The Fuse

The Race for Gas Accelerates in the Eastern Mediterranean

by Nick Cunningham | January 05, 2017

Just this week, Lebanon announced plans to begin the process of auctioning off offshore blocks for natural gas development. The move highlights the growing interest in the Eastern Mediterranean among energy companies and comes as Lebanon’s neighbors have had a head start in developing enormous gas reserves in the region.

The Eastern Mediterranean has not seen dramatic development to date, but the scale of its reserves could be enormous and potentially alter the energy security and trade outlooks for the different countries in the area.

The Eastern Mediterranean has not seen dramatic development to date, but the scale of its reserves could be enormous and have the potential to alter the energy security and trade outlooks for the different countries in the area. In 2015, Italian oil giant Eni made the largest gas discovery ever recorded in the Eastern Mediterranean in Egyptian waters. The event scrambled the calculations of not just Eni and other oil majors that have so far declined to devote large resources to the area, but it also altered geopolitical landscape for Egypt, as well as for its neighbors in the Levant.

Eastern Mediterranean gas could help close supply gap

The discoveries and development in the region are crucial because demand in many Eastern Mediterranean countries continues to grow quickly.

The discoveries and development in the region are crucial because demand in many Eastern Mediterranean countries continues to grow quickly. Natural gas demand exceeds supply by about 1.4 trillion cubic feet (tcf), according to Noble Energy, highlighting the urgent need for new supply. That deficit, in fact, could double by 2025.

Israel originally appeared to be moving quickly towards becoming a major gas supplier for the region, but it can no longer count on Egypt as a large customer of its gas. The Zohr field in Egypt will help the country move toward erasing its energy deficit. In 2015, Egypt produced 4.4 billion cubic feet of natural gas per day (bcf/d), but by 2019 the Zohr alone will reach 2.6 bcf/d. Additional onshore discoveries in Egypt are slated to add more supply.

Even as the countries compete to exploit the Eastern Mediterranean as soon as possible, the outlines of a cooperative regional framework are also visible. Egypt has idle LNG export capacity, dating back from when it used to be a major supplier for the region. Egyptian officials now hope to once again become a hub for gas exports, a change that would allow natural gas from Israel and Cyprus to be routed through Egyptian ports for export to the international market.

“We envision Israel being a big oil and gas regional player in the Middle East.”

Israel, to be sure, has similar ambitions. “I think the East Med as a whole, with Israel at the center, has a great potential for gas discoveries,” Shaul Meridor, director-general for Israel’s Ministry of Energy, told Hart Energy in December. “We envision Israel being a big oil and gas regional player in the Middle East.”

Israel opens up Eastern Mediterranean

Israel was the first mover in the Eastern Mediterranean. In 2009, Houston-based Noble Energy discovered the Tamar gas field off Israel’s coast, a large gas field that came online in 2013. Israel used to rely on imports for most of its energy needs. Tamar, however, now produces enough gas to power about 40 percent of the country’s electricity, saving billions of dollars in import costs annually.

In 2010, Noble Energy and its Israeli partner, Delek Energy, discovered the Leviathan gas field, thought to be more than twice the size of Tamar with 22 trillion cubic feet (tcf) of natural gas. Once developed, the Leviathan is expected provide enough gas for all of Israel’s needs while leaving enough left over for export to Jordan and Egypt. But development of the Leviathan was delayed for several years as the Israel government grew concerned about the concentration of ownership of the country’s gas reserves in the hands of just a few companies. Israel forced Noble Energy to sell off some of its holdings in the Tamar field and another smaller gas field, Karish, in order to comply with antitrust regulations. The regulatory scrutiny has delayed development—six years after its initial discovery, Noble and Delek are now in the process of raising the funds needed to develop the Leviathan, which could be a transformational project when it finally comes online in 2019, assuming all goes well.

Egypt moves ahead

The significance of the Zohr field for Egypt is hard to overstate: Egypt has been suffering from electricity blackouts and energy shortages, forcing it to rely on costly LNG imports.

Israel’s plodding pace has played to Egypt’s advantage. In August 2015, Eni announced the discovery of the Zohr gas field, which is estimated to hold 30 tcf of natural gas, more 36 percent larger than the Leviathan. The significance for Egypt is hard to overstate: Egypt has been suffering from electricity blackouts and energy shortages, forcing it to rely on costly LNG imports. Egypt used to be a net-exporter of gas, but it has becoming increasingly dependent on imports amid scarcities. The energy crisis became a more urgent problem after Saudi Arabia cut off oil exports to Egypt in November as tensions between the two countries escalated. The Egyptian government is keen to see the Zohr field developed as quickly as possible.

The Italian oil giant is just as eager to move forward on the Zohr field. Eni put it on an “ultra-fast track,” cutting spending elsewhere and moving immediately toward development. In November, Eni sold a 10 percent stake in Zohr to BP for $375 million, which allowed Eni to achieve some “early monetization” of its large discovery. The sale also demonstrated Egypt’s growing reputation as a country of interest for the oil majors–BP wanted exposure to the Eastern Mediterranean’s huge potential. In the last few days of 2016, the Egyptian government inked a few more exploration deals with BP, Eni, and Total for additional drilling in the Eastern Mediterranean.

The Zohr project looms large for Egypt. On January 4, Eni’s CEO Claudio Descalzi met with Egyptian President Abdel Fattah el-Sisi for a progress report, confirming that gas production from the field would begin as soon as the end of 2017.

Lebanon wants its share

Lebanon does not want to be left behind in the race in the Eastern Mediterranean. Having garnered a reputation as an ungovernable country in recent years, the new Lebanese government of Prime Minister Saad Hariri issued decrees in the first days of 2017, potentially marking a significant step forward out of the country’s current predicament. With Lebanon suffering from supply shortages and a budget deficit, new energy production could aid in dealing with both problems. Three years ago, Lebanon said that seismic surveys indicated that its waters could hold at least 96 trillion cubic feet of natural gas had 850 million barrels of oil, a huge boon for a country seeing numerous economic troubles at the moment.

With Lebanon suffering from supply shortages and a budget deficit, new energy production could aid in dealing with both problems.

The decrees move the country closer to an auction by delineating blocks, stipulating the use production-sharing contracts, and requiring any oil and gas revenues be deposited into a yet-to-be-established sovereign wealth fund. Big names in the oil industry are already qualified for bids, including ExxonMobil, Petrobras, Royal Dutch Shell, Chevron and Eni.

Gas production to boost energy security, international cooperation

Whether or not any of the countries in the Eastern Mediterranean fully achieve the lofty goals of becoming sizable gas exporters, the region has emerged as a large source of new global gas supply. This development should be good news all around—it will help reduce energy deficits, minimize power outages, and improve fiscal balances. Even more importantly, increased gas trade could also boost regional cooperation in an area of the world that sorely needs it.

 

 

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