Charles Ellinas Zhor - Managing expectations

Zhor - Managing expectations



Ever since the announcement of the discovery of Zhor by ENI fever has been rising in Cyprus, with the inevitable build-up of expectations.

I spent the last four days participating in high level meetings with ministries in Berlin and the European Commission in Brussels. There the tone is different and references to the East Med are measured and non-committal.

Eni's CEO Descalzi was also in Brussels this week expounding his very ambitious plans for Egypt and a major hub for gas exports. Commissioner Canete responded to this with enthusiasm mostly because he is desperate to show that there are other sources of gas to Europe than Russian gas. But most others in the EU are more sober and measured.

And for a good reason. Gazprom has just lowered its gas prices to $6.2 per mmBTU as oil-indexation kicked-in. It is difficult for most other suppliers to match such a price. And the EU made it clear that even though they set up political priorities and guidelines, they leave it to commercial companies to decide where to invest, where to get their gas, how to generate energy and which projects and areas to invest in.  These companies base their decisions mostly on commercial factors and risk.

To take gas from Cyprus to Egypt it will cost at least $6-7 per mmBTU and then you need to add liquefaction, transportation to Europe and re-gasification costs. Allowing for profits the total cost could be more than $12 per mmBTU. How does that compare with Gazprom's prices.

That is one of the reasons that major European companies teamed up with Gazprom, and have now signed agreements, to build Nord Stream 2 to carry 55 bcm of gas to Germany, despite Mr Canete's lack of support. Needless to say that the project has the tacit support of Germany.

When asked in Brussels, ENI sources said there are no indications that Zhor extends into Cyprus' EEZ, but next year's appraisal drilling will show. Yet, in Cyprus expectations are building up.

Europe has plenty of gas and projections are that future needs will at best remain stagnant. They want diversification and prefer to avoid excessive dependence on Russia. But note that the operative word is 'excessive'. Western Europe consider Russia a reliable and dependable partner.

In this context there is a lot of political support for the Southern Gas Corridor. They urge the East Med to consider this as a strong option for sending its gas to Europe, realizing of course that this pre-supposes solution of Cyprob. But not at any price and at any time - both are limited. East Med gas must first find buyers, competing with current gas prices in Europe. And it is important to note that the limited demand for gas in Europe will not be there for long. Other suppliers are ahead of the East Med.

The drive in Europe is renewables - not gas. We need to recognize the above and divert our attention on how best to utilize our limited opportunities.


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