By Lily Leach and Curt Champeon
When we think of offshore energy, we usually think of places like the North Sea or the Gulf of Mexico. The Mediterranean is a relative latecomer, driven by the need to develop more energy to drive developing economies and increasing populations. Many countries that border the Mediterranean such as Libya, Algeria, and Egypt already have established onshore energy economies, while recent offshore gas finds in Israel and Cyprus have redoubled attention to its vast hydrocarbon resources.
Before 2009, Libya and Algeria were the biggest energy producers of all the Mediterranean nations. Then two things happened, almost simultaneously. Large reserves of oil and gas were discovered off the coasts of Israel and Cyprus, and about a year and a half later, a wave of unrest and uprising re- placed the regimes of Tunisia, Egypt, and Libya. This opened up the possibility of investment and exploration in many differ- ent projects, including offshore development. Financial mar- ket instability, which began in 2008, left other countries in the area – such as Italy, Cyprus, Greece, Italy, and Spain – in need of shoring up their economies. One of these ways was to cut their reliance on foreign energy imports.
The Battle Over Cyprus’ Gas Fields
Mediterranean offshore gas finds in both Israel and Cy- prus could potentially supply Europe via Turkey though the Trans-Anatolian Pipeline (TANAP), though this won’t be actu- alized before considerable political challenges are resolved.
Arguably the most contentious issue in Mediterranean explo- ration is occurring between Turkey and Cyprus, over poten- tially large undersea gas fields. Cyprus, recognized by the United States and a member of the European Union, is ac- tively pursuing the development of its gas reserves in its ex- clusive economic zone (EEZ). Meanwhile, Turkey does not recognize Cyrus as a sovereign nation, which is ethnically split between Greek and Turkish populations. Turkey claims that Cyprus’ EEZ is on Turkey’s own continental shelf.
In October, the Republic of Cyprus awarded an Italian-Kore- an consortium (ENI-KOGAS) a license to begin offshore drill- ing in the Mediterranean, south of Cyprus, reported Cyprus Mail. Turkey subsequently dispatched a research vessel and a warship to begin conducting its own seismic surveys in Cy- prus’ EEZ.
“Turkey justifies its show of force by the argument that the Republic of Cyprus should not develop its offshore resources in the absence of a settlement of the 40-year dispute over the division of the island,” wrote Sir Michael Leigh for Cyprus Mail.
Following the event, the foreign ministers of Egypt, Greece, and Cyprus met in the end of October to sign an agreement to boost energy cooperation, meanwhile condemning Tur- key’s exploration for gas in the Cyprus’ east Mediterranean seas as illegal.
EU leaders have joined the condemnation, urging Turkey “to show restraint and to respect Cyprus’ sovereignty over its ter- ritorial sea and Cyprus’ sovereign rights in its exclusive eco- nomic zone.
“It did not have to be this way,” says Leigh. “The energy dis- coveries in the eastern Mediterranean could bring benefits to all the countries in the region, including Turkey.”
In mid-November, Israeli firms involved in the development of Cyprus’ Aphrodite offshore natural gas field announced a
12% increase in reserves. Delek Drilling and Avner Oil Explo- ration – both subsidiaries of Israel’s Delek Group – each own
15% of Aphrodite, with Texas-based Noble Energy controlling the remaining share. Reuters reported the new estimate given to be 4.54 trillion cubic feet (tcf), also raising the estimate for condensate from 8.1 million to 9 million barrels.
Major Finds in Israel; Political Unrest Delays Explora- tion in the Levant
According to The US Geological Survey, the Levant Basin, covering the waters of Syria, Lebanon, Israel, the Gaza Strip, Cyprus and Egypt, is estimated to contain 122 tcf of natural gas and 1.7bn barrels of oil.
Israel’s potentially vast untapped gas resources at the Levia- than field ¬– located off the coast of Israel and southeast of Cyprus – represent a tipping point in the eastern Mediterra- nean gas plays. It claims the largest offshore gas finds in the Mediterranean to date, with recent estimates of the Leviathan field’s reserves to be 21.93 tcf.
Israel has recently increased security cooperation with Cy- prus, hoping for safe export via pipelines passing through the island.
Fazil Can Korkut, Ambassador of the Turkish Republic of Northern Cyprus to Turkey (a nation recognized only by Tur- key, north of the Greek-Cypriot administration on the island), said in mid-November that “Delivering the Israeli gas through southern Cyprus is not feasible.”
“The cheapest and most practical way is to transfer the gas to Europe through Turkey,” he added, citing rising tension between Turkey and Cyprus as barriers for transportation of Israel’s gas.
However according to Al Jazeera, another option is known as the “pipeline plus LNG promise”. That is, “an arrangement whereby following a Cyprus settlement a gas pipeline runs from Israel to Turkey through Cyprus’ EEZ, while at the same time Israel pledges to supply gas for an LNG plant in Cyprus.”
While this model could bring considerable gains to all parties involved, there are uncertainties, including Israel’s security concerns. Al Jazeera suggests “new technologies such as a floating LNG (FLNG) plant or Compressed Natural Gas (CNG) by ship,” could be gaining traction due to concerns.
While the $6.5 billion Leviathan field – operated by Israel’s Delek Drilling and Noble Energy of the US – plans to com- mence gas production by 2017, “industry investors warn this could be the last significant gas project off Israel’s shores for some time,” reported Financial Times this November. “Drilling ships have stopped the search for new gas fields under the eastern Mediterranean off Israel, where 1,000 billion cubic meters of proven reserves lie, and about 1,500bcm more are still to be found,” said the report. “The reason for the hiatus, according to the industry, is the increasingly hostile regulatory environment, including a rule that about half the output should be reserved for the domestic market, although analysts say the recent softening in gas prices has played a contributory role.”
Israel’s Tamar field, which began producing last year, recently saw an increase investment of $1.5 billion from its partners, which include Israeli Delek Group Ltd and Avner Oil and Gas LP, and US Noble Energy.
Meanwhile, Israel is still technically at war with Lebanon over a 300-sq-mile, gas-rich triangle of the Mediterranean where their maritime boundaries intersect. Both sides have threat- ened force, and Israel is developing special offshore protec- tion for the gas fields – though the conflict isn’t expected to escalate any time soon.
According to Equities Magazine, “Lebanon claims that 3D seismic surveys of a 1,160-sq-mile sector conducted off its southern coast in 2012 by the British firm Spectrum indicate that it contains more than 25 tcf of gas. Officials claim that this block alone probably contains more gas than lies off Syria and Cyprus combined.”
The Daily Star, estimates the value of Lebanon’s gas reserves at $300 billion to $700 billion, which is “enough to erase a $55 billion national debt and transform an economy based on banking and tourism.”
Though Lebanon has begun seismic surveys to determine the size of its energy reserves, its essentially frozen political system has delayed exploration. Regional chaos surrounding the small Mediterranean country has caused paralyzing polit- ical and sectarian rivalries.
As of August, the Lebanese government delayed the first off- shore bid round for the fifth time, and the dispute over terms of the draft exploration and production agreement isn’t ex- pected to be resolved soon.
In October, The Daily Star reported that the government was turning its focus to onshore petroleum development. “The off- shore deposits will be huge, and Lebanon will one day reap tremendous rewards from them, but if we want to get an early start, onshore offers a host of clear-cut advantages,” Roudi Baroudi, CEO of Energy and Environment Holding, an inde- pendent consulting firm based in Doha, Qatar, told The Daily Star.
Sami Baroudi, a political analyst at the Lebanese American University in Beirut, told Reuters this November that the influ- ence of regional players on Lebanese politicians is margin- alizing the state. “We have a very, very volatile mix. A region on fire, a civil war raging on your borders and at the same time the local players are so entrenched to their positions that they are unable to reach agreement,” he said. “The stalemate has hampered efforts to tackle public debt, exploit potential off-shore gas reserves and improve crumbling infrastructure.”
There is no telling when Syria’s civil war will end, though after it emerges from violence and political unrest, it too could begin developing its offshore potential.
Similarly in Palestine, potential reserves off the coast of Gaza have been on hold for several years due to disputes between Israel and Palestine. The Gaza Marine gas field is located 30km off the coast of the Gaza Strip, with the Palestinian Authority having awarded BG a 90% stake in 1999.
Uncertainty in North Africa
Libya has a potential goldmine in the Gulf of Sitre project, run by BP. This $900 million program went into effective hiatus with the uprising of 2011.
In June, BP announced it would push back its plans to drill its first offshore exploratory oil well in Libya to 2015 due to ongoing security concerns. The country’s new government is mainly occupied with bringing the onshore infrastructure on- line and doesn’t have the ability to do much else. At a future time when the offshore projects are addressed, Libya’s 53tcf of natural gas – which is already the world’s 14th largest – could actually increase to 70-100 tcf.
Eni, which has operated in Libya since 1959, was the first international oil company to have re-started production after the 2011 uprising, at the Abu Attifel field, through Mellitah Oil
& Gas, a 50-50 joint venture between Libya’s NOC and Eni. In 2012 Eni restarted offshore exploration activities with the acquisition of a 3D seismic survey.
Eni plans to invest more than $8 Billion in the country by2020. Even with 47 Billion barrels of land-based gas re- serves, offshore could produce an even bigger boom, and its low production costs and nearness to its European consumer base could mean huge profits in the future without the need to spend upfront for additional infrastructure.
Morocco and Tunisia, despite holding minor finds historically, may also take part in the offshore boom. Tunisia and Libya were reportedly set to jointly develop a 678,000-acre offshore oilfield in the Gulf of Gabes where their maritime borders con- verge. As of June 2014, Sonde, the Canadian Energy com- pany set to conduct exploration, was still seeking partnership. Tunisia’s offshore reserves also encompass the Ashtart and Miskar fields.
Algeria is another case of a Mediterranean country that is already a leader in land-based energy resources that could see even more success with offshore projects. The country avoided the worst of the “Arab Spring” uprisings. It also has one of the largest seacoasts, and is in an overall under-ex- plored position. All of these point to a huge future potential in the offshore game.
Sonatrach, Algeria’s state-owned energy company, has had problems resulting from internal political power struggles. With these problems largely in the immediate past, it now stands to take advantage of relaxed laws concerning explora- tion and foreign investment. It has increased the 2012-2016 development plan of $62.2 billion to $80 billion and also plans to attract foreign investors such as Royal Dutch Shell, Exxon Mobil, Talisman Energy Inc., and Italian Eni.
At the end of October, Sonatrach announced its plans to car- ry out their first offshore drilling campaign, to begin drilling by the end of 2015, reported UPI News. The exploration will be carried out alone or in partnership, pending a decision by the Ministry of Energy.
Algeria is the third-largest gas supplier to Europe, and has the tenth-largest natural gas deposits in the world, though most of the reserve interest has been onshore.
“Although it’s a major African producer, Algeria’s still consid- ered to be relatively under-explored,” says Equity Magazine say of Algeria, which has reserves of 12.2 billion barrels of oil and 159 tcf of gas.
New Prospects for the Western Mediterranean
European countries along the Mediterranean, which are typ- ically energy importers, are also beginning to explore their offshore potential. The Spanish government has recently announced environmentally controversial plans to open 45% of the Spanish Mediterranean to offshore oil development, beginning with seismic blasts, reported the Huffington Post. The two operators, Spectrum and Cairn, estimate that the deposits in oilfields off the Canaries amount to 500m barrels of crude. Spain’s national government recently offered envi- ronmental approval for Repsol-led exploration efforts in the North of the country.
Deloitte predicts that Spain could become a gas exporter by 2031 while producing 20% of the oil it consumes. While the government insists the offshore exploration is vital for Spain’s economy, which struggles with high unemployment rates, the backlash from environmental groups has been substantial.
Forbes reported in October that Italy, which imports rough- ly 90% of its natural gas needs, is also warming to offshore domestic exploration, and is showing definite potential for a booming energy industry. After initial discoveries and fol- low-up imaging, Italy began an ambitious program that was abruptly ended in 2010 when then-leader Silvio Berlusconi imposed a ban on drilling offshore after BP’s Gulf of Mexico spill.
With time and a change in government, this situation has eased a bit, but only for owners of pre-existing licenses. Bu- reaucracy and government corruption are constant drags on the system and hope of expansion, but there is hope. Petro- celtic’s CEO, Brian O’Cathain is quoted as saying, “there is a lot of pent-up demand for drilling there. Before the ban, there were tens of thousands of people employed in supporting the oil industry on the Adriatic coast. Most of those people were laid off- the government has a big incentive to get them back to work again.”
According to Bloomberg, the Italian national utility Enel is ex- pecting the approval of permits for onshore gas exploration in the northern Emilia Romagna region, which they suggest could someday meet 20% of the country’s demand at a price far lower than current imports.
Malta may also be on the cusp of an energy boom; the small island has always been valued beyond its size historically for its strategic location. Mediterranean Oil and Gas (MOG) has begun to explore and develop offshore Malta, which has the advantage of very little previous exploration and drilling. The areas explored are very similar to Libya, according to William Higgs, the Chief Executive at MOG. The initial prospects are for drilling in shallower waters, with the possibility of larger finds in deeper waters.
In 2012, Genel Energy, headed by former BP Chief Execu- tive Tony Hayward, bought a stake in exploration blocks from MOG.
“But there is another territorial dispute here, with nearby Libya over offshore zones that are likely to hold sizeable volumes of gas and oil,” informs Equity Magazine.
Increasing interest in domestic exploration by Italy and Spain are a testament to anxieties about dependence on foreign energy, as well increased security concerns surrounding im- porting energy from Libya and Algeria. Most recently, accord- ing to Forbes, “the possibility of a new sub-Mediterranean gas pipeline linking Italy with Algeria has faded from view with
Enel CEO Francesco Starace telling Reuters that the situation surrounding the transport project was ‘not encouraging.’”
According to Leigh, “Gas from the eastern Mediterranean could strengthen the energy security of all the countries in the region. There is scope for cooperation in trade and invest- ment, environmental protection, offshore safety and, in the event of an accident, search and rescue.” However, “these benefits could be lost if long-standing conflicts are exacerbat- ed by tensions over ownership of the resources.”
Offshore Opportunities: Egypt’s Silver Lining
Egypt, a country that has had more than its share of bad news over the past few years, is in a very good position when it comes to offshore energy development. Egypt has many long-standing relationships with oil companies on the inter- national markets, has had offshore exploration and harvest under way for years, and is still selling new concessions for additional exploration. Since there are already proven wells that produce energy, it is a lower risk for companies to look for more.
Italian Eni is a huge international participant in the Egyptian energy market and makes great contributions offshore. It has recently, thanks to EGPC and EGAS bid rounds, won three new exploration licenses, two of which are offshore. It ob- tained Blocks 8 and 9, both in a deep offshore development block near Cypriot waters. It will hold 100% equity in Block
9, which is also called Noth Leil Offshore. It covers an area of 5,105 sq. km and it’s depths range from 2,100 to 2,800. Block 8 is referred to as Karawan Offshore and covers 4,565 sq. km in depths ranging from 2,000 to 2,500 meters. Block
8 will be shared 50-50% with BP. Eni has been operating in Egypt since 1954. These two licenses are in addition to its Shorouk Block in the Mediterranean.
Eni’s compatriot Edison is now in possession of three East Mediterranean blocks for deepwater exploration. It bid for the North Port Faud Block in partnership with Petroceltic. This borders Eni’s acreage. Edison and Petroceltic also own the North Thekah Block as of last year. Edison now holds the blocks on either side of the territorial waters of Egypt and Is- rael.
The offshore partnership of Eni and BP has become known as the DEKA, (Denis-Karawan) gas project. The project is producing 1.8 cm of gas per day and associated conden- sates of approximately 800 barrels per day. Production began through the Denise South 6 subsea well, the first in the Tem- sah concession area, offshore of the Nile Delta. The Denise field is around 70 km off the Egyptian coast and Karawan is 60 km off the coast. The Denise field is at a depth of 100 m and Karawan is 68km.
Dana Gas now has a 100% interest in Block 6 offshore con- cession area, (North El-Arish) which is located off of the Nile Delta. It is in water depths of 100m and covers an area of
2,980 sq. km. According to Dr. Patrick Allman-Ward, the General Manager of Dana Gas Egypt, “Block 6 holds signif- icant potential, lying as it does on strike with recent material discoveries in adjacent discoveries in adjacent acreage in the Levantine Basin. The Block provides an opportunity for Dana Gas to expand its operating activities in Egypt into both shal- low and deepwater operating environments.”
One only has to look at a concession map to see that the BG Group has played and continues to play a leading role in Egypt’s energy industry, including huge exploration and de- velopments offshore.
BG Group in Egypt has operatorship of two gas-producing areas in the offshore Nile Delta area – Rosetta and WDDM (West Delta Deep Marine) concessions. It also has opera- torship of three other concessions – El-Manzala (EMO), El Burg Offshore (EBO), and North Gamasa Offshore (NGO). It has a non-operational interest in the East El-Burullus Offshore Concession (EEBO). These are all undertaken as part of a group of joint operating companies. In the case of Rosetta, this is through Rashid Petroleum Company and in the case of WDDM, this is through Burullus Gas Company. They are owned in a 50-50% arrangement with EGPC.
As everyone can see, Egypt is poised to take as much, if not more, advantage of offshore Mediterranean opportunities just as any country in the region. It has come out of the Arab Spring with a more stable system than many of its surrounding neighbors, and has recognized the need to pay off its debts to energy companies and has taken definite steps in that direction.