Confidence in Hydrocarbon Discoveries From Deloitte (Cyprus)'s Oil & Gas Industry Leader |
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Partner in charge of Nicosia office,
Oil and Gas Industry Leader,
Deloitte Cyprus
How significant are the hydrocarbon discoveries for the future of Cyprus?
The recent discovery of hydrocarbons within the island’s Exclusive Economic Zone has attracted a lot of attention internationally and has created a lot of optimism locally about the future.
According to a study by Shell, global energy demand could increase by as much as 80% by 2050.
Therefore, the potential impact of the hydrocarbon discoveries on the future of Cyprus is extremely significant, both on the socio-economic front as well as geopolitically, depending of course on the actual quantity of gas and oil reserves that are confirmed.
Can you expand further on the socio-economic and geopolitical dimensions of such discoveries?
Regarding the socio-economic dimension, in addition to the obvious stream of revenues from the future export of our gas reserves, the emergence of this new industry and the possible direct foreign investment in significant infrastructure projects, such as the LNG Terminal and the pipeline facilities, will create the need for a great number of other support services. These will lead to the creation of thousands of jobs, helping the ailing property market and exerting a favourable domino effect on many sectors of the economy such as financial, professional services and many others. Furthermore, it will reduce the over-reliance of the economy on financial services and tourism and diversify the risk of the economy in the eyes of foreign investors, the rating institutions and the markets in general.
Regarding the geopolitical situation, the discovery of hydrocarbons in Cypriot waters, as well as in the Southern Mediterranean region in general, has added a new dimension to the geopolitics of the region. On the one hand it has created a new dynamic that could be used as a catalyst to promote a solution to the Cyprus problem but, on the other hand, it could create significant complications. Therefore, the historic challenge facing our political leaders is to formulate a common oil & gas strategy that will take into account the interrelated socio-economic and geopolitical factors, which should be the vision of all future governments, irrespective of their political positioning.
Currently the EU produces around 48% of its energy needs within the Union and imports the remainder. Its gas imports are mainly from Russia, Norway and Algeria. Isn't this an area that is perfect for Cyprus to step into?
The EU would certainly welcome the opportunity to diversify its sources of gas imports and reduce its over-reliance on Russian imports and Cyprus could benefit strategically if it is in a position to facilitate such diversification.
However, the issue is not so simple because it will depend on the quantity of gas reserves discovered in Cyprus and the neighbouring countries, the method of exporting to Europe (pipeline or LNG), the prevailing prices of gas in Europe and the Far East and, of course, the geopolitical balances and alliances of the regional players at the time.
The major gas discovery in Block 12 is expected to boost plans to replace oil and coal with gas. How will this affect consumers?
It is expected to help consumers and the Cyprus economy in many ways. For example, the price of electricity for households should be significantly reduced. At the same time, all businesses will also benefit from lower energy costs that will help them become more competitive in the pricing of their products and services for both local consumption and export.
Also, let’s not forget that about two thirds (66%) of the purchase cost of the gas by the power stations will be returned as income to the government instead of being paid to overseas oil suppliers.
Furthermore since gas is a cleaner fuel than oil and coal, it will have lower greenhouse emissions, for the benefit of the community in general.
There are currently no specific tax and VAT laws on hydrocarbon exploration/ exploitation activities in Cyprus. Are the present corporate tax and VAT laws applicable or will new legislation be necessary?
This is correct but the general income tax laws in force are applicable and therefore companies resident in Cyprus are subject to 12.5% corporate income tax on their taxable profits. However, special provisions are included in the model PSC (Production Sharing Contract) which state that the applicable corporate tax will be deemed to be included in the Republic’s share of profit oil & gas and the portion of available oil & gas which the contractor is entitled to will be net of corporate tax. No changes to the existing legislation are expected, but clarifying circulars guiding the companies operating in this industry are expected to be issued at some stage.
Regarding VAT, given the absence of oil & gas industry-specific VAT legislation, Cyprus has generally adopted the main provisions of the EU’s VAT regulations and the system is largely harmonised with that of the EU. Deloitte has worked closely with the authorities in formulating local VAT policies for the newly formed oil & gas industry in Cyprus, following best EU practices, has requested the issue of specific circulars and has obtained rulings on behalf of its clients.
Deloitte has navigated the local tax and VAT laws as they apply to companies and consortia in the oil and gas industry and has supported Cyprus’s first PSC holder in understanding the practicalities of the tax and VAT clauses in the PSC and is advising other PSC holders on their obligations.
Although Cyprus’ natural gas discoveries are recent, your company has been involved in providing services to international companies involved in the sector for some time. What services does Deloitte provide?
In Cyprus, we were involved in the oil and gas industry from the very beginning, serving the first ever exploration company in all facets of its operations with the provision of CRS certification, statutory audit, tax advisory, VAT advisory, human capital services and other advisory work.
As a result of this unique experience and intensive internal training in the oil & gas industry, we have built a very knowledgeable team of professionals, from all service lines, specialising in the oil & gas industry. It is no coincidence that in the last two years we have been providing the major industry players, including all the operators on the island, with most of these services.
How great a role does Deloitte play in the provision of services to the global oil & gas industry?
At Deloitte, we always think ahead to assist our clients in meeting the challenges of our times. We help them by providing a range of services to companies in all segments of the oil and gas industry including 63% of the world’s top 60 oil & gas companies, 43% of national oil companies, and many independents and oilfield services and energy trading businesses. Our Oil & Gas practice, which comprises 2,500 specialists across all sectors of the industry, has an expert presence on every continent and in each major oil and gas centre around the globe.
In addition to the standard tax, audit, consulting and financial advisory services, our range of services spans the entire spectrum of corporate functions as well as analytical price forecasting, economic modelling, geological analysis and reservoir audits, wellhead planning and operations, and deep sea platform and equipment decommissioning, to name a few. Our internal resources ensure that our teams have access to up-to-the-minute market intelligence, can respond promptly to industry developments and are able to provide value added advice to our clients.
With more than 500 professionals in its Nicosia, Limassol and Larnaca offices, Deloitte is one of the largest professional services organisations in Cyprus and part of the Deloitte global network, employing more than 200,000 people in over 150 countries. It provides a full range of audit, tax, consulting, financial advisory and wealth advisory services to a diverse client portfolio and an integrated services offering addressed primarily to the international business community.
Link to source: http://www.goldnews.com.cy/en/energy/confidence-in-hydrocarbon-discoveries-from-deloitte-%28cyprus%29-s-oil--gas-industry-leader
