25 Sep 2016 What gas price earns Cyprus €600 million a year?

This week the finance minister, Harris Georgiades, told parliament that government income from natural gas could reach €500-€600 million per year in around 12 years’ time.

As part of the Aphrodite contract, government revenue will start to flow after the energy companies have recouped their costs. This is one reason why Georgiades mentioned 12 years from now, with the hope that production starts in 2020.

Total general government revenue in 2015 was €6.9bn. The gas revenue could therefore add around 10% more to the annual budget. This large increase in revenue is also why the finance minister has sensibly pushed for some hard rules about how the money is spent.

The figures cited by the finance minister prompted a few people to ask me if the number was accurate. The short answer is yes, but only if gas prices rise to a level at which exports to Egypt become viable.

Thanks to a gas economics course at the Levantine Training Centre in Limassol a few years ago, I have done a lot of number-crunching on the various gas export options. A lot of numbers have to be fed in: cost of drilling, extraction, pipelines and/or liquefaction, transport, as well as what number-crunchers call discount factors.

Luckily my numbers seem to match others’ estimates. For example, when a landbased liquefied natural gas (LNG) plant was still on the agenda, my estimates for the government’s share came close to figures cited by the energy minister, Yiogos Lakkotrypis. I am therefore fairly confident that I am not missing out anything important.

The current LNG spot price (the price if bought today) on the European market is around $4.5 per million British thermal units (mmbtu). Europe is the most likely market for gas sent to Egypt.

This is because, after the massive Zohr find, the country will have more than enough of its own supply. BG (now owned by Shell) is both a partner in Aphrodite and has the idle LNG plant in Idku, therefore using this plant for export will make the most sense.

My own number-crunching, which includes the cost of building a pipeline to Egypt, and then liquefying it at a ready-made LNG plant, suggests that spot prices would have to reach just over $10/mmbtu for exports to Egypt to be viable. For exports by pipeline to Turkey, the viability threshold comes in at a much lower $4/mmbtu.

As an aside, one assumption I make is that 75% of the construction cost of the Idku LNG plant, built in 2001, has been depreciated before production starts. If anyone knows what the industry standard is for depreciation of big industrial works, I would love to hear from them.

An end-market price of $10/mmbtu is pretty close to the figure that energy consultant and fellow commentator, Charles Ellinas, has calculated, using different methods.

It also happens to be the price at which the government would earn about $600m per year in revenues.

In other words, the revenue will only come if gas prices more than double from where they are today. Moreover, with renewable energy prices falling, a doubling of gas prices is currently a long bet.