Cyprus wraps up good year with better outlook for 2019

3 January 2019
20 December 2018, Week 50, Issue 480

A ramp-up in drilling activity and deepening political relations are likely to spur on development next year, writes Gary Lakes in Nicosia

WHAT: 2019 is shaping up to be a key year for East Med gas.

WHY: ExxonMobil’s drilling results are due, with several other key developments shaping up. 

WHAT NEXT: Greater clarity on the shape of the nascent regional gas market is likely over the next 12 months.

It has been a good year for Cyprus and for the East Mediterranean in general. Progress has been made with moving projects forward and relations between countries have improved as plans for the region’s emerging gas sector take shape. The one blot has been continuing threats from Turkey against Cyprus and the IOCs that are engaged in exploring the island’s EEZ.

Cyprus enters 2019 with considerable anticipation. ExxonMobil is currently drilling the first of two back-to-back wells in Block 10, with the results due early in the New Year. Italy’s Eni and France’s Total have yet to make their plans for next year known, but it is anticipated they will form a joint company for the purpose of exploration in Cyprus. They have recently bid jointly on Block 7 and will likely receive the licence for the asset soon.

Eni is the largest investor in the Cypriot offshore, where it is partnered with KOGAS in Blocks 2, 3 and 9, and with Total in Blocks 6 and 11 – and soon 7. It also holds the licence for Block 8 on its own.

Noble intent

US explorer Noble Energy, which is partnered with Royal Dutch Shell and Israel’s Delek Drilling, appears to be finally making headway towards monetising the 127 bcm Aphrodite field in Block 12, which it discovered in December 2011.

Noble and its partners have asked the Cypriot government for an adjustment in their PSC in order to improve their return on investment for developing the field. This currently hinges on a likely deal with Shell to export the gas to Egypt via a new pipeline to the Idku LNG facility (operated by Shell) for re-export.

Once a new agreement is sorted with the government, a commercial deal with Shell Idku will probably come soon after. This would be a major step forward for Nicosia towards its goal of becoming a gas exporter, though it could be 2023 before the gas, and the revenues, begin to flow.

Egyptian aims

Political relations with Egypt continue to deepen, as Cairo looks to transform the country into a regional energy hub. The import and subsequent re-export of Cypriot gas would assist its progress to this end. Egypt has also taken steps to improve technical and legal matters in order to facilitate the import of Israeli gas for domestic use. Israeli gas could also be re-exported from the North African country as LNG.

On the domestic front, Cyprus may finally get a chance to more towards cleaner energy and cut the cost of its electricity bills. The Natural Gas Public Co. (DEFA) has launched its fourth attempt to secure LNG cargoes with a tender for an FSRU to be installed at Vassilikos near the island’s main power station. DEFA will then tender for LNG supply early in 2019. The company was previously unable to find a deal that was cheaper than the cost of importing liquid fuel for power generation, though this time a solution has to be found, as Cyprus faces fines from the EU if it does not reduce its carbon emissions.

US position

While the Turkish navy disrupted Eni’s drilling plans in Block 3 earlier this year, there has so far been no repeat at ExxonMobil’s drill sites.

Indeed, ExxonMobil’s presence could change the dynamic offshore Cyprus, provided the US super-major makes a worthwhile discovery and stays on in the region. Its presence appears to have contributed to changing Washington’s attitude towards Cyprus. The US’ previous position was that the Republic of Cyprus had a right to explore its EEZ and any revenues earned should be shared equitably with all Cypriots (including the Turkish-Cypriots) in the context of a settlement of the four-decade-old Cyprus problem.

This line, which had become the US mantra on Cypriot exploration over the last couple years, never addressed Turkey’s belligerent tone towards Nicosia or its interference in offshore exploration work. But last week, in an interview with Greece’s Ekathimerini newspaper, US Assistant Secretary of State for European and Eurasian Affairs Wes Mitchell told Turkey to back off.

“Greece, Cyprus and Israel are very important countries for the US because they are stable, democratic, Western allies in a region where you don’t find a lot of stable, democratic partners,” Mitchell told the publication. He said it was a “natural step” for the US to deepen its relationship with them.

Most importantly, Mitchell reaffirmed US support for Cyprus’ exploration programme. “Our line has been consistent. Cyprus is a sovereign country and just like any other sovereign country it has resources and can develop those resources,” he said. The official added that he hoped Nicosia would “do this in a way that is equitable and brings everybody on board, but ultimately that is a decision for Cyprus, its leaders and its people.”

He went on to say that Turkey’s point of view towards exploration in the Cyprus EEZ “is a minority of one versus the rest of the world. The rest of the world has a very clear, straightforward view that the EEZ of Cyprus is grounded in international law,” and that the US would “not take a friendly view to any kind of harassment in Cyprus waters, especially when US ships are involved.”

The foreign ministries of both Italy and France should issue similar statements, making it clear to Ankara that they also will not tolerate harassment of their ships, otherwise there could be repeats of what happened in Block 3 in February.

Consensus building

For the last few years, Cyprus has cultivated tripartite groupings designed to build consensus on regional energy co-operation. There is the Cyprus, Greece, Israel tripartite group, which has come to include Italy, and in which the US has also expressed an interest in participating. There is also the Cyprus, Greece, Egypt group, which France has expressed an interest in joining.

Washington’s rekindled focus on the region has been encouraged by ExxonMobil’s presence. But other geopolitical factors are also in play, such as Russia’s growing presence in Syria, its relationship with renegade Libyan General Khalifa Haftar and its budding oil friendship with Saudi Arabia. While these may not be top concerns for US President Donald Trump, who has his own problems with Russia, they are certainly issues that the US State Department and Department of Defence are concerned with. The Iranian military presence in Syria and its support for Lebanon’s Hezbollah, which virtually controls the country, are major worries for Washington.

Furthermore, Turkey’s stance towards the US’ Kurdish allies in Syria and its threats to invade their stronghold in eastern Syria may be an indication to the US that Ankara is not the ally that Washington thought it was.

What next

In the midst of this, Cyprus is looking at a better year ahead for its energy sector. There could be a discovery in Block 10 and a commercial agreement with Egypt. There may also be a few more wells drilled and possibly a new FSRU with some LNG cargoes arriving.

What is clear is that 2019 will be a pivotal year for Cyprus and the rest of the East Mediterranean. By the end of it, there should be a clearer picture of how the gas sector will evolve, with considerable progress on several key projects.

 

Edited by

Ryan Stevenson

Managing Editor

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