MacroPolis

ExxonMobil announced the results of drilling in the Glaucus-1 target in Block 10 in the Republic of Cyprus (ROC) Exclusive Economic Zone (EEZ) on 28 February. Exxon said the discovery “could represent an in-place natural gas resource of approximately 5 trillion to 8 trillion cubic feet (142 billion to 227 billion cubic meters)”, making it potentially the largest discovery in the Cyprus EEZ to date. Cyprus’ energy minister, George Lakkotrypis, said “based on some official data it is one of the biggest finds worldwide in the past two years”.

The news was met with euphoria in the local media but also abroad. The results were described as “huge” by The Guardian and a “giant” by a researcher at Wood Mackenzie energy consultancy. Given the reaction, it is worth digging a little further into the results to see whether the reaction was justified and what the energy options are for Cyprus next. The following is adapted from an earlier Facebook post after cross-checking with industry sources.

Q: Is it a massive find?

A: No. It is a medium-sized find. At an estimated 5-8 trillion cubic feet (tcf) of gas in place, at the high end it is approximately the same size as Aphrodite. However, it is a lot less than Israel’s 21.4 tcf Leviathan field and Egypt’s 32 tcf Zohr field. It is also a tiny fraction of Russia’s proven reserves of 1,235 tcf, and would not be enough to supply the EU’s 467 billion cubic metres (16.5 tcf) demand even for a year. Moreover, the amount estimated is “gas in place”, which is not the same as “reserves”. According to the Energy Information Agency definitions, gas in place is the “most uncertain” of the categories. The recoverable amount could end up closer to that of Aphrodite. In other words, despite the hype, this find is not a game-changer in terms of supplies to Europe.

Q: Then why has everyone made such a fuss?

A: On the international side, it is largely commercial. According to PwC, global exploration spending in 2014-16 collapsed by 60%. There are also longer-term questions about the future of gas in the face of competition from renewables. This explains why there have not been many big finds in the past few years and why the industry would want to trumpet any reasonably sized finds. On the Cyprus side, it is political. Greek Cypriots believe that the more gas they find, the more leverage they have over Turkish Cypriots and Turkey in the stalled attempts to solve the long-running Cyprus problem. The Greek Cypriot media also tend to be highly suggestible, which explains why they ran with the official hype.

Q: Is there enough gas to build an LNG plant and become a regional player?

A: No. LNG plants are expensive. When asked about the possibility of an LNG plant, Exxon’s Tristan Aspray said: “Typically LNG projects would require quantities larger than this single deposit. The potential is still there for more discoveries, even in our own block ... We have not discounted that option [LNG terminal], it is still there as a future possibility.” In other words, Cyprus will need more gas to make an LNG plant commercially viable. A number often cited is at 10 tcf in a single place or 15 tcf if it is dotted about in different fields.

Q: Can Cyprus export the gas quickly?

A: No. Exxon was careful in its wording. It said: "we will incorporate all the data gathered from the complete drilling program, integrating that into our assessment of Block 10 to continue our evaluation of future exploration potential". That means Exxon is not sure yet whether the discovery is commercially viable. More analysis and probably more drilling will be necessary.

Q: So what are the export options for the Exxon gas?

A: The export options are not yet clear. If Glaucus-1 is found to be commercially viable, combining it with the gas from Aphrodite (or Leviathan) may not be possible if there are differences in the type of gas. Aphrodite and Leviathan, located in sand structures, contain no hydrogen sulfide (H2S) and generally lack impurities. The Zohr discovery, which is in carbonate structures, contains H2S, which is expensive to remove. It is not yet known whether Glaucus-1, which has been described as located in “Zohr-like” structures, contains H2S. This leaves as options: the East Med pipeline, which has not yet been built and has plenty of commercial viability issues; floating LNG, a fairly new technology that could work for smaller fields; or combining it with gas from Egypt’s Zohr gas, which is currently being exported via pipeline for domestic consumption in Egypt. However, the latter option would require Exxon to come to an agreement with a rival, ENI, which is the lead investor in the Zohr field. Export options therefore remain uncertain. 

Q: Is the gas worth $30-40 billion?

A: Only if you assume that the costs of exploration, extraction, production, transport and ongoing operations are zero and that the price does not change from today. Assuming that the find is commercially exploitable, and depending on the export option as well as the cut for Exxon, I estimate that the value to the Republic of Cyprus might be around $10 billion spread over 15 years, or around 8% of government revenue each year. However, there are many variables, which shift constantly, therefore one should be cautious in making any firm predictions at this stage. 

Q: So where does this leave us?

A: Natural gas is a long game. It takes many years to build up significant reserves, therefore caution is always advised. The Eastern Mediterranean does have good potential but Cyprus is a long way from becoming a regional hub, if ever, given competition from Egypt, as well as the fact that natural gas as a key energy source may yet be overtaken by renewables.

*Fiona Mullen is author of the monthly Sapienta Country Analysis Cyprus