Maximising the local impact of hydrocarbons discoveries in Cyprus

By Constantinos Hadjistassou*, PhD

Aphrodite offered inspiration to Botticelli for his famous work of art: The Birth of Venus. Besides capturing the imagination, the goddess of love and beauty has more to offer to Cyprus. The Aphrodite gas field, named after the goddess of love, can help propel Cyprus out of its present dire economic situation.

No wonder natural gas and prospective oil resources in the Cypriot Exclusive Economic Zone (EEZ) and the Eastern Med are preordained to replace the maturing North Sea deposits.

Indeed, with estimates of about 1.7 trillion cubic metres (tcm) (or 60 trillion cubic feet, tcf) of natural gas in the 13 blocks of the Cypriot EEZ alone without factoring in Israeli, Lebanese, Egyptian, and – in the future – Syrian gas, chances are the East Med frontier will surpass the North Sea deposits.

Reflecting this geopolitical significance the European Commission has recently taken notice of the potential of the Eastern Med corridor in terms of contributing to the diversification of the EU’s energy supply as well as enhancing pan-European energy security.

Ever since energy independence has assumed prominence, first in the US post World War II order, it still constitutes one of the most important elements of governmental policies. Considering the state of the Cypriot economy and the plague of ballooning unemployment, hydrocarbon matters leave no room for experimentation.

Cyprus is fortunate enough that with the first ultra-deep water well the Aphrodite gas field was appraised at about 200 billion cubic meters (bcm) of natural gas. To put things into perspective, as of 2011, Italy had about 100 bcm of proved natural gas reserves.

With some luck, the A-2 appraisal well which the Noble consortium is currently completing will convert the gas discovery into a proved reserve confirming also the viability of a one train liquefied natural gas (LNG) plant.

Sourcing most of the gas to the international markets is no easy task. Currently, there is ample supply of natural gas in the world. Exacerbating things the shale gas (and oil) revolution in the US coupled with a spate of discoveries off Mozambique and Tanzania, exceeding 2.832 tcm, will intensify world competition.

Not to mention the fact that due to this gas glut major natural gas projects in Australia were recently downsized or shelved.

And then there is Japan which continues to absorb substantial volumes of natural gas following the Fukushima nuclear plant incident. Japanese demand for LNG will gradually wane sooner or later when their nuclear plants will come online.

flamePerhaps the brightest spot in terms of natural gas demand is China and India. According to the Energy Information Administration (EIA) – the US energy statistical agency – China sits on the world’s largest reserves of unconventional natural gas.

Even though LNG is a niche market, a surplus in the world LNG supply will perhaps unavoidably bring about a tectonic shift in LNG pricing. Pricewise, decoupling the current oil indexing of LNG in Asia and Europe will lead to the internationalisation of natural gas prices notwithstanding a drop in prices.

Simply stated, if Cyprus is serious about entering the LNG landscape, there is little time to waste.
While trust in the political and judiciary institutions has reached an all time low, energy matters offer an opportunity for decision-makers to showcase that meritocracy and hope can (still) thrive.

Ever since assuming office the current government has invested most of its efforts in staving off bankruptcy and stabilising the economy. As the Greek and Spanish cases indicate, unemployment is the most stubborn affliction to surmount.
Nonetheless, Cyprus is presented with a unique opportunity to restructure, reinforce and diversify the national economy. The energy sector can well act as one of the fundamental pillars of growth.

For a renaissance to happen local companies (and people) need to engage in hydrocarbon activities. Recalling the Norwegian experience, when oil was first discovered in the North Sea in the 1970s, the Norwegians controlled the pace of developing resources so that local expertise could flourish.

Through a series of protectionist measures and incentives favouring Norwegian companies the local industry gradually developed the know-how. By forging innovation and promoting productivity several Norwegian companies, such as Statoil and Aker Solutions, have risen to become global players in their own right.

Tapping the vast experience from the oil industry, the Cyprus government – through the national oil company (or another entity) – could have become involved from the beginning in developing the local hydrocarbons industry.

As of today no company, either state or private, participates in any of the life-cycle phases of the hydrocarbon fields in the EEZ.

Signature bonuses of 174 million euros during the second licensing round helped buoy the Cypriot economy resulting in some positive remarks from troika’s first assessment.

Dedicating even a small portion of the proceeds from hydrocarbons for developing the expertise and training the local workforce will pay substantial dividends in the nearby future.

Depending entirely on oil companies for developing hydrocarbons resources is not the optimum strategy for realising the maximum benefits from these assets. In fact, the peripheral and support industries which serve the oil and gas fields can generate more value than the monetary price of the hydrocarbons themselves.

When it comes to granting rights for hydrocarbon resources, host countries have a potent tool. That is, in line with international oil practices, the licensee can set the rules. In the contract agreement for ceding a concession the government may insist upon an obligatory level of state participation.

Likewise, the host nation can set another vital condition in the agreements with the oil companies and this refers to the “local content”. Local content alludes to local recruitment, acquisition of local goods and services, transfer of know-how and other measures intended to educate and train local skilled workers and develop the domestic industrial infrastructure.

The local content is viewed as one of the ways to spur local growth while opening up employment opportunities. Ideally a country owing the natural resources tables these priorities during the licensing round negotiations.

It appears that there is no coherent national energy policy on hydrocarbons. Often various public statements do not converge on a single line of action. What is more, the roles of the Cyprus National Hydrocarbons Company (CNHC), the Energy Service and the National Gas Public Company (DEFA) have yet to be clarified.

Engaging the CNHC in the exploration and production activities from the beginning is critical. Employing people with oil field experience and establishing dedicated teams for example in exploration, development and production of hydrocarbons are essential steps.

Critics citing financial restrictions may be surprised to learn that raising the funds for the national oil company is not an issue. Internationally accepted practices in the oil and gas industry conceal the answers to most of these questions.

Quintessential to success are meritocracy, transparency and knowledge transfer from major and independent oil companies operating in the Cypriot EEZ. Look no further than the projects that Total SA has completed or is currently pursuing.

Significant public statements such as the hydrocarbons industry will open up 10,000 work positions bear no weight in the eyes of disillusioned unemployed people. What matters most is how to begin to reap the benefits – fast enough – while managing expectations. Given that within the next three years up to ten wells will be drilled in Cypriot EEZ and with the prospect of discovering oil gathering pace the best is yet to come.

Meanwhile developing the mechanisms on how to best develop and oversee the industry is more important than the discoveries themselves.

*partner at Energy Sequel and researcher in hydrocarbons and low-carbon technologies at the University of Cyprus. For more info please consult: www.energysequel.com

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  • Emre

    Good, optimistic articles from Constantinos. If I were Greek Cypriot I would be happy to jump on the lap of EU/US and Israel when the exaggerated Turkish threat continues there. But don’t get too optimistic as each one of these have their own agenda. EU accepted South Cyprus to EU as it already knew the existing gas reserves. EU helped South Cyprus get into financial crisis after a year it has entered to EU, facilitating the South Cyprus ask for money! So there comes the EU help to South Cyprus owe to EU for about 10-15 years of gas. US companies make the research and extraction of gas while Israel is the house keeper (dog). We will wait and see how the South Cyprus Afrodite gas story will continue…I smell like our Greek Cypriot friends will have to pay 20 years of gas before they put your hands on the gas (if ever). Thats my 5 cents….

    • kasomoulis

      There is no such thing as North and South Cyprus my friend, there is only one internationally legitimate country, that of Republic of Cyprus. Obviously you are not here to enlighten yourself and others but rather you are serving the misguided Turkish claim, thus feeding a useless propaganda to the ignoramuses Turkish voters and other Muslims, whose majority does not even know where the island lies on the world map.

      • Emre

        If I were South Cyprus Greek Cypriot, I would probably think like you. However, your response has nothing to do with what I have commented. I know where the island is which is far away from Europe, in the Middle East which strengths my idea of why EU has accepted South Cyprus to the union. Smell of gas was the dominant reason why South Cyprus got in…

        • kasomoulis

          Sure, you, know where the island is located, no doubt, I hope you know too that it has been inhabited by Europeans ever since the beginning of time. U are right on the smell of gas reinforcing the bond. U sound regretful of the European embrace of the Island as if this is a wrong done against the Turkish nation. The fact is different and I know you know it too – The Europeans had no choice but to accept Cyprus if only in the name of civilization, globalization and FREEDOM – the question is does the Turkish government have the courage to remove the dictating armed force from Cyprus so that the Turkish Cypriots can live FREE as well.

          • Emre

            I don’t think that we will be seeing the Turkish Armed Forces leaving the island near soon as it is strategic as hell…(and now that there is gas and EEZ issues). I think it was a huge mistake that EU accepted South to the union without solving the problem but with the gas reserves on the horizon, EU didn’t want to leave the issue to the 3rd parties. Also Russia (EU’s gas supplier) now and then turns off the gas valve (Ucraine crises) leaving EU without gas. Considering this issue, EU had to act fast to have a 2nd supplier without solving the Cyprus problem. Now the problem is way too big to solve. I mean even harder than before. And with the rejection of Annan’s plan by South Cypriots, and approval of North Republic of Turkish Cypriots to join the island, ofcourse we Turks feel right in our cause.