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Cyprus’s game-changer: the Mighty Aphrodite

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By GlobalMarkets
27 Mar 2017

The discovery of the Aphrodite gas field in Cypriot waters has led many to believe that the potentially huge gas reserves in the eastern Mediterranean could transform Cyprus’s economy.

Road to Cyprus — a series of articles in the run-up to the 2017 EBRD Annual Meetings in Nicosia

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“Game-changer” is a term that is likely to be heard a number of times during discussions about the prospects for the Cypriot economy in the forthcoming EBRD meetings in Nicosia. More specifically, it is a term that is often applied to the impact that the discovery of gas in Cypriot waters may have on the long term prospects for the economy.

To date, this has been restricted to a single field, named Aphrodite, which was discovered at the end of 2011 by Noble Energy, and is estimated to hold reserves of 4.5 trillion cubic feet (tcf). “This may be small by global standards,” finance minister Harris Georgiades told GlobalMarkets last month. “But it has been estimated that the net revenues to the republic from this single field would be enough to repay approximately one-third of our debt as it stands today.”

“We expect several more fields to be discovered through the next rounds of exploratory activity,” adds Georgiades. His optimism, and that of a number of energy companies with their eyes on the potential of the eastern Mediterranean, is underpinned chiefly by the discovery in 2015 of the colossal Zohr gas field by ENI in the Egyptian Exclusive Economic Zone (EEZ). Described by Eni as “sensational”, Zohr is estimated to contain reserves of some 30tcf, and its proximity to the Cypriot EEZ has given rise to hope of other gas discoveries in Cyriot waters.

The most notable of these are in deepwater Block 11, where Total is due to start drilling in a well named Onisoforos, promisingly located just 6 kilometres from Zohr. With Eni also expected to start drilling in block 3 later this year, the government is hopeful that at least two further discoveries will be announced in 2017.

Attention is now also turning to the potential of the three blocks that were put up for auction in the third offshore licensing round in May 2016. Exploration and production contracts are due to be signed imminently for offshore Block 6 (with Eni and Total) Block 8 (with Eni) and Block 10 (with Exxon Mobil and Qatar Petroleum). According to Stephania Tsangaridou-Lazarou, industrial extension officer at the Ministry of Energy, Commerce, Industry and Tourism, offshore Block 10, which had previously been relinquished by Total, attracted the most competition in the bidding round.

Tsangaridou-Lazarou says that the immediate priority, however, is the commercialisation of reserves from the Aphrodite field. She says that the field’s contractor, along with the Cyprus Hydrocarbons Company, is negotiating the sale of its natural gas to Egypt following the signing of an agreement between the two governments last year on the construction of a pipeline. “It’s public knowledge that Egypt’s industry is heavily dependent on oil and gas, and that its LNG terminals are under-utilised because all their domestic production is consumed by the local market,” says Tsangaridou-Lazarou.

Future generations

The potentially huge gas reserves in Cypriot waters is a resource that the government, quite rightly, is determined not to squander. “We have adopted an IMF framework built on the Norwegian model which ensures that any natural resource discoveries cover the needs of future generations,” says Andreas Charalambous, director of financial stability at the finance ministry in Nicosia. “Because we want to minimise the debt and climate change challenges that we will leave to future generations, our ability to take advantage of our natural resources today are constrained.”

Gas discoveries are also expected to have significant implications for employment in Cyprus. “The potential for job creation is not just within the industry itself, but in the demand for a wide range of professional services that the industry will need,” says Tsangaridou-Lazarou. “For several years, the government has been offering grants to undergraduates and postgraduates for PhDs in the oil and gas sector. We’re working with companies in the industry to create placements for the graduates who will soon be qualifying.”

The intensified search for gas in Cypriot waters will create substantial opportunities for the local financial services sector. “When the time comes, we will of course be ready to participate in loan syndications in the energy sector,” says Irena Georgiadou, chairwoman of Hellenic Bank. “Although some of the projects may be too big for a bank of our size, the opportunities in the energy sector will not be confined to the big-ticket drilling projects. There will also be opportunities in ancillary services arising from the gas discoveries, which is where I think the Cyprus banking sector will play a leading role.”

The local banking sector, together with international lenders like the EBRD, will also have a key role to play in supporting the financing of projects in the renewables sector, which will have an increasingly important role to play in Cyprus’s energy mix over the coming decade. According to George Papageorgiou, industry extensions officer at the energy, commerce, industry and tourism ministry, the government’s objective is to generate 13% of its gross final energy consumption and 16% of its electricity from renewables by 2020. He adds that Cyprus is already comfortably ahead of this target, with 9.43% of final energy consumption and 9.85% of electricity coming from renewables, chiefly from wind power, in 2015, while solar power is gaining ground rapidly.

Private sector investment is expected to shoulder most of the burden of ensuring that Cyprus meets its clean energy targets. “New projects used to depend on feed-in tariffs, but with reduced capital costs, especially in photovoltaics, there is no longer any need for government support,” says Papageorgiou. “We are now seeing a lot of interest from private investors in renewables, especially in solar power.”

This article is the third part of a series of six pieces on Cyprus’s economy in the run-up to the 2017 EBRD Annual Meetings in Nicosia.

Click here for part one – Cypriot economy surprises on the upside February 22, 2017

Click here for part two – Cyprus — building bridges, not walls March 7, 2017

Click here for part four - Cyprus eyes golden future for tourism industry April 10 2017

Click here for part fiveAccelerating the recovery in Cyprus’s banking sector March 19 2017

Click here for part six – Cyprus focuses on new FDI push May 2 2017

By GlobalMarkets
27 Mar 2017