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Cyprus Oil and Gas Update

15 September 2014 | Philip Ammerman

In May 2012, we published an article entitled “Strategic Development Options for Oil and Gas in Cyprus. At that time, Noble had just started its Cyprus drilling programme in Block 12 and had announced gas discoveries between 5-8 trillion cubic feet. Since that time, Noble has completed the next stage of its resource assessment and updated its find to 5 tcf. ENI and Kogas have announced that exploratory drilling will start in their blocks in the next few weeks. With these developments in mind, the time is right for a brief re-assessment of Cyprus’ options for oil and gas development in its territorial waters.

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Technical Updates

Since May 2012, five main events have occurred on the technical and operational side of Cyprus hydrocarbon exploration and development. These are:

  1. Noble Energy reported that gross mean resources of gas in Block 12 were estimated at 5 trillion cubic feet. Oil potential was reported in press, but has not been quantified by Noble. Additional drilling is planned in Block 12.

  2. ENI/Kogas are reported to have announced drilling in offshore Blocks 2, 3, and 9 in the fall/winter of 2014, while TOTAL is expected to start drilling in Blocks 10 and 11 in 2015.

  3. Onshore supporting infrastructure is gradually taking shape. EDT set up a mudplant in Limassol Port to support Noble’s drilling operations. Additional companies have announced their entry into oil and gas services, while both Larnaca and Limassol Ports have been considering how to best ramp up services for this segment.

  4. Greece fast-tracked the Euro-Asia Interconnector plan to lay a 2000 MW electric power cable between Greece, Cyprus and Israel. Cyprus appointed DEH Quantum Energy as the project promoter for the project. The European Commission has included the Interconnector in its list of energy infrastructure projects, which may qualify it for EU funding. The total investment is expected to cost EUR 1.5 billion. This decision consolidates the growing strategic links between Israel, Cyprus and Greece and confirms the Cypriot strategy to develop its position in the energy map of the Eastern Mediterranean.

  5. Perhaps most significantly, no decision has been announced on the planned Cyprus LNG plant. The relatively low resource estimate provided by Noble and delays in starting additional drilling mean that gas feedstock amounts are not sufficient to begin detailed planning and tendering for the plant.


Prices, Reserves and Income

Since mid-2012, US Henry Hub natural gas prices have been rising steadily, to a peak of $ 6/mln BTU in January 2014. Part of this rise has been the result of geopolitical instability in Russia and Ukraine, which is discussed later in this article. They have since fallen to $ 3.91/mln BTU in August 2014, reflecting lower seasonal demand as well as receding tension. Prices are likely to rebound in the winter as relations between Russia, Ukraine and the European Union affect gas supplies.


Figure 1: US Henry Hub Spot Market Prices

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Source: US Energy Information Agency


The historical average Henry Hub price from January 2010 to August 2014 is $ 3.85/mmBTU. European spot market prices are higher: average prices are currently $ 9.12/mmBTU. Converting this price to Euro at an exchange rate of 1.3, and assuming a 14-year production term, we can generate various reserve values at the current price estimate. Thus, if Cyprus has 15 trillion cubic feet in recoverable gas reserves, this translates into a current total production value of €103.85 billion. Assuming a 14-year extraction period and government income of 25% from the sector, then annual government income would be approximately € 1.85 billion per year.

Table 1: Production Estimate Valuations

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Anyone familiar with the oil and gas sector can see that this is a highly simplistic scenario:

  1. Any recovery will be based on the ability of downstream operators to use the gas, either for electricity production (which could theoretically be partially exported via the InterConnector, only if additional power generation capacity were built), or for exports using an LNG plant, or exports via pipeline to Israel, Egypt or Turkey. Absent a downstream strategy, production cannot take place.

  2. Production in Cyprus on a major scale cannot start before 2017, taking into account the time necessary to build either an LNG plant or an export pipeline network (or some combination of the two), together with offshore production rigs and supporting infrastructure. By 2020, natural gas prices are forecast to fall still further as massive offshore gas projects come onstream in Australia and other countries. Australia, for instance, has seven massive LNG projects worth over $ 200 billion under development. Pricing is highly volatile, albeit in both directions.


Geopolitical Update

The geopolitical landscape has changed entirely since the first Cyprus Oil & Gas article in May 2012:

  1. In March-April 2013, Cyprus accepted a Eurozone / IMF / ECB bailout (covered extensively on this website) which led to the crippling of the country’s banking sector and significantly weakened Cyprus’ ability to negotiate and operate as a sovereign state. Strict Troika oversight on public spending means that the government’s negotiating position in critical areas is weakened. Key issues, such as the Cyprus LNG plant construction, will be determined not only by the low production estimates and the long drilling programme, but also by the lack of national financial capacity.

  2. In late 2013 the Yanukovich government in Kiev was overthrown, and in 2014 Russia seized Crimea and supported a low-intensity separatist movement in two other Ukrainian oblasts, Luhansk and Donetsk. This has created hostility between Ukraine, NATO and the European Union on the one side, and Russia on the other, leading to a round of embargoes and sanctions by both sides. As a result, Russia is channelling increasing quantities of natural gas to China via overland pipeline, while Russian sales of gas to Europe have been disrupted by deliberate means by both sides of this conflict. It is expected that natural gas supplies and prices in Europe will remain volatile. In this environment, the attractiveness of Cyprus and Israel as “stable” European suppliers will be increased.

  3. Turkey continues to claim Cypriot sovereign areas, and has sponsored an exploration programme of its own which conflicts with accepted international law. The election of Tayip Erdogan as Turkey’s first directly-elected President with 52% of the overall vote has consolidated his position. Together with continuing instability in Syria and Iraq, it is expected that this will consolidate his position, leading to continued interference by Turkey in Cyprus’ sovereign affairs.

  4. The European economic recovery remains weak. The 2009 economic crisis has seen the continued rationalisation of European industry, with energy-intensive factories continuing to merge, close or move offshore. Sectors such as building industry, steel, aluminium and other metal-processing industries have seen factory closures and layoffs. It is unlikely whether such losses can be reversed in the near future. This in turn has led to declining energy demand and prices (at least in the short term). The situation has also been complicated by strong performance from renewable energy, where the EU has set a target of having 27% of total energy consumption from renewables by 2030. Some countries, such as Germany, have already reached this target on certain days.

  5. In a positive note for Cyprus, progress has been made with the Sisi Government of Egypt in settling the maritime border between the two countries. The final maritime border was agreed by President Sisi in September 2014. This clears the way for Cyprus to consolidate its Exclusive Economic Zone (EEZ), and removes another obstacle in the way of hydrocarbon development.

  6. Within Cyprus, the former President, Dimitris Christofias, was voted out of power in February 2013, and was replaced by President Nikos Anastasiades, of the centre-right DISY party. The current government faces significant problems managing its coalition in the face of drastic legal and fiscal reforms demanded by the Troika of creditors, and faces significant difficulties in handling key issues. One of these issues is energy policy.



Cyprus’ effort to develop its oil and gas reserves has met with significant headwinds thanks to technical issues, internal weaknesses and geopolitical risks.

On the technical side, the relatively slow rate of exploratory drilling by oil majors reflects uncertainty in natural gas development in the eastern Mediterranean and the global energy market. The rise of US shale gas and the impending commissioning of massive natural gas projects in Australia leads many observers to forecast declining natural gas prices. Given the risks in the eastern Mediterranean area, most majors have focussed drilling resources in other regions.

On the policy side, Cyprus has made a consistent, long-term effort to develop oil and gas resources, centred around attracting exploratory drilling, and positioning an onshore LNG plant as the focus of commercialisation strategy. The relatively low resource estimates from Block 12, together with the slow rate of drilling by other groups, means that decisions on this objective will be delayed for at least another 12 months. Cyprus’ domestic political scene has seen considerable turbulence in technocratic appointments and public sector coordination. Its bail-out programme and the destruction of the offshore banking sector have significantly increased country risks for future development.

On the geopolitical side, the main short-term risks will be the progress of economic and political relationships between the European Union and Russia following the Crimea/Ukraine conflict. The latest sanctions round by the EU will exacerbate tensions in the energy sector, and may lead to lasting damage in terms of Russia’s energy and financial engagement in Cyprus. This may also lead to renewed impetus in developing Cyprus’ oil and gas reserves as an alternative means of supply to Russia. This scenario, however, will require a considerable up-front investment, while the overall size of Cypriot resources is, to date, nowhere near the amount necessary to offset Russia as an energy supplier.

Philip Ammerman

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