Study: Uncertainty rules smaller nations’ rush to gas

Smaller nations’ plans to invest in natural gas should proceed with caution, according to interim results of a study by MIT Energy Initiative in collaboration with the Cyprus Institute.

Funded entirely by the Cyprus Research Promotion Foundation, the study is part of a larger report that will further take into account the changing dynamics of the regional and global gas markets and give a comprehensive view of the implications for long-term development of natural gas in Cyprus and other similar nations.

Using Cyprus as an example, the study takes an independent look at the economics of developing gas. The researchers expect to finish the report in August 2014.

“While natural gas is often cheaper than oil and gives off fewer emissions, developing the resource comes with risks, especially for smaller nations,” says Sergey Paltsev, an author of the study and a principal research scientist at MIT Energy Initiative.

Because the “cost for these smaller nations makes up a larger portion of their economies,” they need to have “proper expectations…before spending the money.” Researchers found it will take the country about 5 years to put Cyprus’s gas resource to use and the required investments will comprise up to a quarter of the country’s gross domestic product.

“That’s a substantial amount of a country’s economy dependent on a resource that has proven to be unpredictable in the past,” says Paltsev. “Natural gas development is so new to such regions,” he says, and the global gas market is “changing so rapidly, that there’s a large amount of uncertainty.”

Cyprus

Paltsev believes what’s happening in Cyprus is a good model for other countries like it that are exploring gas. The nation has been slowly recovering from a near collapse of its banking industry and searching for revenue. A major gas discovery off its coast 2 years ago has been viewed as an opportunity.

The latest estimate of the resource is about 5 tcf (OGJ Online, Oct. 4, 2013), a small fraction of the global natural gas resource. Francis O’Sullivan, director of research for MIT Energy Initiative, says it is unlikely Cyprus will ever be a major player in the global gas markets, “but that doesn’t mean natural gas can’t benefit the country’s economy if developed properly.”

The study notes that, with the country’s population at about 1 million, Cyprus “has enough natural gas to power the country for nearly a century–while significantly reducing its use of foreign oil.”

LNG vs. pipeline

With estimated reserves ample for domestic use, the Cyprus government has planned to build gas liquefaction to export gas to such places as Europe and Israel. LNG has been the preferred option over pipeline because of political tensions in the area due to the island being divided since the mid-1970s. Turkey occupies the northern half.

While a clear political maneuver, the study notes, building an LNG plant would also create jobs and raise revenue. Depending on the tax scheme, it may raise $1.5 billion in taxes.

At the same time, building the plant would cost about $6 billion for a country whose GDP is about $25 billion. The cost of building an LNG plant, however, is far more than the cost of building a pipeline, though LNG offers greater flexibility to adjust production to changing natural gas prices and market supplies.

O’Sullivan and Paltsev warn that even projects that start out having clear economic gains can become less profitable because of poor technical planning and execution or bureaucratic and regulatory delays.

“Prices change, projects get delayed, overrun costs pile up. These are all unforeseen risks that can come up and must be properly mitigated,” Paltsev says.