The Power of Natural Gas Exploration Rights, Cyprus

As many of you may already be aware of, the small island country of Cyprus is currently in financial ruins and seeking a bailout plan.  While there is a pending bailout offer from the EU, many citizens are outraged by the contingents of it and are seeking another plan.  Amidst the outrage, sources have reported that the Russian energy company Gazprom has extended to Cyprus a bailout offer of their own.

 

Gazprom is the largest natural gas company in the world and is responsible for nearly 10% of Russia’s GDP (New York Times).  In other words, the company has billions and billions of dollars worth of revenue, which it is looking to invest into the further expansion of their natural gas business. 

 

Meanwhile, Cyprus’ neighbor to the Southeast, Israel, just discovered one of the largest offshore gas fields in the past decade, the Leviathan natural gas field.  After this discovery, exploration for natural gas in this Mediterranean region is rampant and Cyprus is likely to withhold the mining rights to a great amount of natural gas.  Thus, a natural gas giant such as Gazprom would be eager to obtain exclusive exploration and mining rights of Cyprus’ natural gas fields, exactly what Gazprom’s bailout plan entails.

 

Gazprom’s reported proposal to Cyprus entails a bailout option in which Cyprus would concede exclusive rights of it’s natural gas fields to Gazprom.  In turn, Gazprom would single handedly bail out the country of Cyprus, who would need around 10 billion Euros to re-stabilize its economy.

 

While this may initially seem like an easy and reasonable solution to Cyprus’ troubled economic state, there are many underlying affects and motives.  Gazprom effectively has a monopoly on the natural gas market in Europe, providing it with about 40% of its imported gas.  The bailout of Cyprus’ would give the country the means to sell rights of its natural gas reserves to be mined by different gas companies.  In theory, Cyprus would have the power to create its own gas industry, which if productive enough, could become and export business to the likes of many European nations.

 

If Cyprus were to create its own gas industry and export to Europe, Gazprom would be undercut and be potentially forced to lower their prices and loosen their grasp on the European market.  This occurrence would be very detrimental to the revenues of Gazprom.

 

As it stands now, Gazprom has not made a release stating its offer to Cyprus, nor has Cyprus given any definitive evidence suggesting consideration of the proposal.  This example however, shows how powerful the rights to natural gas exploration are and to what lengths some companies will go to claim those rights.

LNG, What’s the big deal?

LNG is the key piece in making natural gas an internationally traded commodity, without it, supply and demand of the resource would be far out of balance.  Beyond this, LNG is important in the growing natural gas industry because it allows for the extraction from tough to reach reserves; it can be shipped efficiently and safely, and a has potentially great upside for exporting countries.

The largest benefit of LNG is that it opens up natural gas to world trade.  Prior to the technology which allows us to transform natural gas into its liquid state, natural gas could only be distributed regionally through gas pipelines.  This not only restricted the trade of natural gas, it also restricted the markets ability to grow.  For instance, Australia is currently producing two times more gas than what it consumes.  If it were to have no way to ship this excess over seas, the country would have no incentive to produce its maximum capacity of natural gas and their abundant supply would be a waste since it can’t get to countries who need the energy.

Top 6 exporters of LNG in 2011:

Thankfully however, we now have the ability to super cool natural gas to -162 degrees C, at which point the gas turns into its liquid state. Once in its liquid state, natural gas is 1/600 that of its gaseous volume, meaning that we can transport natural gas on tankers at and economic cost.

With the ability to ship LNG globally comes the ability to import and export natural gas.  Thus, countries such as Qatar and Australia have incentive to produce as much LNG as possible for export.  This benefits both the exporting countries economically and the importing countries because they now have the supply to meet their consumption, The Economist.

While LNG is the key to the international trade of natural gas, it is also important because we now have the ability to tap large natural gas reserves that were once considered inaccessible.  Prior to LNG, we were unable to tap any reserves that were much more than a few miles off any coast because the amount of pipeline that had to be laid under the ocean was unfeasible.  With LNG and LNG specific tankers, we are now able to pump what is extracted from these reserves directly into these ships for super cooling and transport.

By pumping extracted natural gas at sea directly onto the ships, not only are time and money being saved but the detrimental impact on the environment is being reduced.  When LNG is stored, it is put under no pressure and therefore is not explosive.  The ships that transport LNG are some of the most high tech on the sea with double hulls and massive amounts of insulation to prevent any sort of leak.  Even though a spill is not of great fear considering the quality of these ships, the impacts of and LNG spill would be minimal in that LNG is insoluble in water and would all evaporate in a matter of minutes.

The inside membrane of a LNG tanker, Chevron:

LNG has opened the world to natural gas trade providing import opportunities for countries lacking the resource, and export opportunities for countries fortunate enough to have excess.  It has allowed for the market to expand to new heights and with continued exploration by the worlds gas companies, the outlook is only bright for LNG.