Promising Gas Fields In Cyprus

Since the discovery of gas fields some 180 km offshore south of Cyprus in late 2011, the country has been keen to talk up its potential as a future eastern Mediterranean energy hub. For Europe, this and later finds add weight to the theory that the eastern Mediterranean could hold the key to European energy independence from Russia.

For Cyprus, the find is being touted as the foundation for its push to emerge even stronger from the global financial crisis.

In September 2011, the Houston-based Noble Energy began drilling, and within three months the company announced its first major discovery. The field was christened "Aphrodite" after the Greek goddess of love who, according to legend, emerged from the Mediterranean on the island’s south coast.

Although Noble has drilled just one exploratory well thus far, the company says it expects a giant find of up to eight trillion cubic feet (Tcf). If fully recoverable, this find could be significant for Cyprus, as it could not only bring in revenues of up to €32bn, but also cover domestic demand for more than 100 years.

But with the storm just beginning to calm after the country’s devastating €10 billion bailout deal with the eurozone finance ministers earlier this month, there is worry over what this could all mean for Cyprus’ still nascent hydrocarbons sector, and the effect it could have on future negotiations with oil and gas companies looking to invest.

"It is clear that gas needs capital," said Alexander Apostolides, economist at the European University of Cyprus. "But our problem is that the new government knows it cannot spend, because it is under this Troika [the European Commission, European Central Bank and the International Monetary Fund] programme. We are now going to have to massively reduce government expenditures."

Noble’s Aphrodite field could be just the tip of the iceberg, however, with various sources claiming Cypriot waters could hold vast hydrocarbon deposits of anywhere between 40 and 50 Tcf of gas, and 1.7 billion barrels of crude, resources that may ultimately be worth an estimated €250 billion in the years to come.

And while it is still unclear how much of these presumed reserves are recoverable, the resulting interest in Cyprus’ offshore licences suggests, at the very least, the faith that industry players have in the region today.

 

Realism or just hope?

When Cyprus launched its second licensing round for 12 offshore blocks a year ago, 33 bids came in from 15 different companies in countries including Russia, Italy, France, the U.S. and China. Thus far, contracts have been awarded for five of the 12 blocks, to France’s Total, Italy’s Eni and South Korea’s Kogas – all major players in the global energy scene.

Yet despite the enormous obstacles currently facing the island nation, Cyprus is – at least publicly – sticking with its original timetable, which envisages the much needed revenue from gas exports by as early as 2020.

"It is all progressing very well," Charles Ellinas, head of the Cyprus National Hydrocarbon Company (KRETYK) told AFP on the sidelines of an industry conference in Nicosia this month. "End of 2019, beginning of 2020, we expect to begin exports."

Cyprus has outlined plans for an €8-10 billion liquid natural gas (LNG) export terminal supplied by pipeline with the gas from the maiden Aphrodite field, to come into operation by 2019. "We plan to be in a position in 2015 to reach the final investment decision," Ellinas said. "That will mean we can start construction [of the terminal] in early 2016. We should be able to bring [the supply of] first gas to Cyprus [by] end of 2018 to early 2019."

Analysts familiar with the Cyprus case, however, are not convinced by the proposed timetable, warning that there is still some way to go before construction of the terminal can begin, notably raising the necessary funds.

The gas resource at Aphrodite will first need to be appraised so as to confirm the discovery and establish a firm figure for reserves – the quantity of natural gas deemed to be economically and technically recoverable – before any one will consider committing to such a project. This appraisal process, KRETYK says, is scheduled to begin this summer, and should take three to four months.

It is also largely accepted that Cyprus would need to make several new discoveries in its territorial waters, or partner with a neighbouring gas producer to ensure the existence of sufficient gas reserves to make the terminal economically viable. Cyprus has been in talks with Israel over cooperation over their respective gas reserves, but as yet it is unclear whether or not Tel Aviv will elect to go it alone.

Even if Cyprus makes new finds in the next two years, getting a processor up and running will take considerably longer than the three to four years suggested, given its limited experience, as Nick Butler, chair of the Kings Policy Institute at Kings College London explained in a recent editorial for the Financial Times.

"A major new greenfield LNG plant will take a minimum of seven or eight years to build. That means there will not be any gas flowing to Europe before the early 2020s at best."

 

Warnings from Turkey

The situation in Cyprus is further complicated by its ongoing dispute with Turkey. Since 1974, Cyprus has been split into a Greek-administered south, recognised as sovereign by the UN, and a Turkish-administered north, recognised by Turkey alone.

Turkey has repeatedly voiced its disapproval over the southern leadership’s decision to drill in its exclusive economic zone (EEZ) in September 2011, and has refused to recognise the delineation of its EEZ as agreed with Egypt, Lebanon and Israel.

Ankara insists that any and all gas or oil exploration in the Cypriot EEZ be conducted only in cooperation with either Turkey or Greece, to ensure that the proceeds are equally shared.

And in a show of its growing desperation, in late 2011 Ankara went so far as to say it would bar any international energy companies involved in Cyprus from participating in Turkey’s energy sector – a threat companies took seriously then, and are likely to again given their overall reluctance to invest in disputed areas.

So, while Cyprus has taken the decision to launch plans to produce LNG, what happens in practice will largely depend on the Cypriot government’s success in handling its latest financial crisis, making new gas finds, and managing the island’s Greek/Turkish relations.