Maximising the Benefits From the Third Licensing Round

Article appeared in Sunday Mail, on Aug. 21st, 2016

Dr. Constantinos Hadjistassou*

Cyprus-3rd_censing-roundTaking into account the current historically low crude oil prices, the interest shown in the third hydrocarbons licensing round by energy behemoths such as Exxon-Mobil, Statoil and Qatar Petroleum, is a highly encouraging development. Although the timing of the call for tenders was bold, nevertheless great care is needed if we are to make the most of this interest.

Key to the success of the call for tenders was the discovery of the Zohr supergiant gas field which shares similar geological structures – carbonate layers in the bedrock – with the offshore blocks auctioned in the third round. The big question now is the ranking of the bids submitted by the companies as well as the final political decision granting exploration concessions.

The choice of the team that will be assessing the bids is an issue of particular interest. Although one might have expected that the assessment and ranking of the bids would be assigned to one (or more) specialised teams of petroleum industry experts, the bids submitted by ExxonMobil, Statoil, Total and ENI are to be evaluated, among others, by the foreign ministry and the ministry of agriculture. Naturally the Cyprus Hydrocarbons Company will be weighing in along with the energy ministry and the government’s consultants. Given the peculiarities of the oil and gas industry, Cyprus ought to invest in creating a single department or agency exclusively handling such specialised matters.

The Cyprus National Hydrocarbons Company (KRETYK) was established in 2012. Subsequently, in early 2014, the baton was handed to the newly created Cyprus Hydrocarbons Company (EYK). What is needed is not for each newly elected government to set up its own state petroleum company, but rather to have in place a commonly accepted organisation with the appropriate staff and equipment that is able to develop and preserve technical know-how. Outside consultants may certainly contribute, but relying on our own wherewithal is key.

It is likewise worth noting that the state petroleum company (or some other state company, for that matter) does not participate in bidding for any of the offshore blocks. Such a clause could be incorporated into the terms of the tender. But why should we want a state company to participate, even with a small stake, in a consortium that would explore and subsequently develop a natural gas (or oil) field in Cyprus’ Exclusive Economic Zone?

One need only look at Norway’s experience in the North Sea during the 1970s. It is simply not enough to ask for the assistance of foreign companies in exploring the EEZ if at the same time we are not laying the foundations to maximise the benefits to Cyprus. Norway, for instance, through a series of incentives – as well as disincentives – encouraged local companies, including Statoil, to take part in actual field development.

There are, to be sure, concerns over where the financing would come from enabling a state company to take part in such costly activities. Suffice to mention that, to date, the ENI-Kogas consortium has poured more than half a billion dollars into the Cypriot EEZ.

One possibility for financing the state petroleum company would be for the capital to be initially put up by the rest of the members of a consortium, and thereafter the state company would reimburse them either via the sale of natural gas or through other revenues, e.g. signature bonuses.

Considering the interest of the companies which participated in the third licensing round, two issues are a top priority: ExxonMobil-QP’s interest in Block 10, and TOTAL’s reclaiming of the same block (this time jointly with ENI), along with Statoil’s presence. A crucial element in the decision to award licences – which is now a political decision – ought to be the diversity of companies in the EEZ, rather than having players with a dominant position. Let us hope that a swift rebound in oil prices will give that much-needed boost to explore the EEZ, creating new prospects for our country. The icing on the cake would be the discovery of a Zohr-sized field.

*The author is assistant professor at the University of Nicosia.

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