Pipe dreams

Materials World magazine
,
1 Jul 2014
oil rig graphic

Rhiannon Garth Jones takes a look at
some of the challenges facing substantial
recent subsea finds in the Eastern
Mediterranean.

Two centuries on from the Californian Gold Rush, people the world over are still hastening to find the next way to make a quick buck from the Earth’s resources. But what do you do if you find the 21st Century’s energy equivalent of the 1848 discovery? Unlike the Gold Rush, you can’t just walk away with your finds and make your fortune in an instant. With energy a global necessity, the stakes are high and the obstacles can be significant.

In 2009, a consortium of Israeli and American firms discovered more than 8tcm of natural gas in several offshore fields in Israel’s Exclusive Economic Zone (EEZ). Since then, further claims to resources and estimates have come in thick and fast, with both Cyprus and Lebanon exploring their own EEZs. Although much exploration still needs to be done, the United States Geological Survey (USGS) believes there could be a mean of 1.7Bbbl of recoverable oil and 37tcm of recoverable gas in the Levant Basin, an area in the Eastern Mediterranean. Israel’s known gas reserves currently stand at 9tcm, and the USGS judges that there could be at least twice that amount still to be discovered in Israeli waters. If so, this would be a major energy find for all three countries with an EEZ in the basin, possibly securing energy independence and financial revenue for more than 30 years.

So far, however, exploitation of the resource has not proved to be plain sailing. The Tamar field currently supplies the bulk of Israel’s natural gas needs, but political, economic and technical considerations are all complicating development of the other fields, and it is unlikely that many of the issues will be resolved in the near future. The prospects of the three countries with a claim vary, but the situation doesn’t appear to be straightforward for anyone.

Technology trials

At every stage of an energy field, technology matters. Avner Oil Exploration, the company that made the first discoveries and now part of the Israeli Delek Group, initially struggled to explore the area without sufficient drilling equipment and the analytical skills needed to interpret seismic data, before US firm Noble Energy got involved.

Drilling had to be done at depths of around 2,000m, and exploration was made more difficult by the fact that the area had not been thoroughly explored. Further into surveying the area, it was discovered that the two main fields, Tamar and Leviathan, are from different geological eras – the Miocene and the Mesozoic, respectively – and that there might be a major fault along the basin that could prevent some of the resource from being extracted. Martin Cox, a Fellow of the Institute of Energy who advised on the exploration of Leviathan, believes that, ‘To gain more confidence in the area, more drilling is still required’.

Although depths of more than 3,000m have successfully been drilled before, operating at 2,000m is still a complex process, using the limits of the industry’s current technology. Equipment for deep-water drilling has to cope with a highly corrosive environment due to great temperature changes and external pressures of up to 800psi.

In addition to the technology and equipment required for exploration and extraction are those that might be needed on the other side of the operation. The Cypriot Government, which is currently overseeing the Aphrodite field, and the consortiums controlling the Tamar and Leviathan fields have expressed interest in converting the gas into LNG, an area where they lack expertise. Australian firm Woodside is working to become a partner in the Leviathan field and South Korean firm DSME has been brought in to work on the Tamar field, but the Cyprus Government has not yet found a partner.

Political problems

The desire to convert the gas into LNG is partly political for both Israel and Cyprus, both of whom have difficult diplomatic relations with their neighbours. Turkey has occupied 36% of Cyprus since 1974, in the form of the Turkish Republic of North Cyprus (a state only recognised by Turkey) and is likely to block any attempts by the Cypriot Government to build a pipeline to export gas that doesn’t give them a share. Transporting LNG by ship would enable it to avoid Turkey’s possible interference. It is also likely that Turkey will demand that any profits generated be shared by Turkish Cypriots on the island, an objection that has previously been raised in opposition to the awarding of exploration contracts. A recent test drill prompted the dispatch of a Turkish gunboat, but Cyprus is keen to play down concerns, with Foreign Minister Ioannis Kasoulides saying in a media statement, ‘Groups like Noble Energy, ENI and Total would not be investing billions in exploration here if they really thought Turkey were going to stop them’.

Israel’s geopolitical relations present a more complex problem when determining whom its energy might be sold to – exporting gas-generated power simply by transmitting the electricity through its neighbours’ power grids could be made difficult by poor diplomatic relations. Pipelines to both Egypt and Turkey are options, but the Turkish Government remains likely to try to block any agreement between Cyprus and Israel over shared LNG facilities, which would be another option, whether or not Turkish firms gain access to Leviathan.

Even if a pipeline to Turkey were to be arranged, it would have to go through either Cypriot waters or those of Syria and Lebanon – both arrangements that could easily be derailed. Moreover, diplomatic relations between Israel and Turkey have not yet been formally repaired since 2010, when the Turkish Mavi Marmara attempted to break the Gaza blockade. While both countries say talks are making progress, Turkish politics have been noticeably unstable recently, and Israel may be unwilling to rely on Prime Minister Erdogan’s goodwill.

Supplying Egypt with gas via a pipeline through the Sinai would be another option, but the prevalence of Bedouin saboteurs that prevented the Egyptians exporting gas to Israel in 2011 make that a less than ideal solution. A more practical pipeline destination would be Jordan. In summer 2013, Oded Eran, the former Israeli ambassador to Jordan, claimed that, ‘Jordan is in the most immediate need and would be the first client [for Israel]’, adding that a pipeline connecting existing facilities could be completed ‘relatively quickly’.

As many countries have discovered – most recently Ukraine – having strategic importance to energy can make one a potential target, and Iran, Syria and Hezbollah have all suggested that Israel’s burgeoning gas industry could be just that. At more than 300m high and 34,000 tonnes, the Tamar gas platform is a huge structure. To prevent any possible attacks, it has been fitted with warning and defence systems and is routinely patrolled by the Israeli Navy. As more fields are discovered and exploited, the necessity and cost of securing them will grow.

The USGS’s estimate for the Levant Basin includes the Lebanese EEZ, but the lack of government in Lebanon has prevented a licensing round for offshore gas exploration blocks. The Energy and Water Minister of the interim Government, Arthur Nazarian, has claimed that the first licensing round will take place in August 2014, but the Government may well find that its resources need to be directed at the strain on infrastructure caused by ongoing civil war in neighbouring Syria. In the meantime, the country has called on the USA to ensure that its dispute with Israel over territorial waters is arbitrated fairly.



Money matters

Inevitably when dealing with major energy finds, money is significant, and usually in more ways than one. It is needed to finance initial exploration and all the drilling that follows, and will also be needed when transporting both the gas and oil. World gas prices – soon likely to be affected by the availability of US shale gas – will also have to be considered by investors.

LNG is preferable to compressed natural gas because it is more efficient to transport. However, LNG hubs are expensive and, therefore, require a certain volume of natural gas to be economically viable. The standard volume for a facility is 1.8tcm and, by its own admission, the Cypriot Government currently only has access to that maximum amount (although officials guess that there could be up to 18tcm). If this remains the extent of the resource at Aphrodite, then it would be stretching economic viability to build an LNG hub at Vasilikos, the proposed site. Woodside’s involvement in Leviathan would make the possibility of sharing a facility with Israel, which does have enough gas, less plausible, whether or not an agreement is reached with Turkey, as the Israeli fields will probably have their own LNG hub.

However, economics of another kind could play to Cyprus’s strength. Woodside recently missed a 27 March deadline to complete the purchase of its 25% stake in Leviathan, as a result of negotiations with the Israeli Government on how gas exports would be taxed, and the tax treatment of the deal itself. The Israeli Government wants exports to be limited to 40%, with the rest of the energy produced allocated to domestic supply. If no agreement were to be reached, Cyprus might find itself in stronger position to propose a shared facility, without any other LNG expertise involved in Leviathan.

With so many variables at play and the status quo liable to change further as deals are struck, it is hard to predict how and when this exciting find will be fully exploited. The risk that their plans might come to nothing did not stop 300,000 people making the arduous journey to California, though, and it doesn’t seem to be stopping the governments and firms concerned with the Levant Basin.

 

Key players

Cyprus
A member state of the EU, the island has been de facto divided since 1974 into the part ruled by the Republic of Cyprus and that by Turkey. Energy independence would go some way to restoring the country after the financial crisis of 2012–13.

Egypt
One of only two Arab countries to have a peace treaty with Israel, Egypt previously supplied gas to Israel and has its own offshore gas fields, but domestic demand has increased recently. The Sinai pipeline from Egypt to Israel was sabotaged during the Arab Spring of 2012.

Israel
Traditionally low on natural resources, this gas find could secure energy independence for decades and 60% of the gas produced has been allocated for domestic use by the Israeli Government. However, poor diplomatic relations could make negotiations over pipelines to or through neighbouring countries difficult.

Jordan
The second of only two Arab countries to have a peace treaty with Israel, Jordan is interested in buying Israeli gas and building a pipeline.

Lebanon
Political instability has meant that so far, Lebanon has been unable to exploit its EEZ in the Levant Basin. An interim Government is in place until the elections in November 2014, but is likely to be concerned with the impact of the Syrian civil war on its own infrastructure.

Turkey
With limited domestic supplies, Turkey imports most of its energy and is keen to stake a claim to any Cypriot discoveries via the unrecognised Turkish Republic of North Cyprus. Turkish firms are also interested in investing in Israeli fields. 


All information accurate at the time of going to press. Negotiations between both the Cypriot and Israeli Governments and potential partners are ongoing. For further updates visit http://materialsworld.tumblr.com and find out more about developments in the Levant Basin.