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 the leading energy centre and transit hub in the Eastern Mediterranean.

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 as Aphrodite. The reserves are currently estimated at around 7 trillion cubic feet (198 billion cubic metres) – enough to meet Cyprus’ domestic gas demand for around 100 years.

Noble Energy is set to begin exploratory drilling in June 2013 and is in discussions with the Ministry of Commerce, Industry and Tourism over a planned 180-kilometre sub-sea pipeline connecting the Aphrodite field to the island’s southern coast. The natural gas will come ashore at Vassilikos, where it will be distributed to the island’s three power stations, and later to industrial and domestic consumers.

Vassilikos is the third largest port in Cyprus and has always been industry focused. Currently also VTTV is constructing a €300 million import, storage and distribution terminal for petroleum products, but the jewel of this planned Vassilikos Energy Centre will be a liquefied natural gas (LNG) plant. The LNG facility will initially utilise natural gas from Cyprus’ fields and later from other Eastern Mediterranean Energy and Environment reserves to produce LNG for export to Europe and possibly to other international markets via LNG carriers. The estimated cost of 10 billion US dollars for the construction of the LNG terminal and jetty is envisaged to be the largest investment in the island’s history.

Preliminary designs for the energy centre are now nearing completion, while the government is looking for a strategic investor to undertake its construction. Studies on the Vasilikos Energy Centre’s technical specifications should be ready by May 2013, according to executive director of the Cyprus National Hydrocarbons Company (CNHC) Solon Kassinis. 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.

One option for Cyprus – once its gas reserves are proven – might be to put up any sales contracts as collateral to secure loans for financing the LNG plant. Kassinis said US firm Noble Energy as well as Italy’s ENI and French oil giant Total have been sounded out on co-financing the LNG plant. The three companies have drilling concessions on offshore prospects in Cyprus’ EEZ. Energy Minister George Lakkotrypis said recently that Cyprus also wants to sign a letter of intent with Israel’s Delek Group and Noble Energy for the construction of the multibillion-euro LNG facility. He added that connecting the Tamar gas field to Cyprus was the best way to export Israeli gas to the Far East.

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 and the block 11 license went to Total E&P Activities Petrolieres.

These four 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 it will complete the necessary infrastructure – including the pipelines and liquefaction plant – by 2018 and begin exporting natural gas by 2019.

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.

With the natural gas sector still in an early development stage and with great potential in renewable energy, Cyprus offers dynamic and expanding investment opportunities. With these new developments Cyprus’ energy industry as a whole will need investors and partners in order to fulfil the island’s potential as a regional energy hub.

Updated April 2013