Major oil firms interested in Eastern Med gas

By Walid Khadduri, The Arab Weekly  |  Aug. 29, 2016 at 10:07 AM
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BEIRUT, Lebanon -- Major international oil companies have submitted bids to participate in Cy­prus' third licensing round for three southern offshore blocks adjacent to Egypt's northern waters.

The three Cypriot licensing rounds have encountered a number of challenges. Turkey's threats to operating firms overshadowed the first licensing round. It threatened to boycott IOCs operating in Cypriot waters. It did not allow the IOCs to take crude oil from Turkish ports. The IOCs were also not allowed to distribute petroleum products in the Turkish market. Turkey has boycotted Eni but the Italian firm challenged the decision in court and the dispute is being adjudicated.

The second licensing round oc­curred during the Cypriot financial crisis that involved the collapse of two major local banks. The third li­censing round has been taking place during the global price collapse. Oil firms have reduced investments in new offshore fields and cut costs drastically. About 5,000 blocks are on offer worldwide.

The IOCs' interest in the third Cypriot licensing round stems from Eni's major Zohr gas discovery in August 2015, in northern Egyptian waters about five miles from Cypriot wa­ters. Zohr's significance lies in its huge reserves of approximately 30 trillion cubic feet, the largest field so far in the Mediterranean, and be­cause it was found in a previously unexplored deep Eastern Mediter­ranean geological structure.

Cypriot Energy Minister Yiorgos Lakkotrypis briefed the Cabinet on July 27 that the third oil and gas licensing round received offers from a consortium of ExxonMobil and Qatar Petroleum, a second from a consortium of Total and Eni and a third from Norway's Statoil. Other offers were received from a consor­tium consisting of Capricorn and Is­rael's Delek, Avner and another one from Eni.

Zohr, along with the BP gas dis­covery of Baltim SW-1 well in June 2016, is expected to enhance Egypt's plans to be gas self-sufficient within the next decade. Zohr is projected to enter production around 2020.

Egypt is the largest gas importer among Arab countries — despite be­ing a gas-producing state. Gas con­sumption has increased substan­tially in the past few years, rising more than domestic production.

This was due to disputes between the government and the oil firms over payments, which delayed the development of new fields. Con­sumption increased because of high subsidies, which were recently reduced, and due to rapid utiliza­tion of gas in power stations (more than 85 percent of Egyptian power sta­tions burn gas instead of petroleum products), petrochemical and other industrial plants.

Egypt also committed to four gas-export projects (two piped gas and another two liquefied natural gas projects) that burdened the coun­try's resources, obliging it to be­come a gas importer.

The interest expressed by major U.S. and European firms in the Cyp­riot third licensing round has raised expectations of the Eastern Medi­terranean gas potential and its role in regional markets. The gas could provide a take-off for the domestic economies of the regional coun­tries.

It is projected that the availability of sufficient gas supplies in energy-poor Eastern Mediterranean coun­tries will reduce the dependence on crude oil imports and that the im­port substitution will lessen the bal­ance of payments deficit in the new producing countries. Gas is more environmentally friendly than pe­troleum products.

The discovery of natural gas in the Eastern Med has added politi­cal risk to volatile region riddled with geopolitical problems. Most of the gas discovered has been in Exclusive Economic Zones of neighboring countries. Many of the boundaries between them are not demarcated and lack the neces­sary border treaties.

There are also historical feuds among the countries concerned. Israel, for example, has blocked the development of the East Gaza ma­rine field that was discovered in Pal­estinian Authority waters in 2000.

A demarcation treaty was drafted by Cyprus and Lebanon but it has not been ratified by the Lebanese parliament, following a Cypriot-Is­raeli bilateral border accord, which Lebanon considers is in violation of its draft agreement with Cyprus. The conflict has resulted in a disputed zone between Lebanon and Israel.

Lebanon and Syria also need to demarcate their EEZ territories. Syria has awarded a Russian firm a concession that straddles northern Lebanese waters. Cyprus and Turkey are holding negotiations under UN auspices to settle the Cyprus problem and resolve the gas issue between the island's Greek and Turkish communities. Nicosia reports that the negotiations have been encouraging but it is not clear what Turkish President Recep Tayyip Erdogan's position will be following the latest attempted coup.

These disputes and others over­shadow offshore gas developments in the Eastern Mediterranean. Fu­ture political tensions could spill over into the offshore areas. Pro­tests are already being heard that gas from one country is being si­phoned by another. The lack of accords to deal with fields that strad­dle borders is a possible source of conflict. Armed regional conflicts could also spill offshore.

This article originally appeared at The Arab Weekly.

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