Chevron is probably prepared to negotiate around its proposed FDP, but it will probably be on the details rather than the substance
It finally happened. Cyprus rejected Chevron’s updated Field Development Plan (FDP) for the 4.5trllion cubic feet Aphrodite gas field. But we have to be careful here: it is a rejection of the amendments to the 2019 FDP, not the plan itself. At this stage it is a negotiating position. Cyprus is not too happy with Chevron’s proposal and is hoping to get better terms. But can it pressure Chevron? Not sure, but it is worth a try. The negotiations in September will show. Cyprus must press for improvements to the updated FDP, but I hope, though, that this does not end up becoming another missed opportunity.
Past experience teaches us that we must stay focused on solutions.
Positions
Seemingly, the two positions are quite far apart. Central to the 2019 FDP, that Cyprus wants to retain, is the use of a Floating Production Unit (FPU) – a floating platform – over the gas field, where gas would be processed and then exported to Egypt by subsea pipeline. Crucially, the use of an FPU would allow water reinjection into Aphrodite’s reservoir to maintain production levels during the latter years of the field’s life, to overcome pressure loss. It could also allow the construction of a pipeline to bring some of the gas to Cyprus, should that be considered to be commercially viable, something the government has been pushing for.
Chevron’s updated FDP does not include an FPU and reduces the number of wells from five to three, leading to reduced gas production –down to 650million cubic feet per day (mcf/d) from 800mcf/d in the 2019 FDP. It is based on the use of subsea production facilities, with the gas to be sent through a 480km pipeline to Shell’s underutilised processing facilities at West Delta Deep Marine (WDDM) in Egypt for treatment and export to the Egyptian gas system. This would lead to a substantial cost saving, around €1billion, and a shorter construction period. As Mike Wirth, Chevron’s CEO said, “it is a capital-efficient way to get the gas to market” expeditiously.
Cyprus’ government has rejected this because, it says, it would lead to lower gas recovery and less revenues for Cyprus, as well as “increase the technical and commercial complexity of the project”.
However, this is a well-tried and tested development concept for offshore oil and gas fields. It is used extensively on the Norwegian Continental Shelf. In the East Med it was used for the development of the Tamar and Leviathan gas fields in Israel.
It is also the method used by Eni very successfully to develop the Zohr gas field at low cost, taking only 2.5 years after discovery to bring the gas to the market.
It probably will be the development concept Eni will propose for Cronos in block 6, once it completes appraisal drilling, probably early 2024. Eni is expected to propose development of Cronos using subsea production facilities to be tied by subsea pipeline to Zohr. From there the gas will be transported for processing at Zohr’s near-shore facilities in Egypt.
Given its rejection of Chevron’s FDP, would Cyprus also reject a similar proposal from Eni?
Opportunities and risks
The two sides agreed to meet early September to hammer out a plan acceptable to both. Even though Chevron is likely to be prepared to negotiate around its proposed FDP, it will probably be on the details rather than the substance of the proposal.
Even though Chevron has repeatedly said it values its relationship with Cyprus, it is not likely that it will depart greatly from its position just to satisfy Cyprus. Its priority is high returns to justify any investment. After all it will take most risks, all responsibility for the development and will foot the required bill.
In the present climate, with the world transiting to clean energy and net-zero emissions by 2050, the long-term future of natural gas is not assured. In 10-20 years from now the world may be facing declining gas demand and challenging markets – as Europe is now.
I hear constant references to “our gas being developed for the benefit of Europe”. But let’s be clear: Europe’s needs are short-term. Longer-term the EU plans to reduce dependence on fossil fuels in favour of clean energy. It has already achieved more than 17 per cent reduction in gas consumption in comparison to the 2017-2022 average. The target is a 30 per cent reduction by 2030, on the way to net-zero by 2050. During the first six months of this year alone the EU achieved a 23 per cent reduction in the use of gas for power generation. Sticking to the mantra that “Europe needs our gas”, we are fooling ourselves and our people.
Chevron is right in saying that we must expedite development of Aphrodite to take advantage of current markets. And in our region, by far the biggest market is Egypt. Its natural gas production has declined dramatically from the highs attained in 2021, from just over 7bcf/d to 5.88bcf/d now – a 17 per cent reduction in three years – and it is still declining. According to MEES, production at the giant gasfield Zohr has plummeted by about 23 per cent below the field’s production capacity. Egypt is in desperate need for gas.
That is why Chevron has embarked on a project to expand production at Tamar and Leviathan in Israel so that it can double gas exports to Egypt by 2027, with the full support of the Israeli government.
Cyprus should take advantage of this opportunity and expedite gas exports to Egypt, first from Aphrodite and hopefully soon after from Cronos. Not only can these generate revenues for the island’s economy within about five years, but they will also enhance its regional status and cement its political relationship with Egypt – as Israel is doing.
I am sure Chevron and its partners are open to listen and talk, so I hope the two sides find some common ground and a compromise. Not reaching agreement is fraught with risks. Even though Cyprus’ energy minister has the right to terminate the contract, if he can demonstrate that Chevron and its partners have breached its provisions, in all likelihood the case would end up in courts and even in arbitration that would take years to settle, leaving Aphrodite in the doldrums. It would also send the wrong message to the industry.
Chevron and its partners might even consider disposing of Aphrodite, but in the present environment would they find buyers? With many choices around the world for easier and profitable projects, Cyprus would risk being shunned.
However, the minister’s latest statements leave ample room for a positive outcome. His upbeat statement earlier in the week that he is confident “a solution will be found” during the 30-day negotiating period promises hope.
Dr Charles Ellinas, @CharlesEllinas, is a senior fellow at the Global Energy Centre of the Atlantic Council