East Med Gas: Commercial Prospects and More

Exactly what will the Vasilikos LNG terminal mean for Cyprus? That question was answered by Nicos Kouyialis, Minister of Natural Resources and Environment, Cyprus, at the Frankfurt Gas Forum in a session dedicated to the commercial prospects and geopolitical risks of Eastern Mediterranean deep offshore gas. 

“Of course we'd like to see Cyprus become an energy hub," he said. "We've taken an important decision, the only one so far, which is the construction of the LNG plant, and this will be the first step in our strategy of becoming an energy hub."

Mr. Kouyialis conceded that Cyprus' internal market was very small for the consumption of natural gas. “So we definitely have to look to the external markets – the European market and others in the rest of the world.”

Another panel participant, Amit Mor, CEO ECO Energy, Israel, weighed in on LNG in Vasilikos, where the commercial, geologic, and political risks, he said, must be mitigated, raising questions for the potential participants: Israel, Cyprus, Turkey, etc.

For one, would Cyprus remain an EU country, given the deep Russian influence which had been growing, he queried. “This is a major concern for Cypriots, for the Israeli people,” he said.

A conference delegate noted that there had been numerous proposals, among them a proposed chemical and fertilizer factories - serious interest expressed from global players from global service companies to relocate their headquarters to Cyprus.

Of the country's relationship with Russia, he commented, “Of course we are a small nation and need friends, but I think Cyprus has proven for itself and its people that we want to stay in the eurozone and in the EU. This is why we're making all these sacrifices since last March and I think we've developed a lot of discipline and resolve to stay.”

“I think Russia's got bigger problems than worrying about Cyprus, frankly,” quipped Angus Miller, Founding Director, QuinSec Security Management Ltd. (and former Energy Adviser, Foreign & Commonwealth Office, UK). Russia was always wheeled out in such situations, he explained.

There were real questions in Russia's role in all of this, he conceded, especially given the flows of Russian cash through Cyprus. “Russia's major role is as an 'interferer' not as a promoter of anything and now it needs to replace its depleting gas supplies, needs to manage its major market which is Europe. In the past it said it never interfered with the supply of gas to Europe; it demonstrated that it did and that it could and is dealing with the outcomes of that now.”

By overestimating the capacity for Russia to intervene in such activities, he said, resulted in a negative impact on commercial aspects of development.

Moderator John Roberts, Energy Security Specialist, Methinks Ltd. UK, observed that Gazprom was grappling with whether they would face a gigantic fine for an alleged monopoly. “If Russia in some way were seen to do anything, either that physically prevented the Trans Caspian pipeline from being built, or seemed to be some kind of retaliation for a decision in that regard, that would not exactly endear Russia to the West in terms of its reputation of being a reliable supplier,” he said.

Gazprom did not seek to cast itself the reputation of a ruthless natural gas supplier, he added.

Another delegate reminded the others that forthcoming waves of LNG looked to further undermine Gazprom's pricing model, which was based on expensive new gas fields like Yamal. More forthcoming pipelines could hardly make Gazprom's gas more competitive, he said.

“China, China, China,” exclaimed Amit Mor, who said players like Israel and Cyprus must recognize that country's thirst for energy as to how they will develop East Med gas. “China's investing everywhere and is willing to invest in LNG in Cyprus, Israel; it's a major consumer of oil from Iran.

“If it's a pipeline to Europe, we are talking regional gas, Turkish pipeline, European market; if it's LNG, the market is in China, India, east through the Suez Canal – maybe some LNG will come to Europe, but it's not so important,” he continued.

“Aiming for the stars but landing on the moon,” was not a bad thing, according to Adam Hedayat, Vice President, Sea NG Corporation, who suggested that East Med gas should have contingency plans depending on the size of gas finds (for one). “There has to be an integrated plan in order to start looking at petrochemical developments, natural gas used for transportation, small scale exports (via his company's CLNG technology was a possibility).

“LNG requires reserves – in order to invest in a terminal you have to have a reserve of 20 year plus in order for the investment community to go with LNG facilities. If you don't find the gas early enough...Cyprus needs early cash flow: there's an importance in looking at projects that can bring in prosperity, early cash flow as well as a reduction in the cost of electricity.”

Cyprus could have a “first mover advantage” when it came to a small-scale LNG solution in the region, potentially delivering to the region's coastal areas and to customers with power stations in the vicinity.

Noting that commercial realities had eclipsed much of the strategic thinking of the EU, John Roberts questioned where the Union might go next regarding gas in the Eastern Mediterranean.

Anthony Livanios, CEO, Energy Stream CMG GmbH, Germany responded.

He stated, “The market drove TANAP and the Trans Adriatic Pipeline, so everything we are discussing and the concerns raised about the area's geopolitical risks are not taking place in isolation; they happen in relation to the Southern Gas Corridor whose key country is Turkey. Its geography, energy and economic policies that we've seen in the last decade, in tandem with the economic development, places Turkey as the key country between the Southern Gas Corridor and the developments in Israel.”

Nabucco West having lost out in the great pipeline races, Mr. Livanios contended that Europe's energy security policy would be increasingly focused upon Caspian and Levant regions, meaning that in time East Med gas would enjoy an ever-developing relationship with the Southern Gas Corridor.