N. Pirilides & Associates LLC


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Oil and natural gas in Cyprus

There are considerable quantities, speculative and confirmed, of gas at East Mediterranean sea especially within the Exclusive Economic Zones (EEZ) of Israel, Egypt and such indicators have also turned the attention to Cyprus’ adjacent EEZ which is only 6km away from the recent biggest discovery of gas in the Mediterranean sea in Egypt’s EEZ, namely Zohr field, but also close to two giant field discoveries in Israel’s EEZ, namely Leviathan and Tamar, intensifying the interest in Cyprus’ EEZ despite the current low prices of oil and gas. It is self-evident that for a small island with a GDP of €16.36 bl. for the year 2015, any commercially exploitable gas fields found in its EEZ will have a tremendous impact on its economical growth.

The EEZ of Cyprus is divided in 13 uneven blocks and until now there have been two exploration licensing rounds and a third one is underway. In the first two rounds licensing was granted for Blocks 2, 3, 9, 10, 11 and 12 with some of the undertakers being one of the world’s largest energy companies, such as Noble Energy Inc. and Total. In the meantime Block 10 was returned to the Republic of Cyprus and therefore it forms part of the new third licensing round, along with Blocks 6 and 8, which in fact is currently taking place with the deadline for submission expiring at the end of July 2016 and the decision on the applications expected somewhere around early 2017. Afterwards an agreement shall be signed with these exploration agreements based on production sharing contracts (PSC) for which a bonus payment must be paid upon the signature.

To this point in Block 12, namely the Aphrodite field, an estimated resource of 4.5 trillion cubic feet (contingent and prospective) natural gas was discovered according to the appraisal drilling constituting the reservoir commercial and thus highly exploitable. Recently, as per the existing contract Block 12 has been returned to the Republic, following the expiry of the maximum legal term of 7 years of exploration, minus the discovery of Aphrodite which shall be retained by Noble.

It is worth noting that the results of the first drilling of Block 11, a licence for which has been renewed for the first time for another two years with a common term in the licencing contracts that 25% of the field is returned to Cyprus after every renewal, situated only 6km away from Zohr are anticipated to be made available by the end of 2016 or early 2017 and are expected to demonstrate any potential correlation with Zohr. Since Zohr marked the first time that gas had been found in carbonate rocks in the eastern Mediterranean rather than in porous sands, it seems to offer hope that searches with different geological focus will produce more finds in Block 12 as well as discoveries in Blocks 6, 8 and 10.

Whether exploration and the way exploitation is going to materialise for the discoveries found in the EEZ of Cyprus is a matter closely interrelated with the quantities found in Cyprus territory, the resolution of the Cypriot problem and the way Egypt and Israel are going to decide to export their resources with the latter factor being determined by their relationship with Turkey.

The available options are constructing a pipeline connecting Cyprus’ and Israel’s gas wells to Turkey that has to in any event pass from Cyprus’ EEZ requiring Cyprus’ consent and connecting it with another pipeline in Turkey that will provide access to the European Union market, a pipeline to Egypt for distribution there or transportation to Egypt at Idku or Damietta complexes to liquefy the gas exporting it from there to the highest bidder or lastly, and the most preferred option by the Cyprus Government, building a liquefied natural gas complex in Cyprus.

Currently until crystallisation of the options analysed above dependent on determinants as explained, the Cypriot Government is searching for potential buyers with some existing negotiations underway with firms including BG, Union Fenosa (UFG) and EGAS. Cyprus is fundamentally looking for three types of buyers, namely for power production, for industry and for re-exporting through LNG compression process.

The future of Cypriot gas is obscure as it is dependent on a fragile factual background such as the resolution of the Cypriot problem, the volatile relationships between neighbouring countries, the fluctuating prices of gas and the undetermined quantity of gas in Cyprus’ EEZ. However, there is the expectation that the picture will take shape in the next couple of years with important political developments and many exploration drills expected to take place within this time frame. What can offer hope today is the fact that private firms are increasingly reliant on oil or gas which is hard to get at: either because of geology or because of chemistry or because of politics (oil or gas in countries politically difficult to deal with), thus there is the expectation that mega natural gas and oil firms will assist in resolving any arising issues that may appear along the way with Turkey by reasons of the Cypriot problem.

Other than that, on the issue of the quantity of gas in Cyprus’ EEZ, in light of the recent discoveries in the neighbouring areas, the industry is confident that there are substantial quantities in place as demonstrated by the vast interest exhibited in the third licensing round.