Cyprus
has natural gas that can export and
together with
Israel
they reach a critical quantity that
allows them to consider building a common LNG liquefaction plant. Taking the
assumption that they would not choose the pipeline option, we will look the LNG
alternative as of its economic feasibility. This LNG has to be economically
attractive in order to clinch long-term contracts from buyers and it competes
not only with LNG from other countries but piped natural gas and maybe
unconventional gas. Of course, there are number of possible markets and the
prices vary. However all these issues must be considered, as this would be a
capital intensive investment and must be certainly backed up by long term
contracts.
The LNG market are split
into two are areas the Pacific and the Atlantic region. The Asia-Pacific market
is much larger than the Atlantic market, accounting for a higher share of both
imports and exports, but this doesn’t make it necessary accessible neither
profitable for LNG from Cyprus.
Asian Markets
In the Pacific markets, is the
market that has the highest margins due to lack of alternatives sources of gas,
up to now. Here, the numbers usually favor LNG exports when the global oil
price is higher than $75/bbl oil, as gas contract pricing are pegged to oil
price* (indexation for firm contracts today is approximately 14.85%). Thus,
this new investment must ensure that its total operation costs per unit volume
lie below these assumptions. The biggest competitor for that region will be
Australia
, which plans to become a major LNG
exporter in the next 5 years. According to our calculations, the
projected delivery cost structure for
Cyprus
to
Asia
is on average $10.8/MMBtu (7.7/MMBtu breakeven +
3.1/MMBtu transportation cost). This is lower to the “expensive” Australian
investments but higher than the ones that are already have FID (Final
investment decision) or are under construction. Moreover, some additional
upcoming Australian projects and proposed future North American LNG exports
which are expected to deliver LNG to Asia at costs of between $10 - $12/MMBtu
under current gas price assumptions, are close to securing Final Investment
Decisions (FID) and this expected new demand will be satisfied on a first
come-first serve basis.
Therefore, in the case of
Cyprus-Israel LNG project, investors will expect to view
Asia
as a perspective market but they will need to secure
the second wave of demand and specifically from
India
and
China
that are expected to increase their
consumption in the future. However, as we have seen in the past with North
America’s, big importers became unexpectedly exporters, so looking at China
there must be conscious looking the evolutions with the exploration of
unconventional gas. On the other hand,
India
is a market at which
Cyprus
has a clear cost advantage over
Australia
and the only, but significant, concern is
new LNG capacity from
Qatar
that has lower cost structure and more
flexibility in pricing as they have higher profit margins.
Europe
On the other hand, Cyprus-Israel
possesses a clear advantage over their competitors in the Atlantic basin (total
cost around $8.1/MMBtu - 8.5/MMBtu). Here,
Australia
can be pushed out of the picture as the
main competition will come from four places namely piped gas, unconventional
gas in the form of LNG imports from US, intrinsic production; and LNG cargoes
from
Africa
.
Europe
will be in need of additional gas imports in the
coming years to cover the increased consumption needs. Considering the fact
that the
Europe
has decided to diversify its import
sources, it is most likely to favor the southern corridor
Azerbaijan
gas over piped gas from
Russia
and in the end, this could be a big
competitor of European LNG. From the other alternative sources the
unconventional gas cannot be considered a realistic solution despite the
possible low cost structure, due to the lack of technical and economical
visibility. Within the LNG solution, the competition will come from African
countries and US.
North
America
will be a
small-scale exporter and given the low upstream cost, it will be possible to
compete the LNG from Cyprus/Israel. However the escalation to the extent that
it will make US a considerable exporter is unlikely to happen, given the
current information, due to US state energy safety concerns. Nevertheless the
technological advancements and the market responsiveness that characterize US,
cannot exclude this possibility. From the African continent, we expect that
Algeria
, with a high uncommitted capacity and
Nigeria
’s incremental capacity will target the
European market, as the transportation costs are similar to Cyprus-Israel and
therefore this would be on a first come first served basis.
How Russia fits the picture in the
SE Mediterranean
Another question for this analysis,
after seeing Russian interest for Cyprus new explorations, is why Russia in
interested in the region. Gazprom has expressed its interest to boost its share
of global LNG trade to 9 % by 2020 from about 2 % it commanded in 2010. Its
Shtokman venture (with Total and Statoil) had not taken final investment
decisions after demand for LNG in the United States, the main target market for
the project, fell because of shale gas output. The Arctic venture has also
named
Europe
as a potential LNG market. Gazprom’s
Marketing & Trading arm plans to trade up to 3 million tons of LNG in 2011,
but interestingly, sourcing "less than half" of this volume from the
Gazprom-controlled Sakhalin-2 project, while ordering the rest from Egypt,
Nigeria, Qatar and Australia. Moreover, Gazprom signed a 25- year contract with
three energy companies in
India
to supply 7.5m tonnes, or 10bn cubic
meters annually. Considering all these contracts and the actions of Gazprom’s
marketing arm mentioned above, in the long run, it might be difficult for
Gazprom to handle the competition from lower cost suppliers in the
Middle East
,
Asia
and
Australia
, especially those that are located closer
to gas markets and have a significant cost advantage. In order to achieve the
full benefits of LNG trading and compete with the other major gas exporters,
Russia
needs a diversified portfolio of
facilities that include regasification terminals and liquefaction terminals (or
stakes in them). This would enable it efficiently serve its target markets with
reduced transportation costs and also take advantage of opportunities for
diversification. On another front, Gazprom is an integrated natural gas company
that aims to increase its reserves. The new gas resource base in
Cyprus
is therefore an opportunity for Gazprom
to increase its reserves outside of FSU (Former Soviet Union). Currently,
Russia
maintains healthy relations with
Cyprus
and both nations have several bilateral
agreements. Another advantage is that co-operation between both countries on
the energy front will be a good means of strengthening geopolitical stability
within the region.
Conclusion
Even if it is not particular
worrying whether this LNG will find a buyer, as with the given prices there
will be demand from the European countries, we must not forget that the the
price to India are twice the European. Therefore it would be reasonable to say
that the previous mentioned players will try to secure contracts there, before
committing to any investments, and then knock the safer, but less profitable,
door of Europe. Moreover, Russia’s high interests in the gas exploration
efforts in Cyprus will be both economically and politically rewarding. Already,
Gazprom has put in a bid in order to take part in future explorations as this
can become a cost efficient way to serve markets like India (where there is
already a 25 year contract in place) and Spain. It will also help to increase
its gas reserves with high quality gas located outside FSU and move the company
towards becoming a global, diversified LNG player.