The big ambitions of a small island
Cyprus has to balance the ambitions of Europe, Turkey, Russia and the other local players in the region. (PA)
Interfax speaks to Cyprus’s Energy Minister Yiorgos Lakkotrypis about how the tiny island will fit within in the East Mediterranean export puzzle.
Interfax: You’ve said April is when things will start to get busy again for Cyprus’s upstream. What will happen then?
Yiorgos Lakkotrypis: By April, we should start to have the full interpretation of the seismic data collected by the three consortiums operating inside Cyprus’s exclusive economic zone [EEZ]. That’s Noble, Delek and Avner in Block 12; Eni for blocks 2, 3 and 9; and Total for blocks 10 and 11. They’ve collected data throughout the year and by spring we should have the complete interpretation of it and know which targets to drill. What is particularly interesting is that Noble gave a presentation a few weeks ago about the possibility of the presence of oil. So I expect sometime in spring we will set up the targets and from October onwards start some intense drilling activity. The current plan is that Noble is going to drill another exploration well, Eni will drill at least four exploration wells, starting in October, and Total should start in early 2015.
Interfax: Cyprus previously set a target to bring LNG onstream before 2020, but disappointing drilling results at Aphrodite have pushed back this deadline. Are you still aiming to sign sales and purchase agreements before 2018, when a wave of new LNG is expected to hit the market?
Yiorgos Lakkotrypis (Cypriot Ministry of Energy)
YL: It would be naïve to say time is not of the essence here – obviously the sooner the better. The first appraisal well, despite the fact it came in lower than initial predictions, is still a significantly large find – the third largest in the East Med… I cannot say 2018 is a date which should be set in stone, but certainly the sooner we can get the field onstream the better.
Interfax: Given this, have you looked at piping gas to Egypt and exporting it through the idled plants there?
YL: We remain within our strategy for onshore LNG. The possibility of finding more gas within our EEZ is really high, so one can assume it’s not a matter of finding more gas, it’s a matter of timing. So we remain within that strategy – there’s no need for panic after one result. At the same time, we have prepared Plan B, and we are looking at Plan C so we can be ready for all eventualities.
Interfax: What about building a pipeline from Leviathan to Turkey that would fork off to Cyprus, feeding a plant at Vasilikos – is that completely off the table for you?
YL: No. There’s never been anything on the table with regards to a pipeline to Turkey, officially. If our top priority is still to resolve the Cyprus problem and not anything else, then a pipeline to a Turkey is not even an option as long as the Cyprus problem remains unresolved.
Interfax: Turkish Prime Minister Recep Tayyip Erdogan has made several comments that he wants to resolve the Cyprus issue and do it soon.
YL: But it remains to be seen on the ground. The president of Cyprus has been trying hard to resume the talks and negotiations, but what we have seen so far is a pretty inflexible stance from the Turkish side.
Interfax: If the decision to start negotiations is motivated by the commercial incentive of importing East Mediterranean gas, is there a fear that a resolution will be reached in the interest of economic gain, rather than a fair political settlement?
YL: The discussions for the Cyprus problem will have nothing to do with what we are doing for the offshore hydrocarbons. We have had Turkish occupation for 40 years and certainly we cannot remain hostages for another 40 years. So we will be developing those fields independently of the conversation. We are truly hoping they could be an incentive for Turkey to come to terms and finally agree that there has to be a just and sustainable solution and actually see it on the ground, and certainly it does have the power to do so. But the two issues are not related.
Interfax: As an EU member, why does Cyprus not mobilise the EU to lobby Israel for an LNG plant on Cyprus, assuring EU guarantees and financing for the development of the project and exports?
YL: It is not down to that and certainly I cannot talk on behalf of Israel, but what I can say is we have an excellent relationship on all levels with the Israeli government and on multiple fronts as well. Now, the Israeli government will need to decide what its preferred export route or routes are. The EU is certainly keen on having the East Mediterranean gas and they have expressed their support in trying to find the best way that the gas can be transported, so the EU is engaged and I’m sure they will be engaging even more as we progress with the exploration activity.
Interfax: What specific things has the EU done to help Cyprus with gas transport? Compared with their lobbying efforts for Shah Deniz volumes, the EU has been very quiet in the East Med.
YL: The European Commission has approved two projects of common interest in the region and both of them have to do with gas. One of them is for the LNG storage facility which could be part of the LNG plant, and the other is to investigate the possibility of a pipeline from Cyprus to Greece and onto the rest of Europe.
Interfax: I had understood that because of the water depth and distance between Cyprus and Greece that pipeline would be too expensive – is it still being considered?
YL: I have not yet seen a study which tells me how technically or economically feasible such a solution is, which is exactly what the project would look into. But it does show the EU is starting to get interested. Obviously Shah Deniz is in a much more advanced stage than the developments in Cyprus and it comes as no surprise that the EU are more keen right now to conclude the deal with Shah Deniz, Trans-Anatolian and Trans-Adriatic pipelines.
Interfax: What is your opinion on the growing Russian involvement in the East Med? Is Russia likely to play an important role in the region?
YL: In some ways yes – but it remains to be seen how these recent deals materialise because it’s one thing to express an interest and another to put your feet on the ground.Take, for example, Lebanon [where several Russian companies are prequalified bidders], where the licensing round has been delayed once more. With Syria it’s still in very early stages and with Israel, it’s at the level with the companies, so it remains to be seen how that will progress.
The United States Geological Survey made some predictions a few years ago about the presence of oil and gas in the East Med. For gas at least, some of those predictions are starting to materialise as we’re having more and more discoveries and we will certainly have more discoveries over the next 12 months, so it’s not surprising multinationals from Russia – or multinationals from anywhere – will start to get interested in that area.
Interfax: Do you see any potential for Russian involvement in either the gas upstream or export industry in Cyprus?
YL: The potential is there. As far as the upstream is concerned, we have closed the second licensing round and we are working on the timing that we could potentially open the third. That would probably happen once we have more discoveries that would lower the risk for upstream investors when they come. But certainly we would welcome Russian interest just like we would welcome any big multinational.
Interfax: Are you looking at options other than LNG for monetising Block 12 gas, such as GTL?
YL: That will probably come in the longer term. For such an industry to be competitive you need cheap gas. The number one priority now is to get the gas to shore through an onshore LNG plant and once it’s there then it can be used for many other means. But monetising from the angle of GTL, petrochemicals and other related industries is in the second phase of the plan. First of all we want to monetise the gas.
Interfax: Why prioritise LNG development over GTL?
YL: Because with LNG you can build much faster economies of scale. With GTL, it would take longer for us to build economies of scale and make a project to bring gas to shore viable for the purpose. Some of the companies we’ve talked to need really low prices to make GTL viable and the field is in deep water so it’s not going to be cheap. We have it in our plans, but it is phase 2, so we’ll see how things develop over the next few months.
Interfax: How will you proceed with the development of blocks 5 and 6, considering they overlap with Turkey’s EEZ claims?
YL: Last December we invited Eni – the only remaining valid bidder in the second licensing round – to negotiate the terms of an agreement for blocks 5 and 6, but Eni wasn’t ready to propose anything better than what they already had when the second licensing round started, so basically we closed it off there. We consider blocks 5 and 6 to be within Cyprus’s EEZ, we will explore it – just like we did with anything else – it’s just a matter of finding the right commercial terms.
Interfax: Did Eni decide not to raise their bid because of the political risk exploring those blocks?
YL: If they were taking political risk they would not have asked for it in the first place. It was more of a commercial risk and the reason being that we do not have dense seismic in the western blocks so company’s risks were higher. At least this was my personal interpretation. I know that this was merely a matter of commercial risk because the company, even up to the last minute they wanted to take the blocks.
Interfax: Why did you decide to structure Cyprus National Hydrocarbons Co. (CNHC) the way you did? Some commentators have criticised the decision to move towards a ‘fully political’ board’…
YL: I don’t agree that it is a fully political board. The main difference is that we will not have an executive board. But what is more political, to appoint an executive chairman to the board or to appoint a non-executive chairman and then hire with open procedures the best chief executive, chief operations officer and chief financial officer that we can find?
The reason we did it and structured it in this way was so we could have a properly functioning company with a non-executive board and an executive team of directors who are accountable to the board.
The board is the first level of control, then the second level of control is the shareholder, which is the government, and we have also introduced a third level of control which is the auditor general of the republic.
One of the reasons we failed as a country – and I am referring to the recent financial crisis – was the absence of oversight, auditing and controls.
Where was the control of the banks when they were buying Greek bonds or when they were selling worthless paper to unsuspecting civilians? That’s what we are resolving, because this company could potentially be the largest in Cyprus in the not-so-distant future and we want multiple levels of control so we can appoint a board of directors who are not going to be political appointees but will be appointed by us as shareholders.
Their mandate will be to go out and hire the best that we can find, in terms of a chief executive and an executive team that will be separate from the board of directors.
Interfax: What will happen to the current directors, such as Charles Ellinas?
YL: We’ve discussed it with Charles Ellinas. He didn’t feel compatible with the structure we wanted to put in place so we found an amicable arrangement and he is going to be leaving the company.
Interfax: Do you know who you will appoint as chairman of the board?
YL: No, not yet. We have some thoughts, but I am waiting for us to return to Cyprus with the president so that we can look at it.
Interfax: Will you be looking only to appoint Cypriots, or looking internationally?
YL: For the chief executive and other executive roles, anyone can apply. For the role of chairman we do have some names. The vast majority are Cypriots, but we do have some foreigners as well for the board. We will be making a decision soon, I hope before the end of the month.
Interfax: The president is giving a talk at the London School of Economics on Thursday on Cyprus’s geopolitical role: David or Goliath? What is your interpretation of Cyprus position in the East Med?
YL: There is no doubt that we are a tiny country, but we are trying to leverage on the opportunities that we have in front of us to make an impact. I wouldn’t call us either a David or Goliath. We are just trying to make an impact for the size that we are. And this is why we are strengthening our relationships with Egypt; we signed a unitisation agreement with the Egyptian government on 12 December.
We are strengthening relations with Israel, with Lebanon – with whom we’re now negotiating a unitisation agreement even though the tri-point debate between Israel and Lebanon remains. With the central or pivotal role that Cyprus’s geography can play in a turbulent region, we believe we can make an impact that is bigger than our size to bringing stability, prosperity and peace to the region. The more stable the political environment is, the more investments we can attract.
Interfax: Could you see Cyprus playing a role mediating the dispute between Israel and Lebanon over their shared maritime border?
YL: That role is obviously undertaken by someone much bigger than us, which is the United States. But certainly, Cyprus has played its role and where it fits, we will continue to do so because we have an open channel and direct communication with all the East Mediterranean countries.
Interfax: Will companies need to hold a stake in upstream licences to play a role in LNG exports in Cyprus?
YL: One of the options we are looking at is linking the interests of the upstream with the midstream. The plan will be a facility that will process the gas, because ultimately our interests and our profits are in the upstream and are determined by the production sharing contract.
Interfax: Have you started discussions with potential LNG buyers in Asia?
YL: We have. Some of them have been coming to us, in other cases we have been going to them. We’ve had some discussions and certainly there is a good interest in Noble’s current plan to farm out a 30% interest in its stake in Block 12. We are waiting to see the results of this process, but I have to say we’ve been pretty pleased with the interest Block 12 has drawn and the names and destinations.
Interfax: Are you just looking for LNG buyers to come in and take equity in the upstream?
YL: We’re looking at all; upstream, midstream, downstream. The vast majority are engaged in all options, we’re not looking only at buyers of gas.
Interfax: Are you still looking at Europe as a potential market?
YL: Absolutely, with the number of regas facilities in operation and those who plan to put them into operation; Croatia is looking for one, Greece is trying to build another. Europe is definitely a key market for us.
Interfax: How do you plan to price Cyprus LNG; will you be looking to sell under oil-linked contracts or hub-based pricing?
YL: We haven’t got into that detail yet and I expect once we set up the national oil company that will be their number-one task, to look into that together with our partners.
Interfax: What size stake will CNHC take in the plant?
YL: It is something we are discussing internally – what kind of level of ownership we will have in the LNG and the attractiveness of the investment. We will also have to look at how much we can afford. That is the number-one consideration, especially considering the current circumstances. So with all that, we are going to be deciding soon.
Interfax: How soon?
YL: The decision won’t be made public until we have concluded discussions with Noble on the government project agreement, but hopefully we will be deciding in January.
Interfax: When are you looking to launch the FEED study for the LNG plant?
YL: We are already at the pre-FEED stage. We will be looking at FEED once we know we have enough gas to move ahead. When we have that we can go to FEED and then FID.
Interfax: Now that the decision to import LNG into Cyprus has been abandoned, how will you meet Cyprus’s domestic gas demand before Block 12 comes online?
YL: We are launching another process now. The previous one wasn’t coming out cheaper than the liquid fuels we’re using today. But the reason it wasn’t coming cheaper was because it was based on a 3.5 year contract, which was not nearly enough time for anyone to amortise their big FSRU investment requirements. So we closed that process and reopened it with new parameters. We’ve set it out for 7-10 years and we’ve managed to slightly increase the quantities of gas that we demand.
We are doing that by running another back-up power station optionally, and not mandatorily, so we can feed more gas into the turbines we already have. As we’ve increased the number of years and the quantity of gas, hopefully we can negotiate a good import price. The tender has already been sent to the European Commission and will be published in the EU official gazette in the next 10 days.
Interfax: How much gas will you be looking to import?
YL: We are looking to import 650 million cubic metres per year [MMcm/y] and this will increase over the duration of the contract to about 900 MMcm/y.
We are tendering for the supply of gas in a technology-neutral way. We are not asking for LNG or CNG. We will allow the bidders to come and propose the best option that we can find. We want gas at the power stations, that’s what we want.
Interfax: Has anyone already expressed interest in this new revised plan?
YL: DEFA, the state-owned company, has been approached by a number of suppliers.
Interfax: When do you plan to close the tender and have the facility online?
YL: We hope we can conclude it over the next four months because we know what we want. We want straightforward proposals, with no prequalification rounds, for this quantity of gas, for this timeframe.
We hope to start imports in 2016, but it depends on the proposals we get and what they say.
Link to source: http://interfaxenergy.com/natural-gas-news-analysis/lng/the-big-ambitions-of-a-small-island/
