Energy and Environment
Gas production and exports on the horizon
Cyprus’ energy profile is set to change with the discovery of significant hydrocarbon reserves in the country’s Exclusive Economic Zone (EEZ) and with the government’s strategic decision to become an energy hub in the Eastern Mediterranean.
Energy is the new boom industry in Cyprus and the country has already attracted worldwide attention and serious international investment, following the discovery of vast natural gas reserves in its Exclusive Economic Zone (EEZ). The biggest potential for foreign investment in Cyprus in the coming years will be the budding oil and gas sector and the island has begun developing strategies and ambitious plans to exploit its new-found hydrocarbon wealth.
The American company Noble Energy International, which is developing Israel’s giant Tamar and Leviathan gas fields in the Eastern Mediterranean Sea, announced in December 2011 that a world-class discovery of natural gas had been made nearby in Cyprus’ offshore EEZ block 12 – known locally as Aphrodite. In October 2013, Noble carried out appraisal drillings in block 12 and the results have confirmed natural gas reserves of 3.6 trillion cubic feet (tcf) to 6 tcf, with a gross mean of 5 tcf – enough to meet Cyprus’ domestic gas demand for over 100 years.
Noble Energy’s success story in block 12 caught the attention of energy companies worldwide and created huge interest in Cyprus’ second licensing round, which closed in May 2012. The Cyprus Government received 33 bids by 15 companies and consortia from various countries hoping to be selected to develop the 12 offshore blocks. Four licences for gas exploration in offshore blocks were awarded by the government at the end of October 2012 as part of the second licensing round. Blocks 2, 3, 9 and 11 are all adjacent blocks, located north and north-east of block 12, where Noble Energy has a concession to drill. Licences for blocks 2 and 3 were awarded to a consortium of Italy’s ENI and Kogas from South Korea.
The license for block 9 was awarded to a consortium of Total E&P Activities Petrolieres (operator), NOVATEC Overseas Exploration & Production GMbH and GPB Global Resources BV from Russia. Total E&P Activities Petrolieres was granted hydrocarbon exploration licenses in blocks 10 and 11, after signing two production sharing contracts with the Ministry of Energy in February 2013. The French company has also been granted a license by the Agriculture Minister for seismic exploration for oil and gas in block 10 and in parts of blocks 6, 7 and 11 of Cyprus’ EEZ. The renewable license is valid for three months, from February 1 until May 1, and the company expects to start drilling in Cyprus’ EZZ in mid-2015.
These blocks were awarded due to their potential for economies of scale, because they are contiguous and in close proximity to block 12, where the significant natural gas reserves were found. More licences are set to be awarded as the government continues to evaluate the bids for the remaining blocks, with the exception of blocks 1, 4 and 13 for which no bids have been made. Thanks to the competition over the remaining blocks and the knowledge and experience the government acquired during the first round of licencing, further negotiations should be completed faster. The Cyprus Government has high hopes it will complete the necessary infrastructure – including the pipelines and liquefaction plant – by 2018 and begin exporting natural gas in the 2020s. The increasing interest to invest in the energy sector and auxiliary services in Cyprus, also presents new opportunities for growth in the well-established legal, accounting, financial services and the ailing construction sector.
Cyprus has opted for production-sharing contracts with energy companies, giving the state ownership over a percentage of any recoverable gas and oil that is made commercial. A significant milestone in the development of the Cypriot oil and gas industry was the deal between the Cyprus government and Noble Energy, Delek Drilling and Avner Oil Exploration to construct a liquefied natural gas (LNG) terminal in Vassilikos – a deal representing the largest investment in the island’s history. Although there has been debate recently on the viability of the multi-billion-euro project and options to build pipelines, Cyprus and the energy companies involved maintain that an onshore LNG facility continues to offer optimal flexibility for value creation as well as bringing long term benefits to the country. The next two years and significant deposit discoveries will be key to determining Cyprus’ hydrocarbon potential – and the involvement of major international oil and gas companies could help bring the LNG project to fruition.
Currently, Houston-based Noble has de facto priority in the development of the LNG plant and the first train at the facility would process gas extracted from Noble’s block 12, with more trains added subsequently in the event Total and ENI-Kogas discover gas in their own blocks. The investment and confidence shown by these energy giants support Cyprus’ potential in becoming a regional energy hub and its prospects of exporting to energy-hungry Far East markets and contributing to EU energy security.
There is also increasing interest between Cyprus and its neighbours Lebanon and Israel to further cooperate in the energy field. Thanks to Cyprus’ strong business centre and secure and strategic geographical location, the island could provide an ideal base for LNG exports from the region. Also several bidders, such as Israel and Qatar, have shown interest in providing Cyprus with an interim natural gas supply for electricity production until the island can start exploiting its own reserves domestically.
Integral in Cyprus’ plans to become a regional energy hub, is the planned Energy Centre in Vassilikos, where also VTTV is constructing a €300 million import, storage and distribution terminal for petroleum products. Preliminary designs for the energy centre are now nearing completion, while the government is currently looking for strategic investors to undertake its construction. Once the technical designs are done, authorities will invite expressions of interest for the project and at the same time begin probing potential long-term buyers for Cypriot gas.
In the meantime, as Cyprus looks forward to a day when its power plants can be run on the island’s own gas, rather than expensive imported liquid fuels, it is undertaking other initiatives to achieve its national energy and climate targets. The Renewable Energy Sources target is to supply 13% of the island’s energy by 2020: around 300MW of power will be generated by wind farms, 192MW will come from photovoltaic (PV) systems, 75MW from concentrated solar thermal plants and 17MW from biomass and biogas utilisation plants. The island is in a strong position to build on its already high use of solar energy. Around 92% of households are equipped with solar water heaters and 53% of hotels have large systems of this kind. Cyprus is by far the highest user per capita of solar water heaters in Europe. Already four large PV parks have been connected to the national grid, generating 1,000,000 kWh.
The rapidly developing oil and gas sector and the great potential in renewable energy offer expanding opportunities, and Cyprus’ energy industry as a whole will need investors and partners to fulfil the island’s potential as a regional energy hub.
Updated March 2014