ENERGY: Cyprus $9.3 bln natgas development plan is only one of many hurdles

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Cyprus has signed its first natural gas exploitation deal worth $9.3 bln over 18 years with a consortium involving industry giant Shell, US-based Noble and Israel’s Delek but there are more challenges ahead.

Thursday’s official signing in Nicosia comes after cabinet approval of the revised product sharing contract for the commercialisation of the Aphrodite gas field in Cyprus’ block 12.

“Today's signatures for the 25-year Aphrodite natural gas exploitation license, as well as the revised production sharing contract are especially significant developments for the Cyprus energy programme,” Energy Minister George Lakkotrypis said at the signing.

“Noble Energy, Shell and Delek now have in their hands the first exploitation license granted by the Republic of Cyprus so they can commercialize the deposit,” he added.

He said the deal – which took a year to negotiate – means Cyprus will become a producer offering an alternative source of gas supply for the EU while helping to create a “gas corridor” in the Eastern Mediterranean to Europe.

A re-working of the production contract ensures Nicosia receives an average yearly income of 520 mln dollars over the 18-year lifespan of the gas field.

The figures were based on the average price of oil being around $70 a barrel in 2022 with a 2% increase rate and calculated natural gas quantities of 4.1 tcf.

Lakkotrypis said under the new deal, the consortium is obliged to keep to a tight deadline to extract the gas reserves by 2025 when first revenues are expected.

Under the newly revised production sharing contract, the economic terms are adjusted featuring a mechanism R-factor that would render the project sustainable in case of low oil price, while Nicosia will benefit in the case of higher oil prices.

Lakkotrypis said that during the renegotiation, the consortium argued it could not proceed with development due to low oil prices, while the contract had no effective control clauses.

Natural gas is expected to flow from Aphrodite and be pumped to Egypt’s Idku via a subsea pipeline where it can be exported as LNG to Europe and international markets. Shell will be the buyer of Aphrodite’s gas.

It is described as the “biggest development project” on the island with around 7.9 bln dollars invested in infrastructure.

Lakkotrypis said once operational, the gas field will boost jobs while “strengthening Cyprus's strategic relationship” with Egypt, US, Netherlands, the UK and Israel.

Challenging market

Energy expert Charles Ellinas called the deal “positive news” but said there was still a long way to go.

“We should put it into context. What has been signed is the Development Plan, which is a contractual obligation marking the transition from exploration to exploitation.” 

He said the agreement allows the companies to proceed with appraisal drilling next year or 2021 to obtain a more accurate estimate of recoverable gas quantities in the gas-field, to get a more accurate estimate of costs.

With this data the consortium can enter into negotiations with the Idku LNG plant to sell the gas and if successful sign a firm gas sales agreement and then secure required financing from investors and banks.

“If all these things are successful, reaching a final investment decision (FID) will probably take 3 years. At that point, the project is firm and proceeds to construction, but we are a long way off,” said Ellinas. 

The Atlantic Council senior fellow said global markets are challenging while gas and LNG prices are very competitive and will continue as the world inexorably moves towards cheap renewables.

“In Asia, where our potential markets will be, coal is still king, and it is much cheaper than gas.” 

He said gas and LNG demand will be increasing in Asia, but it is also a highly competitive market.

“Not only is it oversupplied with LNG, but it has to compete with cheap coal and renewables.”

“Europe is well supplied with very competitive gas and LNG with a target to achieve a 50% reduction in carbon emissions by 2030 and net-zero by 2050, gas will have to be decarbonised if it is to secure European markets.” 

Ellinas points out that Aphrodite gas will be trying to sell in this environment where profit margins are low, “given that East Med is expensive to develop, it will be facing headwinds”. 

The need to secure sales into Egypt’s Idku LNG plant also poses its own set of difficulties.

“That will not necessarily be easy. Egypt has surplus gas to export and during the last three months Idku has been unable to sell its LNG because of very low market prices,” said Ellinas

“There is a long way to go and it won’t be plain sailing. Securing gas sales is by no means certain. But at least the first step has been taken,” he added.

Texas-based Noble Energy in 2011 made the first discovery off Cyprus in the Aphrodite block estimated to contain around 4.5 trillion cubic feet of gas – it has yet to be extracted.

The discovery of nearby Egypt’s huge Zohr offshore reservoir in 2015 has stoked interest that Cypriot waters hold the same riches.

Cyprus has pushed ahead with exploring for offshore energy resources despite the collapse in 2017 of talks to end the country's decades-long division.

That has angered neighbouring Turkey, which has had troops stationed in the country since 1974 when it invaded and occupied its northern third in response to a coup sponsored by the military junta then ruling Greece.

Turkey was widely condemned after sending two drillships inside Cyprus’ exclusive economic zone after announcing it would begin its own energy exploration.

A Turkish vessel is currently conducting operations in block 7 of Cyprus’ designated EEZ licensed to Italy’s Eni and France’s Total.

“Today's development is yet another milestone in the energy programme of Cyprus which demonstrates that despite all the difficulties our programme is proceeding as planned,” said Lakkotrypis.

In February, ExxonMobil and Qatar Petroleum discovered a huge natural gas reserve off the coast of Cyprus, the Mediterranean island's largest find to date, holding an estimated five to eight trillion cubic feet.

The Italian state-controlled Eni and Total are heavily involved in exploring offshore Cypriot oil and gas.