AN ISRAELI-led joint venture’s proposal to produce and export lucrative electricity
from possible gas reserves within offshore Block 3 is being “considered” by the
government, the Sunday Mail has been told.
The venture had bid for Block 3 but was not picked, the exploration licence ultimately
awarded to the Italian-Korean consortium of ENI-KOGAS.
But Dr Eli Barnea, CEO of Sigma Explorations Holdings Limited - which has a 75 per
cent stake and was the designated operator in the Israeli joint venture - said this
week that their offer still stands.
The Israeli-led group’s proposal on Block 3 incorporated the construction of a power
plant on the island for exporting electricity to Israel and for generating electricity
for Cyprus’ local consumption, by linking the two countries’ grids via a subsea cable.
Due to their geography, both nations are currently isolated in energy terms and
vulnerable to failures at their main power plants, argues Barnea, citing the Mari
disaster of 2011.
In that respect, a 1500MW capacity plant in Cyprus would be a win-win for everyone.
Barnea says the Cyprus government and the ENI-KOGAS consortium could be persuaded to
‘farm-in’ the Israeli-led joint venture.
One option might be for the Israelis to purchase part of the Block 3 gas from the
Italian-Korean consortium. They would then finance a natural gas-powered plant on the
island and sell the bulk of the generated electricity to Israel.
In addition to the jobs created in building a facility, Cyprus would benefit from
charging a fee for the export of electricity to the neighbouring country.
Barnea sees Block 3 as being ideal for the project, because of the prospect’s close
proximity to Cyprus shores - some 65km from Cape Greco.
Moreover, drilling there would cost far less - about US$40 million compared to US$100
million in other prospects - because of the lower sea depths.
Lower development costs in turn would yield lower electricity prices, making them
attractive to the Israeli market.
“With electricity, you need only be competitive on a regional basis. With natural gas,
on the other hand, you’re competing on a global level,” Barnea argues.
And electricity exports from Cyprus to Israel could begin from late 2015 or early
2016; by contrast, the option of exporting gas via a liquefied natural gas (LNG) plant
cannot be achieved sooner than 2020 or 2021.
Barnea holds that exporting natural gas is not the best option for Cyprus because the
added value is not that high. According to his own estimates, Cyprus would stand to
make $10 per million BTU from exporting electricity, compared to just $3 per million
BTU from exporting gas via an LNG terminal.
The proposal is not a new one. It was brought to the attention of the Cyprus National
Hydrocarbons Company (CNHC) back in January through a detailed presentation.
And a month ago, Barnea expounded on the plan’s merits during a meeting with President
Anastasiades in Nicosia; the response from the president was “generally positive”,
says Barnea.
It’s also likely the idea was discussed between Anastasiades and Israeli premier
Benjamin Netanyahu during the former’s visit to Israel this week.
What’s changed since January is the financial crisis here, which has taken a sharp
turn for the worse.
“Before 2020 - and that’s being optimistic - LNG won’t be making a penny for Cyprus.
But if Cyprus can cash in on hundreds of millions of euros from electricity exports as
of 2016, for a period of 20 years, that’s a hell of an incentive,” Barnea says.
In the meantime, the CEO continues to lobby Tel Aviv.
Barnea aims to persuade the Israeli state to issue a conditional statement of intent
to purchase around €1bn of electricity a year from Cyprus.
And in an unmistakeable display of can-do attitude, the entrepreneur thinks he can get
that “in a month”.
To finance the approximately €5bn project, Barnea will be seeking an offtake agreement
backed by the state of Israel. An offtake agreement is a deal between a producer of a
resource and a buyer of a resource to purchase/sell portions of the producer's future
production. It is normally negotiated prior to the construction of a facility (such as
a mine) in order to secure a market for the future output of the facility. If lenders
can see the company will have a purchaser of its production, it makes it easier to
obtain financing to construct a facility.
Offtake agreements are frequently used in natural resource development, where the
capital costs to extract the resource are significant and the company wants a
guarantee that some of its product will be sold.
Barnea also suggests the Electricity Authority of Cyprus and the Israel Electric
Corporation could be invited to co-finance and be stakeholders in the project.
Speaking on condition of anonymity, an energy official here called Barnea’s pitch
“both serious and worthy of consideration.”
What makes the proposal interesting, the source said, is that it does not rule out the
LNG project - the stated cornerstone of Cyprus’ energy plans.
“Rather, the two can be complementary,” the source said.
A gas powered electricity plant could complement an LNG terminal, but the profits would be felt far sooner