Interview with Charles Ellinas, chairman of the state hydrocarbons company KRETYK
* ‘Business as usual’ for oil and gas giants: Cyprus’ financial crisis not a problem
* Noble rebuffed Turkish demands to back away from exploratory drilling
* Six licensed blocks may hold 30 trillion cubic feet of gas - building an LNG first is a must
Q: There appears to be some confusion over the precise role of KRETYK, with reports suggesting some overlap with the duties of the Natural Gas Public Company, DEFA. Could you clear that up?
A: We are an oil and gas company, much like, say, Italy’s ENI. There is no overlap with DEFA, because we’ve met with them, and we agreed we have no intention of getting involved in gas sales and distribution in the island. And as far as I’m concerned, when we do bring the gas to the island - hopefully in 2018 - to Vasilikos plant there will be a link there and DEFA will take their gas and off they go. They’ll sell and distribute it and everything else. That’s not our job. DEFA is much like a utility company, much like for water. Gas is also a utility.
KRETYK is responsible for developing, managing exporting and operating gas. The Energy Service at the Commerce Ministry is responsible for licensing, and also polices adherence to the requirements of the production-sharing agreements. The companies involved in the production-sharing agreements have obligations to fulfill. We are not going to be policing that, it’s the job of the Energy Service, and there’s a very good reason for it: it could be that by the third round of licensing we could be strong enough to go into business with someone else and be part of a license. So we can’t be policing ourselves, someone else has to do it.
Q: What is the status of KRETYK, legal and otherwise?
A: It’s a legal and properly registered company. The charter was vetted and set up by the Attorney-general’s office. The state is the owner of the company. The state should pay for the share capital, but parliament has not released that payment of shares. The key is to make these decisions and ‘unblock’ KRETYK. The longer it takes to resolve these matters, the longer it takes to develop gas resources.
Q: But even in this limbo, you are able to carry out certain functions...
A: Some things. We are still working with the oil companies, but certain things are not progressing. For example, we have been in discussions with Noble Energy about the LNG plant, but now that’s at a standstill because of the uncertainty. Also, we can’t hire more staff. With what, borrowed money? We have a loan right now [from a cooperative bank] and we have two ladies working here on temporary contracts until we sort these things out. So for example if we want to proceed and negotiate deals of any kind, especially to do with the LNG plant, we need suitable international advisors. We can’t go and hire any advisors now because of the uncertainty and we have no money for that. If we do get the €1 million, which is the initial share capital, then we can do a lot more.
We’ve already begun discussions with ENI, we had a meeting with them two weeks ago. Last week we had the first meeting with Total and more meetings are expected in the next few weeks. At this point, the companies are more focused on exploration, and we’re not involved in that, we are merely facilitating.
Q: Any news on whether this limbo will be resolved?
A: We’ve been advised that the matter will be resolved, but probably not right away. Things are crazy right now, and lawmakers have a lot on their plate.
Q: What are the steps toward exporting gas? Can you describe the timeline?
A: Let’s start with the Aphrodite well in Block 12. Noble have retained the services of a French consultant, a contractor called Technip, to do the pre-FEED (preliminary front-end engineering design). This concerns everything - from the offshore facilities as well as the LNG plant. The preliminary design should be completed by May. And it’s based on that work that we know the approximate cost of the project. We know that the offshore facilities, including the subsea pipeline, will be in the order of $3.5bn (€2.7 bn), and the LNG plant will be in the order of $6bn to $6.5bn. Next, Noble plan to carry out the appraisal drilling in Aphrodite during the summer. They confirmed this to me when I met with them in Tel Aviv on Tuesday [March 19]. I saw Terry Gerhart, Noble vice president for international operations, among others. I heard it from the horse’s mouth, if you will. Once the appraisal drilling is carried out, we should be able to assess more accurately how much gas we have, whether it’s 7 trillion tcf or more - we hope it’s more - and declare commerciality. The production-sharing contract requires Noble to declare commerciality three months after appraisal. Once that happens, we then proceed with the selection of the contractor to do the design proper, the FEED design, and we start looking for buyers of our LNG.
And the aim ought to be to complete the long-term sales of LNG, that is to say all the contracts, as well as the design, by early 2015. Before that, we will also be looking for investors in the LNG plant project. As you know, as far as the offshore facilities are concerned (pipeline etc), Noble and their partners are obliged to pay for that. We don’t contribute to that. What we do need is to build the LNG plant. There are ways of doing it where we don’t necessarily need to contribute that much. Also, in 2015 after the FEED design is completed, we should be looking for the contractor to build the facilities. And we need to do that because they will submit a price for the facilities, so we need to know exactly how much it’s going to cost. It matters, because before the end of 2015 we aim to reach what it called the final investment decision. Once that is out of the way, we want to start construction by early 2016.
That in turn will create a lot of jobs at Vasilikos. There is going to be a large number of people working there, perhaps anywhere from 6,000 to 10,000 on construction. A lot of them will be foreigners, because we don’t have the people with the necessary skills. Still, quite of a few people with lower-level skills will be Cypriots. There will also be Cypriot sub-contractors doing a lot of the work. For example, there is a lot of earth that needs to be excavated and moved , flattening and preparing the area. Also, the utilities: power, water, catering that can be done by local contractors. In addition, there is the housing: we’ll need to set up a labour camp where all these people from overseas can be housed. You also need to create an area where all the materials and equipment for the LNG plant will be placed. My own estimate is that in addition to the people actually working on the plant itself, we will have thousands of Cypriots supporting them with services, supplies, and so on. And that should start happening in early 2016. However, we need to prepare in advance, to make sure we maximize the use of Cypriots.
Assuming we do all these things, we should be able to bring gas to the island by the end of 2018 for electricity generation. That itself should reduce the price of fuel for electricity by almost 50 per cent. And in late 2019 we should be able to start exports of LNG. That’s the grand scheme of things.
Q: You said construction of the LNG plant would begin early 2016. How long does it take to build?
A: The offshore facilities should be completed in three years, and the LNG plant in four. The plant is going to be the largest project ever in Cyprus. It’s a huge undertaking. Think of the logistics: you’ve got to bring equipment worth $3bn...where do you put it all?
Also, we need to draft a final master plan for Vasilikos. There was a very preliminary plan prepared five years ago. Currently, there’s space for three LNG trains, but we’ll probably need more than three. So we have to look at how much more land we can make available, what other facilities are there and may need to be relocated.
My estimate is that we will need five to six trains, from the six blocks licensed so far. The six blocks combined, we hope, might contain five to six times the amount of gas there is in Aphrodite, which alone needs one train. The optimum size or capacity of one train is 5 million tonnes a year.
Q: What is the latest on Noble’s plans for appraisal drilling at Aphrodite?
A: We’re looking at the summer. Nothing has changed. But as far as how long the actual appraisal will take, I can’t give you anything more concrete. Drilling is not a precise science. You’re drilling at four, five thousand meters and may encounter all sorts of problems. It could take two months, three, it depends. One has to be careful not to set artificial dates. So provided Noble starts this summer, before September, they are sticking to their timetable and are fine.
Q: Obviously that depends on rig availability. Can we confirm that it’s going to be the Ensco 5006 drilling platform?
A: That is my understanding. The rig is currently on site at the Karish prospect in Israel for exploratory drilling, and as soon as it finishes it will come to us. So it is possible it may come in July, but let’s not put a definite date on that.
Q: How much gas is there in the Cypriot fields?
A: My estimation is that the six licensed blocks -- including Aphrodite and a possible smaller prospect in Block 12 - could hold anywhere from 30 tcf.
Q: Based on what?
A: Based on assessments by the Americans [US Geological Survey] to start with, as well as data from seismic surveys carried out in some of the blocks concerned. We’re talking about the Levantine Basin, which has certain geological characteristics which are likely to be similar in different areas. And lastly, based on the fact that in the part of the basin that we have already drilled, we have found - between us and the Israelis - 36 to 37 tcf of gas so far. Let me point out that we’ve have drilled between a third and a quarter of the basin. The USGC says the whole of the Levantine Basin contains a total of 122 tcf. So the math works, all the indications are that the Americans’ original estimates are probably on the mark. TheUSGS also estimated that our own Exclusive Economic Zone has about 60 tcf, and we have only leased about half of it. So 30 tcf is the expectation. But again, these are all conjectures; we’ve got to drill before we know what’s there.
It’s important to know how much gas is there so you can plan ahead. For instance, all the talk about a pipeline to Turkey... if there’s one pipeline from Aphrodite, OK, that might be feasible, but if you’ve got four to five times as much gas, then it’s not feasible.
Q: Because of the pipelines’ capacity?
A: Yes. Because of the water depths, the radius diameter of a gas pipeline is limited to 20 to 24 inches maximum. A pipeline like that is just about enough to carry the gas from Aphrodite. So if you another five such gas fields, you’ll need another five pipelines. Also, a pipeline going from here all the way to Greece poses huge technical problems, and finally, what, you’d end up with a spaghetti of pipelines winding up in Europe? I just don’t see that as being feasible, for both technical and commercial reasons. So that leaves us with an LNG plant at Vasilikos. To those who doubt that a plant is Vasilikos is viable, I tell them: “Of course it’s viable, it’s the only way to do it.”
Q: So Cyprus will export by ship.
A: Correct. We have to complete the gas sales first because no one will give us money to build the plant unless they know that we’ve sold the gas. The priority is building the LNG plant, I can’t stress this enough. That has to be the basis. Other projects such as building an electricity subsea line to Israel or a methanol plant on the island are welcome, but that comes later, once we’ve ensured we have enough gas. Also, the LNG market is constantly changing. There exists now a window of opportunity to sell. If we wait for another year, we don’t know how the LNG market is going to shape out.
Q: So who would come and invest in the LNG plant?
A: I wouldn’t like to get into specifics, this decision is up to the government. There are people who may want to come and build the plant with us and merely charge a tolling fee to the owners of the gas and to the buyers of LNG. Think of the plant as toll station, where you pay a fee to move the gas from one place to another [abroad]. That’s the most usual method. That’s why it’s important to limit the number of interfaces, so that the whole LNG project is ideally built as a whole, not piecemeal. If you have too many interfaces, the project becomes expensive and as a result the LNG is expensive and you can’t sell it. So you’ve got to figure out whether the final cost of the project will yield competitive LNG prices on the market. I say again, this is no time to experiment, because we may miss the boat.
Q: Have you concluded an MoU with Noble?
A: We reached an MoU with Noble, but haven’t signed it yet because of the elections here and all the aftermath. Noble had put forth a proposal to develop the whole project with us, all the way from the offshore facilities to the export of LNG (including the plant). But that has been put on hold until the newly-instated government here decides its policy. An MoU with Noble still needs to be followed by a final project agreement.
Q: How are talks with ENI and Total progressing?
A: Well, in this doom and gloom, people are saying that the banks are collapsing, investors are getting out, and so forth. What I can assure you is that during the last few weeks we had high-level meetings with ENI and KOGAS in Milan, and with Noble here in Nicosia and in Tel Aviv, and on March 21 with Total. And they are all determined to press ahead. They’re not even thinking about the financial crisis; they see it as an issue for Cyprus, not for them. They have work to do, they are very aggressive and are getting on with it. To them, it’s business as usual.
ENI plans to start exploratory drilling in 2015. If they do find gas, they would then be able to add trains to the existing LNG plant, and could begin exporting perhaps a year later than Noble which has a head-start.
These companies are completely determined and committed. The Turkish threats do not affect them at all. As you may or not know, just before Noble commenced exploratory drilling in Aphrodite, they were approached by Turkish officials who asked them to stop their operations. This took place in Tel Aviv. But Noble’s response was: sorry, but we have an obligation with the Cyprus government and we’re pressing on.
Q: Is it true that Total will be searching for oil?
A: It’s part of their planning. The blocks licensed to Total (blocks 10 and 11) are located between the EEZs of Cyprus and Egypt, they lie more or less on the Nile Delta basin, and Total think that one of the fields contains oil at the top. So Total are organising their surveys with that in mind. Also, any oil that is found can be immediately commercialised. The oil would be extracted from the platform and onto ships. One of these platforms could take about three years to become operational. They have to do surveys, then drill, then assess the information, design the subsea facilities and the platform (FPSO - floating production, storage and offloading vessel).
Q: What is a production-sharing agreement?
A: A proportion of the gas produced (about two-thirds) actually belongs to us, and we can do anything we want with it. Israel has gone a different path: they tax Noble and Delek on their profits.
Charles Ellinas chairman of KRETYK the state hydrocarbons company