October 20, 2012

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A Third Gas Corridor: Prospects For The East Mediterranean

INTERFAX - Dimitris Manolis, the Interconnector Turkey-Greece-Italy’s (ITGI’s) director of international activities, this week raised the possibility of bringing East Mediterranean gas to the European market via the ITGI pipeline as early as 2018. Harris Samaras, the chairman and group chief executive of Pytheas, an international investment banking organisation, spoke to Interfax about the benefits of, and technical and commercial challenges to, building ‘the East Med’ pipeline.

The following are extracts from the interview of Mr. Samaras with Interfax: Harris Samaras, Chairman & Group CEO of Pytheas, talks to Leigh Elston, Editor & Senior Reporter of Interfax, about the possibility, and importance, of the Eastern Mediterranean hydrocarbons to Europe and more (14 September 2012).

Interfax: Would a pipeline running from the East Mediterranean, as suggested by Dimitris Manolis, be feasible?
Harris Samaras: The construction of this ‘East Med Pipeline’, which would connect Israel, Cyprus and Greece to Italy and the rest of Europe, is feasible but it will be costly, and can only be justly assessed when further exploration is concluded and additional gas deposits are confirmed. If, however, the scientifically estimated deposits are proven to exist, it is undoubtedly the best long-term option and solution, not only for the countries involved, but for the EU as well. It is a solution which will liberate the EU from its energy dependence on volatile or [sometimes] ‘hostile’ countries – as both the source and the transportation means will be owned and controlled by EU-member countries alone. Needless to mention, it would strengthen Europe’s negotiating tools in the markets.

Interfax: What technical difficulties would the construction of the pipeline pose?
HS: The most challenging and costly part of such a project would be the construction of the pipeline between Cyprus and Crete (points B to C on the map, above), an approximate stretch of 675 km at depths of about 800-2,000 m. The 3,000 m depths could be avoided if the pipeline bypasses the Herodotus Abyssal Plain, which in certain places is about, or even exceeds, 3,000 m. The total distance, between A and G, and B and H, is about 1,880 km. Approximately 330 km of the pipeline lies within the exclusive economic zone of Cyprus, 1,250 km is within Greece’s (approximately 635 km of which is onshore), 80 km is within Italy’s and 220 km within Israel’s.

Interfax: How much is the project likely to cost?
HS: Roughly, the construction cost of a pair of 32 inch pipelines from Cyprus to Crete at depths of around 2,000 m is likely to be around $25 million per km and, to reach a 28 billion cubic metre per year capacity, the estimated capital cost for pipelines from Cyprus to Crete would be around $20 billion. This is a significant amount, but not prohibitive if the estimated deposits of more than 50 trillion cubic metres do exist.

Interfax: Is ITGI the best consortium to develop such a pipeline? Or should a new project consortium be put together to look into shipping East Med gas into Greece?
HS: It is highly unlikely that Cyprus will accept ITGI or any other consortium that includes Turkey when Turkey does not recognise Cyprus as a sovereign state.

Interfax: Is there enough gas to justify a pipeline to Europe, as well as an LNG export project, as favoured by the Leviathan consortium?
HS: A pipeline would be preferable to an LNG export plant; however, it is highly unlikely that further exploration, confirmation and exploitation procedures would be timely enough to meet the extremely ambitious 2018 or 2019 date. The challenges of engineering and construction, management and time related, economic, and geopolitical, are ample. Right now there are not enough proven reserves to justify both projects or even to justify the construction of a pipeline. The optimum scenario is that, until more hydrocarbons are confirmed in Cyprus and Greece, Cyprus will have to move swiftly with the construction and commissioning of the LNG onshore facilities, i.e., terminal, storage and liquefaction plant. Also, pipelines connecting the Aphrodite gas field and Israeli fields with the terminal have to be designed and laid. Up until the liquefaction plant is constructed, the export of the Eastern Mediterranean gas surplus can by facilitated via CNG loading directly from the offshore field floating production systems to EU ports. Costs of shipping, including capital costs, would be roughtly $3 per million Btu (MMBtu) when average current market prices to European end users are $9/MMBtu. In the short-to-medium, term and after the liquefaction plant is operational, gas can be transported to the EU via the more efficient LNG vessels (CNG’s volumetric energy density is estimated to be 42% of LNG’s). In the long term, following further offshore discoveries in the region, the building of a pipeline system to transport gas from Israel and Cyprus to the island of Crete and then to mainland Greece and Italy into the European gas network makes absolute sense. Although LNG may not be a perfect solution, it offers market flexibility and potential shipment to markets where prices are higher and it is considered a less risky method for monetising large amounts of gas. However, over and above the major upfront cost for the construction of a liquefaction plant, LNG costs significantly more than piped gas. Furthermore, financiers of LNG investments may want to see a medium- to long-term commitment to buy if they are to break ground on a new project. And for any LNG plant to be truly profitable, it would need double the amount of gas known to exist in the Aphrodite gas field. Unless more gas is confirmed within the Cypriot EEZ or extra gas volumes from Israel are guaranteed, such a venture remains questionable.

Interfax: What role is East Mediterranean gas likely to play in Europe’s energy security?
HS: The significance of the southeastern Mediterranean hydrocarbons for the EU as a third corridor is beyond doubt. What is different about this particular corridor, over and above its estimated huge hydrocarbon deposits, is that Greece and Cyprus are EU member states and Israel an honest and trustworthy ally. For the first time ever in European energy history, the EU is guaranteed an uninterrupted supply of a traditional energy source of vast magnitude and potential. Europe is confronted with a unique challenge and a remarkable opportunity and the need for EU action is stronger than ever. Firstly, the EU should upgrade its role and involvement in the hydrocarbon efforts of Cyprus, Greece and Israel, to assist and ensure that an appropriate framework and solid plan are in place so that exploitation commences as quickly as possible. Secondly, the EU should use its regional and global leverage to ensure that geopolitical challenges are resolved within international law and that the southeastern Mediterranean hydrocarbons become a tool for reconciliation and regional stability. Finally, the southeastern Mediterranean corridor should be included in the EU’s energy policy and dealt with as such.

View the whole interview on Interfax and in .pdf here

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