Cyprus has ambitions to become a strategic energy hub with energy giants investing in the region following significant gas-deposit discoveries in the last decade. Inevitably, the impact of the Covid-19 pandemic on the global economy has also affected exploration plans in Cyprus by delaying drilling, but the country is strengthening its role as a key player in the Eastern Mediterranean.
The discovery of vast natural gas reserves in both the Exclusive Economic Zone (EEZ) of Cyprus and its immediate neighbourhood in recent years has sparked an exploration race in the region and a new industry in Cyprus. The involvement of multinational oil and gas companies in Cyprus’ EEZ has strengthened the island’s ambition to become an important hydrocarbons player in the Eastern Mediterranean, and the developing industry has become a new opportunity for business and foreign investment.
Cyprus’ strategic location in the East Med, at the southeast tip of the European Union and close to the Suez Canal, makes it ideally suited not only as an important fuel hub and headquartering location, but also as an energy interconnection node, connecting the electricity grids of the Eastern Mediterranean and North Africa to those of Europe.
Cyprus has completed three successful offshore licensing rounds, awarding the majority of its offshore blocks to some of the world’s top international oil companies. Global energy giants such as Italian ENI, South Korean Kogas, French Total, American ExxonMobil, Qatar Petroleum, American Noble Energy, Israeli Delek Group and Royal Dutch Shell, have all secured exploration rights in Cypriot waters.
In July 2020, Chevron Corp announced an agreement for the acquisition of Noble Energy Inc, including its shares in Cyprus’ Aphrodite gas field. This is a positive development improving project realisation prospects, as after ExxonMobil, Chevron is the second biggest international oil company in terms of market capitalisation.
Although the global energy sector is undergoing dramatic change due to the impact of the Covid-19 pandemic and currently delaying exploration plans around the Eastern Mediterranean until 2021-2022, the commitment and interest remain strong to capitalise on the full hydrocarbons potential of this region.
The first natural gas discovery in Cyprus’ EEZ was made in 2011 by US firm Noble Energy and Delek Group in the Aphrodite gas field in offshore Block 12, which is estimated to have 4.5 trillion cubic feet (tcf) of gas. Following a successful appraisal programme, Aphrodite was declared commercial in 2015.
The next discovery was made by the consortium of Total and ENI at the Onesiphoros prospect in Block 11 in 2017. But it was a small, technical and non-commercial discovery. This was followed by the discovery of the Calypso gas field in Block 6 by Italian ENI in late 2017. The discovery is currently under appraisal.
The most recent success was the discovery in February 2019 of the Glaucus gas-field in the promising Block 10 by the ExxonMobil and Qatar Petroleum consortium, estimated to hold 5 to 8 tcf of gas. This was great news because Glaucus, Calypso and Onesiphoros were discovered in geological formations similar to the giant 30 tcf Zohr gas field discovered by ENI in 2015 in the Egyptian EEZ and adjacent to Cyprus’ Block 11. These more recent discoveries confirm that the Zohr geological model extends more widely in the Eastern Mediterranean region.
These results bode well for Cyprus and the region, adding to its reputation as an emerging gas region. Combined with other discoveries, they are rousing interest amongst major players hoping to secure a piece of the action in the Eastern Mediterranean. ExxonMobil has already extended its interests with licences for two blocks southwest of Crete and in Egypt, where it has secured Block 3 in Egypt during the recent licensing rounds. It is eyeing more prospects, including opportunities in Israel. Chevron has also extended its interest in Egypt, gaining rights to three offshore blocks, and in Israel taking over Noble Energy’s shares in the Tamar and Leviathan gas fields.
Re-analysis of seismic survey data using the knowledge gained from these discoveries has shown good prospects for new, potential discoveries also in Cyprus’ EEZ. As a result, ENI and Total plan to drill at least three more wells in their licenced blocks in 2021-2022. ExxonMobil is also planning to drill one more exploration well and an appraisal well at Glaucus in Block 10, likely in 2021-2022. Any new discoveries would further strengthen potential exploitation of Cyprus’ gas resources.
The oil and gas sector is certainly set to become a key driver of economic growth, with Cyprus actively considering options to exploit its natural gas, hoping for high revenues in the future. Cyprus’ Energy Minister confirmed in March 2018 discussions with Shell to buy around 8 billion cubic metres (bcm) of gas per year, over a 15-16-year period, from Aphrodite for liquefaction at the Idku plant in Egypt and to export this to European and global markets. These discussions have since progressed, with the signing in 2018 of an inter-governmental agreement between Cyprus and Egypt to build a subsea pipeline connecting Aphrodite to Egypt’s liquefaction plants, and a revised production-sharing agreement with Noble Energy – soon Chevron – and its partners over the Aphrodite gas reservoir.
The plan provides that the consortium will be responsible for the extraction platform at the site of the field. Analysts describe the deal as a 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. Based on the plan, first gas was expected in 2025, and according to the Energy Ministry it would be the biggest infrastructure project ever undertaken in the Republic of Cyprus. Even though the plan may experience some delays due to the coronavirus pandemic, Cyprus and Egypt are committed to it.
Since then, the Cypriot and Egyptian governments have intensified discussions on the gas pipeline and Chevron, the new operator of Aphrodite, reaffirmed the importance of developing the gas-field and intention to proceed with plans on how to exploit it as soon as possible.
The recent discovery of Glaucus in Block 10 by ExxonMobil and Qatar Petroleum could also become a game-changer. ExxonMobil has repeatedly stated that should more discoveries be made, its preferred option is to build a gas liquefaction plant at Vassilikos for liquefied natural gas (LNG) exports to Europe and Asia. This would require total gas discoveries to approach 15 tcf and global gas prices to justify commercial viability. All eyes are on the results of the next drilling campaign, expected in 2021-2022. Such a development could completely transform Cyprus’ fortunes. Currently, Cyprus is reliant on heavy fuel oil and diesel imports for its electricity needs and spends over 8% of its GDP to cover the costs. The option of an LNG plant at Vassilikos would not only tip the gas balance of the region, but would also come with major add-on benefits for Cyprus – not just profits from the sale of LNG, but advantages such as new employment, more support industries and service companies, the development of a downstream industry using cheap gas as feedstock, and low-price gas to the Electricity Authority of Cyprus (EAC) bringing electricity prices down.
Improving Port Facilities
In order to support the increase in offshore drilling activities resulting from the old and new licences, a new support base has been set up in Limassol Port to cater to the expanding needs of the international exploration companies. The government has also committed to establish a dedicated industrial port at the energy centre at Vassilikos, to become operational by 2023. The port will operate as a service centre for the oil and gas industry in Cyprus and the wider region, and it will cost around €250 million to set up.
The decision to build the port was taken in response to increasing demand from oil and gas companies and those providing support services to the industry, not only in Cyprus, but also in neighbouring countries. It is an essential step to support Cyprus’ drive to become a regional centre providing support services to the Eastern Mediterranean oil and gas industry.
East Med Gas Forum
Given the geopolitical challenges the region faces, respect of international law, and particularly the United Nations Convention on the Law of the Sea (UNCLOS), is crucial to the peaceful exploitation of hydrocarbons in the East Med. With this goal in mind, the energy ministers and representatives from Egypt, Cyprus, Greece, Israel, Italy, Jordan and the Palestinian Authority met in Cairo in January 2019 and set up the East Mediterranean Gas Forum (EMGF) – with European Commission and World Bank representatives attending the meeting as observers.
The Forum is based in Cairo, with the aim to be an international organisation that respects the rights of members in regard to their natural resources in accordance with the principles of international law, and supports their efforts to benefit from their reserves and use of infrastructure. This also includes a commitment to pave the way for fruitful cooperation in the technical and economic fields, with a view to efficient exploitation of the gas potential in the region.
East Med countries who agree with the Forum’s interests and objectives will have the right to join the founding members. It will be open to other countries or regional and international organisations as observers, and will work with non-members to help create dialogue, mutual understanding and mutual benefit. EMGF also underlines that the private sector has an important role to play in these efforts.
EMGF could benefit regional gas development through dialogue on natural gas policies, including environmental considerations, leading to the development of a regional integrated market in a way that maximises the utilisation of gas resources and transport infrastructure in the region, and would contribute to further cooperation in the East Med.
Gas export projects could also benefit from such cooperation, especially with regards to ensuring a conducive regulatory environment, putting in place the required inter-governmental arrangements and removing political risk.
Natural gas could make a crucial contribution to the future of East Med countries and any such initiatives that could promote its development can only be helpful. The large gas discoveries in the East Med could also have a major impact on energy security and economic development through the exploitation of the gas regionally. This could be in power generation, but also in downstream and petrochemical projects. Given global energy developments, exploitation of natural gas resources regionally is gaining increasing importance – the Forum is well placed to facilitate this.
Cyprus is fast developing into a regional fuel hub for Europe, Asia and Africa, thanks mainly to the successful operation of the sophisticated oil storage terminal by Netherlands-based global oil terminal company VTTI. The company’s €300 million project in Vassilikos became operational in 2014, and was one of the biggest infrastructure projects constructed in Cyprus in recent years and put the island on the global energy map.
The company uses Cyprus as a transhipment 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 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. The industry has tremendous growth prospects with Cyprus’ determination to establish itself as a key energy hub and a stronghold of stability in the region.
LNG Import Terminal
Until it is able to develop its own gas, Cyprus is planning to import LNG to replace heavy fuel oil and diesel in power generation. Not only is this expected to bring the cost of electricity down, but it will also lead to a substantial reduction in carbon dioxide emissions, helping Cyprus achieve its Paris Agreement pledges.
In December 2019, Cyprus signed a landmark deal with a Chinese-led consortium to build a €290 million LNG import terminal at Vassilikos. The project has secured a €101 million grant from the EU under the Connecting Europe Facility (CEF), with the EAC contributing €43 million securing a 30% stake.
The terminal will include a floating storage and regasification unit (FSRU), a jetty for mooring the FSRU and related infrastructure. The attractiveness of Cyprus to gas companies is confirmed by another offer to import LNG. This is under consideration by the Cyprus Energy Regulatory Authority (CERA). Construction of the terminal started in July 2020, with completion expected by 2022. It is Cyprus’ largest project.
Connecting Power Grids
Another important regional energy project is the EuroAsia Interconnector, which will link the power grids of Cyprus with Greece and Israel via an undersea cable. The 2,000-Megawatt (MW) Interconnector, is the only North-South electricity interconnection in the Central Eastern and South Eastern Europe Priority Corridor. The permitting procedure started in 2019 and is expected to be completed by December 2020 for the construction of the first power ‘corridor’ with a capacity of 1,000 MW costing €3.5 billion. The Crete-Attica link is expected to commence in September 2022, and the Cyprus-Crete and Cyprus-Israel links in December 2023.
The Interconnector will end the energy isolation of Cyprus and contribute to achieving the EU Energy Union’s goals of connecting European energy networks, achieving the electricity interconnection target for 2030 of at least 15%. It will also contribute to the internal energy market integration, increase security of energy supply, and support sustainable development by integrating renewable energy sources across the EU.
The project is progressing to plan, with the selection in March 2020 of Siemens AG as the preferred bidder for the award of the contract for the construction of the ‘VSC Converter Stations’ of the EuroAsia Interconnector.
An important milestone was achieved in July 2020, when the government of Cyprus issued the Interconnector with the final building permit to construct a high voltage direct current (HVDC) converter station in Cyprus, with a capacity of 2,000 MW. Construction is planned to start before the end of 2020.
This has since been followed by a framework agreement to also set up an EuroAfrica Interconnector to link the power grids of Egypt, Cyprus and Greece through subsea HVDC cables with the capacity to transmit 2,000 MW. The Interconnector is a VSC-HVDC scheme which will allow the bidirectional transfer of 1,000 MW (Stage 1) between the converter stations, with an estimated cost of €2.5 billion. Completion of the project is planned for December 2023.
Key Energy Hub
Cyprus is well positioned to further strengthen its role as a stable and attractive location in which to base energy infrastructure projects and headquarters for international companies servicing the region. The country’s EU status and beneficial business operating environment provides the island with unique advantages to establish itself as a strategic player and facilitator in the EMEA energy market. With increased regional cooperation and the unfolding discoveries in the Eastern Mediterranean, the growing potential of the developing oil and gas sector offer expanding opportunities for investors, and has established Cyprus as a stable and secure location for companies to manage their operations from.
For more information, contact Cyprus' investment promotion agency, Invest Cyprus.
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