MSc (Petroleum Engineering)

Project Report 2018/2019

Andreas Georgiades

The Petroleum Play in Eastern

Mediterranean: Recent Discoveries,
Complications and Proposed
Development Scenarios.

Heriot-Watt University
School of Energy, Geoscience, Infrastructure and Society
Institute of Petroleum Engineering

Supervisor - Dr. Mark Bentley

January 27, 2019

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Declaration:

I ANDREAS GEORGIADES confirm that this work submitted

for assessment is my own and is expressed in my own words.

Any uses made within it of the works of other authors in any

form (e.g. ideas, equations, figures, text, tables, programs) are

properly acknowledged at the point of their use. A list of the

references employed is included.

Signed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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0.1 Summary

Over the past decade extensive natural gas fields have been discovered in the Levantine Sea, in east-

ern Mediterranean. In a politically tense region with no prior experience in large-scale hydrocarbon

production, with no existing upstream and midstream infrastructure and with the final quantities

being unknown each decision to be taken carries a vast risk. The depth of the prospective fields and

the fact that Cyprus is an island without the possibility of an overland gas export option method,

creates a complex scenario to be addressed.

The purpose of the study is to analyze and compare the options Israel and Cyprus have and

designate which one (if not a combination) will yield the highest returns. Always taking in concern

the past, current and forecasted geopolitical conditions of the area, the energy demands of potential

exporting targets and the current gas transportation technology utilized globally.

Section 0.3 provides an overview of the recent discoveries as well as the inter-nation relation-

ships, the current and expected energy demands, and describes the three main gas transportation

methods applicable (CNG, LNG, PNG) and their limitations. Section 0.5 and 0.6 present the vari-

ous costs each method will incur and the respective profit based on current market prices in Europe

and Asia. The estimated Internal Rate of Return (IRR) is what is finally calculated and used to

present the optimal solution.

The analysis shows that for the quantities already discovered, the distance from the fields to

European mainland, and the current gas prices, CNG would be the ideal option. Something that

verifies previous studies on the subject of optimum gas transportation methods based on distance

and gas reserves (Fig.5). This contrasts the current actions of the involved states which seem to

promote the option of an LNG plant and have already procured the construction of a pipeline to

Greece. The possible reasons for deciding on such solutions are addressed in Section 0.6
Contents

0.1 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

0.2 Aim and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

0.3 Introduction and Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

0.4 Data Summary & Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

0.5 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

0.6 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

0.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

0.8 Suggestions for further work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Appendices 36

A Cyprus exploration blocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

B Israel-Lebanon dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

C Zohr field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

D LNG projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

E Current and forecasted NG prices . . . . . . . . . . . . . . . . . . . . . . . . 40

3
List of Tables

1 Israel’s gas fields [1] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2 Global gas fields [2] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

3 Recent LNG projects [3] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4 Major assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

5 Cyprus-Greece 2000km pipeline estimates . . . . . . . . . . . . . . . . . . . . . . . . 19

6 LNG exports to Europe estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

7 LNG exports to Asia estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

8 CNG exports to Europe estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

4
List of Figures

1 Main geological features of Eastern Med [4]. . . . . . . . . . . . . . . . . . . . . . . . 8

2 EEZ on ”Median line principle” [5] . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3 Turkey’s suggested EEZ [5] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4 Optimum transp. methods 2008 [6] . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

5 Optimum transp. methods 2012 [7] . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

6 Output Vs Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

7 Timeline of main events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

8 Pipelined NG comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

9 LNG comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

10 CNG comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

11 Overall comparison based on export capacity . . . . . . . . . . . . . . . . . . . . . . 25

12 IRR range for the cases of 5,10,15 TcF . . . . . . . . . . . . . . . . . . . . . . . . . . 29

5
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TRNC Turkish Republic of Northern Cyprus

EEZ Exclusive Economic Zone
RoC Republic of Cyprus
UNCLOS United Nations Convention on the Law of the Sea

LNG Liquified Natural Gas

CNG Compressed Natural Gas
FLNG Floating Liquified Natural Gas

TcF Trillion cubic feet

EPSC Exploration License and Production Sharing Contracts
MoU Memorandum of Understanding
CHC Cyprus Hydrocarbon Company

BcF Billion cubic feet

PNG Pipelined Natural Gas
GTW Gas To Wire

BTU British Thermal Unit

MMTPA Million Metric Tonnes Per Annum
IRR Internal Rate of Return
SCNT Suez Canal Net Tonnage
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0.2 Aim and Objectives

The report intends to analyze and define the optimum method for the countries in Levant region

to export the natural gas recently found in their Exclusive Economic Zones. The study will focus

mostly on Cyprus and Israel, as they are the only two countries along with Egypt that the upstream

stage has already started. Egypt’s energy needs do not allow for export, therefore those quantities

are not taken in concern. The scenario of both countries co-exploiting their reserves is also to be

investigated.

Three methods are going to be discussed. The -widely used- pipeline method to Europe, the

option of liquidizing natural gas and shipping it a) to Europe b) to Asian markets and the third

option of compressing the gas and shipping it to Europe. Shipping compressed gas to Asia will not

be investigated further, as the number of ships required to be built is unrealistic. The results will

be compared with previous literature on the subject of natural gas transportation in other regions

of the world.

For each case the estimates of country’s authorities are taken as a best-case scenario, as well

the author’s estimates based on previous projects as a more realistic-scenario. Different quantity

capabilities for each method will be also projected, since methods like Liquified Natural Gas (LNG)

follow economics of scale - higher production equals lower cost.

The research will benefit not only the exporting states, but will also enable financial providers

to assess risk and opportunities of the various options. The process will also point out areas where

further research is required before decisions are made

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0.3 Introduction and Literature Review

Since the ancient times Eastern Mediterranean was a theater of clashes and disputes. The geostrate-

gically important geographical location (being in the center of three continents), the mixture of

religions and the scarcity of basic life sustaining resources like water never gave the area a time to

catch its breath. However, the major hydrocarbon discoveries of the past decade can make-or-break

this fragile region. In the oldest oceanic crust of the world which dates approx. 340 million years

old [8] the U.S. Geological Survey estimates that in the Levant (or Levantine) Basin alone almost

120 Trillion cubic feet (TcF) of gas are present [9]. As a single field it would have been the fifth

largest gas field in the world (see table 2) however six countries have claimed a part of it. Out of

that six only Cyprus, Israel and Egypt have (at the current point) taken significant steps forward

in becoming natural gas producers; thus our focus on them.

Figure 1: Main geological features of Eastern Med [4].

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Figure 2: EEZ on ”Median line principle” [5] Figure 3: Turkey’s suggested EEZ [5]

Cyprus, being the key player resulting from its position and it’s EU membership, relies on diesel

fuel to power up it’s electrical grid; though the main power plan at Vasillikos has the provisions to

switch to gas-powered turbines. The yearly needs of the island hover around 1410MW [10] which

means most, if not all, of the recoverable gas is destined to be exported. Cypriots, who went to war

for unification with Greece, were never in good terms with Turkey, considering the two countries

have been through an armed conflict, and an ongoing claim on the northern part of the island

(the self-declared Turkish Republic of Northern Cyprus (TRNC) from 1983). This causes major

implications from the moment Turkey-backed TRNC disputes Republic of Cyprus (RoC)’s Exclu-

sive Economic Zone (EEZ) and threatens with military action any attempts from RoC for further

exploration and production. Turkey, (who along Israel and USA never signed the United Nations

Convention on the Law of the Sea (UNCLOS)) also disputes Greece’s EEZ limits. They argue that

the island of Kastellorizo shouldn’t have it’s own EEZ (crucial point since it allows Greece’s EEZ

to connect with Cyprus’) but rather Turkey’s EEZ connects with the one of Egypt’s. Fig. 2 and

3 show how the limits would have been under UNCLOS ”median line principle” and how Turkey

argues they should be. This is a key point, as Article 79 of UNCLOS states that ”The delineation

of the course for the laying of pipelines (i.e. the EastMed) on the continental shelf is subject to the

consent of the coastal State” [11]; in our case Turkey. This is the same issue Israel would possibly

face if it attempts to lay an underwater pipeline to Turkey through Cyprus’ EEZ.

The country divided its potentially hydrocarbon-bearing area in 12 blocks (Appendix A), and

awarded Exploration License and Production Sharing Contracts (EPSC) to companies based not

only on economic criteria but also taking in concern the ”nationality” of each corporation; a move
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that down the road proved wise. Based on the above, Noble got Block 12 awarded, ENI-Kogas

Blocks 2,3,9 and Total 10 and 11. Total didn’t renew its license for Block 10 and ExxonMobil with

Qatar Gas jumped on board. Cyprus Hydrocarbon Company (CHC) offers three types of licenses,

Prospection which allows only geophysical surveying(1 year), Exploration which allows 2D/3D sur-

veying and drilling (3 years with 2 renewals allowed), and Exploitation which includes production,

storage and transportation but not refining (25 years with an extension of 10 allowed) [5]. Assuming

the companies achieved a similar agreement with the one Noble did for Block 12, then the govern-

ment is entitled to around 60% of the production [12]. Cyprus agreed on EEZ delimitation with

Egypt in 2003 [13] and with Israel in 2010 [14]. Although an agreement was signed with Lebanon

in 2007, it was never ratified by the latter, as they dispute Israel’s maritime limits and therefore

Cyprus-Israel’s agreement [15]. Point 1 in the graph (Appendix B) is claimed by both countries.

The island’s first major (and still the only confirmed) field is ”Aphrodite”, discovered by Noble

in 2011 inside Block 12. The estimates quantify the Levant-basin field at 7 TcF of natural gas,

with a gross of 5 to 8 Tcf [16]. Although some dry holes by Total and Eni brought some initial

disappointment, the recent discovery of ”Zohr” field in Egypt, amongst the largest in the world

(see table 2), restored the hopes of everyone. The reason behind it being the fact that Zohr is only

6km away from Cyprus’ Block 11 (Appendix C), but also that the source of Zohr is assumed to be

the ”Eratosthenis” seamount [17], the latter being inside Cyprus’ EEZ.

Israel followed a parallel timeline, though with totally different complications. Constantly in

a hostile relationship with the arab states surrounding him, he did manage to move the gears of

its gas-powered industry covering 40% of its needs from Egypt (along with Jordan the only two

countries officially in peace with Israel) [18]. This came to an abrupt end in 2011, when the Egyp-

tian president Hosni Mubarak was overthrown and replaced with Mohamed Morsi. Morsi, unlike

his predecessor, didn’t enjoy the idea of his country providing Israel with gas. As a result of the

reduced security measures in the Sinai peninsula, the ”El-Arish” pipeline was attacked, terminating

the gas supply not only to Israel but also Jordan [19]. When Abdel Fattah el-Sisi replaced Morsi in

2014 the situation normalized, but by that time Egypt requirements in gas were far more than what

it could produce. In less than a decade, the same pipeline that was feeding Israel from Egypt can

now provide Egypt the much needed gas from Israel’s fields. Its relationship with Turkey is equally
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stormy. Once the closest of allies, however Recep Tayyip Erdogan’s transformation of the country

to a more theocratic state and the ”Mavi Marmara” incident in 2010 were 8 Turkish nationals

were killed by Israeli commandos shattered any chance of the two powerful states becoming what

they used to be. Nevertheless and in the unlikely case Israel would want to export gas to Turkey

through a pipeline, it would still be unable to do so, since Cyprus wouldn’t allow the pipeline to

pass through its waters and Syria doesn’t even recognize Israel as a legitimate country. As a result,

the realpolitik of the area formed a new strong alliance, that of Cyprus and Israel. The two nations

graduated from a neutral relationship to a stage where Israeli fighter jets are now the most frequent

users of Cyprus military airfields. In 2013 the duo signed with Greece a Memorandum of Under-

standing (MoU) which, amongst others, included military cooperation to protect the region’s O&G

infrastructure [20] [21] and in April, 2017 a preliminary agreement for ”EastMed” was signed. A

2,200Km underwater gas pipeline that would connect the Levant fields to mainland Europe through

Cyprus and Greece [18].

Field Discovered Size(f t3 )

Tamar 2009 10.8 x 1012
Dalit 2009 0.7 x 1012
Leviathan 2010 22 x 1012
Dolphin 2011 0.08 x 1012
Tanin 2012 1.2 x 1012
Karish 2013 2.3-3.6 x 1012

Table 1: Israel’s gas fields [1]

Israel’s gas fields discoveries came like manna from heaven. The estimates for the yet-to-be

developed fields -including ”Tamar” that came in production 4 years ago- reach approximately 40

TcF (see Table 1), enough to make the country a major regional exporter. Unexpectedly though,

the issues arise when the government was unable to attract the big O&G firms (unlike neighboring

Cyprus). People argue that two major reasons contributed to that, first and obvious, the relation-

ship the Jewish state has with it’s Arab neighbors. Big energy players wouldn’t want to see their

piece of the pie in countries like Qatar and Iran shrink, for the prospect of a possibly marginal

profit in Israel. The second but equally important reason is the hesitation -and internal legislative

”instability”- of the state to decide if and how much to export [22]. It was the same reason that

led Australian Woodside to resign of her rights to buy 25% of Leviathan’s field. That was a ma-

jor step-back, as Woodside’s expertise in LNG was something Tel Aviv was counting on [23] [24] [25].
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In Egypt the political turbulences that brought the country to the brink of a civil war shook

the energy foundations as well. Once a heavy exporter of oil and gas, Sisi’s maneuvers diverted

the production to the country’s own plants. And while an obvious buyer for Israel’s and Cyprus’

exports, the recent discovery of ”Zohr” came to switch balances again. ”Zohr”, estimated to hold

up to 30 TcF of gas [26] [27], will be the 20th biggest field globally (see Table 2), driving the

country’s production to surpass its consumption by 2020 [26]. It is worth noting that Egypt has

two underutilized LNG plants, one ENI-supoorted in Damietta, and one BG-supported in Idku.

Field Country Size(f t3 )

South Pars Iran and Qatar 1,235 x 1012
Urengoy Russia 222 x 1012
Yamburg Russia 138 x 1012
Hassi R’Mel Algeria 123 x 1012
Shtokman Russia 110 x 1012
Galkynysh Turkmenistan 98 x 1012
Zapolyarnoye Russia 95 x 1012
Hugoton USA 81 x 1012
Groningen Netherlands 73 x 1012
Bovanenkovo Russia 70 x 1012
Medvezhye Russia 68 x 1012
Dauletabad Turkmenistan 49.5 x 1012
Karachaganak Kazakhstan 48.4 x 1012
North Pars Iran 47.2 x 1012
Kish Iran 45 x 1012
Orenburg Russia 45 x 1012
Kharasavey Russia 42 x 1012
Shah Deniz Azerbaijan 42 x 1012
Golshan Iran 30 x 1012
Zohr Egypt 30 x 1012
Tabnak Iran 22 x 1012
Kangan Iran 20 x 1012

Table 2: Global gas fields [2]

Energy forecasts. Before one identifies exporting targets, demand for natural gas must be es-

tablished. Fortunately, the future looks bright for the major gas-producers as the majority of

technical reports forecast an increasing demand in the upcoming years. BP estimates that by 2040

the daily gas consumption will rise to 500 Billion cubic feet (BcF) from approximately 350 which

is now [28]. In EU alone, McKinsey demonstrates a 5.5% import growth from 2016 to 2017 [29]. In

2012 the Union imported 11 TcF, last year it rose to 14.4 [30] [29]. Various reasons are behind this
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increased demand, one major being the fact that many countries due to environmental regulations

are switching from ”dirtier” energy sources to greener ones (e.g. China from coal), but also to re-

duce dependence on one source/supplier. Another notable reason as this report investigates further,

is the reduction of gas transportation costs (with methods like LNG); something that made the

valuable energy source a global commodity rather than just being traded in closed regional markets

like before. The reduced costs, the increased availability and the ability to negotiate better prices

(now ”spot contracts” were possible), all contributed to the rising demand. A point to be made

is that Europe’s only ”own” field (Croningen) is depleting fast, with Netherlands already cutting

down on exports [31].

Gas transportation. The targeted buyer and the transportation mean (therefore cost) are not

only interconnected but they create a loop. More isolated buyer, higher price to pay, higher the

transportation cost. That is, if the estimated reserves verify; otherwise the exporter stays with

a multi-billion dollar investment but not enough gas to make it profitable. The report compares

three major ways of transporting gas. Transported as underwater Pipelined Natural Gas (PNG),

shipped as Liquified Natural Gas (LNG) and shipped as Compressed Natural Gas (CNG). There is

a fourth way called Gas To Wire (GTW), however it is neither in the author’s technical expertise,

nor a common practice with large gas fields.

Gas transportation through pipeline is up to now the most common practice implemented. The

straight-forward construction and technical simplicity provided a cheap way to transfer gas straight

from the wells to the buyer. However PNG has three major disadvantages. Firstly it will tie you

to only one market. If the buyer decides for any reason that he does not want to buy more gas

from you then another pipeline has to be build to reach other markets, if any. Similarly, if more

gas fields come to production but the buyer does not require more than what was agreed. Second,

a single pipeline -especially if overground- its totally exposed and offers an easy target to anyone

ill-intended. While this may not be a problem in e.g. Northern Europe, in Middle East (as the

Egypt-Israel pipeline case) definitely poses an issue. The third reason and the most important

being that a pipeline becomes unprofitable in large distances. Currently the longest operational

underwater pipeline is the ”Nord Steam”, which transfers gas from Russia to Germany. At 1,224

Km it cost $9.76 billion to be built, and transfers 1.94x1012 f t3 per year [32]. As a reference, the

proposed ”EastMed” will have to cover a distance approximately 2,000 km. Fig. 4 and 5 show
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a comparison of the optimum distance for each transportation method, the left being from 2008,

the right from 2012. Although many small parameters make each study unique, the reduction in

costs in just 4 years was tremendous. The shrinkage of the pipeline area was not because it became

more expensive, rather than other means became more affordable. Where CNG was profitable up

to approximately 1,200 miles, in 2012 that distance almost doubled.

Figure 4: Optimum transp. methods 2008 [6] Figure 5: Optimum transp. methods 2012 [7]

While a precise cost of the ”EastMed” is yet to be defined, the officials agree that it will cost

around $7 billion [18] [33]. Some argue that the number is a very optimistic approach and doesn’t

represent reality so for analysis purposes both cases ($7 and $10 billion) will be examined. How-

ever, they seem to disagree on the capacity of the pipeline under that cost. Israel’s energy minister

talks for approximately 8 to 10 bcm/year [33], while the official contractor of the project says 10

bcm/year [34] and the Greek Public Gas Corporation argues for 8 bcm/year [5].

LNG allowed for the economically-feasible transportation of gas in large distances. This is

achieved by liquidizing the product at a temperature of -162 Celsius (-260 Fahrenheit), which in

turn reduces the volume of the gas to 1/600th of what it would have been in normal surface condi-

tions. The liquefied product is then transported globally using specialized LNG ships, which they

will transport the gas to re-gasification plants. Most of the ships currently operating or being built

have a capacity of 140,000 m3 (5,000,000 f t3 ) however the range extends up to 260,000 m3 [35].

As per 2017 prices, a 174,000cm ship costs $182 million and these numbers are going to be used

as a benchmark for our analysis [36]. Charter rates for such vessels vary around $70-$80,000 per

day [3] [36].

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Estimating LNG plant costs is even harder to do. The statistical sample is a very small one and

spans from different years all over the globe. While technology improved and allowed for shrinking

costs, the rise in price of raw materials like steel counter-effected that. What is accepted widely

though, is that LNG follows economics of scale, meaning that the higher the production the lower

the cost. However, caused by the reasons mentioned above, is hard to quantify that ratio. Appendix

D shows the variance of CAPEX Vs output for various projects in different time periods. The only

qualitative meaningful comparison one can make is of projects of the same year in the same area.

The only such case is 2009 in Qatar, where indeed a higher output plant dropped the production

cost per unit. Ernst and Young claim that you should assume $2.6 billion per Million Metric

Tonnes Per Annum (MMTPA) of the plant’s output [3]. A analysis of Table 3 provides a similar

value and an equation (Fig. 6) which will be used to estimate the proposed Cyprus LNG plant cost.

Project Completion CAPEX Capacity Cost

($x109 ) (MMTPA) ($x109 /MMTPA)
Ichthys 2016 34.0 8.4 4.048
Pluto 2012 12.5 4.3 2.907
Prelude 2017 12.6 3.6 3.500
Wheatstone 2018 30.0 8.9 3.371
Gorgon 2015 45.0 15.0 3.000
Gladstone 2017 16.0 7.8 2.051
Interoil 2016 09.3 8.0 1.163

Table 3: Recent LNG projects [3]

Figure 6: Output Vs Cost

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As a general rule of thumb, for every MMTPA capacity of the plant, a reserve of 1 TcF should

be there in order for the project to be economically viable [37]. Noble in 2012 estimated the cost of

exporting LNG from Cyprus to Asia around $7.8/MMBTU. Cypriot authorities claimed that the

proposed plant on the island would cost $9 billion ($3 billion for the infrastructure and $6 billion

for one train) [10]. However it would only cost $3 billion more for each extra train they would want

to add to the plant. This translates to a $12 billion plant with a 10 MMTPA output. Although

this seems like an over-optimistic approach, for comparison purposes it will be included as a best

case scenario.

CNG is a relatively new technology, which acts as an alternative solution when the distance or

quantity do not justify LNG or pipelines. CNG requires minimum infrastructure as the compres-

sion of the gas is being done on-board. This low CAPEX is the main advantage of the method.

However, a CNG vessel can carry much less than an LNG one, almost 2.4 times less [38]. A typical

new-generation ship has a capacity of up to 500 MMf t3 [39]. For the subsequent analysis is taken

as a given that a 330 MMf t3 coselle-type ship costs $115 million and as a worst case that the cost

rises to $200 million [40]. Another, downside of the CNG method is that the first vessel -the Jayanti

Baruina- was only delivered 2 years ago. This means there are not many vessels globally available

and, assuming they are all tied to a long-term contract, an interested party would have to construct

them from scratch; obviously delaying economical exploitation of the products by a large margin.
 17

Figure 7: Timeline of main events

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0.4 Data Summary & Assumptions

• For the majority of data regarding gas consumptions, productions and imports, the statistics

provided by annual BP, EU and Eurogas reports were used.

• Technical data for LNG, CNG, and pipelines were taken from SPE publications and conference

proceedings.

• The timeline and the sequence of events was constructed from reputable news agencies.

• Regarding legal definitions, the Law of the Seas, delineation agreements and EEZ maps, those

were extracted from the United Nations (UN) online portal.

• The stance of regional (and-non) geopolitical powers was researched in the press but also in

the official congressional reports and publications of major US political institutions.

• Lastly, agreements between Government entities and hydrocarbon corporations regarding (but

not limited to) the terms of Exploration License and Production Sharing Contracts (EPSCs)

were taken from official state portals.

• For the Internal Rate of Return (IRR) calculations we assume 1 year for con-

necting/tapping on the live wells and 20 years of production. However for the

CNG plan due to the unavailability of ships (and the time-consuming production

of them) we assume 1 year for each ship to be constructed before the full fleet

starts sailing.

Cyprus-Greece distance 623 Naut. Miles

Cyprus-S. Korea distance 8,900 Naut. Miles
Cyprus-Greece roundtrip duration 3 Days
Cyprus-S. Korea roundtrip duration 37 Days
LNG price (Asia) 8.8 $/MMBTU
LNG price (Europe) 6.5 $/MMBTU
LNG and CNG vessel speed 20 Knots
LNG vessel capacity 78,000 LNG MTon
LNG vessel cost 182 106 USD
CNG vessel capacity 330 106 f t3
CNG vessel cost 115 106 USD

Table 4: Major assumptions

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0.5 Results

Two cases were analyzed for the pipeline scenario estimations; Case 1 being the cost as argued by

region’s officials, and Case 2 acting a worst case scenario where the cost rises to $10 billion USD.

For each of the two cases the costs of three different capacities were calculated, in order to assess

the profit impact a higher or lower performance pipeline would have. Based on the cost/capacity

relationship the cost per MMBTU was estimated and the respective revenue by use of the cur-

rent gas prices given in Table4. The Total Net Revenue was calculated assuming one year of zero

production and the full construction cost deducted, followed by 20 years continuous production at

the respective capacity. Maintenance costs were not taken in concern as they were considered minor.

Case 1 Case 2
9
Construction cost (10 ) $7 $10
Capacity (109 f t3 /yr) 250 353 424 250 353 424

Cost ($/km/109 f t3 ) 14,000 9,915 8,263 20,000 14,164 11,804

Cost ($/MMBTU) 1.36 0.97 0.80 1.95 1.38 1.15

Revenue ($/MMBTU) 5.14 5.53 5.70 4.55 5.12 5.35

Yearly revenue (109 $) 1.32 2.01 2.48 1.17 1.86 2.33
Breakeven (yrs) 5.3 3.5 2.8 8.6 5.4 4.3
Total Net Revenue (109 $) 19.38 33.13 42.60 13.38 27.13 36.60
ROI 2.77 4.73 6.09 1.34 2.71 3.66
IRR 18% 29% 35% 10% 18% 23%

Table 5: Cyprus-Greece 2000km pipeline estimates

LNG costs were broken down to two parts, one being the construction of the LNG plant and the

other buying the vessels. As seen in section 3.0 the construction costs are depended on the output

capacity of the plant (which is in turn bounded with the estimated discoveries), hence three different

plant sizes were analyzed. These three scenarios were investigated in Case 1 using the estimated

costs Cyprus government provided, and in Case 2 the author’s estimate based on previous projects

(Fig. 6 and Table 3). Since the LNG carriers are assumed to be bought and not built the IRR

calculation was based again on one year construction and 20 years of continuous export. The same

construction estimations were used for the case where LNG was to be exported to Asian markets

(table 7). In this case there is a higher cost associated with the larger amount of vessels required,

but an increased revenue due to the higher LNG price currently in that region.
 20

Case 1 Case 2
Reserves (1012 f t3 ) 5 10 15 5 10 15
(1-train) (2-trains) (3-trains) (1-train) (2-trains) (3-trains)
Capacity (109 f t3 /yr) 250 500 750 250 500 750
Capacity (1012 BTU/yr) 273 546 819 273 546 819

Plant Cost (109 $) 9 12 15 14.5 28.4 42

Plant Cost ($/MMBTU) 1.75 1.17 0.97 2.82 2.77 2.71

No. of LNG vessels(109 $)* 0.55 1.11 1.66 0.55 1.11 1.66
LNG vessel Cost (109 $)** 0.182 0.364 0.364 0.182 0.364 0.364
LNG vessel Cost 0.035 0.035 0.024 0.035 0.035 0.024
($/MMBTU)

Total cost ($/MMBTU) 1.79 1.20 1.00 2.86 2.80 2.74

Revenue ($/MMBTU) 4.71 5.30 5.50 3.64 3.70 3.76
Yearly revenue (109 $) 1.21 2.72 4.24 0.94 1.90 2.90
Breakeven (yrs) 7.59 4.55 3.62 15.67 15.15 14.54
Total Net Revenue (109 $) 24.20 54.39 84.77 18.72 37.98 57.98
ROI 2.64 4.40 5.52 1.28 1.32 1.38
IRR 12% 22% 27% 2% 2% 3%

Table 6: LNG exports to Europe estimates

*,** Although, under these calculations, the ship would be idle half the year it would still be

more beneficial than leasing one. The leasing option can be examined in the 10 TcF case. For the

calculations we assumed 1 ship to be bought in the 5 TcF case and 2 ships for the 10 and 15 Tcf cases.

The same three possible reserve quantities were used to evaluate the option of CNG (Table

8). The complication in this case would be the fact that the vessels will have to be ordered and

constructed, as is a relatively new technology and not a market pool where one can buy from.

Hence, the IRR (contrary to the other two cases) was calculated with the assumption that each

ship required would take a year to complete. In a real life scenario exports are to start as soon as

the first ship is delivered therefore our study acts as a worst case scenario where no profit exists

until all carriers are delivered.

 21

Case 1 Case 2
Reserves (1012 f t3 ) 5 10 15 5 10 15
(1-train) (2-trains) (3-trains) (1-train) (2-trains) (3-trains)
Capacity (109 f t3 /yr) 250 500 750 250 500 750
Capacity (1012 BTU/yr) 273 546 819 273 546 819

Plant Cost (109 $) 9 12 15 14.5 28.4 42

Plant Cost ($/MMBTU) 1.75 1.17 0.97 2.82 2.77 2.71

No. of LNG vessels(109 $) 7 14 21 7 14 21

LNG vessel Cost (109 $) 1.274 2.548 3.822 1.274 2.548 3.822
LNG vessel Cost 0.248 0.248 0.248 0.248 0.248 0.248
($/MMBTU)

Total cost ($/MMBTU) 2.00 1.42 1.22 3.07 3.01 2.96

Revenue ($/MMBTU) 6.80 7.38 7.58 5.73 5.79 5.84
Yearly revenue (109 $) 1.75 3.79 5.84 1.47 2.97 4.50
Breakeven (yrs) 5.89 3.84 3.22 10.70 10.42 10.14
Total Net Revenue (109 $) 34.91 75.83 116.74 29.44 59.42 89.96
ROI 3.40 5.21 6.20 1.87 1.92 1.97
IRR 16% 26% 31% 7% 7% 8%

Table 7: LNG exports to Asia estimates

Reserves (1012 f t3 ) 5 10 15
Capacity (109 f t3 /yr) 250 500 750
Capacity (1012 BTU/yr) 273 546 819

No. of CNG vessels(109 $) 7 13 19

CNG vessel Cost (109 $) 0.81 1.494 2.19
CNG vessel Cost ($/MMBTU) 0.157 0.146 0.142

Total cost +20% ($/MMBTU)* 0.19 0.18 0.17

Revenue ($/MMBTU) 6.31 6.32 6.33
Yearly revenue (109 $) 1.62 3.25 4.88
Breakeven (yrs) 0.50 0.46 0.45
Total Net Revenue (109 $) 32.4 64.91 97.54
ROI 40.25 43.42 44.64
IRR 47% 29% 22%

Table 8: CNG exports to Europe estimates

* added cost to accommodate infrastructure expenses (loading pipes etc.)
 22

0.6 Discussion

Figure 8: Pipelined NG comparison

The analysis tried to cover the various estimations provided by the respective authorities and

key persons. Although, in all cases the project is profitable, it is easily noticeable that if the cost

increases to 10 billion US dollars -as critics argue- there will be a major drop in profits. This is

not a distant scenario and should not be treated as such, since the depth and uncertainties of the

project classify it as high risk, which will probably incur unexpected expenses. In the most likely

case of the approximately 10 BcM per year, which is the contractor’s estimate, this cost increase

comes with an 11% drop in the Internal Rate of Return.

 23

Another useful extract, is the fact that even in the highly unlikely scenario that Cyprus alone

does not discover any more natural gas, Aphrodite on it’s own with the 5 TcF proven reserves can

sustain the construction of the pipeline. However, this is not a decision that is to be made purely

on economical criteria. As mentioned in the previous chapter, a laid pipeline requires permission

from the states their EEZ is being affected. Given the conditions in the east Mediterranean and the

claims over the area west of Cyprus, it is not expected for the construction to proceed smoothly.

Any delays in a project of this magnitude will increase an already negative cash flow and lower the

expected IRR.

Figure 9: LNG comparison

The variation grows wider in the analysis of the LNG option and this is mainly caused by the es-

timates given by the Cyprus government. The projected cost for the construction of a 1-train plant

seems reasonable (Uni. of Columbia gives a typical 11-16% IRR for LNG projects [41]), however

the $3 billion extra cost per train can be considered over-optimistic. Although the calculations do

not take in concern the cost of bringing the gas to wellhead, it is still widely deviated from Noble’s

$7.8/MMBTU estimation. Under Noble’s price, exporting in LNG even to Asia is not economically

beneficial.
 24

Using a more realistic scenario (Case 2) based on the cost of previous projects (which match the

E&Y estimations) the LNG option would only make sense to be examined further if Asia was the

targeted destination. As previously mentioned, the LNG method provides freedom of altering your

buyers, however the seller enters a more competitive market. Asian countries have no geopolitical

reason to buy from an EU member state; unlike the case of pipelined gas to Europe. An extra

cost which could also have an impact would be the tolling system at the Suez canal. These costs

have not been incorporated in the study, and should be before a final decision is to be made. For

reference purposes, an average-sized LNG carrier with a Suez Canal Net Tonnage (SCNT) of 30,000

will be paying roughly $200,000 per crossing

One must also not overlook existing agreements/investments made by the involved production

companies. ENI owns 40% of Damietta’s LNG idle plant. Given the recent Zohr discovery it would

make much more sense for the Italian giant to divert all the produced gas to an already constructed

plant a few hundred kilometers away.

Figure 10: CNG comparison

CNG analysis display a different pattern. Contrary to the previous methods investigated, it is
 25

observed that the rate of return acts in reverse of the quantities planned for export. This has to do

with the fact that CNG is a relatively new technology and ships are not available to be immediately

bought, therefore they have to be constructed. This adds years (assumed 1 year for each ship to

be constructed) before profit can be made. The analysis covers the East Med - Greece route but

not Asia, since building 75 ships to transport the minimum of 250 Bcf to Korea is not a realistic

case. However, as seen on the next figure, even in the worst case scenario that there will be no cash

income until the whole fleet is completed, the IRR is still the best possible option in all cases (with

one exception to be discussed). That value can only increase, since some ships will start delivering

before the whole order is delivered. If multiple shipyards are employed the construction time will

further be reduced, again increasing the Rate of Return.

Figure 11: Overall comparison based on export capacity

What is clear from the overall method comparison, is the fact that CNG looks as the most

profitable way to go, whether is to develop a single field the size of Aphrodite or combined fields.

The only case CNG is not the way to go is if Cyprus estimates for it’s LNG plant are achievable

and if Israel agrees to co-export. However, the previous case studies and currently running LNG

plants indicate a much lower return. In fact, based on those rates, LNG is the least profitable way

to go in all cases. A case where pipelined natural gas to Greece could be more profitable is the

possibility of the pipeline being able to carry 12 BcF/yr as Israeli officials mentioned, not a likely
 26

option though since most official technical reports insist on the 10 BcF/yr.

It’s surprising that Cyprus has not investigated the CNG option despite the fact that it has been

suggested by many established engineers and scientists [42] [43] [44] [3] while the pipeline agreement

is already signed and LNG studies present that option as ideal. It is the author’s opinion that this

is based on three reasons. One being the pressure as well as the financial support from EU to

access the East Med gas. The pipeline will bind a steady supply to an energy-thirsty market, and

the funds already released for the construction lower the cost making it the quickest and cheapest

option for the involved parties. Second reason being the LNG numbers CHC presents, as well as the

high expectations for further discoveries. The later is not to be taken lightly as is highly unlikely

Aphrodite will be the only field available for export. In fact the most promising blocks are yet to be

drilled and quantities might reach levels being less profitable with CNG. The third possible reason

LNG option is promoted is a geopolitical one. As seing in the previous chapters, Israel -and the

companies involved- favor the option of a plant that would be based in an EU state, unreachable

from insurgents and possible extremist acts. Cyprus will benefit as well, since increased quantities

will lower the cost and they will be having a powerful neighbor with active interests on the island.

However, the lack of confirmed reserves at the time, the cost of opportunity with CNG, PNG op-

tions, and the assumed preference of ENI in utilizing it’s own plants in Egypt do not favor this

option.

Comparing with the figures from previous studies [4,5], some expected conclusions are extracted.

If one compares with the most recent study 5, this report’s findings match perfectly. CNG is by

far the preferred method and as quantities increase the pipeline option becomes more profitable;

this follows the trend shown in Fig.11. However, going four years back, LNG would have been the

most profitable option. The advances in CNG technology almost doubled the profitable distance

range, making it today’s ideal option for East Med.

There are two options that have not been analyzed for reasons to be explained. The first being

the construction of a pipeline from Cyprus to Turkey, which in turn to be connected to the existing

network transferring natural gas to Europe. This would require only a minor (less than 100km)

underwater pipe laying, with previous studies arguing a cost of approximately $2.4 billion; the
 27

above including the cost of the pipeline from the fields to mainland Cyprus [5]. For a 10bcm/year

pipeline -and the remaining assumptions unaltered- this translates to a rough IRR of 32%. Under

this case, the pipeline is now marginally the most profitable option, a result that is being verified by

the ”optimum transportation methods” (chart: 5). The reason for this development scenario not

presented or suggested is the author’s point of view that the possibility of such an agreement taking

place is close to zero. This, given the troublesome relation between the two countries, including

the non-existing will to recognize any official entities from both sides, the presumed wish of EU to

detach from a single gas supplying route and maximize its options, and lastly the fact that no nation

would want its main source of income to be controlled by a third party other than him and the buyer.

The later is the reason that the option of Cyprus (and probably Israel) liquidizing the gas in

Egypt’s LNG plants under a tolling scheme and then selling them as LNG is not investigated.

Added to that, and although the numbers for such a speculative scenario are not known, it is

highly unlikely that quantities more than 5 TcF in a 20-yar period would justify ”renting” and not

constructing their own plant.

Given the willingness of EU to fund the EastMed pipeline, the fact that the majority of the

blocks are yet to be explored (therefore quantities are still unknown) and that Noble’s Aphrodite

will come on-line much earlier than the remaining fields, it is the author’s opinion that Cyprus

and Israel should proceed with two options. First constructing the pipeline to Greece with the cost

covered in the biggest percentage possible from European funds, to an extend that would shrink the

profitability gap with CNG. The fast construction of the pipeline will allow a guaranteed income as

soon as the two countries have quantities to be exported, with the minimum risk as this scenario

can be sustained with the smallest quantities. Meanwhile, and as soon as there is a clearer picture

for the remaining quantities the construction of CNG ships can be initiated (provided that there

are more than 5 TcF for export, on top of the 5 TcF covered by the pipeline). In the unlikely

event that a Zohr-size field is discovered then the option of LNG can be re-evaluated. This will also

depend on the LNG price in the Asian markets which is expected to rise; a possible scenario since

the region is vastly growing with new markets in Indochina emerging. The above suggestions are

based on the assumption that the numbers Cyprus provided for the LNG plant are not achievable

and that previous case studies’ costs are more accurate. If a verified business plan can indicate
 28

otherwise, then the option of the LNG plant on the island is to be discussed again. The above

variables establish the need to wait for a more accurate reserve estimation, before a development

decision for the total quantities of the region is being made.

 29

0.7 Conclusions

As clearly seen in Fig.12 if Cyprus or Israel decide to export on their own, with the current verified

discoveries, CNG would be the most profitable (in terms of IRR) option. Even with the LNG’s best

case scenario, which are the numbers Cyprus’ authorities provided, as long as the exported quan-

tity is 10 TcF or less the LNG is not an attractive option; although economically viable if chosen.

However, if the upcoming discoveries match the two nation’s expectations and the gas prices in Asia

stay or increase from the current benchmark, then the liquefied gas option can possibly exceed the

returns of a CNG project. These optimistic expectations combined with the decision to co-exploit

some of the fields, the risk of CNG’s relatively new technology and the time it will take to construct

the ships is possibly what drives the two countries to favor the option of constructing an LNG plant.

The option of a pipeline, although not as profitable as the CNG, offers a faster and cheaper

option at least for the first exported quantities. Europe’s need for new energy sources and it’s

willingness to finance a percentage of the pipeline’s cost, the lower CAPEX required, the option

of neighboring countries tapping in at the future and the uncertainty of the final volume of gas

available for export justify the decision made to proceed with the construction of the EastMed

at the current stage. The only certainty derived from the analysis is that Cyprus and Israel will

increase their profits if they proceed with exporting their natural resources together, and given the

tense geopolitical conditions in the region they have both to gain by cooperating and deciding on

a unified business plan.

Figure 12: IRR range for the cases of 5,10,15 TcF

 30

0.8 Suggestions for further work

• Wellhead costs/price should be estimated. Added to the the costs estimated above might

make some of the suggested methods unprofitable. This is more likely in the case of an LNG

plant, especially if the quantities are less than expected.

• The tolling scheme in Suez must be analyzed and taken in concern since it will make the LNG

option (to Asia) less profitable

• Floating LNG plants are now emerging and they provide a cheaper and therefore a financially

more attractive option for smaller export quantities. Depending on the discovered fields they

might provide a better alternative.

• The potential returns of the pipeline should be recalculated after the final contribution of EU

to the project is finalised.

• A further analysis into Asia’s energy requirements forecast will give a more reliable prediction

about possible price fluctuations and possibly higher returns of the LNG option.

• Jordan can provide a promising export target for Israel given the low cost of an overground

pipeline although the country’s energy needs must be estimated first.

• The increased use of green technologies and regulations in EU (with the rising carbon taxes/fines)

that drive its members to shift to alternative energy sources might reduce the possible profit,

and will make the Asian market (thus the LNG project) a more attractive option.

• Although Greece’s exploration process is still in its early stages, the fields investigated are

located around the island of Crete and in close proximity to the EastMed route. Possible

discoveries will make the pipeline drastically more profitable and extend the utilization period,

even when Cyprus and Israel switch to LNG/CNG projects.

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Appendices

36
 37

A Cyprus exploration blocks

[4]

B Israel-Lebanon dispute

[45]
 38

C Zohr field

[26]
 39

D LNG projects

[3]
 40

E Current and forecasted NG prices

[46]