Prudent Management of the Hydrocarbons Concessions

Article published in the Cyprus Weekly newspaper on 11 Jan., 2013.

By Constantinos Hadjistassou, PhD

Cyprus’s bright spot?
More than one year since the official announcement of the discovery of seven (7) trillion cubic feet (tcf) of natural gas by Noble Energy, in the Cypriot Exclusive Economic Zone (EEZ), negotiations between the Government and Total’s and ENI’s consortia regarding blocks 2, 3, 9, 10 and 11 are progressing faster than ever. French Total, one of the six “supermajor” oil and gas companies, flirts with blocks 10 and 11 while Italian ENI and South Korean KOGAS placed their bets on blocks 2, 3, and 9.

If concessions are awarded new prospects lie in the horizon in terms of scoring more natural gas and possibly oil. It is believed that block 10 conceals commercial size oil reserves. Although in the Levantine basin some 35 tcf of natural gas have been discovered so far jointly between Cyprus and Israel, no company has yet to successfully drill for oil at the desirable depth. By virtue of its higher mass density oil in associated oil and gas reservoirs is found at a greater depth below the natural gas.

After negotiations between Mr. Sylikiotis and Total, Novatec, and Gazprom Bank for block 9 collapsed on December 19, the minister is forging ahead with fresh talks with the ENI consortium for the same block. Block 9 received the most bids during Cyprus’s second licensing round for oil and gas rights. Out of the 12 blocks on offer, the current Government is prepared to grant permits for five. For the record blocks 2, 3, 9, 10 and 11 cover an estimated surface of 18,049 square kilometres— almost double the area of Cyprus.

KRETYK, the national oil company (NOC), recently took over the hydrocarbons discussions sidelining a state committee which comprised Mr. Kassinis and other technocrats. More than two months ago Kassinis resigned from his position as a non-executive member of KRETYK.

Today (8/01) Mr. Sylikiotis briefed a parliamentary committee on the progress of energy negotiations including the political decision to establish a sovereign hydrocarbons wealth fund for the oil and gas proceeds. Should Israel assent to export a portion of its natural gas together with Cypriot gas through the proposed Cyprus LNG facility the implications are expected to ripple as far as Russia. For economic and (geo)political reasons Russia wishes to remain a protagonist of natural gas exports to the EU.

Cyprus’s second licensing round for offshore permits conveys some strong messages to Turkey. Geopolitically, it is about high time Turkey reconsiders its double standards policy of selectively abiding with the UN Law of the Seas (UNCLOS) in the Black Sea while not embracing the convention in the Aegean and the Mediterranean seas bordering with Greece and Cyprus, respectively. With more gas and oil waiting to be discovered in the Levantine Basin, Turkey is presented with the unique opportunity to adopt a far-sighted approach of resolving problems with her neighbours. In exchange Turkey will gain access to energy supplies for its emerging economy. Prohibitively expensive energy prices could prove Turkey’s choke point.

Successful negotiations between the Government representatives and the Total and ENI consortia will conclude with the award of 5 exploration licenses— one for each block. What’s different now and back in 2007 when Noble was granted the first and only exploration license is that a working hydrocarbons system has been discovered in the Cypriot EEZ let alone Israel’s natural gas strikes in light of the agnate geological formations shared among the Aphrodite and the Leviathan gas fields.

Geologically this means that companies have now a higher probability of striking gas (& oil) than prior to 2007 and in exchange are prepared to accept smaller returns on a lower risk investment. Yet oil exploration is a risky and capitally intensive business and the profitability of the companies should be ensured through the production sharing agreement. As expected the latter developments lend more leverage to Cyprus strengthening its negotiating position. Cyprus is therefore presented with a unique opportunity to negotiate production sharing contracts with more favourable terms that the previous one. Signature bonuses and local content are two areas which can be improved with immediate impact. Local content refers to the development of local skills, technology transfer, utilisation of local manpower and possibly local manufacturing.

Past Governmental decisions regarding natural gas barely afford complacency. Despite the progress realised even since Mr. Sylikiotis took over from Ms Antoniadou there is a long way for restoring public trust. The latest lapse being the way in which the NOC was staffed. Without discrediting anyone international practices involving transparent procedures should be adopted. In the name of meritocracy and professionalism any position however senior should be publicly advertised giving the opportunity to qualified applicants to apply. Needless to say experience in developing hydrocarbons fields is a prerequisite for such high-level posts.

As far as the second licensing round is concerned signature bonuses, ranging from €150 to €200 million, could be a lifeline for the Cypriot economy. Presently we are told discussions are on the fast lane. Negotiating with veterans from the oil and gas industry is only possible if the calibre of the Governmental team matches their counterparts. Experience is instrumental. And this because tweaking a few clauses in the terms could cost millions if not billions in the long run. Oil and gas negotiations usually involve multidisciplinary teams charged with handling technical, environmental, financial, regulatory, legal and other matters.

It is not a matter of which Government awards the hydrocarbons rights, what matters most is to demonstrate competence in handling the negotiations and landing the best deal possible. We often hear that our natural wealth is Cyprus’s last hope to weather the economic storm. Popular wisdom should guide decision makers to whom we entrust the fate of our country.

You may also find interesting:

Defaming the Petro-Industry

The Geology of Cyprus

Maximising the Benefits From the Third Licensing Round

Leave a Reply

Your email address will not be published. Required fields are marked *