Cross-border projectsCyprusEconomyEnergyEurope

Offshore Deposits Offer New Horizons for Cyprus

Thanks to new discoveries of offshore natural gas, Cyprus has a real opportunity to expand its reach in the energy market. But to do this, the island-nation needs to navigate tricky geopolitical realities - as well as expand its current infrastructure – or the opportunity may slip away.

Earlier this year, international energy players discovered two more sites rich in natural gas, just offshore of Cyprus, in Blocks 6 and 10, respectively led by Eni and Total on the one hand, and ExxonMobil and Qatar Petroleum, on the other. This follows previous discoveries in the area, starting as early as 2009, when prospectors discovered reserves of natural gas in the Tamar field off the coast of Israel. Subsequently came the discovery of the Leviathan field offshore of Israel, and the Aphrodite and Calypso fields in Cypriot waters. Altogether, these deposits contain an estimated 40 trillion cubic feet of natural gas – or more.

Currently, both Cyprus and Israel import their energy, but these gas fields have the potential to change all of that, as well as generate revenue via energy exports. Both Europe and Egypt are target markets for this new energy resource, especially as Europe’s demand for natural gas is likely to increase – in part to reduce its reliance on Russia, but also because gas is a cleaner alternative to coal, as the continent slowly transitions to renewable energy sources.

Last year, exploratory drilling in the Aphrodite field in Block 12 failed to produce commercially viable reserves. With the find of new potential deposits in other blocks, Energy Minister Yiorgos Lakkotrypis addressed the Gulf Energy’s Eastern Mediterranean Gas Conference in Nicosia in early March, saying the “quality of the reservoir in Block 10 allows us to be optimistic about the very high recoverability potential” of the ExxonMobil discovery. “We are waiting for the remodelling or re-calibrating of geological data and will look again at Block 10 targets.”

If the newly located deposits do bear commercially viable loads, Cyprus plans to export any natural gas from the Aphrodite field to Egypt via a pipeline, but there are multiple ways Cyprus could benefit from its offshore energy resources.

Four Options for Cyprus

Andreas Koutsoulides, Commercial Manager of the state energy firm, Cyprus Hydrocarbons Company (CHC), proposes that Cyprus build its own LNG (Liquefied Natural Gas) plant, which cools down natural gas to its liquid state for greater ease of transport; especially if the gas is being transported by any means other than a pipeline. A site in Vasilikos was prepared, and a master plan drawn up after the discovery of the Aphrodite field, but the limited resources discovered made the plans economically unviable – something that might have changed due to recent discoveries. And indeed, plans to build the site are already in motion, with expected completion by 2023.

Koutsoulides notes that the LNG plant would require “a minimum threshold of 10-15tn ft3 of resources to enable such a plant to go ahead”. That makes the LNG proposal “number one in terms of strategy, because not only is it a solution that can bring upstream revenue to the country, but it will also have additional effects on the domestic economy in terms of employment, and significant industrial activity”.

Alternatively, Cyprus could build a floating LNG plant, which according to Koutsoulides, offers “tried-and-tested technology, and we are looking at that very seriously. A floating facility gives lots of flexibility to move onto another field. Also, the threshold for the resources required to get a project up and running is lower than for an onshore facility”. This option would allow Cyprus to process its own natural gas more quickly, for less monetary outlay.

Cyprus could also simply export the natural gas to Egypt, albeit without a pipeline, as their domestic energy market has high demands. Egypt also has two existing LNG plants Cyprus could make use of: Idku and Damietta. Cyprus has already planned to monetise resources from the Aphrodite field in this manner, and such ideas are attractive “because of the supply and demand structure there, the availability of infrastructure, and changes in the gas market regulatory framework”, said Koutsoulides.

Finally, Cyprus could make use of the East-Med Gas Pipeline project, which, if it gets up and running, would allow natural gas to be transported from Israel and Cyprus to Northern Europe, opening new markets for both countries. Getting a reliable alternative energy supply is a major concern for Europe, for both economic and political reasons. Currently, the majority of Europe’s oil and gas comes from just one source – Russia – and in 2016, the production of primary energy within the EU was fifteen per cent lower than a decade earlier, making energy security a major issue. “There has been a sharp decline in Europe’s energy supply”, Koutsoulides says, “and they have been looking for years for diversification of supply”.

Of these four options, East-Med energy consultant, Charles Ellinas, strongly prefers that Cyprus build an onshore LNG plant; ideally to handle natural gas resources offshore, and from the Leviathan field, offshore from Israel. The Leviathan project, Ellinas says, “is having some troubles finding customers”, and Cyprus handling the liquefaction of Israel’s natural gas, might open the European market for this and future offshore discoveries.

According to Ellinas, “Cyprus should start developing LNG now, and not wait. If Aphrodite gas was sold to Egypt, it would delay things another two to three years. And the longer you leave it, the more difficult it becomes. ExxonMobil has mega-projects elsewhere. Just because they made a discovery in Cyprus, it isn’t a game-changer for them.”

The East-Med Gas Pipeline project would allow natural gas to be transported from Israel and Cyprus to Northern Europe. Copyright: Dabarti CGI /

Ellinas also considers an East-Med pipeline to Europe not commercially viable, in part because the project needs to take costly detours to avoid Turkey’s maritime boundaries. The project remains in the planning stages, so the course of the pipeline can still change in line with shifting geopolitical realities. But once the pipeline is laid, adapting to diplomatic needs will not be so easy, especially if Turkey refuses to join in partnership with the project. And importing gas from Russia is simply less costly. “To produce gas in Israel costs $4-5/mn Btu. By the time you add on pipeline costs and a profit, it is arriving in Europe at $8-9/mn Btu. Gazprom can deliver gas to Europe at a profit for $4.50/mn Btu. Even US LNG is finding it difficult. It is a very competitive market.”

Attracting Israeli business could also give Cyprus a geopolitical edge: Turkey opposes Cypriot exploitation of offshore natural gas deposits while the island remains divided; and also claims sovereignty over some of the EEZ, or exclusive economic zone – and has announced plans to drill off the south of Cyprus, in an assertion of these claimed rights.

In fact, the breakaway “Turkish Republic of North Cyprus” – which is only recognised by Turkey – already informed the UN, that drilling for oil and natural gas will commence within the Cypriot EEZ, with research and drilling set to be conducted by the Turkish seismic research ship, Barbaros. The areas to be mined are: Areas F and G, which are also within Cypriot Exclusive Economic Zone parcels 1,2,8,9; and portions of parcels 12 and 13, as well as areas claimed by Greece.

A US official indirectly warned Turkey that the United States did not encourage these plans, saying that ”the United States was strongly discouraging any activity that could escalate tensions” in the region.

Turkey has long opposed Cyprus “unilaterally” awarding exploration and drilling contracts to firms without consulting the Turkish-occupied north. In Turkey’s letter to the UN, Turkey reiterates proposals to include the exploration of offshore hydrocarbons in the ongoing dialogue, between the Greek and Turkish Cypriot communities, as part of the island-nation’s reunification efforts.

If Turkey successfully finds and extracts natural gas from the region, it could potentially destabilise Cyprus’ growing energy sector, as well as threaten Israeli energy interests. But if Cyprus cuts a deal with Israel, it is believed that Turkey will be much less likely to start drilling off Cyprus’ southern shore, in a bid to avoid confrontation with both states.

To make that work, Cyprus and Israel would need to settle their dispute over the Aphrodite gas field, which extends to the Ishai field in Israeli waters – straddling the nations’ maritime borders and respected EEZs. Settling via international arbitration is likely to be time consuming, and slow down development. Instead, a possible unitisation deal would allow for joint exploration, development, and revenue sharing from the field, thereby bypassing the costs of arbitration. This cooperation is also in line with previous trilateral mechanisms established between Greece, Israel, and Cyprus (and similar trilateral summits with Jordan and Lebanon) to promote economic cooperation and energy diversification.

The Fluctuating Egyptian Market

Both Cyprus and Israel need to take into account, that while Egypt hungers for natural gas, they are also producing more of their own, thus turning away from energy imports. After the chaotic 2011 uprisings, Egypt was forced to import liquefied natural gas. Now, however, they are resuming their own exports. “If the minister of petroleum is allowing Egypt to export, then he must be confident Egypt will have sufficient production to do so”, says Ellinas.

The Egyptian company Dolphinus Holdings, has signed a ten year contract with Noble Energy and Delek Drilling, for Israel’s offshore fields to export the natural gas therein to Egypt – but many technical and security issues remain unresolved, stalling the project. And new discoveries at Eni’s offshore Nour field will also further boost Egypt’s own natural gas reserves, and are likely to sharply curb any appetite for importing energy from abroad. That in turn threatens the likelihood of Cyprus being able to offload their relatively small volume from the Aphrodite field to Egypt, as there was little urgency for the project a few years back, when Egypt was short of gas. It is even less likely that Cairo will make it a priority going forward, when their own natural gas reserves have increased.

Room To Move

Cyprus might be angling to be a future East-Med hub, but so is Egypt. If Egypt becomes the main hub, Cyprus would have a secondary role as a regional centre. But even that more limited goal will remain out of reach, if energy development companies are not given the space to build service centres. Cyprus has given approval for the development of the LNG plant at Vasilikos, as a dedicated energy port, but it won’t be ready until 2023. Until then, energy sector companies are stuck at Limassol, the island’s main commercial port – and it’s a tight fit.

Alessandro Barberis, Managing Director of Eni Cyprus, commented on the tight space: “Currently, we as operators are forced to use the only oil and gas space available, at Limassol Port. It is not enough if simultaneous drilling operations are under way. The Vasilikos Port project is targeted for 2023, but we need to think of the medium term.” Dalio Vitale of Halliburton agrees: “Vasiliko is important, but it’s five years away. We need something in the shorter term.”

Varnavas Theodossiou, head of ExxonMobil in Cyprus, was also frustrated by the cramped working conditions. “Maybe Cyprus can expand Limassol Port, maybe we can use Larnaca. But the current port situation is not sustainable for operators.”  Yves Grosjean, General Manager of Total, added that, “when we talk about an oil and gas service centre, we are talking about an urgent need that won’t go away (…) In some cases there are up to twenty different companies working with one operator for drilling one well”.

If Cyprus doesn’t expand facilities soon enough, the companies currently present might just pack up and leave, to find less crowded waters elsewhere – possibly to Malta. Currently, the lack of space is already slowing down drilling schedules. Eni-Total has planned five wells at the end of this year, and ExxonMobil another two next year.

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B. Lana Guggenheim

Lana is a freelance journalist based in New York City. She has a M.Sc. in International Conflict from the London School of Economics and Political Science. She has worked as an analyst, reporter, and editor, covering extremism, culture, economics, and democracy.

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