East Mediterranean Gas: Navigating Success in Choppy Waters
The waters of the eastern Mediterranean Sea have proven some of the most fruitful for international companies exploring for natural gas in the past decade or so. There have been a string of large gas discoveries offshore Egypt, Cyprus and Israel. The most recent of these discoveries was the giant Zohr field offshore Egypt in mid 2015 by the Italian company ENI. The Zohr discovery shows that there may still be a great deal of gas yet to find in a region which has a long history of gas production. Egypt has been producing gas from this region for decades. The Zohr field proves that a deeper stratum of rock is gas bearing after several previous drilling attempts were unsuccessful. ENI is making swift progress developing the field with first gas expected before the end of 2017.
Israel announces bid round for 24 blocks
There are still pathways to access these opportunities from bid rounds and buying into existing projects. Israel announced on 15 November a bid round for 24 blocks offshore. This is a rare opportunity: a significant number of concessions on offer in gas-prone waters in an OECD country. In 2009 and 2010, the US company Noble Energy and its Israeli partner Delek found extensive gas resources in the area. The Tamar field started production in 2013 but the Leviathan field has yet to achieve a final investment decisions it has become beset by regulatory delays. The same partnership followed its success with a major discovery offshore Cyprus, the Aphrodite field.
But past problems may put some off
The Israeli government is likely to pay careful attention to courting Australian oil and gas companies in order to overcome past failed efforts. In 2014, Noble and Delek negotiated with Woodside to take a stake in the Leviathan project in order to use its considerable LNG experience. The negotiations broke down after six months as Woodside were not able to ensure stable investment conditions and the risk of political interference was too great. This caused considerable embarrassment to the Israeli government who are anxious to repair the damage to the country’s reputation as an investment destination. The other significant driver behind the government’s bid round is to encourage own entrants into the sector to reduce the dominant position that Noble and Delek enjoy. Controversy over Noble and Delek’s potential abuse of its position has been behind much of the delay to Leviathan.
Meanwhile the outlook in Egypt is looking up
In Egypt, ENI is reported to be ready to sell a 40% share in the Zohr field having just completed the sale of a 10% share in Zohr to BP. The Egyptian state-owned gas company EGAS also holds regular bid rounds for acreage with the next likely to be launched in the first half of 2017. The outlook for the natural gas sector in Egypt has improved in recent weeks. The government has introduced far reaching economic reforms that should resolve some of the key issues facing foreign investors in the natural gas sector, particularly the payment arrears. The government has allowed the currency to float freely and has reformed energy product prices. These reforms along with the injection of finance from the IMF and other institutions should go a long way to resolving the shortage of hard currency in the country and the government’s credit issues.
And the region is well placed to serve local and European markets
The availability of such gas resources is only a commercial opportunity if the markets exist for this gas. The eastern Mediterranean is strategically positioned for gas markets. Egypt itself offers a substantial gas market with most of its electricity generation based on gas-fired power plants. For the foreseeable future, production from Zohr is expected to be dedicated to the domestic market. Egypt also possesses underused LNG export facilities which are well positioned to supply to Europe. Gas demand in the EU is expected to rise in the next 5-10 years as more gas infrastructure is built and the bloc attempts to reduce its dependence on Russian gas. Egypt could also act as hub for regional gas with provisional agreements in place to transport Cypriot and Israeli gas to Egypt for onward export to world markets.
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