Development of Aphrodite

It is happening at last. The much-heralded declaration of commerciality of the Aphrodite gas field is out. It was announced in a Cyprus government press release on Sunday, following a statement made by the Delek Group to the Tel Aviv Stock Exchange.

Even though this is an important step in terms of moving from exploration to exploitation, it is the easy part in the process to exploit Aphrodite’s gas. Its importance is in formally initiating this process. Otherwise commerciality was assured when appraisal drilling confirmed 4.5 tcf gas reserves in October 2013 – a substantial quantity of gas, sufficient to make the field commercial.

This should now be followed by the submission of a development plan, which according to Cyprus Weekly sources is imminent, expected to be out this month. The complete process was covered in detail in an article published in Cyprus Weekly on 24 April 2015.

Challenges

We should welcome this but with a degree of sobriety. Looking at some of the headlines so far we are already counting on the profits. Declaration of commerciality and submission of a development plan is the start of a process not the end of it. Much needs to be done before firm gas sales are identified, let alone signed. The challenges to be faced are detailed in earlier editions of Cyprus Weekly on 1 May and 29 May 2015.

At this stage other than making regional markets a priority we do not have any firm gas sales prospects. It would of course be a very positive development if such gas sales to Egypt and Jordan go ahead. But there are many serious challenges to the realization of these regional markets detailed in earlier editions of Cyprus Weekly. And we do not yet have a plan B. Should such regional sales not materialize we will need to go back to the drawing board, which will take that much longer.

Until we actually sign gas sales agreements we do not have a project. This is the most important prerequisite to the development of any gas project. Political willingness alone is not enough.

Whats next

We need to await the submission of the development plan, which should happen in the near future. In it Noble should outline details of the preferred development options, an estimated timetable leading to construction and production, details of work to be undertaken, etc. In the case of Aphrodite Noble has already stated that its preferred development option is through the use of a floating production, storage and offloading vessel (FPSO) and sales to regional markets. But given that sales to Egypt and Jordan may or may not go ahead, Noble is expected to also leave all other export options open. In fact Noble’s approach may be to commit to develop the field and build the necessary production facilities, but leave it to the buyers to transport the gas to the final destination and provide the facilities to get it there. But this may be a risky approach.

Whatever the option, Noble will not proceed with the development of Aphrodite until it is satisfied that profitability is ensured. As indicated in the 24 April edition of Cyprus Weekly, in reviewing the development plan, the government's overall aim should be to maximize economic benefit, taking into account the environmental impact of the development. It should also ensure that it provides secure gas supplies to Cyprus consumers at competitive prices.

Timing

Even if gas sales to Egypt are successful, and we able to start the development process now, it will be the end of 2016 at the earliest before a final investment decision is taken, enabling the project to move to the construction phase early 2017. Construction will require 3 years to be completed, with exports possibly starting early 2020. Most of the profits during the first 3 years will be diverted to pay the cost of the offshore facilities. As a result, as far as Cyprus is concerned, serious income would only be realized by 2023.

If gas sales to Egypt do not go ahead, and given that we do not have plan B, we will need to add of the order of two years to this process, assuming an alternative is identified. An export option which is viable and available now may not be in two years, given the rapidity of developments we are experiencing in the global oil and gas sector.

With possible profits of the order of $2 to $3 dollars per mmBTU, and Cyprus share of the order of 60%, net profit to Cyprus will be about $5.4 to $8 billion dollars over the lifetime of the project. This assumes total gas sales of 129 bcm (4.5 tcf ) over 15 years, with exports of about 8 bcm per year.

Does it matter?

As long as eventually our gas is developed and exported some delays should not be a problem, provided the markets are there and reasonable profitability is assured. In this respect we can rest assured that we are aligned with the interests of the gas companies, ie to make money. Eventually Aphrodite will be developed and Cyprus will reap the benefits.

It is just that we could do with such benefits sooner than later, given the state of our economy.

On the other hand, as we said in earlier editions, delays of the order of two years can enable the current Cyprob negotiations to progress unhindered.

Use the opportunity wisely

If such delays become inevitable, we should use this opportunity wisely. We should concentrate on developing a long-term master plan, which sets the goals and the framework within which government and industry should operate to develop Cyprus hydrocarbons. This should be supported by a conducive regulatory regime. We should also prepare the ground to go for a third offshore block licensing round in about two years, coinciding with the expected recovery in oil prices. With Total’s and ENI’s longer term presence in our EEZ beyond their current extensions not assured, we need to attract other companies if we are to continue with exploration efforts to discover new resources and realize the hydrocarbon potential of our EEZ.

It requires careful preparation for such a licensing round to be successful, given our exploration setbacks over the last year. The above could provide a sound basis from which Cyprus, federal or not, can attract the international companies required to develop its hydrocarbon industry successfully and ensure realization of the benefits.

*CEO of e-CNHC (ECP Natural Hydrocarbons Company)

("Cyprus Weekly", 9 June, 2015)