Cyprus: Exploitation Of Hydrocarbon Resources In Cyprus

Geostrategic and financial interests regarding gas exploration and exploitation

Cyprus, the third largest island in the Mediterranean Sea, is located at the crossroads of major international energy routes between the Gulf countries and the West. Its status as a Member State of the European Union offers security guarantees, and its economy is well known as an open services-oriented market. The geographical position of Cyprus and its worldwide financial activities have made it a strategic hub for business activities in the region and the recent discovery of gas deposits offshore Cyprus gives it potential to develop as a centre for oil and gas trading.

Cyprus is a promising frontier for exploration, with proven potential in the vicinity. It is adjacent to five main offshore recognised hydrocarbon structures, namely the Eratosthenes Continental Block, the Levantine Basin, the Herodotus Basin, the Nile deep sea fan, the Eratosthenes Basin and the high anticlinorium and the top Eastern Cyprus Arc. The offshore deep water frontier exploration area extends to about 51,000km² being part of the exclusive economic zone located to the south of the island. The studies to be carried out in Cyprus's EEZ concern 13 exploration blocks. The large potential of Cyprus as new emerging hydrocarbon region, is mainly based on geostrategic factors that offer the ability of offshore investments in the area.

Experience in nearby Israel regarding the exploitation of natural gas resources in the Eastern Mediterranean rim demonstrates that the demand for natural gas is increasing and that a shortage is expected in 2012-2013 due to disruptions in Egyptian gas supply. Gas supply will be accelerated in 2014 with the commissioning of the Tamar field, discovered in 2000, 15km off the coast near Ashkelon. This is projected to produces considerable gas quantities, with deposits estimated at 1.2 trillion cubic feet (33.5 billion cubic metres).

The natural export options have so far focussed on the installation of a plant using gas produced in the EEZs of Israel and Cyprus to produce fertilizers, methanol and petrochemicals. The initial estimates of a pipeline between the Leviathan gas field and Vasilikos in Cyprus indicate a length of 200 km, with a maximum depth in excess of 2 km. The construction and the development cost of the relevant pipeline are estimated at $3.5 billion, with the plant itself estimated at between $8 billion and $12 billion.

The EU characterises Cyprus Republic as an emergent market for natural gas and also as an isolated market. Unlike the electricity sector, which has already been liberalised, the gas sector will remain a government monopoly for at least 20 years. The state-controlled Natural Gas Public Company (DEFA) has been designated by the government as the sole importer and distributor of any form of natural gas in Cyprus.

Current licensing rounds in the area concern 3 countries. The first is Egypt, where the creation of a new joint venture between Dana Petroleum and the Egyptian General Petroleum Corporation aims at the production of oil and gas through a lease in the Gulf of Suez after approval by the Egyptian Ministry of Petroleum. Egypt is offering 15 blocks covering more than 18,000 km² with a bid submission date of 31 January 2012. In Algeria Alnaft, the national agency for the development of hydrocarbon resources, is seeking to conclude contracts for exploration and exploitation in two blocks including the Rhourde Rouni Block. In Iraq, twelve blocks covering 87,200 km² are on offer in the fourth licensing round with bidding in January 2012.

Looking back over recent years, the economic crisis depressed the global demand for gas 2009/2010, particularly in the OECD and in Eastern Europe/Eurasia. The over-supply in the market was exacerbated by the investment in unconventional gas production in the USA, reducing reliance on gas imports.

Most long-term supply contracts into Europe and Asia include commitments as regards minimum volume and most buyers under such contracts have reduced their purchases to the maximum extent allowed under the contracts would allow it. Refusal by the pipeline suppliers to Europe, particularly Russia and Algeria, to lower their prices caused their exports to fall significantly in 2009. According to certain gas trade scenarios, an erosion of excess capacity will be observed over the next few years, with the average capacity utilisation rate moving from less than 75% in 2009 to around 80% by 2015. In this scenario, global demand is driven strongly by Asia, whereas the gas demand growth in Europe is expected to recover more slowly. Because of new transport capacity that has become available, pipeline capacity utilisation is unlikely to return to pre-crisis levels for some years, if at all.

Looking more closely at the gas and LNG markets in Europe and the eastern Mediterranean region, natural gas has increased its share in the energy mix over the last 40 years and according to the latest International Energy Agency (IEA) analysis the outlook for gas over the next 30 years is positive, with the prospect of an even greater share in the overall energy mix.

According to IEA estimates, gas demand in Europe is likely to reach nearly 670 billion cubic metres by 2035. The decreasing cost of LNG makes it more competitive in more markets, especially where there is political instability, making it a more attractive option than international pipelines crossing many countries.

Global demand for natural gas may be twice current levels by 2030, with LNG growing perhaps fivefold, driven by continued cost reduction. The IEA's analysis shows that the total capital costs for new LNG projects will increase by about 40% from the mid 1990s to 2010 with the greatest cost reduction being seen in projects to expand existing facilities and to build larger trains. In addition, the LNG shipping fleet will need to increase in order to meet increased demand.

LNG allows access to otherwise inaccessible suppliers and can hence improve gas supply security. With the exception of Greece and Turkey, South-East Europe (SEE) lacks LNG import facilities and cannot benefit from availability of cargoes at what may be attractive prices.

LNG has the potential to take an important role in European gas supply. Today, LNG represents approximately 20% of European gas imports. For 2010 European gas imports were estimated at 300 billion cubic metres out of total consumption of 560 billion cubic metres. The main European LNG supply sources to date have been Algeria, Nigeria, Libya and Egypt, although Qatar has also started supplying LNG to European destinations in recent years.

Legal and regulatory framework

Cyprus's long term energy strategy is aligned with EU directives and is based on three main objectives: security of supply, economic efficiency and environmental strategy. The policy regarding security of supply reflects the EU's aim of diversification of energy sources and parallel maintenance of national security stocks. The economic efficiency objective targets a reduction in the cost of energy and the cost of production. On the other hand, environmental strategy targets the EU's objectives regarding use of renewable energy sources, the reduction of CO2 emissions and the increased efficiency in power generation.

The European Commission is pressing for further liberalisation of European energy markets in order to promote lower energy prices through choice of suppliers, to guarantee a fair opportunity of investment between companies of different sizes by giving them equal access to the market, to encourage investment in power plants and to allow the emissions trading scheme to work properly.

The harmonisation of Cyprus Law with EU Directives 2009/72 and 2009/73-3 is aiming at this end. The regulation is seeking to harmonise and strengthen the powers and duties of the national regulators in order for them to be able to issue binding decisions on companies and impose penalties, where is considered appropriate. Further, EU regulation is seeking to ensure the independence of the national regulators of industry interests and government intervention by having their own budgets and strict rules for management appointments. A platform of mutual cooperation should also be developed and implemented in order to facilitate cooperation among the totality of EU national regulators.

The legal and regulatory framework in Cyprus governing hydrocarbons, their prospection exploration and exploitation and oil and gas drilling activities, including their implications for business and the environment, comprises national laws, EU regulations and multilateral and bilateral international agreements.

Hydrocarbon exploration licences allow geophysical surveys as well as exploration drilling. They are granted for an initial period of up to three years with an option to extend for up to two periods of two years each. On each renewal, at least 25% of the initial area is relinquished. In the event of a discovery, the licensee has the right to be granted an exploitation licence for an initial period of up to 25 years with an option to extend for up to 10 years.

As a minimum, the production sharing contracts issued by the government include obligations to carry out at least a specified amount of exploration work, the definition of the work programs and of the budgets to be attributed and the specification of the project appraisal and development plans. The contracts will also include clauses dealing with profit sharing of the oil and gas production, annual surface fees as well, bonuses and training obligations included in the project.

Cyprus has carried out a Strategic Environmental Assessment (SEA) to identify, describe and evaluate the likely significant effects on the environmental effects of implementing hydrocarbon exploration and exploitation activities and applicants are required to follow and comply with the results and recommendations of the SEA.

Bilateral agreements regarding the maritime boundaries of the exclusive economic zone have been concluded with Egypt, Lebanon and Israel, in 2003, 2007 and 2010 respectively. In addition, a framework agreement with Egypt concerning the development of cross-median line hydrocarbon resources was signed in 2006, together with a confidentiality agreement.

Cyprus's newly-discovered natural gas resources will make a substantial contribution to Europe's energy security and will promote the development of the South-Eastern Mediterranean region. As a result of this development further bilateral relationships and synergies may be developed with international investors and other interested countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.