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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Why This Mega NatGas Project Might Not Go To The Oil Majors

The upcoming Cyprus bid round may be one of the best opportunities of the year — to build a new oil and gas empire.

When the tiny Mediterranean nation offers up its offshore acreage this summer, all eyes will be on the “usual suspects” in this part of the world. Namely, Italian major Eni — who operates the massive Zohr natgas discovery next-door in Egyptian waters. And others mid-tiers like Noble Group, who work nearby in the Israeli offshore.

And there could well be some surprises when it comes to bidders for the Cyprus licenses. Especially from Russian firms — with that nation having shown a surprising level of interest in the eastern Mediterranean energy scene. Don’t be surprised to see a Gazprom or Rosneft pop up in the mix.

Of course, there’s also a chance that the Cyprus round could attract some heavier hitters. With names like Shell and BP possibly being drawn in by the sheer scale implied by East Mediterranean discoveries like Zohr (30 trillion cubic feet of natgas).

But here’s the thing. When you really look at it, there are issues with all these players.

Start with the most likely bidders — like Eni and Noble. They’re already in the area, right? Why wouldn’t they take what they know about the emerging carbonate reservoir plays of the Mediterranean and run with it in a new area?

But the problem is, they’re already in the area.

Eni already owns a mega-field in Zohr. Noble owns a Leviathan (as well as already-licensed acreage in the Cyprus offshore). Both fields are going to be expensive and complex to develop (although likely very profitable in the end).

So do these firms really have the funding and manpower bandwidth to go after another mega-field? Especially one that comes with all the exploration risk of a greenfields play? At a time when things are tight in the global E&P sector in terms of capital deployment?

The big surprise of the Cyprus round might turn out to be — both of these groups stay on the sideline. Quite simply, they’ve got a lot on their plates.

So, who else could step up? Certainly the Russian E&Ps have capital, and probably the necessary risk appetite. Related: OPEC’s Latest Failure Creates Opportunities For Traders

But will Cyprus want Russian influence here? And more importantly, will the neighbours stand for it?

An Eastern Mediterranean state like Lebanon would almost certainly be happy to see the Russians step in. Especially since Beirut has been jockeying for a share of the precious natural gas that’s going to come from all the new discoveries.

But the very existence of cozy Russia-Lebanon relations may make Russian involvement in Cyprus an uncomfortable idea for other players in the area. Most notably Israel — a country that has been quietly deflecting not-so-subtle attempts by Vladimir Putin to get involved in the offshore natgas sector.

Does Israel have enough clout with Cyprus to influence a decision on the license awards? Hard to say for sure — but it’s certainly possible. In which case, Russian firms could find themselves effectively disqualified for political reasons.

And the super-majors? In theory, Shell is a logical fit — through its recently acquired BG Group division, which knows natgas and Europe well.

But again, most of the big E&Ps are cutting back on capital spending these days. Especially when it comes to rank exploration plays — with these companies favouring development projects where they can deploy capital with little risk.

All of which breaks down like this: the already-in Mediterranean players might be too all-in on the region, the outsiders might be too sensitive to bring in, and the big players may be too conservative to want in.

So who’s left?

How about… someone completely unknown?

Although it sounds unlikely in the utmost, the Cyprus bid round may actually be the perfect place for a junior E&P to swoop in. With such a firm having no political strings, and also carrying the right risk-reward incentives for a project like this — which is still a make-no-mistake exploration play, albeit with some very strong indications of mega-discovery potential.

That “proven” nature of the play might be enough to attract equity capital to a Cyprus-focused start-up. As I noted before, there’s $161 billion in private equity money for natural resources right now — and the world’s top-performing PE fund the last decade was a Europe-focused energy investor.

Might backers in the PE sector pay up $50 million for a shot at a Cyprus mega-find? They just might. Especially if they were injecting capital into a freshly-minted junior, where they could command major ownership — and be involved in designing the firm and the management team from the ground up.

The team would certainly be key in such a scheme. With a big-name president or CEO being a requirement in order to attract the big capital needed here. Related: Colombian Oil Patch Needs $70 Billion To Survive

But that kind of thing has happened before in the E&P world. With high-profile executives forming blind-pool cash box companies with hundreds of millions or even billions of dollars — to then go out and hunt for projects.

And investors might be all the more interested given that European natgas pricing is still some of the strongest on the planet. Making a potential Cyprus natgas field one of the most attractive projects on the planet in terms of commodities pricing.

It’s an outside chance — but the dynamics here could make this one of the big shockers in energy for 2016. And it could make billions for someone with the vision to put the pieces together correctly. Let’s see if there are any takers.

Here’s to filling the gap.

By Dave Forest

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