by Costis Stambolis politicians, Eurocrats and energy analysts. In the aftermath of Russia’s incursion in Ukraine last February the energy scene in Europe has changed radically following the decision by the USA and the EU to reduce Russian energy imports to a bare minimum.Most profound has been the substitution of Russian gas supply with increased LNG imports from the USA, Qatar and elsewhere and higher volumes,via pipeline, from Norway and Algeria
As the energy crisis deepens and the omens for 2023 are not good in the supply front, a lot of soul searching is now taking place among EU’ s unilateral decision last March to press ahead by all means and against all costs to decouple from Russian energy - crude oil,oil products,natural gas and coal- over a short period of time has upended long term supply contracts worth hundreds of billions and forced European businesses to look elsewhere for energy supplies.
The accelerated change of Europe’s energy direction has also come at a huge cost following a sharp rise in electricity and gas prices in almost all countries in the 27 nation block but also in the UK. Gas prices have jumped on average 8 times above early 2021 levels and electricity prices, which are directly affected by gas, have similarly experienced many fold increase.
The governments of most European countries have resorted to heavy subsidies in order to prevent wholesale electricity and gas prices translating into extravagant retail energy prices which could have lead to social upheaval. According to estimates by the Bruegel think tank the total cost of the energy crisis in the EU is likely to have reached a total of € 1,0 trillion by the end of 2022, of which € 700 billion correspond to consumer subsidies of one form or other.
As the current energy crisis persists it is becoming abundantly clear that this is the result of actual supply shortage, especially in the case of European gas. As Russia has gradually suspended deliveries in many countries the resulting gap had to be filled by increased liquified natural gas (LNG) imports the cost of which is much higher than the one applied to long term gas supply contracts which many countries had with Russia’s Gazprom over the last 40 years or so. In 2021 Russian gas exports to EU 27 amounted to 153 bcm of which 137 were delivered via pipeline and the rest by LNG. With Russian gas imports corresponding to almost 37% of EU gas supply and some 46% of total gas imports.
According to preliminary estimates there has been a dramatic fall in Russian gas export volumes in 2022 to the EU totaling some 70 bcma . To meet demand, which has dropped only slightly, EU member countries increased their pipeline imports from Norway and resorted to massive LNG imports,mainly from USA,Qatar and Algeria. In a sense they exchanged one form of dependence with another and more expensive at that.As Russia is expected to further curtail gas exports to Europe in 2023 the outlook is for more LNG imports, while the European Commission is actively searching for alternatives including increased gas deliveries,via pipeline, from Azerbaijan and Algeria.
The huge, until recently, dependence of Europe on Russian gas imports is indicative of the continent’s worsening energy predicament. According to latest Eurostat data in 2020 the EU was 60% dependent on energy imports of all different kinds with highest that of crude oil, followed by gas and coal. In the case of gas EU’s dependency increasingly worsened over the past 20 years as indigenous production in the North Sea and the Netherlands - mainly from the Croningen filed- got progressively less. Last year total European gas production reached 50,6 bcm corresponding to just 12,3% of total consumption. Hence, it is becoming apparent that if Europe wants to rein on unrealistically high gas prices and do away with massive fiscal subsidies which only help distort market competition and encourage consumer complacency, it has to take some bold steps to increase production from local sources, within member states and immediate members.
Although encouragement of European gas production runs contrary to the much touted green agenda of the European Commission, which aims at curbing significantly oil and gas use by 2030 as it heads towards NetZero50, it is such the ferocity and tenacity of the current energy crisis that a major repositioning of energy policy seems inevitable.Already we can see signs of this change of energy policy direction as emphasis is placed lately on the construction of new LNG and gas storage facilities,especially in Germany,the Baltic countries and SE Europe, whereas more and more companies are entering into long term LNG supply agreements with the USA, Qatar and other major producers. Such contracts normally run for 15 to 25 years, well beyond the time limit set by ambitious EU goals for the continent’s decarbonisation.
In this context Cyprus and other countries in the East Mediterranean, notably Israel and Egypt, have an important role to play in ensuring European gas supply from a region which is bordering to the main European land mass. If we consider all the indigenous or near indigenous gas sources in the EU we shall see that between them the North Sea, the Adriatic, the Black Sea, the Ionian Sea, the Cretan Sea and the East Mediterranean (including Cyprus and Israel) have proven or contingent hydrocarbon reserves estimated to exceed 12 trillion cubic metres which can cover European gas consumption for 30 or more years. In fact they could stretch for many more years as gas consumption is likely to level out or even decrease over the coming years as energy efficiency measures take hold, more fields are discovered and gas imports from LNG and pipeline from friendly countries are likely to continue, albeit at a lower rate, for some time.
Important gas discoveries in offshore Cyprus over the last ten years or so are helping bolster the island’s role as a prospective major gas supplier to the EU along with Israel and Greece. The latest gas find at the Zeus location in block 6, operated by ENI, just before Christmas, concerns an estimated quantity of 2.0 to 3.0 trillion cubic metres (tcf) Although small in terms of volume, (at 72 billion cubic metres) compared to other gas discoveries in the East Mediterranean, the particular find is a positive addition to the rest of gas discoveries in offshore Cyprus. The Zeus discovery brings the number of deposits off Cyprus to five and include findings in Blocks 6 (Cronos and Zeus), in Block 10 (Glaucus), in Block 7 (Calypso) and Block 12 (Aphrodite). Between them these fields are estimated to hold proven reserves amounting to 15,2 to 18,2 tcf or 570 to 655 bcm.
If we were to examine Cyprus’s growing hydrocarbon natural gas potential in a broader regional context, especially in relationship to Israel, which has proved reserves nearing 1 trillion cubic metres, a picture is emerging whereby the Israel-Cyprus axis could develop into an important alternative gas supplier to the EU. Gas exports from the region towards European destinations can be secured either by means of Liquified Natural Gs (LNG) shipments or through the planned East Med pipeline (see map). Although this project has over the past years attracted considerable criticism from various quarters- notably from Turkey and the USA- on account of its routing and high cost, the current energy security situation in the EU is such that Brussels is keen to promote the project, which after all is a fully backed European Project of Common Interest, as a matter of urgency. In addition the huge price differential between current gas prices in the East Med and continental Europe make the importation of gas from this region a bankable proposition since long term gas purchase agreements can now be established between sellers ( Israel,Cyprus) and buyers ( EU countries).
(“FINANCIAL MIRROR”, January 6, 2023)
