RCEM: Views on Energy News

The European Commission recently marked as a Project of Common Interest (PCI) the pipeline that will link the Greek and Cypriot deposits (East Med Pipeline), lifting the hopes of both Athens and Nicosia about the possibilities of seeing this project materialising. 

The project seeks the construction a pipeline connecting the Leviathan field offshore Israel, to Cyprus and the eastern part of the Island of Crete in Greece. In order to connect the supply of this pipeline to the EU market alternate routes were discussed, including connections from Crete to the Trans-Adriatic Pipeline (TAP), the Interconnector Greece-Bulgaria (IGB) and the Revythousa LNG terminal close to Athens.

The capacity of this pipeline is scheduled at 8-10 bcm per annum, and the Cypriot authorities expect that equivalent quantities could be available for the proposed LNG terminal if Israel participates, allowing thus for both projects to be viable. However this is just and assumption for the moment and the examination of the economics of these alternatives makes the political nature of this debate clear.

Assuming that the forecasts of reserves materialise, the construction cost of the transmission line becomes central issue between these two options. A new built LNG facility will be one of the costliest constructs in the modern energy industry, as in previous cases building costs have been around $10 bn (for the initial terminal and one liquefaction unit), with the cost building up to $8 bn and $6 bn, if in the future there is a 2nd and 3rd unit added respectively. Despite its large cost, it still remains a cheaper option compared to the East Med Pipeline, which will require an investment of at least $20 bn, as ENI suggests.

A number of technical, financial and geopolitical factors mark this project as one of the most expensive projects internationally. Costs that are hard to justify economically, in many important energy or financial institutions who may be interested to engage in the wider Mediterranean region.

The choice between these two alternatives will have direct implications on the long term pricing structure and distribution options of the energy triangle Greece-Cyprus-Israel to the rest of Europe and probably the world markets. In the case of the pipeline option, natural gas will be able to reach the EU markets at a lower cost compared to LNG, as there is no liquefaction and then regasification is required before reaching to the natural gas markets. Nevertheless, we must not forget that the high cost of the pipeline will have to be integrated in the pricing of the natural gas. Moreover, the supply route will be predetermined thus excluding the possibility of targeting alternative markets but strengthening the energy security and the possible scenarios of region's energy independence possibly in combination with an increase in capacity from Renewable Energy Sources (RES).

The option of LNG construction will provide Cyprus with the flexibility to seek alternative markets in case of EU demand swings. Additionally, even though this option will mean direct competition with LNG coming from the Middle East and Africa, the lower transportation costs and the country's participation in the Eurozone, automatically secure a significant advantage of Cyprus over its competitors. This option will also trigger long term indirect benefits to other sectors of strategic importance for the countries of energy triangle, as the activity of shipping, engineering and servicing companies will be increased significantly. This will happen because the involvement of these companies will be required for the maintenance and conservation of the units and the transmission system, increasing thus demand of skilled labour as well as the absorption of energy related capital by Cyprus and Greece.

The dilemma therefore can be argued to be more political and geo-strategic than economic.  Although, the construction of a pipeline could secure cheaper gas in the long term, primarily for the Greek market and consequently for the EU markets, the LNG option might be more favourable for the Greek and Cypriot economies in the short horizon.

Amid these significant developments and debates in the energy landscape of the country and the wider region of south-eastern Mediterranean, the 'Greek Energy Forum', a network of Greek professionals working in London and the wider EU in the field of energy, has been established. Its mandate is to capitalize on the multi-faceted experience of its members in energy issues, in order to assist the process of making the country a strategic energy player within the wider Mediterranean.

*Dr. Angelos Gkanoutas-Leventis (CITYPERC, City University London, Vice-Chairman Greek Energy Forum), Dr. Konstantinos Tsanis (Senior Analyst - Bloomberg Energy Finance) and Dr. Kostas Andriosopoulos (Assistant Professor, Director of Research Centre for Energy Management (Research Centre for Energy Management-RCEM, ESCP Europe Business School), are among the founding members of the Greek Energy Forum (www.greekenegyforum.com). The opinions expressed in the article are personal and do not reflect the views of the entire Forum or the companies that employ them.

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