclusive economic zone until a viable incentive could be found for Cyprus. The underlying reasons for Cyprus resistance are not only political issues, but also conflict of possible economic interests related to its plans to export its own gas from the Aphrodite offshore field, discovered in Cyprus in 2011 by Noble Energy, with an estimated gas reserves of 125bcm.

Presently Cyprus is heavily dependent on imports of oil, which mostly goes to fuel oil-fired power plants. Therefore, the domestic use of Aphrodite’s gas would be a good way to relieve Cyprus from oil imports and reduce high electricity prices.

However, currently there is no natural gas infrastructure in Cyprus and its creation will require time and investment. The investment will expectedly come from gas export, which can count on approximately 90% of Aphrodite gas reserves after meeting domestic requirements.

The Cypriot government expects to gain at least $1.8bn per year from gas exports and intends to start exporting from Aphrodite field by 2019.

An LNG plant in Vasilikos in Greece,processing not only its own gas but also the supplies from the East Mediterranean region and potentially Lebanon , was initially planned by Cyprus.

However in April 2016 the Cypriot president indicated that construction of the Vasilikos terminal would depend on further gas discoveries.

An optional and cheaper solution could be to build a pipeline connecting Aphrodite to Egypt’s Idku LNG export terminal, which is currently operating at 10% of its 2013 capacity.

Egypt became a net gas importer in 2015, despite being a large gas producer and gas exporter in the past. Currently growing demand and shortage of supply are down to government subsidies of gas costs and policies requiring gas producers to sell part of their output to the domestic market at lower than international price. In August 2015, a giant offshore gas field was discovered by Italy’s Eni in Egypt’s waters – the field has become known as the Zohr field.

Zohr’s gas reserves are estimated at about 850 bcm, and if confirmed, that would essentially double Egypt’s overall gas reserves. Zohr is the largest field to date in the Eastern Mediterranean region and one of the largest in the world in recent years. It is expected that gas production from the Zohr field will start in Q4 2017 and will focus on supplying the domestic market. No gas export from the Zohr field is expected to take place in the forseeable future.

As for the potential gas exportation from Cyprus’ Aphrodite field to Egypt, this remains dependent on finding a mutually agreed solution between Cyprus and Turkey.

Turkey is aiming to become a significant natural gas hub, taking advantage of its key location between major natural gas reserves in the Middle East, Central Asia, the East Mediterranean area and Europe – the world’s second-largest natural gas consumer.

As it stands today, 99% of imported gas is used within the country, due to a fast growing energy demand. In 2015, Turkey imported around 48.4 bcm, which was split between Russia (55.3%), Iran (16.2%), Azerbaijan (12.7%), Algeria (8.1%), Nigeria (2.6%) and others (5.1%) – following Turkey’s energy security strategy to diversify energy routes and source countries.

Libya will continue gas export to Europe via a greenstream pipeline connecting Mellitah in Libya to Gela in Italy, as the latter greatly supports the former’s economy. Further development of gas production and export remain unlikely until political clarity and stability are established in Libya.

Algeria, possessing the 10th largest gas reserves in the world, and the top gas producer in Africa, demonstrated a steady gas production decline throughout the last decade – from 89.2 bcm in 2005 to 82.5 bcm in 2015, mainly due to maturing gas fields and a lack of new projects to compensate.

At the same time, domestic gas demand was rapidly growing from 22.6 bcm in 2004 to 39.5 bcm in 2015, driven by governmental subsidies, population growth and the development of gas processing industries. Export of gas reduced accordingly, not least because of lower gas consumption in Europe, but as a result of economic recession, higher utilisation efficiency and larger renewables share. However, latest news reports indicate that in 2016 Algeria increased gas exportations to up to 54 bcm, including 20 bcm of gas to Spain, covering 55% of the country’s demand. Algeria plans to further increase gas export reaching 57 bcm in 2017.

Meanwhile, the East Mediterranean region and Cyprus have accelerated their efforts in finding new gas reserves in Levant basin. In July 2016, Cyprus concluded the third licensing round for offshore exploration and eight energy giants expressed their interest. In December 2016, Cyprus announced that Total, Eni and ExxonMobil had been selected for negotiation of the exploration contract of its three oil and gas blocs in close proximity of Egypt’s Zohr. Drilling is slated to start in 2017.

In November 2016, the East Mediterranean region invited bids for exploration of half of its economic waters in 24 blocks, with the offer due to close in April 2017. The survey made by Beicip-Franlab (IFP group) indicated that the new sites could potentially possess an estimated 2.137 bcm of gas. This has made the government hope that vast reserves of natural gas in the East Mediterranean region’s economic waters are yet to be discovered.