Charles Ellinas Block 12 - Aphrodite Development Plan

Block 12 - Aphrodite Development Plan

It is understood that Noble and the government of Cyprus may be at the final stages of agreeing the Aphrodite gas-field Development Plan.
Whilst this is good news, especially if it is associated with signed gas sales agreements with Egypt, there may be other explanations. I first covered these in a Sigmalive blog on 4 February and raised questions in an earlier Sigmalive blog on 27 October 2015.
But first let’s consider gas sales to Egypt. The reality of gas prices in Europe casts doubts on this. With gas prices in Europe down to $4-5 per mmBTU selling gas to Egypt for liquefaction and onwards sales to Europe as LNG is commercially challenged.
Selling gas for domestic consumption in Egypt is a possibility but it would be for a limited duration, say to 2020-2022. This is not sufficient to justify development of Aphrodite. By then Zohr, West Nile Delta and East Nile Delta gas-fields and Shell’s shale gas developments collectively will add over 40 bcm per year to the Egyptian gas grid.
Besides, Egypt has payment problems. Only last week there was a press article that BG Egypt stopped drilling in a gas-field demanding that the price they get paid is increased to $7 per mmBTU and that EGAS pay them $1 billion overdue debt.
When BG Group joined Block 12, the new partnership carried out an assessment of Block 12, together with the government of Cyprus, and considered changes to the binding Work Plan under the Production Sharing Contract (PSC).
As a result of this, the government notified the Block 12 partners that, on completion of the transfer of 50% of the rights of Noble in Block 12 to BG, which took place on 27 January, it would formally waive the requirement to carry out additional drilling. 
Press articles published since then suggest that the partners did not, anyway, see a purpose to additional drilling given that Noble has not identified a target to drill.
However, as recently as 2014 indications were that there are other small gas field prospects in Block 12. So, it is strange to claim now that no target to drill has been identified. The main reason may be costs. It could cost over $100million to drill one well, at a time when the oil and gas industry is facing severe financial problems due to low global oil prices.
A substantial part of this cost would eventually pass to the government, as a recoverable cost under the PSC, once Aphrodite is developed. As a result, it may have suited both the Block 12 partners and the government to wave this additional drilling.
However, all this points to another possible explanation.
As previously reported, the Block 12 PSC was signed on 24 October 2008 for three years. It is usual for such contracts to have provisions for a number of extensions and, as reported, relinquishment of part of the Block each time an extension is granted.
The first extension was granted on 22 October 2011 and another on 22 October 2013. But the process cannot be indefinite. In May 2016 it will be seven years and seven months since signature of the PSC and four years and seven months since expiration of the original three-year term of the PSC. A further extension of the exploration period may not be contractually possible.
It is very likely that Noble and its partners may have to relinquish the remainder of Block 12 after 23 May 2016 and retain only the Aphrodite gas-field. This would negate the need to drill an additional exploration well. As a result, Noble and its partners will not need to carry out any further exploration and will now be concentrating on the development of Aphrodite.
The Development Plan for Aphrodite has been in discussion with the government since June 2015. In fact the declaration of commerciality was made in early June 2015 and the Development Plan was submitted later that month. When BG joined the partnership it led to a further review of the plan. 
It is now very likely that the Development Plan will be approved before 23 May so that Noble and its partners can proceed from exploration to exploitation, with the plan to develop and export of Aphrodite gas. This is a pre-requisite to retaining Aphrodite after 23 May. Hence the push to announce agreement on the Development Plan before then.
The problem though is that no gas sales have yet been identified and are unlikely to be identified in the near future. A Development Plan does not mean sales and without signed gas sales agreements Aphrodite cannot move to FID and the plan remains just a plan. 
The key issue now is to secure gas sales and develop Aphrodite. Given the low gas and LNG prices globally, which are expected to persist well into the 2020s, this will take time. Solution of CyProb may open up other options.
Dr Charles Ellinas
Nonresident Senior Fellow – Eurasian Energy Futures Initiative - Atlantic Council