Energy Minister Giorgos Lakkotrypis said negotiations have finished with Cyprus getting a good deal under the circumstances that is worth over $9bn or around $500 million (€443m) per year over 18 years, depending on the international price of oil. The revenues are based on an average price of oil of $70 per barrel.
Speaking after the cabinet meeting on Wednesday, Lakkotrypis said the parties were now at the stage of discussing the development and production plan.
Following that, the cabinet will be presented with two documents and will issue an exploitation permit.
“We had examined three scenarios, $60, $70, and $80 [per barrel]. Cyprus will become a natural gas producer and will also have a revised contract with very strict terms as regards the implementation of what has been agreed,” the minister said.
Specific milestones have been set that companies must respect or there would be serious consequences, he added.
Lakkotrypis said the revenues under the $70/barrel scenario will be variable “and will depend on the international price of oil. The figures I am referring to are the ones included in the intermediate scenario, which will possibly be the one that prevails.”
The talks began last summer, when the consortium telegraphed that it was not satisfied with the revenue-sharing deal in place.
The companies had struck a preliminary agreement to sell the Aphrodite gas – some 4 trillion cubic feet – to a liquefaction facility in Egypt.
However due to low oil and gas prices, the Aphrodite consortium believed the returns on their investment were unsatisfactory, and sought to renegotiate the revenue-sharing agreement with the Cypriot state.
The consortium’s investment would consist of an extraction platform at the site of the well, plus a pipeline running from the reservoir to Egypt’s shores.
The minister said the effort is to extract, if not all, most of the reserve in the Aphrodite field so that its exploitation would be viable.
The quantity needed by Cyprus is very small to justify the high cost of developing the reserve solely for the island’s needs.
Lakkotrypis did not rule out Cyprus asking for some of the gas from the field in the future.
“The first priority at the moment is to conclude the export contract so that the reserve can be developed,” he added.
Based on the plan, the first gas is expected between 2020 and 2025. The energy minister said this would be the biggest infrastructure project ever undertaken in the Republic of Cyprus, worth some $7.9bn.
Charles Ellinas, senior fellow at the Global Energy Centre, Atlantic Council previously suggested that Cyprus’ “profit share is likely to be between $50-100m per year”.
In an article for the Sunday Mail last month Ellinas wrote that the key revision in the agreement would result in redistribution of profit, increasing the share of the companies when oil prices are low, but conversely, when global oil prices rise, Cyprus share will increase.
He said the negatives far outweighed the positives in the deal.
“Given that long-term global oil prices are expected to stay low, around $65 per barrel, in effect the revision to the PSC [Production Sharing Contract] is largely one-sided. It will result in substantially more profit to the JV [joint venture] and less to Cyprus over the lifetime of the PSC,” Ellinas wrote.
He also said forecasts in the past six months showed that average gas prices converging to about $6.50-$7.50 per m/btu (British thermal units) in Asia and $5.50-$6.50 per m/btu in Europe.
“Should these remain in the longer-term, which is likely, Cyprus’ profit share from the sale of Aphrodite gas to Shell’s Idku liquefaction plant will be meagre.”
Ellinas argued that in return for the higher profit share, Cyprus should at least demand the construction of a pipeline to bring cheap gas directly from Aphrodite to Cyprus for power generation.
Given the small gas quantities, Cyprus needs, less than 1 bcm/yr, the cost of such a project would be relatively low, resulting in the price of gas delivered to EAC being less than $6/mmBTU.
This would certainly be substantially lower than the price resulting from the planned import of LNG and would lead to a significant reduction in the price of electricity to the Cypriot consumer.
“It would be ludicrous if we end up sending our gas to Egypt to be liquefied, only to buy it back as LNG at prices much higher than bringing the gas directly from Aphrodite to Cyprus by pipeline.”
Source: Cyprus Mail