Cyprus’ LNG Project Continues Despite Complicating Factors | Natural Gas Europe

Cyprus’ LNG Project Continues Despite Complicating Factors

January 21st, 2014 12:10am
Noble Energy discovers the Aphrodite field in Cyprus’ EEZ

Substantial amounts of gas under Cyprus’ seabed could turn the island into a regional energy hub that would transform its cash-strapped economy and provide Europe with a new source of natural gas. Eastern Mediterranean gas could contribute in increasing Europe’s energy security and diversifying its energy portfolio. In late 2011, Noble Energy announced the discovery of the Aphrodite natural gas field in Cyprus’ EEZ and revealed an estimated gross resource range of 5 to 8 trillion cubic feet (Tcf), with a gross mean of 7 Tcf. Noble Energy operates the discovery with a 70 percent working interest; while Delek Drilling and Avner Oil Exploration each hold 15 percent stakes. The Aphrodite gas field is an offshore gas field off the southern coast of Cyprus located at the exploratory drilling Block 12 in Cyprus’ exclusive economic zone. Successful exploratory drillings offshore neighbouring Israel encouraged the belief that Aphrodite could indeed hold substantial amounts of gas but it wasn’t until October 2013 that Noble Energy downsized the field to a range of 3.6 to 6 tcf, with a mean of approximately 5 tcf.

Becoming an energy hub is Cyprus’ strategic goal

Meanwhile, Cyprus had developed ambitious plans. Successfully extracting the natural gas from its waters would allow the cash-strapped island to build an LNG terminal and reach European and East-Asian markets. An LNG terminal on the island’s coast could also attract the natural gas found in the respective exclusive economic zones of Lebanon and Israel for liquefaction and shipping to international markets through the island’s facility. The natural gas finds off the island’s shores are also important for Cyprus’ own electricity generation given that natural gas independence would result in substantial reductions in the price of electricity.

The downsizing of the Aphrodite field will not affect Cyprus’ plans

The downsizing of the Lady of Cyprus gas field in Block 12 raised the question of whether Cyprus will still go ahead with its multi-billion dollar LNG plant, and in the affirmative, if it can proceed without a helping hand from its Eastern Mediterranean neighbours. Lebanon, despite attracting more than 52 companies to its pre-qualification round, has not yet launched its first bidding round and hence has not awarded licences that would allow the country to tap into the hydrocarbon wealth believed to be hidden off its shores. Recent estimates resulting from seismic surveys indicate that there is a 50% probability that 45% of Lebanese waters could contain up to 96 Tcf of natural gas, according to the Lebanese minister of Energy Gebran Bassil. Before such quantities are confirmed and activities commence, Lebanon needs to form a government that would pass two essential decrees (delimitating the offshore blocks and approving the model exploration and production agreement). Israel, ahead in the game, has not yet formulated an export strategy that would shed the light on how it plans to transport and sell the gas of its 10 Tcf Tamar and 18 Tcf Leviathan fields. Only in October 2013 did Israel confirm its decision to export around 40% of the natural gas found off its shores when its Supreme Court rejected a petition filed against Prime Minister Benjamin Netanyahu’s cabinet June decision on gas exports. How the country will choose to direct its gas remains undecided. Pooling costs with Cyprus would increase the island’s chances of concretising its LNG plans in the Vasiliko coastal area of Cyprus located between Larnaca and Limassol, and in a shorter delay. The Republic of Cyprus repeatedly urged its Israeli neighbour to opt for an energy collaboration through the island’s facility. While Israel has shown interest in the project, it has not yet dismissed other possibilities, including for example a possible collaboration with Turkey that would involve building a pipeline connecting the Leviathan to Europe. Renewed diplomatic relations between Turkey and Israel after the March 2010 flotilla incident render this scenario at least possible.

Cyprus’ plans remain unchanged

Israel’s collaboration with Cyprus is still purely hypothetical. Lebanon’s collaboration is too early to examine. The quantities of natural gas encountered today in Cyprus might not justify alone the pursuit of the project. However, things are likely to change in the future. Noble Energy considered the results of the appraisal drilling in Aphrodite as encouraging further exploration activities within Block 12 of Cyprus’ EEZ. There are good indications from recent seismic surveys that two other fields in Block 12 could hold 2 Tcf each. Noble Energy, Delek Drilling and Avner Exploration plan to start exploration drilling at one of these fields in Q4 2014.

Important factors increase Cyprus’ chances of becoming an energy hub

Despite the recent developments, Cyprus still has strong reasons to believe it can effectively bring its project to fruition. Major international oil and gas companies have expressed their interest in joining in the project: Total, Noble, Delek and Avner through MOUs. ENI also showed interest in participating should the italian giant encounter recoverable amounts of gas during its exploration activities. Cyprus also has good relations with its neighbours, both Israel and the Arab neighbours. Cyprus has reached maritime border agreements with Israel, Egypt and Lebanon (although the Lebanese state has not yet ratified the agreement with the Cypriot island). Cyprus has also played an important role in facilitating Israeli-Lebanese dialogues aimed at the resolution of the pending Israeli-Lebanese maritime border conflict. Additionally, the fact Cyprus is a Common Law jurisdiction is a major advantage given that common law is usually the system of choice when it comes to international commercial transactions. Cyprus' tax regime is another key point: the island has become a favored location for international commerce as well as for reputable multinationals seeking a legitimate tax efficient jurisdiction raising Cyprus to a new level of international business. Moreover, Cyprus’ EU membership grants it reputation and stability. Finally, Cyprus offers excellent services. Its banking system remains one of the strongest despite the crisis that hit the island earlier this year. The ancillary industries create the ideal environment for the development of the energy industry. Cyprus has an excellent multi-lingual workforce that will no doubt contribute in ensuring the natural gas industry operates at a high level of excellence and professionalism. For all these reasons, major companies have elected Cyprus as their place of incorporation and there is no doubt that the island’s attractiveness will facilitate its transition into a regional energy hub.

Karen Ayat is an analyst focused on energy geopolitics in the Eastern Mediterranean.  Email Karen on ayat_karen@hotmail.com. Follow her on Twitter: @karenayat

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