The significance of monetizing gas discoveries in the Eastern Mediterranean using a marine pipeline between Egypt and Cyprus is finally appreciated by government officials on both sides. Imported Natural Gas from Cypriot fields, will be mainly used at the Egyptian side to balance gas shortage in Idku LNG, Damietta LNG, and domestic gas requirements at peak demand. Gas pipelines are highly desirable assets with excellent Return On Investment (ROI). This is clearly demonstrated by recent gas pipeline sales in energy markets across the world. In this article, we shall attempt to analyze the “Hope Pipeline” project development from the viewpoint of governance structure to maximize the return for the people of Egypt and Cyprus.
Placing a value on a marine gas pipeline is a unique process unlike any other type of appraisal. A valuation study concerning a pipeline is critical for determining salvage value and defining the optimum governance structure.
One valuation method is using comparative sales analysis based on sales histories of comparable assets. It is obvious that no two pipeline systems are the same. However, this method is useful to get a quick overview of the pipeline value by looking at sales histories of comparable pipeline systems in varying regions. For this reason, we will use the BG Group gas pipeline sale that took place few days ago in Australia and will compare it to the proposed gas pipeline between Egypt and Cyprus using a valuation multiple based on the book value.
On December 9, 2014, BG Group agreed the sale of a 543 kilometre pipeline for US$ 5 billion. The 42 inch underground pipeline network is linking BG Group’s natural gas fields in southern Queensland to a liquefied natural gas export facility (QCLNG) at Gladstone on Australia’s east coast. QCLNG will have an initial production capacity of 8.5 MMt/a of LNG from two trains, with provision for a third train. The pipeline was constructed between 2011 and 2014 and has a current book value of US$1.6 billion.
When we compare the Australian asset to the proposed pipeline in the Mediterranean, we shall consider the following differences: Cyprus-Egypt pipeline is a marine line with a total length of 180 km. However, offshore pipelines usually have a much higher construction cost per kilometer compared to onshore projects. LNG plants in Damietta (1 x 5.4 MMt/a) and Idku (2 x 3.6 MMt/a) have a combined production capacity of 12.6 MMt/a of LNG from all trains (almost 50% higher than QCLNG), with provision for an additional train in each plant.The rough cost estimate of the proposed pipeline is around US$1 billion-plus.
When placing a value on the proposed pipeline system, several factors are considered including availability of supply, the promise of continued and steady future demand and the status of competition. All these factors are in favor of a high appraisal for the Egyptian-Cypriot case, specially when we think about the project as a key vehicle for monetizing the Eastern Mediterranean gas. In the QCLNG case, the valuation multiplier of the selling price divided by the book value is 3.125. Applying a comparable valuation model, the Cyprus Egypt gas pipeline valuation could easily reach 4 to 5 billion US$ once complete. Obviously, this is a rough estimate that can be further refined based on the outcome of the project feasibility study.
Project Governance and Pipeline Routes
The ownership of regional oil and gas pipelines is usually proportionally shared between the host countries crossed by the pipeline. This is more or less true in almost all regional projects developed in the Eastern Mediterranean and North Africa to date and we assume that the Cyprus-Egypt gas pipeline case will not be an exception because of the strateguc nature of the project.
The majority of the pipeline route is located in Egyptian water. The devil is in the detail when it comes to choosing the best pipeline landing spot in Egypt. Few multinational companies operating in Egypt have nearby offshore gas fields, gas facilities and pipeline networks connected to the Egyptian shore. The integration of existing facilities may influence the route selection for economical reasons. However, the project independence is a strategic choice and therefore, such integration if ultimately justified by economic feasibility shall be bound by:
1. Maintaining the project ownership to the public
2. Providing full control of the pipeline operation and gas distribution to governments in both countries
Financing a project of such scale is a big challenge for any government. One idea for Egypt, could be the use of investment certificates similar to what had been used to finance the new Suez Canal project. Suez Canal investment certificates generated 61 Billion EGP in a matter of two weeks and have an interest rate of 12 percent p.a. They were only available to Egyptian nationals.
Egypt can use the revenue of this project to pay its debts to foreign oil companies. Appropriate planning, transparency and a good governance structure for the Cyprus-Egypt Pipeline can bring peace and prosperity to the people of both countries.
Dr. Maged Amin