News about new gas fields – smaller, larger, and extra-large – do not cease to flood world media. Overly exaggerated comments again appeared in media after the Italian company Eni discovered a field in Egyptian waters. Geopolitical analysts also joined the debate and almost predicted redrawing of the geopolitical map of the Eastern Mediterranean, including predictions of great difficulties for the fields discovered to date in the coasts of Israel, Cyprus and Palestine.
That Egypt will win is beyond doubt. Surely Eni will benefit most and the earliest of all, already at the moment when the probable reserves are proven and appear on the balance sheet of the company.
I will not go into the details that we present to our clients here because the zoom in at this stage is not so important. I will focus on basic factors and conclusions which will enable readers to get a better understanding and be able to filter subsequent news.
First, the field is actually quite large, as it is over a trillion cubic meters. But it will take at least 5-7 years before the first quantities of natural gas reach the European market. Of course, if we assume that the export is targeting the European market. Until then, any field that can produce and deliver real gas (in the battle for the niche market in Europe) will prevail over the Egyptian field, especially if already developed fields have covered the initial costs. Those who join the race later in a downward market will have to wage a more difficult fight for customers.
Secondly, the reader must realize that the largest gas field in the world – Pars, which is divided between Iran and Qatar, will be entirely accessible to the global market after the removal of sanctions against Tehran. Today it is no less challenging after the find of a large gas field, to be able to produce competitively and ensure long-term purchase agreements. So this industry is characterized by wholesale purchases or exchange of assets with economic actors that consume large quantities of natural gas.
Thirdly, the biggest problem in forecasting the swings in the European and global gas market is the inability to prove sustainable growth in consumption rates. On the contrary: at present, there is a gas glut in Europe – "Gazprom" alone is unable to sell over 180 billion cubic meters of gas production capacity to Europe. The big news stories for supplying nearly 100 billion cubic meters to the Chinese gas market remain just virtual reality – neither the Western (“Altai”) or Eastern (“Power of Siberia”) routes have progressed so far. Which means that in the foreseeable future, especially in view of current and future discoveries of gas fields, there will be tremendous competition for access to markets and gas sales. Which puts buyers in a privileged position: buyers do not need to commit to any single supplier – especially not in the long-term, nor for a fixed price.
Another illusion is that market failures – lower prices - in the gas market will be offset by higher prices for co-produced crude oil. Forecasts for future oil production, consumption and prices are no less comforting.
Fourthly, the gas discovery in the Egyptian economic zone will likely intensify the battle for control of the transmission routes – to ensure the capacity allocation and access in the Southern Gas Corridor to the South and Southeast Europe. If Israel struggles to implement its plans for additional economic dividends from sales of natural gas from the fields in Tamara, Leviathan, etc. -- then what to expect for proceeds from sales of natural gas from Iraqi Kurdistan and Azerbaijan? Not coincidentally Baku is increasingly tense.
The clouds are gathering for extraction companies in the SEE region – especially for "Gazprom", because the most dynamic changes in the European gas market are related to the discovery and possible significant new gas flows to Europe from the South, from the Southeast (Iran, Qatar and Iraq) and from the East - Azerbaijan and Turkmenistan (Trans-Caspian Gas Pipeline).
The consolation of "Gazprom" can only be ellusive – i.e. that it will be able to retain its share of the market (including gain some on the “spot market”) in Northwestern Europe with the expansion of Nord Stream-2, and by so doing to offset losses in the Southern Corridor and the blocking of Turkish Stream. The analyses stating that Russia's military intervention in Syria is connected to Moscow’s desire to project military power in the region, where it is losing the battle for energy routes and markets should be treated as credible
With or without the Turkish Stream, "Gazprom" has no chance of resisting market pressure from big and cheaper gas producers from the south, even more so because its biggest market is failing to meet expectations– Turkey grows slower economically and consumption of natural gas is well below forecast. The only niche in Europe for selling significant quantities of new gas (at the amounts discovered in the Mediterranean, the Middle East and the Caspian Sea) is Central and Eastern Europe – because of its natural desire to replace the Russian gas monopoly opening up at least 50% of the CEE market to new suppliers. To sustain its market dominance and thwart unfriendly competition "Gazprom" has started a managed diversification of markets of Central and Eastern Europe where "Gazprom" swaps its market shares with dubbed strategic partners in Europe, such as Wintershall. The aim is not to allow non-EU and genuine competitors in the region – producers and traders from the Caspian region, the Middle East, the Mediterranean and North America.
And finally - all these new gas fields will have to account for the impact of indigenous gas production in the Black Sea and the natural national gas industry protectionism (e.g. Romania). Quantities may not be as large as those in the Mediterranean, but are fully commensurate with the level of consumption and their supply costs lower.
It is precisely the technological revolution in the oil and gas industry that has deprived natural gas from its allure as a foreign policy asset. What applies to "Gazprom" applies even more to any new player in the gas market. The times of unfettered rejoice and jubilation that accompanied each new discovery are long gone – it is now a buyers’ market, so producers will be competing.
Therefore, it is quite possible that much of the newly discovered trillions of cubic meters of natural gas in the Mediterranean and elsewhere will remain underground for a long time. The only relief to investors and producers may come if Europe decides to rely on even more natural gas to boost its economy, or if it expands gas use into new sectors and areas. Otherwise, several newly discovered fields may prove noncompetitive – if fuel prices remain permanently low below 200 dollars per thousand cubic meters. And especially if one has to build expensive new infrastructure to reach European customers.
In these global processes, Southeast Europe has a potentially significant place, but only if the countries there build up their gas consumption and storage capacities, and if they work in cooperation with each other to offer competitive terms for gas transit to major markets in Central and West Europe. Which excludes expensive new grand projects, especially before these countries have used all available infrastructure. The battle for the lowest production costs and price at delivery will force all players along the gas value chain to cut all non-essential costs.
The next time you read news about yet another new gas find just put yourself in the place of the "winner" – unfortunately, it is always too early to call it a victory day and certainly not the right time for rejoicing.