Energy & Environment - Cyprus Profile

Energy & Environment

Energy-Fuelled Future

The Cyprus energy sector is gaining serious momentum thanks to significant international investment in both hydrocarbons and interest in renewables, and also in terms of the prospect of connecting the eastern Mediterranean and North Africa to Europe – establishing the country as a key player in the region.

The budding oil and gas sector of Cyprus has become one of the biggest opportunities for foreign investment, following the discovery of vast natural gas reserves in both the island’s Exclusive Economic Zone (EEZ) and in its immediate neighbourhood in recent years. Hot on the heels of hydrocarbon investment is also renewable energy, which has gained more traction lately with international companies determined to harness the island’s wind and 340 days of sunshine – boosting the development and diversification of its energy landscape.

In addition, Cyprus’ strategic location in the eastern Mediterranean, at the southeast corner of the European Union and close to Suez Canal, make it ideally suited not only as an important fuel hub, but also as an energy interconnection node, connecting the electricity grids of the Eastern Mediterranean and North Africa to those of Europe.

Hydrocarbon Discoveries

In 2011, US firm Noble Energy, who is developing Israel’s giant Tamar and Leviathan gas fields in the eastern Mediterranean Sea, announced a world-class discovery of natural gas in Cyprus’ offshore EEZ block 12 – known as Aphrodite. Two years later, Noble carried out appraisal drillings in block 12 and the results confirmed natural gas reserves of 4.54 trillion cubic feet (tcf) – enough to meet Cyprus’ domestic gas demand for over 100 years. Noble Energy’s success story in block 12, and the subsequent 30 tcf discovery in Egypt’s giant gas field Zohr close to Cyprus’ EEZ, caught the attention of energy companies worldwide and created a swell of interest, with more players entering the market hoping to secure a piece of the action.

The good news for Cyprus and the region continued in February 2018, with another gas discovery by Italian heavyweight ENI in block 6 off Cyprus, branded Calypso. According to ENI, natural gas reserves in Calypso could exceed 6 to 8 tcf, and appraisal drilling to pinpoint the quantities more accurately is still to be carried out. The added bonus was the news that Calypso was discovered in carbonate formations, similar to Zohr in adjacent Egyptian waters. Not only does this demonstrate that the Zohr geological model extends more widely, but it also raises drilling hopes in blocks 8, 9 and especially 10. What the Calypso discovery has done is spark hope for new opportunities for gas exports. ExxonMobil is proceeding with advanced preparations to drill two wells in block 10 in late 2018, and analysis of seismic survey data has shown good prospects for discoveries. After Calypso, a significant new gas discovery in block 10 could potentially be a game-changer and tip the gas balance of the region.

Licensing Success

Cyprus completed its third licensing round and awarded three blocks in March 2017 to some of the world’s top international oil companies: block 6 went to ENI/Total, block 8 to ENI and block 10 to ExxonMobil and Qatar Petroleum.

Global energy giants such as French Total, a consortium of ENI and South Korean Kogas, and the UK-Dutch company Royal Dutch Shell, have already secured exploration rights in Cypriot waters and 2017 was a pivotal year in a new wave of exploration activities in the island’s waters. In order to support the increase in off shore drilling activities resulting from the old and new licenses, a new support base has also been set up in Limassol port to cater to the expanding needs of the international exploration companies.

The oil and gas sector is certainly set to become a key driver of economic growth, with the country actively considering options to sell its natural gas, hoping for high revenues in the future. The already-established involvement of major oil and gas companies in Cyprus has further strengthened its efforts of becoming a key regional energy hub. Cyprus is also in the process of setting up a national investment fund to manage future hydrocarbons wealth for the benefit of all Cypriots.

In addition, Cyprus’ Energy Minister confirmed in March 2018 discussions with Shell to buy 10 billion cubic metres of gas per year, over a 10-year period, from Aphrodite and Leviathan for liquefaction at the Idku LNG plant in Egypt and to export to global markets. Should this succeed, it could enable the development of Cyprus’ Aphrodite gas field starting from 2019 and potentially start generating revenue for Cyprus four years later.

Connecting Continents

In 2016, Cyprus entered into a memorandum of understanding to transfer natural gas via subsea pipeline to Egypt once extraction from Aphrodite begins – a move welcomed by Noble Energy who said it would help boost projects in the region. It is hoped that an inter-governmental agreement for the gas pipeline will be signed soon. The country is also in discussions with Greece, Italy and Israel about the potential of transporting gas from the eastern Mediterranean to Europe, via Greece and Italy. This €5.5 billion project, if given the green light, would constitute the largest underwater pipe-line in the world – stretching over 2,000 km.

Another key connection is the EuroAsia Interconnector, which will link the power grids of Cyprus with Greece and Israel via an undersea cable. The €3.5 billion and 2,000-Megawatt (MW) interconnector, will be the only North-South electricity interconnection in the Central Eastern and South Eastern Europe Priority Corridor. The construction of the first power ‘corridor’ with a capacity of 1,000 MW, will commence in 2019, with the first part, connecting Crete to Greece that could be completed at the end of 2020. The second part connecting Cyprus to Crete and the third part connecting Israel to Cyprus would be completed at the end of 2021, while the whole project is expected to be completed at the end of 2022. However, construction of parts two and three cannot commence until they secure full funding. The connector will contribute to achieving the Union’s goals of connecting European energy networks, increasing security of energy supply, and contributing to the sustainable development by integrating renewable energy sources across the EU. This has since been followed by a preliminary agreement to also set up a EuroAfrica Interconnector to link the power grids of Egypt, Cyprus and Greece through another 2,000 MW undersea cable.

Growing Fuel Exports

A strong drive has also been seen in developing Cyprus into a regional fuel hub for Europe, Asia and Africa, thanks mainly to the successful operation of the sophisticated oil storage terminal in Cyprus by Netherlands-based global oil terminal company VTTI. In 2015, the company’s Cyprus subsidiary VTTV announced expansion plans to also take advantage of the regional natural gas opportunities. The €300 million project in Vasilikos was one of the biggest infrastructure projects constructed in Cyprus in recent years and put the island on the global energy map.

The VTTV terminal has also given birth to a new export product for Cyprus in mineral fuels and oils, which jumped from zero in 2014 to €98 million in 2015. The company uses Cyprus as a terminal, blending its raw materials and then exporting them to the rest of the world, but mainly to Lebanon and Israel. With large refineries operating and more being built in the Middle East, the international market expects more product-vessel traffic through the Suez Canal, bound for the European and Mediterranean markets. These cargoes need to be resized or blended with other products to change specification and meet regional requirements. VTTV’s strategic location makes it the first terminal of its kind in the eastern Mediterranean offering these services and connecting Europe and the Black Sea with markets in the Middle East and Asia. As a percentage of Cyprus’ GDP, petroleum is only worth around 1%, but the industry has tremendous growth prospects with the country’s determination to establish itself as a key energy hub and a stronghold of stability in the region.

The oil retail sector saw another coup after Greek company Motor Oil struck a €10 million deal to buy out all 31 Lukoil gas stations – constituting 10.8% of all gas stations in Cyprus. These are now branded with the Shell logo. These developments are expected to intensify competition and create a more competitive market in fuel retail.

Fossil Fuel Reliance

A key challenge for Cyprus is its high dependency on fossil fuels for energy – the biggest share within the EU in fact, which makes it crucial for the country to develop both its natural gas, the cleanest of the fossil fuels, and renewable energy sources. The potential of the latter is enormous, both in terms of clean energy and low electricity prices, and it will hopefully receive the priority it deserves, so that Cyprus can achieve its 2030 clean energy commitments to the EU.

Cyprus is reliant on heavy fuel oil imports for its electricity needs and spends over 8% of its GDP to cover the costs. However, the country has now embarked on a plan to import liquified natural gas (LNG) for power generation by 2020 over a 20-year period so that it can reduce carbon emissions in line with EU targets, and until it can exploit its own reserves. The EU agreed in January 2018 to partially fund the cost to build infrastructure at Vasilikos for this purpose to the tune of €101.5 million, constituting about 40% of the eligible amount. The Public Natural Gas Company (DEFA), as the sole importer and distributor of natural gas on the island, plans to announce tenders during 2018 for the construction of the required infrastructure and the procurement of LNG. Progressively, the project will include the introduction and use of natural gas by the transport, industry and energy sectors in Cyprus.

Harnessing RES Potential

Cyprus is also undertaking other initiatives to achieve its national energy and climate targets. Due to its isolation from the trans-European electricity networks, Cyprus is aiming to have 13% of its energy consumption coming from renewables by 2020. It achieved 9.3% by 2016. This is being generated by wind farms, photovoltaic (PV) systems, solar thermal plants and biomass and biogas utilisation plants.

Cyprus’ energy policy has created financial support for RES projects, and a special fund was created aiming to support RES and energy saving investments in Cyprus, with revenue derived from consumers paying a ‘green tax’ levied on electricity bills (currently at €0.01 per kWh and €0.005 per kWh for vulnerable groups).

Even though the country’s national grid system has certain intrinsic and technical limitations affecting RES penetration and reliability of the energy system – including lack of interconnections to the trans-European electricity networks – studies by the International Renewables Agency (IRENA) concluded that renewable energy, mostly solar, could provide 25% to 40% of Cyprus’ total electricity supply by 2030 and bring costs down significantly. This can be increased further by implementing RES installations with storage capability.

The country is also exploring ways to introduce smart grids in the national network and is on the look-out for projects that could facilitate energy storage, and ventures that have production on a 24-hour basis. Also the prospective EuroAsia Interconnector could bring more solutions in its wake.

The island has three projects that have won significant funding from ‘NER300’ – a financing instrument managed jointly by the European Commission, European Investment Bank and Member States. The Helios Power Project, EOS Green Energy Project and the Green+ Smart-Grid Project have garnered a combined €117.8 million to develop innovative renewable ventures in Cyprus.

Cyprus is already one of the highest users per capita in the world of solar water heaters in house-holds, with over 90% of households equipped with solar water heaters and over 50% of hotels using large systems of this kind. With almost year-round sunshine, Cyprus certainly has plenty of energy to harness.

Solar Energy Boom

Solar energy has become a bit of a boom segment for Cyprus recently. The European Bank for Reconstruction and Development (EBRD) alone has financed five solar parks across the island with an investment of €10.85 million in a bid to increase photovoltaic capacity in Cyprus by 12%. Scandinavian Solar Parks, a Cyprus company with Swedish investors, has established nine solar power generation parks with a capacity of around 1,300KW of energy. Local Cyfield runs a 3MW PV park in Ayios Ioannis, while the Electricity Authority of Cyprus (EAC) operates its own PV park in Tseri with a nominal capacity of 3MWp, generating some 5,000MWh per year and avoiding 3,600 tonnes of carbon dioxide emissions per year. The state power company also has an ambitious project planned to self-finance and operate a 20MW photovoltaic (PV) power station inside the Sovereign Base Area (SBA) of Akrotiri. In addition, a solar field on the island’s southern coast in Pentakomo aims not only to generate electricity but to provide fresh water by powering energy intensive desalination plants. The research facility is a result of a partnership between the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Cyprus Institute, which is pioneering research in renewable energy systems.

In addition, the EAC forged a deal with the country’s archbishopric in July 2018 to develop two photovoltaic parks in Nicosia, producing around 66 MW. The project is set to be the largest PV system in Cyprus, contributing to the island’s national renewable energy sources targets. These are all positive developments, but there continues to be untapped potential in terms of renewable energy production, and international interest in developing the sector in Cyprus is expected to increase considerably in coming years. This investment is also crucial in order for Cyprus to achieve its targets – and further open up the field for companies with expertise in renewables.

Electricity Market Liberalisation

Currently, Cyprus is in a transitional step before full electricity market liberalisation, which is being spurred on by the publication of a binding timetable by the Cyprus Energy Regulatory Authority (CERA), to ensure that the electricity market in Cyprus is liberalised on 1 July 2019. CERA has worked towards the full opening up of the energy market and granting consumers the right to choose their own supplier. CERA’s proposition is a ‘net pool’ model, where the operations of the state power company, EAC, are unbundled and the production and supply operations separated. EAC production would then enter into bilateral agreements with suppliers for the sale of energy at regulated prices. CERA foresees establishing an electricity exchange where suppliers’ bids for quantities of electricity will be updated every half an hour. The exchange will match supply and demand and fix the price for a contract. This will be operated by the Transmission System Operator (TSO), which must first become independent of the EAC.

Capitalising on Hydrocarbon Potential

With the unfolding discoveries in the eastern Mediterranean, Cyprus is well-positioned to further strengthen its role as a stable and attractive location in which to base energy infrastructure projects as well as regional headquarters for international companies servicing the region. With its EU status and beneficial business operating environment, the island has unique advantages to staunchly establish itself as a key player and facilitator in the EMEA energy market. The still-developing oil and gas sector and the growing potential in renewable energy offer expanding opportunities for investors, and Cyprus is certainly one to watch in the coming years.

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September 2018

Cooperation Partners