29 Jan 2017 Is the East Med gas pipeline an option for Cyprus?

The Cyprus News Agency (CNA) reported this week that the cost of the EastMed pipeline from Israel to Cyprus, Crete, the Peloponnese in Greece and then Italy would be $6bn. This is close to the $5.7bn figure cited by Globes a few months ago.

CNA also said that a study presented in Brussels had found the pipeline to be commercially viable and technically feasible.
Subscribers to my monthly report will have already know that I suspect the reported figure is not counting the full cost.

The entire pipeline including the land pipeline in Greece would be 1,900 km. It will also be very deep, reaching 3,000 metres in some parts.

A figure of $6bn implies a pipeline cost of just $3.2 per km. To illustrate why this is too low,we can compare this with the Nord Stream pipeline. Completed in 2012, Nord Stream is 1,224 km long and only 210 deep—shorter and much shallower than the proposed EastMed pipeline.

Nord Stream’s website says that the total investment cost was $7.2bn. Of this total, $5bn was spent on pipes, pipe materials and pipe-laying. A total investment of $7.2bn implies a cost of just under $6 per km.

If we only count the $5bn investment in pipeline construction, Nord Stream comes to a cost of $4.1 per km. Either way, the NordStream cost was much higher than the amount implied in the estimate for the EastMed pipeline, which would be one of the longest, deepest pipelines in the world.

I suspect that the $6bn estimate does not include the land pipeline in Greece. Remove this and the cost comes in at $4.6 per km. This is a little higher than Nord Stream, but makes sense given that it is much deeper.

It would be good if I could confirm my hunch. The studies made to date have been paid for by the EU taxpayer, because the EastMed pipeline is an EU ‘Project of Common Interest’, meaning that it can attract EU funding for studies into its viability.

However, when I contacted the Commission to enquire whether the report would be made available, they said it was up to the companies to provide any information.


The price must be right

Even if you take the $6bn at face value and assume that new technology or weak oil prices have led to a massive reduction in costs, there is still the question of what price the sellers need in order to make a profit.

According to my Sapienta Economics gas model, you would need a gas price of around $7 per million British thermal units (mmbtu) before you started to make a profit.

European gas import prices have been rising lately, reaching $5.50/mmbtu at the end of December according to World Bank data. However, with a global glut in gas, it will take a while before they stay above $7/mmbtu.

We can wait that long, or we can solve the Cyprus problem. A shorter pipeline to Turkey would be viable at a price of just above $4/mmbtu according to my model.