Does Chevron's acquisition of Noble Energy affect the feasibility of the EastMed natural gas pipeline project? This is the question which arises upon the surprising announcement on Chevron's acquisition of Noble Energy's shares in parallel with the ratification of the EastMed gas pipeline agreement by Israel and Cyprus earlier this month. Noble Energy is the operator of the Tamar and Leviathan gas fields in the Israeli exclusive economic zone and is also one of the three license holders of the Aphrodite gas field in the Cypriot exclusive economic zone. Altogether the Leviathan and Aphrodite gas fields could provide sufficient gas quantities to support long-term natural gas export from the EastMed region to Southern Europe. This assessment will try to determine whether Chevron's entrance into the EastMed region is related with the EastMed pipeline project and to what extent the feasibility of such megaproject is affected in the age of Covid19 and associated global energy crisis.
The fact is that there are not that many options to export the EastMed gas from the region - Egyptian Damietta and Idku LNG facilities are capable of dealing with fairly limited gas quantities, which Egypt reserves largely to itself. Export to Levantine states of Lebanon, Syria and Turkey from Israel or Cyprus are geopolitically and economically impossible. The Arab Gas Pipeline which had once served as the gateway of Egyptian gas to the Levant is only partially operational, with its pathway towards Turkey blocked by the Syrian Civil War arena. Finally, the Floating Liquefied Natural Gas (FLNG) facility option, which had long been discussed as the potential export option for Israeli-Cypriot gas reserves is now postponed until better post-Covid19 times. Originally, the FLNG had been considered as one of the options for phase III Leviathan gas field development, aiming to export it's gas to Mediterranean and perhaps even Asian markets. Another, even less feasible option was the Vasilikos LNG project proposal in Cyprus. Now, however, the only significant option still on the table for Eastern Mediterranean gas export is the EastMed gas pipeline project. But is it really viable on its own right in those challenging times of global energy crisis?
Prior to Covid19 crisis, the EU market has had a fairly stable demand of around 500 BCM/year of natural gas, which has mainly been met by supply from the Russian Federation, Norway, Algeria and Azerbaijan. Local EU gas production has provided about one quarter of the demand. Lower but growing shipments of LNG provided the rest and together with Algerian LNG is projected to reach nearly one quarter of EU gas imports by 2023. In 2014, the EU natural gas demand bottomed at just above 400 BCM/year, but then rebounded back to around 500 BCM/year in 2018 and remained so in 2019. It is fair to assume the 400 BCM/year figure would define the year 2020 and would slowly stabilize at 450 BCM/year towards mid-2020s upon recovery. The impact on suppliers in 2020 would probably split between main pipeline supplies (Russia, Norway and Azerbaijan) and LNG cargoes (Algeria and others), though it is clear the LNG is preferred at present due to attractive pricing. For now, declining EU internal gas supply sources can be relieved upon reduced demand, but this is temporal. In recent years, EU domestic gas depleted at a rate of around 13 BCM/year, but this year would make an exception. However, with economic recovery we would witness a further depletion of 10-13 BCM/year in EU gas production which would fairly soon decline below 100 BCM/year. Internal EU gas production decline creates a gap which should at least partially be met by more imports towards the middle of this decade. This is where the EastMed gas pipeline project is strategically positioned.
The EastMed gas pipeline was coined in 2013 by the European Comission, aiming to connect Israeli and Cypriot offshore gas reserves to Southern Europe via the Greek island of Crete. The EastMed gas pipeline project is the realization of the Southern Corridor vision of the European Union, which has long hoped to diversify its energy sources and ehnace supply from Caucasus and the Middle East. The combined length of the four-section pipeline is planned at 1,900km - the longest gas pipeline in the world. It would also become the deepest laid pipeline, reaching as deep as nearly 3km depth in the Mediterranean Sea. The capacity of the EastMed project has changed over the years. From 2013, the EastMed project has become a strategic cooperation mark of the Cyprus-Greece-Israel alliance in the Eastern Mediterranean (the "Energy Triangle"), with Italy as secondary actor in the deal and potential end-customer. The pipeline project is a notable geopolitical statement, a counterweight to Turkish ambitions in the Mediterranean and hence being tolerated by the Turkish foe Egypt, which could otherwise oppose the pipeline due to regional compeition. Practically, The EastMed project is being developed by IGI Poseidon SA, a joint venture of Greece’s state-owned supplier Depa SA and Edison SpA. EastMed pipeline initial capacity is designed at 10 BCM/year and a cost of 6-7 billion USD, but financial feasibility would requre its capacity to increase to 15-20 BCM/year. In any case, the current timeline of construction is setting 2025 as the target finish line for the project - a questionable timeline at those times of uncertainty.
Figure 1. The location of the Israeli Leviathan and Cypriot Aphrodite gas fields in Eastern Mediterranean - potential main supply sources for the EastMed gas pipeline project (edited map by NordNordWest).
Potentially, the gas quantities for the EastMed gas pipeline project are there - this would mainly rely on Leviathan phase III development with around 8 BCM/year, Aphrodite would be able to supply about 6 BCM/year more and finally in January 2020 Energian signed a letter of intent to supply 2 BCM/year from Karish & Tanin project. Altogether those are summing up to 16 BCM/year - the right amount to enable the supply feasibility of the EastMed pipeline in case everything works out. Moreover, more natural gas is waiting in the sea, with Calypso and Glaucus gas fields in Cypriot economic waters bringing more upgrade potential in terms of supply in the longer term.
Thus the scene is prepared - the Cyprus-Greece-Israel agreement on the EastMed pipeline was signed in January 2020, just prior to the global crisis. It was however ratified as planned by Cyprus on July 17 and shortly later on July 19 also by Israel. Moreover, global oil & gas majors are eyeing the EastMed project and this is where we can assess the relevance of this deal to Chevron. Which of the global majors are already present in the EastMed? First let's take a look south into Egypt, which is not directly involved with EastMed project, but is an ally of the Energy Triangle and in theory is a potential affiliate. ENI is one of the first companies to become involved in the Egyptian offshore zone and is the main licence holder of the giant Zohr gas field. ENI's (50% stake) partners in Zohr are BP (10%), Rosneft (30%) and Mubadala Petroleum (10%). ENI is also holding the stale Damietta LNG facility in partnership with Naturgy via Union Fenosa joint venture, whereas the sporadically operating Idku LNG facility is held by Royal Dutch Shell, Petronas, Engie, EGAS and EGPC. Both ENI and Royal Dutch Shell are also present in Cyprus (the main arena for EastMed project), with ENI holding licenses for blocks 2,3,9 in 50% partnership with Korean KOGAS, licenses for blocks 6,11 in 50% partnership with Total and license for block 8 on its own. Royal Dutch Shell has a 30% interest in the Aphrodite gas field in block 12, where it is partnered with Israel Delek Group and Noble Energy (now merging with Chevron). Additional players in the Cypriot offshore zone are ExxonMobil and Qatar Petroleum who hold the license for block 10. It should be mentioned that Calypso gas field is located in block 6, whereas Galucus gas find is located in block 10. Israeli gas finds have so far failed to attract global oil & gas majors, with just two mid-size operators Noble Energy and Energian participating in offshore gas development, though by now also India-based ONGC and UK-based Cairn and Soco companies gained licenses for exploration.
One of the oil & gas companies which have an obvious interest in the EastMed project is hence Edison, which is partnered in IGI Poseidon developing the whole pipeline project. ENI and Royal Dutch Shell are also very much relevant, and though they do have involvement in potentially competing LNG export operations in Egypt, they are heavily involved in Cyprus - with ENI licensed on the Calypso gas field and RDS having a stake in Aphrodite gas field. ExxonMobil is also a positively affiliated to the EastMed project via its Galucus gas find in the Cypriot economic zone. Finally, Chevron will obtain holding in producing Israeli gas fields Tamar and Leviathan and have a major holding in Aphrodite. Chevron will hence become the only global oil & gas major to have producing gas fields in the Eastern Mediterranean, relevant to the EastMed project. Remarkably, it will also become the first global oil & gas giant to have activity in Israel - a sign of warming ties between Israel and some of its Arab neighbours.
Chevron does already have notable offshore gas exploration projects with connected subsea pipeline infrastructure - the Gorgon project in Western Australia and the Anchor project offshore Lousiana. The EastMed project would however require a longer initial connection of about 200km long branch from Leviathan and Aphrodite to Cyprus, which is doable. However, the main challenge in technical and financial terms would be construction of the other 3 branches from Cyprus to Crete, from Crete to Peloponnese and from Peloponesse to mainland Greece. In any case, the addition of Chevron as one of the main actors in gas development in Eastern Mediterranean is certainly a positive influence on the feasibility of the EastMed pipeline project. However, the techno-economic feasibility of this mega-project is still challenging and would probably require another game-changing event, such as recovery of European gas demand post-Covid19 or a find of another major gas field in the region, both not expected in the near future. The entrance of Chevron into Eastern Mediterranean is hence mainly to affect the mid and long-term developments in the region, potentially including the EastMed project towards mid- 2020s under certain conditions.