As the development of the Cypriot gas fields approaches, the claims about their importance for European gas supplies become louder, completely ignoring whether Europe really needs this gas and, of course, how oil and gas companies make their investment decisions and where the most likely markets for our gas are.

Apart from Qatar Energy, no other gas company invests billions of dollars in large-scale projects on a speculative basis. They do not make "final investment decisions" until they have signed long-term 20-year contracts for the gas or LNG they plan to produce.

The situation is different on the oil market. There is a global market and a global price. In addition, oil can be stored for long periods of time when the market is weak. The same cannot be said for gas and LNG.

Unfortunately, our regional politicians are not aware of or ignore these industrial realities. They talk about supplying gas from the Eastern Mediterranean to Europe without taking into account Europe's needs.

The EU's gas demand

The EU has set very ambitious targets to reduce natural gas consumption in its REPowerEU legislation and is well on track to achieve them.

In addition to ending dependence on Russian gas by 2027, the implementation of REPowerEU would lead to a reduction in gas consumption of 52 percent by 2030 compared to 2019.

This is the reason why utilities in the EU are not signing long-term gas or LNG purchase contracts – the fear that they could be tied to contracts beyond 2030 that they cannot fulfill.

Following the end of the Russian gas transit agreement through Ukraine on December 31, 2024, the European Commission (EC) confirmed again on January 2 that there are no concerns about security of supply. Gas supplies are secured through alternative routes and withdrawals from storage facilities. In line with the REPowerEU objectives, the European gas infrastructure has also been strengthened since 2022 by significant new LNG import capacities. Europe does not need new gas supplies.

In the EU, electricity generation from renewable energy surpassed that from fossil fuels in 2024 and continues to rise. Renewable energy, together with hydropower and nuclear power, now provides over 70 percent of EU electricity, while gas use is declining.

As the graph shows, according to Bruegel, the EU's gas consumption has been steadily declining since the pandemic. By 2024, it fell by around 25 percent compared to the average for the years 2017 to 2021.

So far, the EU is well on track to meet and probably even exceed the REPowerEU target.

Source: @Bruegel_org

Long-term LNG contracts already in place in 2024, together with domestic production and capacity from existing gas fields in Norway and Algeria, would provide the EU with sufficient supplies until 2040. Further long-term gas supply contracts could lead to a gas oversupply in Europe. ACER even warns that the gas demand cuts outlined in REPowerEU, if fully met, could lead to a gas oversupply before 2030.

And there may be another potential challenge. According to the FT, the EU has begun discussing a "return to Russian gas as part of a peace deal with Ukraine. Supporters say reopening the pipelines could facilitate a deal with Moscow and reduce energy costs." This idea appears to have support from German and Hungarian politicians, as well as from other EU capitals.

Bloomberg warned of this possibility back in December 2022: "Even as European leaders vow not to return to business as usual after the war in Ukraine, the inescapable realities of geography and markets can trump even the most determined politicians." If that happens, it will come at the expense of more expensive LNG imports.

It is clear that new gas projects in countries around Europe, for which selling on the European market is the only option, could involve significant financial risks. These countries should increase their LNG export capacity to diversify away from Europe and into Asia, where gas demand is expected to continue to grow through 2050.

The future is regional

Currently, the known gas reserves in the Eastern Mediterranean are not sufficient to support large new export-oriented projects. Fortunately, we have a huge market in the region that can absorb all this gas: Egypt. In the long term and depending on geopolitical developments, this could also be Turkey.

Due to years of declining production, Egypt has gone from being an exporter to an importer of liquefied natural gas (LNG). The country wants to use the gas to meet its ever-increasing demand for electricity generation, but also as a raw material for the petrochemical and fertilizer industries.

But this is an expensive option that is not sustainable in the long term. In 2025 alone, the country is expected to spend about $8 billion on LNG imports, which could severely impact the country's struggling economy.

The focus has already been on Israel, where new projects have been approved to increase gas exports to Egypt from the current level of about 10 billion cubic metres per year to 21 billion cubic metres per year by 2028.

Egypt is also in talks with Cyprus to import gas from the 2.5 trillion cubic feet (2.5 trillion cubic feet) Kronos and 3.5 trillion cubic feet (3.5 trillion cubic feet) Aphrodite gas fields. Intergovernmental agreements to promote these projects are due to be signed by the presidents of the two countries in Cairo on February 17, paving the way for Eni and Chevron to agree field development plans with the Cypriot Energy Ministry.

Eni plans to do so later this year. Part of the gas will be liquefied in Damietta to supply existing LNG customers. But there are still question marks with Chevron. The immediate reason for the delay is a resolution of the dispute with Israel's Ishai Group, which is expected within the next three months.

However, the biggest challenge facing oil and gas companies is Egypt's ability to make regular payments over the long term and its willingness to pay market prices for this gas. These are the main reasons why these companies have not yet pushed ahead with new gas projects in the country.

The ExxonMobil Factor

Following successful exploratory drilling in Egypt's North Marakia block, ExxonMobil has just started drilling a promising target: Electra in Cyprus' Block 5, followed by Pegasus in Block 10.

If Electra turns out to be as large as some reports claim (30 trillion cubic feet), several test wells would be required over two to three years before development options can be fleshed out. Depending on how the global LNG market evolves over the next decade, the discovery of even 10 trillion cubic feet or more could be enough to support a world-class LNG export project targeting Asia. The most likely location for such a project would be Vasilikos in Cyprus, but another possibility would be the currently idle LNG plants at Idku and Damietta in Egypt, with a combined capacity of 12.5 million tonnes of LNG per year.

However, given ExxonMobil's processes for planning and permitting new large-scale projects, it is unlikely that such a project will come online before the early 2030s. But let's wait for the drilling results first.






Source: CyprusMail.com
Author: Dr. Charles Ellinas

Dr. Charles Ellinas is a Senior Fellow of the Atlantic Council's Global Energy Center and has 35 years' experience in senior management positions in the oil and gas sector. He is a regular columnist for the Cyprus Mail.