Cyprus Oil and Gas: Rewards and Risks

COMMENT: By Dr Alan Waring

 

In the 1990s, I advised a number of US, British and Middle Eastern companies in the energy sector on operational risks. A particular problem then was a series of major hazard disasters, both upstream in exploration and production (E&P) and downstream (Refineries and Distribution) as well as seagoing tankers. Readers may recall the names Piper Alpha, BP Grangemouth, Sea Empress, Odeco. E&P had spread from historical oil & gas regions such as Middle East and Gulf of Mexico to the North Sea, Indian Ocean, Africa and many other places. With a looming global energy deficit, the search for and exploitation of new fields has continued e.g. Central Asia, Vietnam and has now reached the shores of Cyprus.

We should rejoice at the potential opportunities and benefits for Cyprus. Primarily, these will be potentially to reduce the reliance on imported gas, especially for power stations, and to bring in tax and other revenues. As an oil and gas producing country, Cyprus will also no longer be so reliant on tourism. However, an influx of international oil industry companies, personnel, expertise and expectations will also bring new challenges to Cyprus.

 

— Inevitable and Imminent?

 

It would be easy to fall into the trap of assuming that an oil and gas bonanza for Cyprus is both inevitable and imminent. Not so. We are just at the early stages of Exploration and it has yet to be proven that commercially exploitable sub-sea deposits exist. As some commentators have wisely pointed out, it will take several years for licensees to find out.

However, let’s assume that commercially exploitable finds are made. Actual ‘best bet’ drilling sites for production wells will then need to be identified. Yet more time. Then production installations will have to be set up. For each installation, this could well involve a full Projects Phase requiring design, on-shore fabrication, off-shore construction, hook-up and commissioning, not to mention a ‘Safety & Environment Safety Case’ requiring regulatory approval. Add another 2-3 years before actual Production could start.

During all this pre-production stage, a legion of risk exposures will exist for the various parties involved – political, major hazards and regional conflicts are just some of the headline risks. Many risks will also carry forward throughout the productive lifetime of the fields, typically 20-30 years.

 

— The ‘What Comes After?’ Issue

 

Let’s further assume that production does start. In addition to all the strategic and operational risks, Cyprus itself will also be faced with economic and social risks. Economic risks? Surely that’s the whole point of exploitation, isn’t it? Oil and gas will reduce Cyprus’s economic risks by introducing a strategic revenue stream and all its spin-offs. Well, yes, but this is limited to a, say, 25 year primary window. As with so many of Cyprus’s struggles with a changing world, few people bother to ask the obvious question ‘What comes after?’ The property boom, asset sales, tourism, you name it – there is a lack of strategic thinking and planning for ‘what comes after’.

If oil and gas production is viable, Cyprus will enjoy a primary revenue window of 20-30 years (or 50% of notional lifetime). The UK is now beyond the 50% lifetime mark with its offshore oil and gas. Many Middle Eastern countries that previously were third-world societies and economies continue to enjoy their respective oil and gas bonanzas. However, most are struggling to address adequately ‘what comes after?’ for when their fields peter out. Those that fail to plan for an ‘economy without oil’ can expect a bleak future with massive social unrest, political upheaval and possible collapse. Some will be in danger of reverting to a third-world existence. Existing tensions within the Middle East associated with oil and gas wealth, such as the haves-and-have-nots, power abuses, Western control, corruption and human rights abuses, are already fertile ground for global terrorists such as Al Ghaeda. Populations used to easy oil wealth but with little or no other alternative industrial base to fall back on will be especially vulnerable. Saudi Arabia, for example, is only belatedly trying to tackle its future without oil. Some have barely started. If anyone doubts the seriousness of the problem, they need only read Stephen Leeb’s book* on the global energy crisis which exists already.

 

— Societal and Social Risks

 

Then there are societal and social risks. Offshore oil and gas will change fundamentally the character of Cyprus. Ports will need to service the installations. A myriad of essential support companies will cluster around the ports – pipeline suppliers, welders and fabricators, divers, drillers, seismic specialists, helicopter companies etc etc. Offshore crews from all over the world will be patronising the bars and restaurants. Ugly MODUs (Mobile Offshore Drilling Units) and other floating units will be laying up for maintenance and repairs, in the ports and/or within sight of the beach. All great for the local economy in one way – but damaging to the tourist economy in another. I have seen it all before from Aberdeen to Eindhoven, from Great Yarmouth to Ijmuiden, from Stavanger to Camranh Bay. Cypriots will have to get used to a new lifestyle and environment largely imposed from outside.

We all saw how close Cyprus came to environmental disaster with the oil contamination of coastal waters in Lebanon during the Israeli attacks in 2006. An offshore oil and gas industry brings the potential for environmental accidents that much closer to Cyprus. Tourist beaches are in the front line.

 

— Regional Tensions

 

Turkey has already made plain its outright opposition to the Republic going ahead unilaterally with an E&P programme. Turkish sabre-rattling and hints of potential attacks against offshore installations do not help. Of course, the oil and gas dispute is not a one-off problem but part of the much bigger ‘Cyprus Problem’ which remains complex and, so far, intractable. The Republic has every right to proceed with an E&P programme. However, if Northern Cyprus is ever to be enticed back into the legitimate fold, we do need not oil and gas to be added to the long list of ‘levers’ or ‘weapons’ (negative motivators) in the overall dispute. Cyprus’s oil and gas should be a conflict-neutral inducement (positive motivator).

Statesmanship is needed both to ensure that the Republic’s legitimate E&P programme proceeds and to allay the understandable fears of Turkish Cypriots that they will receive no benefits. Mutually Assured Paranoia must be dispelled. Former Minister Nicos Rolandis has suggested an in-trust escrow fund specifically to protect Turkish Cypriot rights to oil & gas revenues. I do not know if this specific suggestion is viable but it exemplifies the creative, positive thinking required to build mutual trust and confidence. We need to see a lot more.

 

— The Future is Now

 

The offshore oil and gas experience of Cyprus is just beginning. It is probably a far bigger proposition than many in Cyprus imagine. The rewards can be immense but so too can be the risks – for the government, industry, the economy, society, the region. The production and revenue half-life may be as short as 20 years. Not only do more immediate strategic and operational risks need to be addressed but so too does the ‘what comes after?’ question for when Cyprus’s offshore fields run dry.

 

*The Coming Economic Collapse – How You Can Thrive When Oil Costs $200 a Barrel, Stephen Leeb, ISBN 0446 57978-5, Warner Business Books, 2006.

 

Dr Alan Waring is an internationally recognised risk management consultant who advises companies, organisations and government departments on a wide range of risk issues. Contact [email protected].

 

©2007 A E Waring