Are we finally going to make it big? Sadly no
With ExxonMobil planning to drill an appraisal well before the end of the year and following political agreements in Egypt to work together to develop Aphrodite, hopes are again rekindled that finally Cyprus’ gas is about to be developed. At least that is what our politicians are telling us.
But are these hopes realistic and likely to happen? Are global markets ready to buy East Med gas? Are we finally going to make it big?
Sadly no. After years of hearing about of Aphrodite natural gas exports, and that “the procedures for the Cyprus-Egypt gas pipeline are progressing and will be accelerated”, the global energy sector is moving further away from reliance on hydrocarbons.
But, as always, the answers lie in the state of global markets and prices.
Recovery in economic activity globally, and OPEC’s tight control of supply, are buoying oil prices that have increased by about 40 per cent this year. Natural gas is following suit. The world’s largest economies are now surpassing pre-Covid gas demand levels.
Europe is in a state of shock with the impact of high natural gas prices and rising electricity prices. Something similar is happening in the US. In Asia LNG prices have sky-rocketed.
This has been caused by the confluence of a number of factors. A long, cold, winter in Europe and Asia was followed by lower gas supplies due to resumption of maintenance activities that were delayed last year due to Covid-19. The problem was exacerbated by Russia exporting less gas than Europe needs, with some saying that it is doing so to force approval of Nord Stream 2. Indeed, this week Russia’s foreign ministry said that “pumping commercial natural gas supplies via the Nord Stream 2 gas pipeline will not start until the German regulator gives it green light.” The pipeline is ready to start operations on 1 October.
In Europe also the massive increase in carbon emission allowance prices to almost €63/tonne – close to 2.5 times last year’s price – has hastened switching from coal-fired power generation to natural gas. And on top of this, wind power generation is at a low due to a long period of calm weather.
The rapid resurgence in economic activity has also led to big increases in the demand for LNG, particularly in Asia, at a time when in the US shale gas producers are under pressure to reign-in spending.
What happens next depends much on winter weather in Europe, the US and in Asia.
But even though electricity prices are unlikely to ease-off before the end of the year, this is not a permanent development. Once economic activity returns to pre-Covid-19 levels oil and gas demand, and prices, will return to normality – some forecast that they may even collapse to low levels. In its latest forecast Fitch Ratings expects global natural gas prices to drop down to about $5/mmbtu by 2022/2023. A price that cannot support East Med projects.
However, in order to get on track for net-zero emissions by 2050, new measures are needed to promote further clean energy and efficiency gains. This is expected to be the outcome of the climate change conference COP26 that is taking place in Glasgow in November.
The devastating floods and wildfires we had this year are giving a new impetus to calls for faster energy transition as we approach COP26, with calls for more drastic action intensifying. This translates into increasing pressure on the oil and gas sector to hasten greening-up of its activities.
The IEA has increased pressure on oil and gas companies in its ‘Net-zero by 2050 Roadmap’ released in July. It states that beyond projects already committed as of 2021, “there is no need for investment in new fossil-fuel supply in our net-zero pathway.” An implication of this is that oil and gas companies must halve production by 2030 if the world is to deliver the Paris Agreement.
Even though in reality energy transition may be slower, nevertheless such calls are putting enormous and increasing pressure on the oil and gas companies.
LNG is facing new challenges. In July, both Japan and the EU put forward far-reaching new carbon emissions reduction plans for 2030 that will impact LNG demand. South Korea is considering complete suspension of LNG development, and coal, in favour of green hydrogen.
In fact, countries with economies representing over 80 per cent of global GDP and over 70 per cent of existing LNG demand have already committed to carbon neutrality by 2050-2060.
And this is happening at a time when Qatar and Russia are building new, huge, LNG liquefaction facilities that can provide some of the cheapest LNG in the world, and can soak-up any lingering demand.
But the EU has stolen the lead with its ‘Fit-for-55’ package, committing to a 55 per cent cut in emissions by 2030 and net-zero by 2050. The latter is already bound by legislation. The package foresees reduced use of natural gas to 2030 and commits to a rapid acceleration in the implementation of renewable energy, by 40 per cent of final energy by 2030. In the US natural gas is excluded in Democrats’ Plan for clean electricity by 2035.
With such commitments, as we approach 2030, and beyond, it is hard to see how fossil-fuels can keep their current share of the global energy mix. Consumption of oil and gas is likely to peak sooner than expected.
This is the environment under which drilling is about to start again in Cyprus’ EEZ.
Prospects in Cyprus
A project like Aphrodite, or Glafkos, needs about 20 years of continuous production at the quantities on the basis of which the investment decision was made to yield the expected profits. The price of gas that makes these projects economically viable is around $7.50/mmbtu. During these 20 years of operation, the average price should not fall below this level. With prices expected to fall back to $5/mmBTU, this is not possible.
Suffice it to say that between 2015-2020 the average price in Europe was around $5.50/mmbtu.
It is one thing to have inter-governmental agreements and another to attract investments. The former are political exercises on paper but the latter need companies that are ready to risk billions of dollars. Something they do not do unless profits are at the level they require.
Rapid energy transition is altering Cyprus energy prospects – we must alter our plans too.
Dr Charles Ellinas is a Senior Fellow at the Global Energy Centre, Atlantic Council