By CM: Our View
CONTRACTS for the first hydrocarbon exploitation licence were signed on Thursday and were described by energy minister Giorgos Lakkotrypis, as “another milestone in Cyprus’ energy programme”. It was the first real milestone of our energy programme because as we have learnt over the last few years, licensing rounds, surveys, exploratory drilling and discoveries of deposits might create big expectations, but until contracts for the exploitation of the findings are signed, their commercial value is theoretical.
This is an illustration of the extremely slow pace at which the oil and gas industry moves. The discovery at the Aphrodite field in block 12 was announced in December 2011, the exploitation licence was finalised in 2019 and production is scheduled to begin in 2025. It will be 14 years after the discovery before revenue will start coming in. Even then, it will be reduced because the bigger share will go towards covering the big investment by the oil companies, estimated to be in the region of €7 billion.
There are, however, many more hoops to jump through over the next six years before any money starts coming into state coffers. There has to be a second confirmatory drilling, followed by the preparation of the Front End Engineering Design, which determines the technical requirements and costs and the Final Investment Decision about infrastructure and sales. The last stage of the preparatory process, expected to be in 2023, would be the finalising of the Gas Sales and Purchase agreement, which should not pose problems because according to the plan the gas will be piped to the Idku liquefaction facility in Egypt. Once all this is completed the actual work for extracting the gas will begin and take about two years.
Will these timeframes be adhered to? A provision in the exploitation licence agreement stipulates that in the event that the agreed timeframes are not adhered to by the consortium, consisting of Delek, Noble and Shell, the Republic can break the contract and take back control of the gas field. Lakkotrypis had made a point of mentioning this as an added safeguard for the Republic, but its value is questionable considering the many exogenous factors that could delay the process, such as a fall in oil and gas prices, technical difficulties and Turkish threats. Even if the Republic were forced to take back control of the field because of delays, how many years would be needed to find another consortium to sign an exploitation licence and start preparation work from scratch?
We mention this because nothing about oil and gas industry is straightforward, certain or fast-moving, primarily because billions of dollars are at stake in projects where countless outside factors affect decisions. Everything must be approached with a large dose of caution, which was why it was very surprising to hear the usually pragmatic Lakkotrypis make forecasts not only about the expected revenue from Aphrodite, which would depend on the world oil price at the time, but also about the island’s role as “an alternative source of energy supply to the EU”.
It is no bad thing to think big, but pragmatism is also necessary. Lakkotrypis’ claim that “one more decisive step had been taken toward realising the shared vision of countries in our region to create a Mediterranean natural gas corridor to Europe,” was another example of the grandiose rhetoric that accompanies energy talk. Do we have a shared vision with Turkey, which is in our region? Through where and how will the natural gas corridor go to Europe? The East Med pipeline is not viable and the gas from Aphrodite will go to the Idku plant in Egypt, so what natural gas corridor will make us an alternative source of energy supply to the EU?
There is no need for these platitudes which try to present Cyprus as a major player in the energy field. We should be happy that an energy exploitation licence was signed, that the consortium had found a buyer for the Aphrodite gas and that in six to seven years, other things being equal, some revenue will start rolling in. This alone is fantastic news and there is no need to play it up with grand visions about energy corridors and alternative supplies for Europe that as a country, we are in no position to deliver.
SOURCE
This is an illustration of the extremely slow pace at which the oil and gas industry moves. The discovery at the Aphrodite field in block 12 was announced in December 2011, the exploitation licence was finalised in 2019 and production is scheduled to begin in 2025. It will be 14 years after the discovery before revenue will start coming in. Even then, it will be reduced because the bigger share will go towards covering the big investment by the oil companies, estimated to be in the region of €7 billion.
There are, however, many more hoops to jump through over the next six years before any money starts coming into state coffers. There has to be a second confirmatory drilling, followed by the preparation of the Front End Engineering Design, which determines the technical requirements and costs and the Final Investment Decision about infrastructure and sales. The last stage of the preparatory process, expected to be in 2023, would be the finalising of the Gas Sales and Purchase agreement, which should not pose problems because according to the plan the gas will be piped to the Idku liquefaction facility in Egypt. Once all this is completed the actual work for extracting the gas will begin and take about two years.
Will these timeframes be adhered to? A provision in the exploitation licence agreement stipulates that in the event that the agreed timeframes are not adhered to by the consortium, consisting of Delek, Noble and Shell, the Republic can break the contract and take back control of the gas field. Lakkotrypis had made a point of mentioning this as an added safeguard for the Republic, but its value is questionable considering the many exogenous factors that could delay the process, such as a fall in oil and gas prices, technical difficulties and Turkish threats. Even if the Republic were forced to take back control of the field because of delays, how many years would be needed to find another consortium to sign an exploitation licence and start preparation work from scratch?
We mention this because nothing about oil and gas industry is straightforward, certain or fast-moving, primarily because billions of dollars are at stake in projects where countless outside factors affect decisions. Everything must be approached with a large dose of caution, which was why it was very surprising to hear the usually pragmatic Lakkotrypis make forecasts not only about the expected revenue from Aphrodite, which would depend on the world oil price at the time, but also about the island’s role as “an alternative source of energy supply to the EU”.
It is no bad thing to think big, but pragmatism is also necessary. Lakkotrypis’ claim that “one more decisive step had been taken toward realising the shared vision of countries in our region to create a Mediterranean natural gas corridor to Europe,” was another example of the grandiose rhetoric that accompanies energy talk. Do we have a shared vision with Turkey, which is in our region? Through where and how will the natural gas corridor go to Europe? The East Med pipeline is not viable and the gas from Aphrodite will go to the Idku plant in Egypt, so what natural gas corridor will make us an alternative source of energy supply to the EU?
There is no need for these platitudes which try to present Cyprus as a major player in the energy field. We should be happy that an energy exploitation licence was signed, that the consortium had found a buyer for the Aphrodite gas and that in six to seven years, other things being equal, some revenue will start rolling in. This alone is fantastic news and there is no need to play it up with grand visions about energy corridors and alternative supplies for Europe that as a country, we are in no position to deliver.
SOURCE
