Cyprus is an island with less than 1 million inhabitants located at the northernmost tip of the African plate, which in the Middle East area contains 65% of the world oil deposits. Following speculation over many years that there may be vast amounts of natural gas in Cypriot territorial waters and the June 2010 discovery of 453bn cubic metres of useable gas in the Leviathan gas fields in Israel, the Cypriot drilling finally begun by the US-based energy company Nobel Energy in the zone known as Block 12 (Aphrodite field), an 800,000-acre (1,250-square-mile) area in the Cyprus Exclusive Economic Zone (EEZ) southeast of the island and only 34km from the Leviathan gas fields. As predicted, the Noble Energy Chairman and CEO Charles D Davidson announced a "significant" discovery in a statement made in December 2012. According to Noble Energy, Block 12 contains an estimated 5 to 8 trillion cubic feet (tcf) (140-230 billion cubic meters) of natural gas. "If we use prior news releases on the Tamar and Leviathan discoveries (in Israel) as a guide, we believe that today's initial resource report by Noble is likely to be conservative, and we would not be surprised to see significant upward revisions in the next couple of years as the project nears production," Sterne Agee analyst Michael McAllister said in a note. Even with the current estimate of Noble Energy, Cyprus will become self-sufficient in the commodity for decades. Every trillion cubic feet of natural gas covers the Cyprus' electricity production needs for 30 years, meaning the discovery in Block 12 will keep Cyprus satisfied for about 200 years. If one considers that 6,000 cubic feet is equal to one barrel of oil, then approximately 7 tcf is equivalent to one billion barrels, and to give an indicative value of these deposits based on the barrel analogy, the deposits in Block 12 worth today around € 100 billion (US$129 billion). That is 15 times the annual budget of Cyprus.

The discovery of significant natural gas reserves in Block 12 of Cyprus and the nearby Tamar and Leviathan fields in Israel has indicated enormous petroleum and natural gas potentials in the region, deeming the  circumstances for exploitation and production of oil and gas in Cyprus extremely positive and attracting great international interest from major energy providers. The Republic of Cyprus published in February 2012 requests for bids in the second round of tenders for offshore gas and oil exploration concessions in the official journal of the European Union. The Cypriot government is offering concessions to Blocks 1 to 11, and Block 13, located to the south of the island inside the island's 51,000-square kilometre EEZ. When Cyprus published its first tender for offshore gas exploration in 2007, Noble Energy was the only company to bid. Cypriot officials are now confident that the new tenders will draw far greater attention following the proven natural gas discoveries. The Eastern Mediterranean Sea is considered to be a generally underexplored energy province. The Cypriot and Israeli strikes all fall within the perimeter of the greater Levant Basin, a triangular salient of the sea between the two countries that may hold, according to an estimate by the US Geological Survey, as much as 3.4 trillion cubic meters of natural gas and 1.7 million barrels of oil. Israeli companies have an edge, as they already possess geological information of the region, which includes Israeli and Cypriot waters in the Eastern Mediterranean. Israeli companies mentioned as possibly interested in the Cypriot tenders include Delek, Shemen Oil and Gas Resources Ltd. Delek, which is already working together with the Houston-based Noble Energy Inc., has already proposed a partnership with Cyprus to build a facility on the island for processing and exporting natural gas found in Israeli and Cypriot waters. Delek, which is controlled by Yitzhak Tshuva, already owns 30% of the rights to the Block 12 concession, which it acquired from Noble Energy Inc. last year.

On the other hand, big oil companies have the advantages of size and wherewithal, as well as political ties with the Cypriot government. Russian relations with Cyprus are at their best in many years. Russia has forged close ties with Cyprus, both in providing financial assistance and acting as an ally in regional geo-political matters. Russia's Gazprom has already announced that it will participate in the tenders. Options explored included Gazprom contributing to a partnership for the development costs of the field (estimated at $6 billion-$8 billion), the purchase of gas under long term contract for resale to the Middle East and Far East, and the development of liquefaction terminals. Noble’s vice president Terry Gerhart  stated in February 2012 that Noble Energy is considering building a natural gas terminal for the domestic market and for exports from Cyprus.

By  now it is evident that new favourable economic prospects stemming from the discovery of hydrocarbons are opening for the future of Cyprus. Within the next five years the development of gas related infrastructure in Cyprus is expected to boost investment on the island, which would be disproportionate to its size and population. The significant injections of fresh capital should revitalise the island’s economy and lead to job creation in the near future taking out the country from the troubles created during the last few years from the worldwide economic crisis. Cypriot officials also hope that the gas discoveries in Cyprus will encourage investors from other sectors to invest in Cyprus. In this respect, there are numerous articles in the local media for likely investments from multinational organizations and funds on various projects in Cyprus. Less than a month following the Prime Minister Netanyahu’s visit to Cyprus in February 2012 with energy related issues and projects on the agenda, a business forum brought entrepreneurs from Cyprus and Israel together in Tel Aviv to discuss their common interest in the latest developments in gas exploration developments. Representatives of the real estate and tourism sectors in Israel also attended.

Looking into the future, Cyprus should achieve growth due to access to cheap energy supplies, which should ultimately improve the quality of life of its people in monetary terms. Proven discoveries only from Block 12 (140-230 billion cubic meters) could make Cyprus, which now relies almost exclusively on imported and expensive fuel oil to fire its energy grids, self-sufficient for decades. The island has estimated needs in gas of 1 billion cubic metres (bcm) per year. That benefit would also flow to the Cyprus businesses. Some more optimistic people say that the taxes could also reduce boosting further the economic activity. Natural gas is also a source of low carbon electricity and offers a great potential for providing Cyprus with a low-cost pathway to secure clean electricity well into the future which will better in this respect the quality of life of the future generations.

Cyprus, one of the smaller European Union (EU) states, might also have a role to play in the energy strategy of the EU where gas resources are undergoing a much-observed depletion, especially since European production started decreasing in the North Sea. Indeed, the EU is today almost 50% dependent on imports for its oil and gas consumption and it will be 70% in about 15 years. A large part of its oil and gas imports will come increasingly from Russia. This comes at a time when natural gas is gaining ground over other fossil-fuels and becoming the pillar to a “greener economy”. Following the Kyoto Protocol signed in 2005 requiring participating countries to reduce their greenhouse gas emissions, natural gas is expected to climb up to the second most important source of energy in the EU, just behind oil and shoulder to shoulder with coal (nuclear and renewable energy being a distant fourth and fifth respectively). With all these in mind, the Eastern Mediterranean energy resources may prove very valuable for the EU, and Cyprus can play a regional role in the achievement of Europe's energy goal. Goldman Sachs published a research report in December 2011 stating that the Cyprus success may help fast-track EU-based liquefied natural gas development.

The world energy demand is predicted to rise by up to 30% by 2030 with the emerging markets of China and India having a major contribution to that extent. Energy, already an important security concern, will continue to shape future military and political relations, especially if there is no other option other than oil and gas to satiate growing demand. Turkey in an effort to gain something from the proven gas reserves of Cyprus has warned the Cyprus Republic against pursuing “adventurist policies,” and said Turkish Cypriots should also have a say in how the island’s oil-and-gas rights are used. That’s rich, coming from Turkey who invaded Cyprus in 1974 and illegally occupies the north of the island, ethnically cleansing the Greek-Cypriot population from the occupied areas, who to this day cannot return to their homes. The USA could not be neutral over this giving its nod to the Republic of Cyprus to proceed with the exploration; not only because Noble Energy is an American company and the USA is very much in favour of developing alternative energy sources which are not dependent on Middle East oil, but also because it was the right thing to do (in accordance with international law and the Law of the Sea Convention). Other stakeholders, including the EU, Israel and Russia also stood behind the Republic of Cyprus giving the clear message that it is Cyprus’ “sovereign right” to go ahead.

Article by:
Andreas Philippou, Partner
Baker Tilly Klitou
Nicosia, Cyprus