of Energy, Commerce, Industry & Tourism of Cyprus – Yiorgos Lakkotrypis, Minister
The Cypriot economy has recently been through a banking crisis and remains disproportionately dependent on a triumvirate of sectors – namely tourism, professional services and shipping. To what extent can Cyprus’ nascent hydrocarbons industry play a lead role in guiding the country back to economic prosperity?
Oil and gas brings a completely new dimension to the Cypriot economy and delivers potential in three core areas that can be differentiated according to timing. In the short- term, we are witnessing significant investment from international exploration and production (E&P) companies such as ENI, Total and Noble, and equally from the types of firms that support and service the upstream segment of the oil and gas value chain. Notable examples there include Schlumberger and Halliburton.
In the medium-term, the country will enjoy the revenues accrued from the sale of hydrocarbons in accordance with whatever monetization strategies that we resolve upon. We have already identified a variety of options for exporting natural gas to European and global markets and are now in the process of evaluating which mechanism best suits the Cypriot context.
Finally, the long-term aim will be to grow a knowledge-based community specializing in oil and gas related services, which can continue to nourish the economy even after our hydrocarbon reserves have been exhausted. Traditionally Cyprus holds a competitive advantage in the service sector and it makes sense that we also develop a specialization in oil and gas services that could then be exported throughout the Eastern Mediterranean. A number of countries in the region will be commencing their own exploration activities in the near future and demand for technical, commercial and legal support will be increasing. Our aspiration is to position Cyprus so that it provides that expertise and manpower.
What progress has been made in terms of new discovery subsequent to the award of additional blocks under the second licensing round of 2012?
We have signed six production sharing contracts, three of which are with the consortium of ENI and Kogas, two with Total and one with Noble, Delek and Avner. ENI and Kogas have already started in September a very extensive exploration programme, which will last from 12 to 18 months depending on findings. We should be anticipating the results of the first exploration well by the end of the year. Noble, Delek and Avner will, in 2015, be drilling at a least another exploration well and will likely be conducting more appraisal of the existing discovery. Total meanwhile is in the process of interpreting the thousands of kilometers of seismic data they have acquired. They are exploring a completely new play which we call the Nile Data Basin whereas the other operations are all in the Levantine basin – which is why it is going to take Total a little more time than the others. All in all there is going to be a lot of activity across all of the blocks that we have licensed to date.
You mentioned that the licensing rounds are now attracting top-tier E&P players. What steps is the Ministry actively taking to maintain momentum and secure the requisite inward investment from oil service companies for the industry to flourish?
We are being very proactive in the sense that we are actively seeking investment in that auxiliary part of the oil and gas industry. We have established the capability to allocate land at very favourable terms and have also been fast tracking the permitting process by setting up a cross-cutting team involving personnel from each of the relevant government ministries. This ensures that we can deal with incoming investment in a swift and coordinated manner and that appropriate incentive structures are in place.
One area that is in need of investment is, of course, the flagship Vasilikos LNG terminal. How close is Cyprus to sourcing the 6 billion euro financing following last year’s memorandum of understanding with private entities such as Noble, Delek and Avner?
This year we also signed memorandums of understanding with Total, and ENI and Kogas. We now have an alignment with each of the operators active in Cypriot waters which allows us to properly evaluate the technical and commercial terms. The number one priority today is to make the project commercially viable and competitive worldwide. One challenge is ensuring we have adequate quantities of natural gas to make the venture bankable, but on top of that we have to be sure that it would be sufficiently competitive in the global marketplace. We are currently at a stage where we are waiting for additional hydrocarbon discoveries and monitoring global trends, while simultaneously engaging the operators in discussions about the economics of proceeding with the project. In that sense we are pursuing parallel tracks.
If we have multiple discoveries within our EEZ then the LNG terminal proposal could well be the optimal solution because it allows for greater flexibility and market diversity than the other proposals for monetizing our natural gas wealth. We are talking with interested financiers, but in order to progress further on that front the right fundamentals must be in place and that essentially means additional discoveries.
What other options are you considering for the monetization Cypriot natural gas?
Under the EU initiative of Projects of Common Interest (PCI), we are also reviewing a concept for an Eastern Mediterranean pipeline that would potentially connect Israeli and Cypriot gas supplies to European consumer markets via Greece. Another PCI concerns setting up an energy storage facility at Vasilikos, which could accommodate the EU member states’ strategic reserves. I could also mention ideas for FLNG, CNG and regional pipeline sales. The other day we signed a memorandum of understanding with Jordan which resolved to jointly explore the feasibility of Cyprus selling natural gas to the country. We have held very similar conversations with Egypt. At the moment, all of these options are receiving serious consideration.
Discussion of the country’s potential as the EU’s sole natural gas exporter dominates Cyprus’ hydrocarbons agenda, but what about the outlook for oil? Total, for example, has expressed its interest in drilling for oil in blocks 10 and 11. Is there not a “time dividend” to be reaped from focusing resources towards oil because of the shorter timeframe needed to bring oil on-stream?
So far there has been no significant discovery of oil in the Levantine basin. The US geological survey predicted in 2010 the presence of both natural gas and oil. Meanwhile the presence of natural gas is steadily being borne out. So we can reasonably assume that the presence of oil will also be confirmed in due course. You are absolutely correct that there is a commercial advantage from oil in the sense that you can monetize much quicker without the need for putting in place a lot of expensive upfront infrastructure. Some operators are indeed looking into that option and I am confident that more news on that will be forthcoming in the next couple of years.
The hydrocarbons industry is very new to Cyprus. How is the country going about building up the requisite know-how considering the long lead times associated with developing technically skilled oil and gas professionals?
Within the production sharing contracts that we have signed we have incorporated an agreement with each operator whereby they undertake to allocate a specific amount of their resources to education on a yearly basis. We have safeguarded that from the beginning of the process and are using part of that funding towards training up the civil servants that are going to be required to manage and oversee the domestic industry. The regulatory and legislative work that still needs to be undertaken is considerable.
At the same time, using part of that funding, we are looking at developing technical skills such as high pressure welding and other blue collar capabilities, and have been collaborating closely with the national educational apparatus to build local capacity in white collar jobs.
We also recognize that the training that happens in the classroom is only a small part of the overall education process so are doing everything we can to promote on- the-job apprenticeships. We are encouraging the foreign operators to make use of local labour and have been busy promoting internship programmes and foreign exchanges where Cypriots can receive practical training in oil and gas centres of excellence such as Aberdeen and Stavanger.
What is the role ascribed to the fledgling national oil company? Since it commenced operations on the 1st January 2013, the CHC, the youngest NOC in the world seems to have already gone through its fair share of drama – both a rebranding with the change of name and a number of managerial shake-ups.
The structural changes were necessary because of the potential of the company to become one of the most influential entities in the entire country. We simply had to put in place the right auditing and control mechanisms for it to function properly because they were wholly lacking and power was too concentrated. Under the previous regime there was an executive chairman of the board which meant that the chairman of the board was simultaneously the CEO. That effectively eliminated one level of control that the Government has at its disposal. Under the restructuring, this has changed and there is now an authentic board of directors that can engage in proper oversight of the CEO. We appointed seven experienced oil and gas specialists who are Cypriots and have excelled overseas with large multinationals such as Shell and BP. The CHC’s role is essentially to be a commercial arm of the government with regard to the commercialization of the hydrocarbons that will eventually go into production, as well as a participant on behalf of the government in any infrastructure that is developed such as the LNG terminal. They will also be joining with the operators in marketing and selling once projects come on-stream. The regulatory function stays with the government however.
We understand Cyprus aspires to become an energy logistics, petrochemical and oilfield services hub for the entire Eastern Mediterranean. To what extent does Cyprus’ geographical positioning and reputation for fiscal leniency and political stability make the country an attractive base for region-wide oil and gas operations?
Cyprus enjoys a number of unique attributes that make it ideally suited to the role of being the hub for the region: its central geographical placement, the fact that the country is an EU member, its fully transparent legislative framework, its reputation for a rule of law that is predictable and stable. This is what underpins our pursuit of agreements with neighbouring countries. There are many potential synergies that have yet to be leveraged in terms of transit and export of natural gas. We have allocated a large amount of land to host facilities for transit and storage of liquid fuel, propane and other variants. It is not, after all, as if there are many other alternatives in the region.
There are many possibilities where we could cooperate more closely. It could be about joint development or about collaborating on the sale and purchase of energy. We are currently at a peculiar situation where there are many different credible possibilities and everyone is trying to figure out which is the optimum mix of options to proceed with, but the will from the countries of the Eastern Mediterranean is unquestionably there.
For its part, the Cypriot government strongly promotes the idea that the discovery of hydrocarbons can be the source of conflict resolution and stability despite the political differences that are acknowledged. If we create the right economic environment then political stability and growth should follow.
Cyprus is at a critical juncture in its development path. We are seeking investment and I urge the community to investigate Cyprus as an epicenter of new frontier ventures. What’s more, we are working hard at creating the business environment that these companies will find much to their liking.
To read more articles and interviews from Cyprus, and to download the latest free report on the country, click here.