How hydrocarbons can steer Cyprus out of crisis

Article published in Sunday’s Mail on July 15th, 2012
By Constantinos Hadjistassou, DPhil*

Not many years ago hardly any energy industry insider could have imagined that the Eastern

 Med will someday emerge as a promising hydrocarbons frontier on a par with the Persian Gulf,

 offshore Australia or the Yamal Peninsula in northern Russia.
Although, at the time, Egypt had already located some respectable oil and gas fields it was the 

discovery of the Tamar formation, with an estimated 275 billion cubic metres (bcm), in 2009,

 that raised some eyebrows. One year later the Leviathan gas find with an estimated 470 bcm

 changed the regional energy landscape forever. In the meantime, Cyprus’ Energy Service 

in collaboration with the Norwegian PGS company had acquired some 20,000 line kilometres

 of two-dimensional (2D) multi-client seismic data in the Cypriot Exclusive Economic Zone (EEZ).
Bilateral agreements with neighbouring countries paved the way for the exploitation of the subsea

 mineral wealth. First, Cyprus and Egypt agreed and ratified the delimitation of their EEZs in 2003. Negotiations between Lebanon and Cyprus followed. But Lebanon, despite its ambitions to 

exploit its potential offshore resources, has yet to ratify the accord with Cyprus citing a dispute 

with Israel. Then, in 2010, Israel and Cyprus reached consensus on drawing the demarcation 

line between their EEZs in accordance with the UN Law of the Sea (UNCLOS).
In 2011, Noble Energy’s consortium, already with a strong presence in the area, drilled an 

exploratory borehole in Cyprus’ Aphrodite block and announced in December the discovery 

of an estimated 200 bcm of natural gas in place. Technically, the exploratory phase is probably

 the most challenging stage of tracing a working hydrocarbons system. At least one appraisal

 well will be necessary for gathering more information about the characteristics of the reservoir. 

Attributes like the permeability and porosity of rock formations will be used to construct a 

conceptual model of the reservoir ultimately permitting a more accurate estimation of the volume

 of the hydrocarbons. Even before well completion, more challenges lie on the horizon. 

Developing an ultra deep water (>1,500m) gas system poses some formidable engineering

 challenges. High water pressure, limited access to equipment due to the water column, 

marine geo-hazards such as an unstable seabed, sea motions, and the corrosive nature 

of seawater are only few of the issues to be addressed.
After its discovery, natural gas has to be processed, usually onboard a floating platform, 

before being pumped to the shore (or processed onsite using a floating liquefaction facility)

 via a submarine pipeline. Collectively, discovering, extracting, processing, and transporting

 natural gas is a capital intensive business. Therefore, unless the natural gas accumulation is

 “large enough” it would be difficult to justify an expensive offshore development. Despite 

being cheaper than oil, natural gas emits about 30 per cent less carbon dioxide compared

 to heavy fuel oil.
At a water depth of 1,689m the separation of the Aphrodite natural gas from water and other 

gaseous and liquid fractions is usually done onboard a spar-based platform or a semi-submersible. 

Together with the submarine pipeline the estimated cost of these facilities is on the order of $3.5 

to $4 billion. Even if all the electricity needs of Cyprus were to be met using natural gas powered

 generators, such as the combined cycle gas turbine (CCGT) units at Vassiliko, the natural gas

 needs of Cyprus will amount to an estimated average of 1.2 bcm per annum until 2020. From 

the economic standpoint Cyprus’ minuscule natural gas needs are hard to substantiate the 

development of the Aphrodite field.
If the natural gas field will not be developed exclusively for energy security, then a large 

proportion of it will need to be sold in the international market or sourced locally as feedstock 

to chemical processes in order to make the development of the field viable. On top of that, a 

one train liquefaction plant, capable of processing and exporting 5 million tonnes of natural 

gas per annum (mtpa) will cost approximately 8 billion euros to commission. Clearly, investments

 for such mega-scale projects will need to be raised from the international markets. Buoyant 

natural gas markets in Asia and EU demand could dictate the project viability. Under the 

current economic crisis which Cyprus is experiencing the Aphrodite discovery offers a glimpse

 of hope to the ailing national economy.
It will take more than political courage to transform Cyprus into a regional energy exporter and

 transshipment hub. Definitely the advisory report issued by Cyprus energy regulator (CERA),

 which advised the government of the self-evident options regarding the exploitation of the 

natural gas, marks only the beginning.
Transforming Cyprus into an energy exporter and a regional energy hub is easier said than 

done. Meeting such ambitious targets will require vision, political courage, public approval, 

incentives for the private sector, transparency, and of course overcoming a host of obstacles.

 Central to this will be the award of concessions during the second licensing round. Cyprus’ 

second auctioning for exploration rights has surpassed expectations in the sense that it 

succeeded in attracting some of the big protagonists in the upstream and downstream oil and

 gas industry.
Companies like Total of France, KOGAS of South Korea, Petronas of Malaysia, and ENI of Italy,

 are only a few of the contestants. Careful screening of the bids and award of the leases should 

also factor in the technical know-how of the companies in ultra deep-water developments as well

 as their country of origin and economic leverage. As past experience has shown, with Noble 

Energy’s consortium, big names will make it more difficult for Turkey to interfere.
One of the ways Cyprus will be able to raise funds from the second exploration round, in the 

short term, is through “signature bonuses”. In order to entice governments, companies usually

 offer to hand over cash in return for a concession. This tactic also serves as an indication of 

the promising nature of offshore acreage. Unverified sources in the press claimed that some 

companies promised a signature bonus of as much as €120m if Cyprus were to award them 

a specific block. Careful and balanced decisions are vitally important emphasising also 

prospects for collaborations between the consortia and companies.
With the commencement of infrastructure developments, such as the construction of submarine

 pipelines, employment opportunities will help lower the unemployment rate in Cyprus. The 

dedicated nature of such projects though warrants specialised expertise both at the vocational

 level, such as welders and technicians, and at the scientific end, e.g., subsea engineers. 

Auxiliary services such as ferrying people to and from the platforms and infrastructure 

maintenance will also be needed in the short and long term.
If Cyprus were to construct a single train of 5 million tons per annum (mtpa) Liquefied Natural 

Gas (LNG) plant considerable employment opportunities will arise. At its peak construction phase

 the LNG project is expected to employ about 4,000 workers. An agreement to liquefy Israeli 

natural gas will also translate into royalties from the export of LNG and other valuable by products.

 These benefits are expected to accrue at least three years from now when, and if, the funding 

for the LNG plant is raised. Provisions in contracts should offer the opportunity for the active 

participation of Cypriot construction companies.
Perhaps in the shorter time frame, in relation to LNG exports, and provided interest from the 

petrochemical and chemical industries materializes, natural gas could be used as a raw material

 for the synthesis of ammonia, for fertilisers, production of plastics and hydrogen, and even 

diesel fuel. In 2011, Qatar inaugurated the largest plant in the world which converts natural gas

 into diesel. Given that Cyprus is financially in a dire situation financing large projects will emanate

 from multi-national companies. The government though should offer incentives aimed at attracting 

companies interested in such ambitious ventures.
Besides the infrastructure, Cyprus should invest heavily in transferring and developing know-how

 from the oil and gas industry and its human capital base. Capitalising on its traditionally good 

relationships with the Arab countries, its highly educated workforce, developed financial service

 sector, and its EU membership, Cyprus could act as a regional energy hub offering oil and gas

 support services for nearby Middle East countries. Norway’s offshore service and maritime 

industries could offer some inspiration. Despite an imminent decline in its oil and gas revenues,

 Norway’s petro-cluster currently employs both directly and indirectly some 250,000 people.

 Aker Solutions, Statoil, Seadrill and the Ulstein Group are only a few of the Norwegian champions

 operating in the global oil and gas arena.
Something often forgotten is Cyprus’ maritime sector. Currently, Cyprus is a world-class ship

 management centre with the tenth largest commercial fleet, in terms of gross tonnage, in the 

world. Some of these companies are already active in oil and gas exploration and production 

sector. Government provisions could facilitate knowledge transfer from oil and gas companies,

 to be granted exploration and production rights in the Cyprus EEZ, to local firms. Revitalising

 the Cyprus economy and developing local expertise should guide government decisions. 

Diversifying the Cyprus economy with a strong emphasis on entrepreneurship will help steer

 Cyprus out of the economic crisis and lay the foundations for a prosperous future. Setting the

 priorities and safeguarding the sustainable development of natural resources fall under the

 jurisdiction of government functions. Private sector involvement can bring along speed, creativity

 and efficiency.
*researcher at the University of Cyprus specialising in hydrocarbons and low-carbon technologies