Professional Documents
Culture Documents
CYPRUS
HYDROCARBONS:
SCENARIOS AND
OPTIONS
A Non-Political Review
GIANNIS KALLIKA
No part of this publication may be reproduced or transmitted in any form or by any means without permission
in writing from Thoukidides Think Tank. Please direct inquiries to:
Thoukidides Think Tank
www.thoukidides.com
secretariat@thoukidides.com
Its vision is To constitute a credible source of strategic analysis over vital issues that concern Cyprus.
Its mission is To Collect and employ the views and expertise of distinguished scientists for the analysis of vital
issues that concern Cyprus.
TTTs first engagement, which has become the flagship of its future work, has been the preparation
of its vision for Cyprus. This has been labelled as Vision 2020 and is summarised in the following
statement: Cyprus to become a fully sovereign and democratically advanced state where all lawful citizens
will enjoy human rights, basic freedoms and liberties, and all the benefits entailed by the EUs acquis
communautaire under conditions of social and economic prosperity and security.
Further to Vision 2020, TTT has carried out research on key strategic issues related to Cyprus. To date the
Energy, Health, Economy, Education, Security, Cyprus problem and State Institutions committees have
presented in-depth scientific work. This work has been publically presented and is available on our website.
In relation to energy, TTTs vision is summarised in the following statement: to constitute a driving force for
sustainable development, reliable political, economic, and environmental benefits for all lawful citizens and
future generations of Cyprus through an effective and transparent management framework which will be
governed by the principles and values of our people.
ii
iii
Dedicated
to
the
future
generations whose lifestyle is
highly dependent on our decisions.
iv
Preface
The subsurface of Cyprus has been under the microscope of oil and gas companies since 1938, when a
subsidiary of Iraq Petroleum (currently BP) undertook seismic surveys. Sixty years later and after two bidding
rounds, the consortium led by Houston-based Noble Energy has identified quantities of natural gas in its first
appraisal drilling. French TOTAL and the consortium of ENI/KOGAS (Italy/South Korea) are the other two major
companies that have been granted exploratory licences in Cyprus EEZ. Their exploratory drillings in 2014 and
2015 will allow the Republic of Cyprus to have a more realistic picture of its reserves in blocks 2,3,9,10,11 and
12. With only Noble Energys results from its appraisal drilling, it is accepted that there are not enough reserves
to allow the FID for an onshore liquefaction terminal with 2 (or more) trains. The current poor financial state
of the country, does not permit other export options which could be used for the gas quantities found to date;
such as the pipeline to Greece. The other highly advertised option (a pipeline to Turkey), realises the resolution
of the Cyprus problem. However, the current state of the proximity talks suggests that political breakthroughs
must happen, thus putting the scenario on hold. In anticipation of future price drops in liquefied natural gas,
the Cypriot Government and the companies involved are in a rush to find more gas that will enhance the
feasibility of the onshore liquefaction terminal; Cyprus Government top priority.
The available information is limited, technical and confusing making it difficult for the public to have a clear
view of the various events taking place; hence the need for an easy to read and understandable analysis. In
this publication, the reader will have the opportunity to get a sufficient knowledge of all the aspects regarding
the hydrocarbons exploration and production from multiple angles. The author describes the geopolitical
importance of Cyprus by showing the direct interest of Russia and U.S.A. and correlates that with opportunities
in the European market. Furthermore, an overview of the regional and international exploration is given,
followed by the stages of the exploration and production of natural gas. It highlights the importance of pricing
mechanisms, market trends, types of contracts and legality issues such as the Exclusive Economic Zone and
the Exploration and Production Sharing contract. Special interest is given to the monetization options available
such as the Compressed Natural Gas, Liquefied Natural Gas (onshore/offshore), pipeline to Greece, pipeline
to Turkey, pipeline to Egypt, EuroASIA electricity transmission line and Gas to Liquids.
The need for a strategic partnership in the region with a country having proven gas reserves is presumed, thus
a comprehensive analysis of various scenarios depending on Israels export options is given. Israels export
scenarios include export through a pipeline to Turkey, a pipeline to Greece, a pipeline to Egypts LNG facilities,
CNG to Greece and LNG through an offshore liquefaction vessel or onshore at Vassiliko in Cyprus.
Unfortunately the changeable economic/energy environments in Egypt, Lebanon and Greece could not be
marginalised from the analysis.
Acknowledgements
The author would like to thank all the contributors and reviewers for their input and comments.
The author would like to thank TTT and in particular Athos Kyranides and George Karagiorgis (author of section
16, Game of Thrones) who suggested the completion of this publication. Many thanks also go to other
colleagues in URS Corporation, Alison Horton, Daniel Evans and Ross Tyler who provided essential support in
terms of editing, production and context. The publication also benefitted from the challenging assumptions
and careful review of Andrea Lambi, Aris Kapsanakis, Daniel Kiremijian, Frango Marangou, Naheeda MHussein; and Suzan Chatora who kindly took the time to comment on earlier drafts.
Many thanks also go to other specialists in the industry who shared their views on natural gas across the value
chain, notably to Anastasios Giamouridis, Charles Ellina, Fiona Mullen and Gary Lakes. Special thanks go to
Petros Isidorou (author of section 15, Indirect Revenues) for rigorously attacking my assumptions making them
either stronger or redundant.
The author also expresses his gratitude to Konstantinos, Maria and Eliana Kallika and Melpo Stylianou, whose
continuous support and encouragement has proven invaluable in this project.
Giannis faced various difficulties in finding the information and it is his promise that he will be at the service
of those who seek to know more about Cyprus hydrocarbons. Feel free to contact Giannis at
ykallika@gmail.com
The authors intention is to present a comprehensive and comprehendible review of hydrocarbons in relation
to Cyprus and emphasize the prospects and dangers associated with them. The author simply identified and
organised them into a sequential framework and takes no credit for them or considers himself as an expert in
the exploration and production of natural gas. The topic of hydrocarbons is rather new for the Cypriot people
and information about it not readily available. As a result Cypriots are currently deprived of the opportunity
to appreciate the extent of the opportunities and threats accruing from this precious gift of God.
vi
Disclaimer
While this publication intends to provide accurate and authoritative information in regard to the subject
matter covered, neither the publisher nor the author makes any representation, express or implied, with
regard to the accuracy of information contained in this publishing, nor do they accept any legal responsibility
or liability for any errors or omissions that may be made. Where values for parameters have been stated, these
should be treated as indicative only. Readers should independently verify the prices/values they are dealing
with as they may differ substantially from those referred in this book. This work is supplied with the
understanding that Thoukidides Think Tank and its authors are supplying information, but are not attempting
to render engineering or other professional services. If such services are required, the assistance of an
appropriate professional should be sought.
How to cite this book: Kallika G., 2014. Cyprus Hydrocarbons: scenarios and options, a non-political review.
Thoukidides Think Tank. ISBN 978-9963-2086-0-9. Available online from www.thoukidides.com.
vii
Contents
List of Figures .................................................................................................................................................... xii
List of Tables .................................................................................................................................................... xiv
Glossary ............................................................................................................................................................ xv
Abbreviation ................................................................................................................................................... xvii
1.
Introduction ................................................................................................................................................1
1.1.
2.
Cyprus .........................................................................................................................................................2
2.1.
Historical context................................................................................................................................2
2.1.1.
1877-2005 ..................................................................................................................................3
2.1.2.
2.2.
3.
4.
5.
4.1.
Qatar ...................................................................................................................................................9
4.2.
Russia ..................................................................................................................................................9
4.3.
4.4.
Australia ........................................................................................................................................... 10
4.5.
Egypt ................................................................................................................................................ 11
5.2.
Israel ................................................................................................................................................ 13
5.3.
Jordan .............................................................................................................................................. 15
5.4.
Lebanon ........................................................................................................................................... 15
5.5.
Syria ................................................................................................................................................. 15
5.6.
Greece ............................................................................................................................................. 15
5.7.
Turkey .............................................................................................................................................. 16
5.8.
6.
7.
7.2.
7.2.1.
7.3.
7.3.2.
7.4.
7.4.1.
7.4.2.
7.5.
8.
Egypt ................................................................................................................................................ 29
8.2.
Israel ................................................................................................................................................ 29
8.3.
Lebanon ........................................................................................................................................... 30
8.4.
8.5.
Greece ............................................................................................................................................. 33
9.
Exploration .............................................................................................................................................. 34
9.1.
9.2.
9.3.
10.
10.1.
10.2.
10.3.
10.4.
Oil................................................................................................................................................. 42
11.
Legalities .............................................................................................................................................. 43
11.1.
11.2.
12.
12.1.
13.
13.1.
13.2.
13.2.1.
14.
Downstream Options........................................................................................................................... 54
14.1.
14.1.1.
14.1.2.
Market ..................................................................................................................................... 58
ix
Quality ..................................................................................................................................... 62
14.1.4.
Safety ....................................................................................................................................... 65
14.1.5.
14.2.
14.2.1.
14.3.
Pipelines....................................................................................................................................... 78
Market ..................................................................................................................................... 79
Other monetization options ........................................................................................................ 84
14.3.1.
14.3.2.
14.3.3.
14.3.4.
15.
16.
17.
17.1.
17.2.
18.
17.2.1.
17.2.2.
18.1.
19.
19.1.
19.1.1.
19.1.2.
19.1.3.
19.1.4.
19.1.5.
20.
21.
22.
22.1.
22.2.
22.3.
22.4.
22.5.
23.1.
23.2.
23.3.
23.3.1.
24.
24.1.
24.2.
25.
26.
xi
List of Figures
Figure 1 Aftermath of Turkish Invasion ..............................................................................................................5
Figure 2 Cyprus ...................................................................................................................................................5
Figure 3 Years to Depletion of the Aphrodite Field with and without Exporting...............................................8
Figure 4 Exports of natural gas in 2012 ..............................................................................................................9
Figure 5 Percentage of dependence on Russian Gas (per cent of total, 2012) ............................................... 10
Figure 6 Global LNG trade flows 2012 ............................................................................................................. 11
Figure 7 NEMED estimated gas reserves as high as 122tcf ............................................................................. 12
Figure 8 Global LNG Liquefaction Capacity Utilization by country for 2012 ................................................... 13
Figure 9 Israel gas demand outlook ................................................................................................................ 14
Figure 10 Barbaros' position within Cyprus EEZ .............................................................................................. 17
Figure 11 Natural gas pipeline system to Europe .......................................................................................... 18
Figure 12 PTRNC Proposed EEZ ....................................................................................................................... 19
Figure 13 Subsea wellheads system ................................................................................................................ 20
Figure 14 Typical layout of an LNG FPSO vessel .............................................................................................. 20
Figure 15 Seismic survey using hydrophone ................................................................................................... 22
Figure 16 Hydrophone vs Dual-sensor streamer ............................................................................................. 23
Figure 17 A typical Exploration and Production cash-flow ............................................................................. 24
Figure 18 Petroleum Resource Classification Scheme .................................................................................... 25
Figure 19 Influence of initial planning in the project ...................................................................................... 26
Figure 20 Typical overview of the Project Phases in the Oil & Gas ................................................................. 28
Figure 21 Cyprus Legitimate EEZ ..................................................................................................................... 29
Figure 22 Israeli-Lebanese EEZ Dispute Zone .................................................................................................. 30
Figure 23 Turkey's EEZ in the Mediterranean Sea........................................................................................... 31
Figure 24 Turkey's proposed EEZ..................................................................................................................... 32
Figure 25 Position where Turkish navy overextended their authority within Cypriot EEZ ............................. 33
Figure 26 Greece's EEZ .................................................................................................................................... 33
Figure 27 Onshore/offshore exploration 1938-2014 ...................................................................................... 34
Figure 28 Hydrocarbon Exploration Licences .................................................................................................. 37
Figure 29 Timeframe of hydrocarbons exploration activities ......................................................................... 39
Figure 30 A Cross section of the Messinian Evaporites and Tamar sands Geomorphology Aphrodite 1 ....... 40
Figure 31 A-2 Appraisal well map .................................................................................................................... 40
Figure 32 Gross unrisked mean resources ..................................................................................................... 42
Figure 33 Structural traps ............................................................................................................................... 43
Figure 34 EEZ Boundaries Schematic............................................................................................................... 45
Figure 35 LNG-Oil correlation typical formula................................................................................................. 46
Figure 36 Notional LNG contract slopes .......................................................................................................... 46
Figure 37 World Price formation 2010-LNG imports ...................................................................................... 47
Figure 38 U.S.A. natural gas net export .......................................................................................................... 48
Figure 39 World LNG netback prices November 2013 ................................................................................. 48
Figure 40 LNG/Oils environmental impact ..................................................................................................... 49
Figure 41 Share of oil and gas in electricity generated in Japan ..................................................................... 49
Figure 42 LNG price per annum for various pricing mechanisms ................................................................... 50
Figure 43 LNG costs to Europe ........................................................................................................................ 50
Figure 44 Short vs Long-term LNG Contract (2000-2011) ............................................................................... 51
xii
List of Tables
Table 1 Main periods in the prehistory and history of Cyprus ...........................................................................3
Table 2 Second round bidders ......................................................................................................................... 36
Table 3 Gas supply in EU.................................................................................................................................. 47
Table 4 Gas supply by Source and price mechanism....................................................................................... 47
Table 5 Financial breakdown for onshore liquefaction facility ....................................................................... 72
Table 6 Financial breakdown for offshore liquefaction facility ....................................................................... 74
Table 7 Future Pipeline Projects ...................................................................................................................... 79
Table 8 Regions Pipelines ............................................................................................................................... 79
Table 9 Cyprus-Greece pipeline net revenue .................................................................................................. 83
Table 10 Cyprus-Turkey pipeline net revenue................................................................................................. 84
Table 11 Fees of data packages ....................................................................................................................... 88
Table 12 Annual surface fees .......................................................................................................................... 88
Table 13 GDP growth..................................................................................................................................... 119
Table 14 Sovereign Wealth Fund Rankings for up to 2013 ........................................................................... 121
xiv
Glossary
Bright Spot
Brownfield
Compressed
Natural Gas
Downstream
Greenfield
In reflection seismology, a bright spot is a local high amplitude seismic attribute anomaly
that can indicate the presence of hydrocarbons and is therefore known as a direct
hydrocarbon indicator.
It refers to the development of expansion in a physical commerce-related structure or
group of structures in an area where previous facilities exist. A brownfield investment
has lower cost than a greenfield investment.
Natural gas in its gaseous state that has been compressed.
The downstream sector commonly refers to the refining of petroleum crude oil and
the processing and purifying of raw natural gas, as well as the marketing and distribution
of products derived from crude oil and natural gas.
It refers to a project that lacks any constraints imposed by prior work. A greenfield
investment is the investment in a physical commerce-related structure or group of
structures in an area where no previous facilities exist
Liquefaction
Liquefied
Natural Gas
Natural gas that has been cooled to -259 degrees Fahrenheit (-161 degrees Celsius) and
at which point it is condensed into a liquid which is colourless, odourless, non-corrosive
and non-toxic. Characterized as a cryogenic liquid.
LNG Train
An LNG train is a liquefied natural gas plant's liquefaction and purification facility.
Lump sum
Lump sum
turnkey
Midstream
Lump sum turnkey is a combination of the business-contract concepts of lump sum and
turnkey. Lump sum is a complete payment consisting of a single sum of money while
turnkey means that product or service will be ready to use upon delivery.
The midstream sector involves the transportation (by pipeline, rail, barge, oil tanker or
truck), storage, and wholesale marketing of crude or refined petroleum products.
Pipelines and other transport systems can be used to move crude oil/gas from production
sites to refineries and deliver the various refined products to downstream distributors.
The midstream operations are often taken to include some elements of the upstream
and downstream sectors such as LNG facilities.
Netback
Re-gasification
The process by which LNG is heated, converting it into its gaseous state.
Reserves
Reservoir
The portion of a resource, such as natural gas, that has been discovered and that is
technically and economically extractable.
xv
Taksim
Upstream
Weather
Window
xvi
Abbreviation
ALARP
Bcf
Bcm
GtL
GtL
HH
IOC
JVC
LOI
MCM
MMBoe
MMcf
MoC
MSPA
MTPA
NEMED
Ministry of Commence
Master Sale And Purchase Agreements
Million Tonnes Per Annum
North East Mediterranean Deepwater
National Revenue Fund
Organisation for Economic Co-operation and Development (Cyprus is not part of OECD)
Oil Price Escalation
Project of Common Interest
Pseudo Turkish Republic of North Cyprus
Republic of Cyprus
Return of Investment
Republic of Turkey
Standard Cubic Foot
Supply Purchase Arrangement
Semi Prismatic Type-B Design
Special Purpose Vehicle
Trillion Cubic Foot
Thoukidides Think Tank
United States Geological Survey
BIM
CHC
CNG
CNHC
CYTA
E&P
EAC
EPC
ESPC
FEED
FID
FLNG
FPSO
FSRU
GCV
GoG
NRF
OECD
OPE
PCI
PTRNC
RoC
RoI
RoT
SCF
SPA
SPB
SPV
TCF
TTT
USGS
xvii
1. Introduction
The delimitation of the Cypriot Exclusive Economic Zone in combination with the 3-D seismic analysis and the
successful drilling by Noble Energy in block 12, are expected to change completely Cypruss energy mix. From
the position of a net consumer of hydrocarbons, Cyprus is expected to meet the status of a producer of natural
gas and most probably the producer of oil. It is expected that the transition towards this transformation will
include turbulent periods. Apart from being an exporter of energy, Cyprus will produce natural gas for both
its transportation sector and the power generation.
The prevailing severe economic crisis which was exacerbated by the events of March 2013 has spread the view
that hydrocarbons can be a panacea for Cyprus financial problems.
The unsuccessful explorations due to technological limitations from various companies which date back to
1950 did not put off Cypriots who strongly believed in the existence of hydrocarbons in the Eastern
Mediterranean. The discovery of hydrocarbons in neighbouring countries such as Israel and Egypt and Noble
Energys results from the appraisal drilling in Cypriot EEZ confirmed the presence of natural gas.
Driven by the industrialisation of Asia, consumption of liquefied natural gas (LNG) has grown rapidly over the
last three decades which has increased the price for LNG. The geopolitical developments in Eastern
Mediterranean provide fertile ground for the evolution of Cyprus into an LNG regional hub.
As this publication highlights, the presence of hydrocarbons does not provide just a prosperous financial future
to the legitimate Republic of Cyprus but has drawn the attention of super powers such as USA, Russia, and
China; whose geostrategic position of Cyprus is of great importance. Furthermore, Europes strategy to
decrease its dependence on Russian gas, has been given a real chance of materialising as Cypruss
hydrocarbon reserves can cover a significant part of Europes energy needs in the foreseeable future. This
window of opportunity for Europeans appears much bigger if the prospect of securing the flow of the
hydrocarbons reserves of other Mediterranean countries (namely Lebanon, Israel and Greece) is taken into
account. These developments have alarmed Turkey which has raised its claims over Cypruss energy resources
and has made declarations of an increased will to solve the Cyprus problem. The descent of U.S.A.s Vice
President, John Biden in Cyprus signalled, as he stated, a new era for the Cyprus-U.S.A. relations. This visit
showed White Houses intentions to pave play a role in the evolution of energy developments in the Eastern
Mediterranean.
The monetization options, such as the widely discussed onshore/offshore LNG, pipeline to Greece/Turkey but
also some new options such as the pipeline to Egypt and CNG to Greece/Egypt are examined from various
angles. The highly advertised scenario that Cypriot gas can be supplied to Europe via Turkey is investigated
and discarded since the TANAP (gas pipeline starting in Azerbaijan and reaches Europe via Turkey) will have
reached its full capacity by the time Cypriot gas will be available for export.
The author meticulously examines the untold elements of each monetization option and presents them in a
unique way that anyone with limited background knowledge can understand. The reader will be able to
comprehend the drawbacks, limitations and benefits of each option as well as what is needed for the option
to become economically feasible. Except the various monetization options, there is a distinct reference to
Cyprus neighbouring countries and their strategic plans.
2. Cyprus
Cyprus is the third largest Mediterranean Island in size having an area of 9,251km2 and is situated in the northeastern part of the Mediterranean Sea, 33 east of Greenwich and 35 north of the Equator. The closest
country from their shore is Turkey (North) at 78km and Syria/Lebanon (East) 102/163km, Egypt (South) 356km
and Greek island Rhodes (West) at 415km. The population of Cyprus is 1,155,403 (with a population rate
growth of 1.52 per cent) of which the Greek Cypriots are 77 per cent, Turkish Cypriots are 18 per cent and
other 5 per cent with approximate 10,500 people of Russian origin. Since the Turkish invasion and occupation
of over 36 per cent of Cyprus mainland, around 115,000 illegal Turkish have settled dramatically changing the
demographic balance as a result of Turkeys policy [1].
(Nicosia) has been the capital of Cyprus since the 11th millennium BC. It is situated roughly in the
centre of the island and is the political headquarters as well as the main business centre. (Limassol),
extending along the south coast, is the second largest town and a prestigious tourist destination.
(Larnaca), a commercial centre and the seat of the European Consulates in the 18th century, has now Cyprus
main airport. (Paphos) in the south-west is a fast developing tourist resort. (Famagusta),
the centre of the pre-1974 tourist industry is now a ghost town. (Kyrenia), the main coastal urban
centre in the north, is now inhabited almost exclusively by Turkish Cypriots and Turkish settlers.
2.1.Historical context
The prehistory of Cyprus begins in the Late Paleolithic and Pre-Pottery Neolithic with the first traces of human
habitation 9,000 years ago. In the Bronze Age the island was influenced by the Achaean Greeks and in the Iron
Age there was a fusion of Cypriot, Mycenaean and Syro-Anatolian elements. The island experienced Assyrian
and Egyptian domination (9th8th Millenium BC), Phoenician settlement (Kition), Persian domination (6th
Millenium BC) until King Evagoras of Salamis, ruled from 411-374 B.C.), unified Cyprus and made the island
one of the leading political and cultural centres of the Greek world. Cyprus eventually came under the
Hellenistic state of the Ptolemy of Egypt until the Roman period. For almost eight centuries, Cyprus was under
the administration of the Byzantine Empire of the East until 1192 when it was sold to the Knights Templar and
Lusignan. After a Frankish period (until 1489) and a Venetian period (until 1571) Cyprus came under the
Ottoman Rule, until 1878 when it was sold to Great Britain [2]. After years of armed resistance with Britain,
the Republic of Cyprus was established as an independent state in 1960. On the 14th of August 1974 Turkish
premier, Bulent Ecevit, ordered a military attack and Turkey captured over 37 percent of Cyprus land. Since
then, the two communities have been in talks to reunify the islands but none has led to fruition [3].
Period
Late Paleolithic
Neolithic
Chalcolithic
Early Bronze age
Middle Bronze age
Late Bronze age
Geometric
Archaic
Classical
Hellenistic
Roman
Byzantine
Frankish
Venetian
Ottoman
British
Independent Republic
Turkish Invasion
EU member
Duration
9000-7000 BC
7000-3800 BC
3900-2500 BC
2500-1900 BC
1900-1650 BC
1650-1050 BC
1050-750 BC
750-475 BC
475-325 BC
325-50
50-330
330-1191
1192-1489
1489-1571
1571-1878
1878-1960
1960
1974
2004
Since then, Cyprus is halved with the Northern 37 per cent of Cyprus Island been under Turkish Cypriot
administration named as Pseudo Turkish Republic of Northern Cyprus (PTRNC) as shown in Figure 2. At
present, there are about 35,000 heavily armed Turkish troops and the North has been occupied by some
115,000 invaders from Turkish Anatolia, compared to the 89,000 Turkish Cypriots.
Figure 2 Cyprus
The Republic of Cyprus is the only sovereign on the island that is internationally recognised whilst the PTRNC
has remained unrecognised by the international community except Turkey. The last major effort to settle
the Cyprus dispute was the Annan Plan in 2004. The plan was put to a referendum in both the PTRNC and the
Republic of Cyprus. It only gained the support of the Turkish Cypriots and was rejected by the Greek Cypriots
(76 per cent), who perceived it to disproportionately favour Turks. In total, 66.7 per cent of the voters, both
Greek and Turkish Cypriots, rejected the Annan Plan V on April, 24th 2004 [7]. Five days later, May the 1st,
Cyprus became a full member of the European Union.
2.1.2. 2005 - 2014
Between 2005 and 2008, the Republic of Cyprus followed an adjustment program aimed at meeting accession
criteria for the euro, which was adopted as the national currency in January 2008. GDP grew by an average of
3.8 per cent year-on-year from 2000 until the start of the recession in 2008. Problems emerged in the
5
3. Domestic use
This publication focuses on monetization strategies that concern revenue generation via export price
strategies. A sustainable strategy looking towards the medium and long-term effects, should also take into
consideration how to exploit the natural resource domestically. However, opportunities for domestic
utilization are not assessed in this publication. What can be stated is that regardless of the extent of domestic
gas substitution in the coming years, Cyprus will have sufficient resources for developing export capabilities.
Energy, Commerce, Industry & Tourism Minister Lakkotrypis said that the target of this process is to have
natural gas for energy production in Cyprus in 2016 [16], thus Cyprus will substitute natural gas for oil for
power generationiii. One way of illustrating this point is by comparing the rather small energy usage profile
relative to the estimated (from A2 appraisal drilling well) volume size of Block 12 field. Even in the extreme
scenario where Cyprus gasifies its entire economy and no new discoveries are made from TOTAL, ENI and
Noble there will likely still be sufficient resources left to consider exporting (maybe not with an onshore
liquefaction plant but floating liquefaction plant).
Figure 3 demonstrates the number of years it would take Cyprus to deplete its estimated gas reserves, with
and without exporting. At the extreme scenario, which is with full gasification and no new discoveries, the
field would last about 10 years. Conversely, if Cyprus fully integrates gas into its power sector alone and does
not export, the gas would last nearly 24 years iv.
ii
History repeats itself, Britains main motive in acquiring Cyprus in 1878 was to combat Russian influence in the
Mediterranean and to protect its route to India.
iii
Delek announced that the Noble Energy-led consortium have submitted their application for Cyprus Natural Gas Public
Company tender for an interim gas supply starting in 2016 [293].
iv
For more information see MIT report, Natural Gas Monetization Pathways for Cyprus Appendix 3.
Figure 3 Years to Depletion of the Aphrodite Field with and without Exporting v
4. International statevi
Fast forward seven to ten years (2020-2023) and the LNG markets will be a different place says gas expert
Sikorski. Qatar has been the key exporter with 26 per cent share of the LNG market which will begin to decline
since the U.S.A., Australia and East Africa will start their LNG exports by 2018-2020 targeting the same market
as Cyprus would do; Asia [17, 18].
With regards to the total export, Russia is the largest exporter in the natural gas market with 196bcm exports
(in 2012), as shown in Figure 4, leaving Qatar in the second place with almost half the capacity.
There should be concern if the economy will become too reliant on natural gas. This is principally a security concern
since the natural gas infrastructure is vulnerable, and damage to it will have a disruptive effect on the economy.
vi
Australia is set to overtake Qatar and become the largest LNG exporter in 2020 with an overall share of 21 per cent in
the global LNG trade. With increasing gas exports from East and North Africa, Africa as a region is likely to overtake the
Middle East. Increasing diversification of LNG supply sources supports the globalization of the gas market which will exert
pressure on the landed prices [124, 344].
bcm
150
100
50
0
Russia
Norway
Qatar
Canada
Netherlands
Algeria
Indonesia
United States
Malaysia
Australia
4.1.Qatar
Exports of 3.7tcf per annum proclaim Qatar as the largest LNG exporter to date since 2006.
Qatar has even developed their own fleet of Q-Max carriers with a capacity of 267,000mcm (a typical size for
an LNG carrier has traditionally been 155,000mcm). Liquefaction terminals in Qatar are specifically designed
to cater for these large carriers, with the benefit of size being lower energy requirements (~40per cent) given
economies of scale with engine efficiency [20].
Qatar has committed over 90 per cent of its LNG production volumes between 2014 and 2020 as part of its
supply purchase arrangements (SPAs). LNG production growth elsewhere in the world over the next few years
may challenge some of Qatar's remaining spot volumes, although with the majority of its LNG already sold,
the impact on Qatar's natural gas exports should not be extended in the long-term.
Qatar's LNG exports began to shift to more short-term contracts and spot-market sales over the past few years
compared to the previous contracts which were part of long-term oil-index. According to Qatar National Bank,
in 2012 Qatar exported over 19.9mmt of LNG as short-term or spot-market sales accounting for more than a
third of short-term and spot-market sales in the world. Several recent agreements between Qatargas and
international LNG importers are of the short-term variety, including a deal based on continental European
prices rather than oil-indexation for the first time in Qatars history. [21]
4.2.Russia
Despite the vast gas reserves, Russia was not a significant player in the LNG market, until recently. Russia is
expanding in the LNG market through two terminals. The first, Yamal project, a 3-trains terminal located at
Sabetta will be fully operational by the end of 2018 which Russia has already signed a long-term supply
contract with China [22]. Their second LNG terminal will be the Shtokman Terminal located at one of the
worlds largest natural gas (Shtokman field) field having (estimated) 3.8 trillion cubic metres.
On the other hand, Russia, the worlds largest natural gas supplier signed a 30-year, USD$400bn deal with
China to export natural gas and plans to construct (by 2015) the South Stream pipeline delivering 63bcm of
gas per annum to Europe. With conjunction of the already established Nord Stream pipeline (delivering 55bcm
9
Figure 5 Percentage of dependence on Russian Gas (per cent of total, 2012). Source: The Economist [25]
4.4.Australia
Australia has 62mmtpa of liquefaction capacity under construction and there are plans for operations in the
period between 2014 and 2018. Once the capacity goes online, Australia will match Qatars LNG export by
2018 [26]. However, there is a risk that excess supply will put future plans at stake.
For more information see http://www.al-monitor.com Crimea crisis may end USD$23 billion pipeline project
10
5.1.Egypt
Egypt, following Algeria is the second largest natural gas producer in Africa and the largest oil producer of the
non-members of the Organization of the Petroleum Exporting Countries (OPEC). Egypts geography is of great
importance in international energy markets since it is the sole operator of the Suez Canal and SuezMediterranean (SUMED) Pipeline. The Suez Canal is the umbilical cord that provides the transit route for oil
and LNG shipments traveling Northbound from the Persian Gulf to Europe and North America and Southbound
shipments from North Africa to Asia (Figure 6). The importance of this transit route is highlighted by the
SUMED Pipeline which acts as a stand-by route for ships that are unable to navigate through the Suez Canal
[19].
Suez Canal
The Nile Delta regions block North East Mediterranean encouraged the RoC back in 2003 to begin serious
offshore explorations. U.S.G.S estimated means of 1.8 billion barrels of recoverable oil, 223tcf of recoverable
11
Since April 2012, the period which the Egyptian Government cancelled its existing gas supply contract with
Israel, Egypt has struggled to fulfil its piped gas supply contract with Jordan due to political unrest and
militants attacks on the pipeline that runs through the Sinai Peninsula. According to researcher on Energy and
Economic policies El-Katiri [31] Egypts current domestic situation is shaped by continued natural gas shortage
and daily electricity blackouts, political turmoil, political corruptionviii, dysfunctional governing institutions and
unexcelled budgetary pressure.
Egypt joined the club of LNG exporters in May 2005 by shipping its first cargo from the newly constructed Idku
terminal (capacity 10bcm per annum) [32]. However, intense turmoil has seen Egypt's LNG exports declined
by half over the past five years, from 496bcf in 2008 to 237bcf in 2012. LNG exports declined even further in
2013 because the Egyptian Government diverted additional natural gas supply to its domestic market, a
decision which had tremendous impact to its LNG plants. The Segas LNG plant in Damietta was forced to shut
down its operations in 2013 due to the lack ix of natural gas to feed the facility [33]. The Idku plant, which is
fed gas from the BP-operated West Delta Deep Marine (WDDM) offshore concession, is running below
viii
In a report published by EIPR and Platforms the revenues lost to Egypt by exporting during the six year period (20052011) under-priced gas to Israel, Jordan and Spain sums to almost USD$10billion. During that period, Egypt lost more
than double the countrys annual health expenditure [288].
ix
Reminder, Egypt has proven gas reserves which correspond to 2 percent of the world total!
12
Figure 8 Global LNG Liquefaction Capacity Utilization by country for 2012. Source:IGU [17]
5.2.Israel
In January 2009, the consortium consisting of US based Noble Energy and Israel based Avner, Delek Drilling,
Isramco and Dor announced a gas discovery of 8.4tcf in the Tamar 1 offshore (Matan (309) block) field
13
For the reasons discussed above, in August 2012 the Tzemach committee recommended exporting 53 per cent
of Israels offshore gas and the cabinet office decided to accept the recommendations, but only after barring
exports from the Tamar field, confirming Israels main priority which is to cover its domestic energy needs for
the next 29 years. This meant lowering the overall percentage earmarked for export to 40 per cent which
decreases the export volume from 16.35 to 11.68tcf [39, 40].
Noble Energy, announced on the 4th of April, 2013, that the Tamar natural gas field offshore from Israel had
been successfully brought online at full capacity with all five of the subsea wells now producing at stable rates
totalling approximately 300MMcf/d. When combined with existing Mari-B volumes, the total current exports
are nearly 500MMcf/d and are expected to average 700MMcf/d through the remainder of 2013. Initial sales
commenced on 31st of March 2013 as natural gas flowed from the field to the Tamar platform and then to
the Ashdod Onshore Terminal [41].
On the 6th of January 2014, Delek announced the natural gas supply agreement with Palestine Power
Generating Company in the total scope of 4.75bcm (the overall contractual amount) for a period of 20 years.
Importantly, the price of gas determined in Supply Agreement will be linked to Brent Crude prices, and includes
"a floor price" [42].
14
5.3.Jordan
Jordan does not have significant oil resources (at just 0.213tcf). Jordan meets only 3 per cent of its domestic
demand with its domestic sources of oil and natural gas and relies mainly on imports to fill its energy gap.
Jordan whose power sector is heavily depended (more than 80 per cent) on Egyptian gas was arguably in a gas
crisis. However, their gas shortage crisis was resolved on February the 14th, 2014, when The United States
State Department advanced the Israel-Jordan contract for natural gas supply [47].
5.4.Lebanon
The government of Lebanon accomplished a pre-qualification bid in April 2013 for exploration in the countrys
territorial waters. The first licencing round should have begun in May 2013 but eventually after being
postponed for 4 times is set to open in August 2014 [48]. Results from seismic exploration indicate that
resources in the Southern sector Lebanons EEZ could total to 12tcf but validation of these estimates requires
further offshore exploration.
Regarding the domestic use of gas, Lebanon is facing a gas crisis due to the Egyptian pipeline sabotage. Thus
Lebanon is looking for another natural gas suppliers and Israel is not one of them due to disputes regarding
their EEZ.
5.5.Syria
Syria is the regions only significant oil producer. However, its on-going domestic conflict which peaked during
2012-2013 reduced the oil and natural gas production. The unforeseen length of the civil war led to significant
gaps between regional oil production and oil demand totals.
5.6.Greece
Greece has 10 million barrels of proved oil reserves as of 1 January 2011. Greece's oil production stands at
7,946 barrels per day (bbl/d), ranked 90th and imports at 496,600 bbl/d.
During 2012-2013, Greece's government awarded an exploratory contract to Petroleum Geo-Services. The
company has been licensed to conduct far-range offshore research for hydrocarbons in the western and
southern regions of the country, which based on previous indications, show great potential for substantial
amounts of oil and gas. It should be noted that in the summer of 2011, J. Robinson of PGS at a conference in
Athens discussed the Eratosthenes region which is geologically connected with the Cypriot EEZ, where large
discoveries have been made [49] [50]. However, Greece's dispute with Turkey over their EEZ poses substantial
15
5.7.Turkey
Turkeys extensive deep-water exploration in the Black Sea to find natural gas/oil was unsuccessful. Thus by
October 2011, their focus was shifted towards the Mediterranean Sea and the areas in Antalya. Turkeys
desperation to find natural gas in the Mediterranean pushed them to explore in a region within RoCs EEZ,
South West of Cyprus.
In December 2013 Turkey issued a NAVTEX informing mariners and the RoC that three ships will be conducting
seismic surveys in areas very close to the offshore blocks 2 and 3, which are licensed to ENI/KOGAS. It was
apparently a tit-for-tat move, coming just one week after the Cypriot Government decided to offer blocks 5
and 6 to the consortium of ENI/KOGAS.
In January 2014 Turkey issued a NAVTEX that Barbados x Hayrettin Pasa, a research vessel acquired by Trkiye
Petrolleri Anonim Ortakl (TPAO), will be conducting seismic surveys until May 2014. The defined sea area
trespassed into parts of offshore blocks 4, 5 and 6, which lie south-to-southwest off the coast of Cyprus. The
three blocks fall within an area which Turkey claims as its own continental shelf. However, online vessel
tracking website Exact Earth, tracked the Barbaros West of Paphos (Figure 10). Despite staying out of block 1,
the vessel had trespassed well into the EEZ, which encompasses a much larger area than the offshore blocks
[52]. Barbaros was escorted by two military ships, the M/V Bravo Supporter and the M/V Deep Supporter.
The Barbaros is a strategic asset for Turkey as it has the capability of carrying out seismic 3D surveys which can be used
to determine the presence of hydrocarbons.
16
Due to Turkeys increasing need in CO2-reduced fossil fuels such as natural gas, the Turkish state-owned
upstream operator TPAO is planning to increase its domestic natural gas production by enhancing the
involvement of IOCs in offshore exploration and production operations in the Antalya, Mersin, and Iskenderun
regions. In November 2011 Shell increased its global activities by signing a partnership agreement with TPAO
for exploration licenses. The agreement aims to evaluate the hydrocarbons reserves by performing offshore
exploration and evaluation, as well as inland exploration works in the South Eastern Anatolian Region. In 2013,
Shell also signed an agreement with TPAO for deep water explorations in Black Sea [54].
Turkey being a gas distribution provider has a special and significant role in Europes future plans on energy.
European countries are importing 32 per cent from Russia (in 2012), making Russia the main supplier of natural
gas [55]. Europe pushes for an extra natural gas import option and Turkey will be the country into which gas
will be transferred by as shown in Figure 11. The Trans-Anatolian Gas pipeline is of great importance since it
will be the medium into which gas will be transferred from Azerbaijan through Turkey and split at Strandzha
for the Nabucco West pipeline and at Kipoi for the Trans-Adriatic xi pipeline to meet the demand of North
European and South West countries respectively.
xi
The initial capacity of TAP will amount to 10bcm per annum with the possibility of expanding to 20bcm per annum. The
TAP's construction project is planned to start in 2015. [221]
17
Figure 11 Natural gas pipeline system to Europe. Source: ReThink Institute [56]
18
Turbine compressors gain their energy by using up a small proportion of the natural gas that they compress. The turbine
itself serves to operate a centrifugal compressor, which contains a type of fan that compresses and pumps the natural
gas through the pipeline. Electric compressor uses an electric motor to turn the same type of centrifugal compressor.
This type of compression does not require the use of any of the natural gas from the pipe; however it does require a
reliable source of electricity nearby.
19
The natural gas immediately after it is extracted exists in mixtures with other hydrocarbons; principally ethane,
propane, butane, and pentanes (more information can be found in section 14.1.3) and other gases such as
hydrogen sulphide (H2S), carbon dioxide, helium, nitrogen, and other compounds. At the Floating Production
Storage and Offloading vessel (FPSO), the natural gas will be processed and separated from all the various
hydrocarbons and fluids to produce what is known as 'pipeline quality' dry natural gas (Figure 14). Once the
gas is purified, a pipeline will carry it to the onshore facility.
Figure 14 Typical layout of an LNG FPSO vessel. Source: Festen and Leo [62]
20
7.2.Feasibility Design
7.2.1. Exploration and Appraisal
By means of geoscience methods, such as 2D/3D surveying (Figure 15) oil companies that have been granted
with a licence make utmost efforts to gather/acquire data and interpret/analyse them. An exploration well is
drilled once the reserves and risks of a prospect pass the following decision criteria/processes:
21
The best demonstration, which allows the user to understand the extent to which technological improvements
have helped the discovery of hydrocarbons, can be demonstrated in Figure 16. The picture on the left shows
the result from a hydrophone streamer analysed by the old conventional Kirchhoff PSTM stack method
whereas the picture on the right shows the results from a dual-sensor streamer which are analysed with the
new P-up PSTM stack method. The differences are more than obvious. The ability of the dual-sensor to record
more of the low frequency events in the seamount enhanced the possibility of successful hydrocarbon
explorations. Focusing on the seismic events as shown in the two pictures the Messinian Salt we observe that
it is possible to interpret the deep rotated fault blocks along the section on the P-up data which is not clearly
visible on the other data [64].
22
With the prerequisite that promising amounts of oil and gas are confirmed from the exploration phase, the
gas field is appraised to establish its size and characteristics. The appraisal wells provide technical information
which is used to determine the optimum method for maximum recovery of the oil and gas. The potential social
and environmental impacts associated with appraisal drilling are similar to exploration drilling and an EIA and
SIA is usually carried out in advance if required by the Government of the country [65].
Well testing taking place before permanent well completion is referred to as drill stem testing. Quality tests
are mainly used to:
The exploration and production of hydrocarbons is a multimillion dollar high-risk venture which can drag
medium sized companies to bankruptcy (Figure 17). Thus special measures are taken to limit this potential
and enhance the overall picture of the reservoirs quantity since geological concepts are uncertain with respect
to structure, reservoir seal and hydrocarbon charge.
23
In almost all cases, the results are accompanied with a probability percentage (risk elements) xiii. The economics
and risk of exploration are usually analysed through the use of the probability theory and an explicit modelling
of the sequential stages of exploration as shown in Figure 18.
xiii
Risk elements can be and are not limited to a)source presence, b)source maturity, c) reservoir quality, d)trap quality,
e)migration/trap timing.
24
7.3.Detail Engineering
7.3.1. Pre-Preliminary Front End Engineering Design
The preliminary Front End Engineering Design (Pre-FEED) work typically provides complete basis for design
especially where this is neither available nor properly done at the conceptual design stage. At Pre-FEED stage,
engineers put great emphasis on developing proper process design basis and specifying the required process
parameter on which the main FEED work depends. The selected Design Case will be further optimised and
engineered generating PFDs and plant layouts. Value engineering reviews, based on PFDs, improve the design
and identify additional studies to be carried out during FEED phase.
When the design basis is complete, the following information is defined:
26
Reduction in overall time (from concept design to export) by allowing the contractor to overlap the
design and construction process and
Reduction in the amount of claims for design changes by eliminating any gaps in responsibility for
design and construction activities.
The limitation of a typical EPC delivery model is its financial risk for the contractor. Having to deliver at a fixed
price, called Lump sum, a gigantic project in undeveloped sites can increase the duration and cost of the
project resulting in great financial losses for the contractor. The industry has adapted to these challenges by
beginning to employ further by having two variations of EPC as follows:
7.4.1. EPC Cost Reimbursable:
This method allows the client to contracts with one entity to perform the engineering, procurement, and
construction management services on a cost-reimbursable basis. The EPC entity performs the engineering and
procurement work whereas the client with the assistance of the Construction Management team of that entity
is responsible to find its own contractors. The benefits of this approach are:
Avoids the problem of finding a contractor willing to accept the risk of a USD$8 billion fixed price
contract and
Provides the owner with the opportunity to have significant input regarding the purchase of
equipment, key design or technology issues and contractor selection.
The limitation of this approach is the risk to be borne by the client. The client must employ an experience team
to fulfil its substantial responsibilities and identify all possible risks which could cost budget overrun. If the
client fails to identify the various obstacles, the owner will bear the possible cost overruns.
7.4.2. EPC- Cost Reimbursable with Fixed Price:
This method allows the client to contract with one entity to perform the engineering, procurement, and
construction management services on a cost-reimbursable basis. The EPC entity performs the engineering and
procurement work whereas the client with the assistance of the Construction Management team of that entity
is responsible to find its own contractors. The benefits of this approach are:
The selection between these two methods generally depends upon the factors on which the owner places the
greatest emphasis: owner control and input as well as shortest duration (EPCM); or reliance on a major designconstruction firm and limited cost growth.
Typical Preliminary Liquefaction plant main features are summarised below, as given by Ellinas (former
chairman of the Cyprus National Hydrocarbons Company-CNHC) [73]:
Site preparation;
Civil works;
Piping works;
Mechanical erection;
E&I works;
27
Typical Preliminary pipeline main features are summarised below, as given by Nussbaum [74]:
Pipeline metering;
Corrosion Inhibitor injection skid;
Emergency Shutdown Valves and control systems;
Pipeline platform risers, J tubes, and subsea connection spools to the subsea pipeline connections;
Permanent pig launcher at the upstream and trunk line platforms;
Subsea Isolation Valves integrated into piled subsea structures;
Subsea spur lines tie-ins along the trunk line;
Subsea shore approach to a landfall beach valve;
Onshore pig reception facility and
Slug catcher.
28
8.1.Egypt
In February 2003, the RoC delimitated its EEZ with Egypt and on the 13th of December 2013 ratified a
Framework and a Confidentiality Agreement on the exploitation of cross-median line hydrocarbon resources
[80]. According to Minister Lakkotrypis this ratification could potentially open the doors for a long-term gas
export since they have a joint technical committee which will look at possible ways of cooperation between
the two countries [81].
8.2.Israel
In December 2010 Cyprus delimitated its EEZ with Israel and established an agreement on the exploitation of
cross-median line hydrocarbon resources based on the principles of customary international law relating to
29
8.3.Lebanon
In January 2007 Cyprus delimitated its EEZ with Lebanon, yet remains unratified by Lebanon. Lebanon
advocates that its EEZ extends up to point 23 (as shown in Figure 22), whereas Israel advocates its respective
zone extends up to point 1, creating an overlap area of 874 km2, stemming from a maritime-border dispute
between the two countries xiv. Minister Lakkotrypis has taken the opportunity to become the ombudsman and
is trying to find a solution regarding the disputed maritime border between Lebanon and Israel. Any progress
from either, Israel or Lebanon will have an indirect effect for Cyprus [82]. At the moment Cyprus and Lebanon
are in the process to sign a Framework and a Confidentiality Agreement on the exploitation of cross-median
line hydrocarbon resources [83].
In reality, this dispute has little consequence for the RoC as the coordinates of the eastern boarder of its EEZ will most
likely stay unchanged.
xv
For an in depth review please see the report of Grel et al, 2013, The Cyprus Hydrocarbons Issue: Context, Positions
and Future Scenarios
30
Figure 23 Turkey's EEZ in the Mediterranean Sea. Source: Sea Around US Project [86]
The limits agreed between the RoC and Egypt are disputed by Turkey as they conflict with its interests
regarding its continental shelf in the region comprised by the area from Cyprus to Rhodes. The Turkish claims
in the area can be seen in Figure 24. The Turkish position is that the ability of an island, such as Cyprus, to
generate maritime zones should be limited when competing with a continental, coastal state, such as Turkey,
for these zones [78].
31
As regards to the bidding process for the several research blocks of the RoCs area, the state included all 13 of
its blocks in its second licensing round. Block 12 was excluded as it had already been licensed to Noble Energy.
All blocks but 1, 4 and 13 have received bids (even by important players, such as KOGAS and TOTAL) although
the Turkish government has warned that companies bidding for disputed blocks will be excluded from its
energy projects. The lack of bids for blocks 1, 4 and 13 has been primarily because of limited, geological
potential. The fact that the Turkish threats have not had much effect indicates that, using the already existing
political backing from the international community, the Turkish opposition on the matter can be further
diminished in the future.
On the 2nd of February 2014 the Turkish navy expelled a Norwegian vessel (Princess), carrying out a survey on
behalf of French oil giant TOTAL in Cyprus economic exclusion zone as shown in Figure 25, claiming it had
entered an area under Turkeys jurisdiction [88].
32
Figure 25 Position where Turkish navy overextended their authority within Cypriot EEZ. Source: ExactEarth [89]
8.5.Greece
As a result of the Aegean dispute with Turkey, Greece has to date not delimitated its maritime boundaries in
the Eastern Mediterranean. However, Jerusalem recognizes the Greek Exclusive Economic Zone (EEZ) as the
continuation of the Cypriot EEZ in the West side of the island as shown in Figure 26 [90].
33
9. Exploration
Hydrocarbons were not formed during the period 2010-2014 when most of the Cypriots realised their
existence. . Hydrocarbons have been present at the area for thousands of years since their formation is a time
dependent process. Since 1938, various companies have been trying unsuccessfully to locate them both
onshore and offshore as seen below [92]:
34
Prospecting licences. These are valid for up to one year. They do not permit drilling but allow
evaluation of potential by identifying geological structures by means of gravity, magnetic and seismic
surveys.
Exploration licences. These are initially valid for three years and allow the holder to undertake gravity,
magnetic and seismic surveys and exploratory drilling. They are renewable for two further periods of
two years. On each renewal, 25per cent of the initial licence area is relinquished. In the event of a
discovery the licensee has the right to be granted an exploitation licence for the discovery.
Exploitation licences. These are granted for an initial period of up to 25 years with the option of one
renewal of up to 10 years.
The criteria used for granting licences for the prospection, exploration and exploitation of hydrocarbon include
[59]:
National security;
Technical and financial ability of the applicants;
Financial ability of the applicants;
Ways in which the applicant intends to carry out the activities that are specified in the licence;
Financial consideration that the applicant is offering in order to obtain the licence and
Any lack of efficiency and responsibility that the applicant has shown under any previous licence or
authorisation of any form in any country of the world.
Consortiums
Individuals
Company name
Country
Canada
Cyprus
Cyprus
France
xvi
Noble Energy operates Leviathan with a 39.66 per cent working interest with Delek Drilling and Avner Oil Exploration
following with 22.67 per cent each and Ratio Oil exploration with the remaining 15 per cent. Noble Energy operates Tanin
with a 47.06 per cent working interest with Delek Drilling and Avner Oil Exploration following with 26.47 per cent each.
36
37
10.
During the exploration phase, there are major uncertainties related to volumes and economies. As the level
of information increases, these uncertainties are alleviated and the interested companies proceed further with
exploration.
Appraisal drilling is carried out (immediately after exploratory drilling) once oil or gas has been discovered in
order to assess the extent of the field, total reserves, possible rate of production, properties of the oil or gas
and determine how to develop the field most efficiently. Based on the findings, a table which shows the lowhigh risk areas is prepared and the final decision for the production is made.
The summary of the exploration and appraisal wells to date and planned works is shown in Figure 29.
38
Noble
ENI/KOGAS
Total
Block 12
(blocks 2,3,9)
(blocks 10,11)
Geophysical surveys
Appraisal TBA
10.1.
After analysing the results using probabilistic analysis, Noble Energy announced in December 2011 that they
discovered significant amount of gas in the Aphrodite A-1 exploration well. Drillings were made in high-qualityMiocene-Sand at a total depth of 5,860m and water depth of 1,688m [100]. The analysis showed that there is
75 per cent probability to exceed 5tcf and 25 per cent probability to exceed 8tcf giving an estimate that 60 per
cent should be more than 7tcf. On the other hand, three months after Noble Energys announcement, the
NSAI using a different analysis method-deterministic methodology, gave an estimate of 5.1tcf with a 50 per
cent possibility to have more than that [101] which decreased the reserves and shocked the parties involved.
39
Figure 30 A Cross section of the Messinian Evaporites and Tamar sands Geomorphology Aphrodite 1. Source: Noble Energy [100]
10.2.
rd
On the 3 of October 2013 Noble Energy announced that the A-2 (Figure 31) appraisal well drilled on the Block
12 discovery offshore the Republic of Cyprus had successfully encountered approximately 120 feet of net
natural gas pay. The appraisal targeted Miocene sand intervals at a depth of 5,607m, 1,731m below sea level
[102].
After production testing over a 39ft section of the upper, Miocene reservoir Noble Energy estimated a
maximum, flow rate of natural gas of 0.000056tcf/day, with performance modelling predicting an extractable
capacity of 0.00025tcf/day. 3.6 to 6tcf with intermediary approximately 5tcf were estimated by the drilling
40
10.3.
Future Exploration
Ellinas estimated 1.2bcm reserves basis for the six blocks which have been tendered off including Aphrodite.
Kassinis, the ex-Vice Chairman of CNHC has on several occasions estimated that all 13 Blocks of the Cypriot
EEZ could hold as much as 59.67tcf. Based on two highly respected gas experts, most of the Cypriot citizens
are eager for more hydrocarbons, which will enable the desired onshore liquefaction plant to proceed.
Neither TOTAL nor ENI/KOGAS have not yet presented their own estimates regarding their blocks. Minister
Lakkotrypis announced on the 12th of July 2013, after ENIs CEO meeting with President Anastasiades, that the
consortium will commence 4 exploratory and appraisal drillings starting in the second half of 2014 [105].
Following on, TOTAL carried out geophysical surveys in the third and fourth quarter of 2013 and plan to
proceed with two exploratory wells in 2015 for its two blocks.
David Stover, Noble Energys President and Chief Operating Officer, has mentioned in a teleconference in the
1st quarter of 2014 that we (Noble Energy) anticipate bringing a rig back into the Eastern Mediterranean late
this year (2014) or early next year for a multi-year program covering additional Cyprus exploration, deep
Mesozoic oil exploration and development activities at Tamar and Leviathan. For Block 12, Noble Energy
targets to withdraw 28-56bcm by the beginning of 2015 (they carried out a detailed, 3D, seismic survey in
August 2013). It was estimated that by the end of 2015 Nicosia and Noble Energy/Delek should have a clear
view of the amount of commercially retrievable gas in Aphrodite, and a dependable estimate of the amount
in Block 12, a time frame which is subject to change due to financial difficulties of Delek group and available
drilling rigs in the region [106].
One can suggest that the withdrawal of Woodside from Leviathan influences the exploration in Cyprus since
the consortium must find the USD$2.71billion needed for the development of the gigantic field which
translates to cuts in other activities. This can however open doors for an expansion of the members of the
41
10.4.
Oil
On the 13 of December 2013, Noble Energy announced that there is evidence of multiple opportunities in
the Eastern Mediterranean with approximately 3.034 billion barrels of gross unrisked oil potential in the deep
Mesozoic play in both Cyprus (1,496MMBoe) and Israel (1,538MMBoe) (Figure 32). They followed saying that
they are evaluating 3D seismic data on an on-going basis and plan to resume exploration drilling in the Eastern
Mediterranean in late 2014 or early 2015 announcing directly their oil exploration in the region [111].
Based on the profit-sharing agreement between the government and Noble Energy, having a current price of
more than USD$107 per barrel xviii, the above statement translates to revenues of approximately USD$104bn
for RoC whilst the overall revenue for both Noble Energy and RoC could be as high as USD$160bn. The term
unrisked is industry jargon for a rough estimate of reserves and it is too early to tell whether Cyprus struck
gold since the terminology does not reflect the probability of geologic success [112].
Figure 32 Gross unrisked mean resources (* includes gas, oil and natural gas liquids). Source: Noble Energy [113]
xvii
Data rooms is a common practice for companies and are used in many different types of transactions where the
vendor wishes to disclose a large amount of confidential data to proposed bidders typically during the due
diligence process. The traditional data room will literally be a physically secure continually monitored room, normally in
the vendors offices, which the bidders and their advisers will visit in order to inspect and report on the various documents
and other data made available.
xviii
Spot Prices provided by IEA on the 4/4/14.
42
Figure 33 Structural traps. Source: Devold and University of Maryland [115, 116]
11.
Legalities
11.1.
An exclusive economic zone is a sea zone prescribed by the United Nations Convention on the Law of the
Sea at the Third United Nations Conference on the Law of the Sea (1982), over which state has special rights
over the exploration and use of marine resources, including energy production from water and wind. It
stretches from the baseline out to 200NM from its coast. In colloquial usage, the term may include
the continental shelf. The term does not include either the territorial sea or the continental shelf beyond the
200NM limit. The difference between the territorial sea and the exclusive economic zone is that the first
confers full sovereignty over the waters, whereas the second is merely a "sovereign right" which refers to the
coastal state's rights below the surface of the sea [77].
All limits are measured from baselines in which the normal baseline corresponds with the low water line along
the coast. Under the Convention, normal baseline can be drawn around low tide elevations which are defined
as naturally formed areas of land surrounded by and above water at low tide but submerged at high tide,
provided they are wholly or partly within 12NM of the coast.
The Territorial Sea is a belt of water not exceeding 12NM in width measured from the territorial sea baseline
Cyprus' sovereignty extends to the territorial sea, its seabed and subsoil, and to the air space above it. This
sovereignty is exercised in accordance with international law as reflected in the Convention. The major
xix
43
xx
This is of great importance to Cyprus since UNCLOS is ambiguous on whether Nicosia could prevent construction of the
IsraelTurkey pipeline along its continental shelf. On the other hand, the RoC may be able to argue its case with sufficient
skill to secure political support among its EU allies, which in turn could raise the financing costs of such a project.
44
11.2.
Production sharing agreement is a common type of contract signed between a government and a resource
extraction company (or group of companies) concerning how much of the resource extracted each party will
receive. In production sharing agreements the country's government awards the execution of exploration and
production activities to an oil/gas company.
If the contractor declares a discovery to be commercial, it then has a contractual obligation to submit to the
Cypriot authorities a development and production plan within a 4-month period. Upon approval of its
development and production plan, the contractor applies for upgrade its Hydrocarbon Exploration to a
Hydrocarbon Exploitation License in the exploitation area.
Since the oil/gas company bears the mineral and financial risk of the exploration and production phase, when
successful, the company is permitted to use the money from produced oil/gas to recover capital and
operational expenditures, known as "cost oil or cost gas". The existing Production Sharing Contract with Noble
Energy from the first licensing round reportedly splits the ownership of Profit Hydrocarbons 65/35 under
normal conditions in favour of the Cypriot government. The remaining money is known as "profit oil or profit
gas" and is split between the government and the company, at a rate of about 65 per cent for the government,
35 per cent for the company [118].
An important aspect of the SPC regarding the Tax Revenue is that there is no taxation of hydrocarbons
production revenues beyond profit sharing. Under the EPSC the applicable corporate tax is deemed to be
included in the Republics share of profit oil, and the portion of available oil which the contractor is entitled to
is net of corporate tax. This was mostly added into the ESPC to make it attractive and increase the interest of
45
12.
The gas pricing mechanisms are parameters of great importance for the final decision of the monetization
option. As seen in section 14.1.5.3, gas pricing can turn a promising monetization option into a curse. This
section of the report will not place the reader into great depth of gas pricing mechanisms but only highlight
the importance of gas pricing mechanism from the sellers point of view.
The International Gas Union has identified three major market based pricing mechanisms, covering OECD and
non-OECD markets [17]. These mechanisms are:
Oil Price Escalation (OPE), the price is usually linked through a base price (Figure 35) and an escalation
clause, to competing fuels, typically crude oil, gas oil and/or fuel oil (Figure 36);
Gas-on-Gas Competition (GoG), gas to gas competition indicating an indexation to spot prices that
reflect supply and demand for natural gas in a market. Trading takes place at physical hubs (e.g. Henry
xxi
The UKs income tax rates for 2014-2015 were: 20% on annual earnings up to 31,865, 40% on annual earnings from
31,866 to 150,000 and 45% on annual earnings above 150,000 [223]. On the other hand, Cyprus tax rates for 2014
were: 0% on annual earnings up to 19.500, 20% on annual earnings from 19,501 to 28,000, 25% on annual earnings
from 28,001 to 36,300, 30% on annual earnings from 36,301 to 60,000 and 35% on annual earnings above 60,000
[224].
46
Hub) or notional hubs (e.g. NBP in the UK). There are likely to be developed futures markets (NYMEX
or ICE). Spot LNG is also included in this category;
Bilateral Monopoly (BIM), The price is determined by bilateral discussions and agreements between a
large seller and a large buyer, with the price being fixed for a period of time and
Netback from Final Product (NET), the price received by the gas supplier is a function of the price
received by the buyer for the final product the buyer produces. This may occur where the gas is used
as a feedstock in chemical plants, such as ammonia or methanol.
Consumption
2008 Bcm
2009 Bcm
561.9
522.1
390.4
117.3
563.0
346.9
114.8
529.9
Pipeline Supplies
Oil-indexed
Market-priced
Total Supply
It is also important to analyse the supply by county of origin since those countries will be the main competitors.
As shown in Table 4, Russia is the main competitor supplying gas using oil-indexed price.
Table 4 Gas supply by Source and price mechanism. Source: Melling [119]
2008 Bcm
Oil-indexed
Spot
Oil-indexed
Spot
Netherlands
UK
Germany
Romania
Denmark
Italy
49.0
18.0
10.0
10.7
9.0
9.0
9.2
24.2
51.9
3.8
0.0
1.1
0.1
0.4
42.0
11.0
10.0
10.0
7.6
8.0
8.8
27.0
50.0
3.0
0.0
1.0
0.5
0.3
150.0
70.0
35.8
9.9
6.6
29.2
0
0
130.0
70.0
32.5
7.0
3.0
30.0
0
0
Other
2009 Bcm
47
5.8
4.0
0
0
6.0
4.0
0
0
Total
390.4
117.3
346.9
114.8
12.1.
Figure 39 World LNG netback prices November 2013. Source: Oil and Gas 360 [122]
xxii
In November 2013, an LNG supply contract between BG and CNOOC (starting production in 2015 for 20 years) is
based on a blending of oil-linkage and gas-on-gas market pricing [221]
48
Figure 41 Share of oil and gas in electricity generated in Japan. Source: EIA [124]
As a result of the shift from Oil index to HH, those LNG projects which are delayed, or are unable to find buyers
soon, may face decreasing pricing risks (Figure 42), thus RoC will need to decrease its selling price in order to
be competitive which can put the project at stake. The statement of gas expert Ellinas is of great importance
xxiii
Natural gas emits 60 per cent less carbon dioxide than coal and 20 per cent than oil in electricity generation thus the
operators are less susceptible to pay any penalties for exceeding the allowable CO2 limit.
49
Figure 42 LNG price per annum for various pricing mechanisms. Source: BP [125]
Similarly, as a result of the shift from excess buyers, to excess sellers, those LNG projects which are delayed,
may face increasing pricing risks. As shown in Figure 43 LNG projects in West Africa and Middle East having
low liquefaction costs will be able to drop their price thus having an impact on the overall market. Going
forward, the truth is RoC will eventually have to face pricing reality to remain competitive.
50
13.
LNG Contracts
Before moving into the various contract types it is important to explain to the reader the preliminary
agreements currently used in the oil and gas industry. There are two types of preliminary agreements, the
letter of intent and the memorandum of understanding. A letter of intent outlines the intent of one party
towards another with regard to an agreement, and may only be signed by the party expressing that intent
where as a MoU must be signed by all parties to be a valid outline of an agreement. None of these agreements
guarantee that that the two parties will proceed as stated on the MoU. There are many examples where the
parties did not reach an agreement such as Woodside xxiv with Noble Energy-led consortium and Israel with
Gazprom for the supply of LNG. Thus the deal of Israel with Union Fenosa cannot be taken for granted since it
is a non-binding letter of intent, which simply expresses the intentions. However, there is no doubt it is a step
forward towards completion of the agreement [127].
In contrast to the two above, a contract is a legal document governed by contract law. There are two types of
contracts, short-term and long-term. The LNG supply system can shift away from the current norm of longterm contracts, by increasing flexibility and removing barriers to markets. Prices would be more responsive,
and determined via swap and spot transactions, hence allowing the market to determine the most efficient
supply routes. In order to facilitate more competitive natural gas markets, especially in Asia, transaction costs
have to be reduced in short-term contracts, while long-term contracts have to revised, to allow for more
sensitivity to market changes [19].
13.1.
In order to achieve a competitive natural gas market, especially in Asia, a move away from its stiff,
monopolistic structure, with government intervention and vertically integrated energy companies, to a more
xxiv
Woodside could potentially elevate any liquefaction project due to its experience in that sector, notably, with its ability
for quick E&P- they managed to explore and produce liquid gas from Pluto field (Australia) in just 7 years and its strong
market establishment (delivered more than 3,200 LNG cargos) [273].
51
Figure 45 LNG Carrier Fleet and Order book. Source: Timera Energy [128]
Without the existence of an LNG trading hub, to regulate capacity and availability of LNG supplies, an LNG
market with short-term transactions, which is similar to the oil market, with a standardised product for
companies to trade, is near impossible to happen. An additional obstacle to the creation of a standardised
LNG product, are the technical requirements of LNG delivery (e.g. quality of LNG etc.) [124].
Four main types of short-term contracts exist in the current market, after IEA [124]:
1. Short-term contracts: These contracts are similar to long-term contracts, but have a smaller duration.
They usually last from one to four years, and there is no provision, to allow for price changes.
2. Portfolio optimisation: A supplier will usually enter into a long-term agreement to supply LNG, but
optimise its netback by holding control of the destination of supply. In practice, several long-term
contracts will regularly get broken up into short-term contracts to optimise profits, while at the same
time conform to supply commitments.
3. Spot trading: Spot trading is made up of short-term contracts of less than one year [129]. It usually
takes place, when there is unused capacity in the infrastructure (e.g. LNG carrier ships, gasification
facilities etc.), and the deals are facilitated through competitive tenders.
4. LNG arbitration: LNG arbitration involves an adjustment to an existing contract, that will benefit, both
the supplier and the consumer, and a shipment is delivered to a third party
The main constituents of any LNG contract are the cargo specific terms, such as prices, specification and
quantity delivered. In the Asian market a well-defined reference, benchmark price assessment does not exist.
Hence prices are determined, by the willingness of each individual buyer and seller, to achieve a deal and an
experts estimate of the value of a cargo in the Asian Pacific market. If a reference benchmark price was
52
13.2.
Long-term contracts
The majority of LNG contracts in the international market are long-term, even though the proportion of longterm contracts has fallen since 2000 [131]. The main reason being, that in order to facilitate LNG trade, unlike
other bulk products such as oil, it is necessary to invest in capital-intensive infrastructure such as liquefaction
and re-gasification. Hence buyers and sellers, need certain assurances of quantities supplied and delivered,
before embarking on such investments. This has led to the LNG market working in a similar way to pipelines,
where demand and supply are connected via fixed infrastructure. Long-term contracts oblige the buyer to buy
an agreed volume of LNG at an agreed price, over an agreed time period. This leaves the supplier susceptible
to price changes, and the buyer to changes in his demand of LNG.
LNG supplies from long-term contracts are either transported free on board or delivered ex ship (DES).
FOB practically means that the buyer is responsible for the transportation of the commodity. The title to the
commodity is transferred to the buyer at the shipping point. The buyer bears the advantage of choosing the
destination of the cargo. However they also have to bear an increased cost for transportation, insurance and
re-gasification.
The title to LNG that is DES is only transferred to the buyer after the shipment has reached the agreed port.
Hence transportation and insurance up to the point of arrival at the port is borne by the seller. All subsequent
costs, such as unloading and taxes are paid by the buyer.
13.2.1. Destination Clauses
A destination clause in an LNG contract, removes the buyers right to resell the purchased LNG in another area,
other than what is agreed. This clause is set by sellers to prevent competition in other areas. These clauses
have played a part, in keeping prices high in some regions of the world, especially in the Asia Pacific region.
Producers from the Middle East are making the most of these destination clauses, as their geographic position
allows them to arbitrage between the European and Asian markets.
Destination clauses ensure that LNG sellers to the Asian market make a return on their initial infrastructure
investment in excess of several billion pounds [132]. In Europe, however, the EU has taken strong measures
to eradicate destination clauses. Directive 2003/55/EC, which was the second European gas directive,
prohibited the use of destination clauses for LNG, in order to increase competition and create an EU gas market
[133]. In the U.S.A., destination clauses are not prohibited and new contracts have a higher degree of flexibility
compared to before.
53
14.
Downstream Options
Monetisation is the process of converting an asset or establishing something into legal tender [135]. Natural
gas can only generate revenue if it can be transferred from the extraction stage to the consumer. Monetisation
in the natural gas market refers to the process of making the gas available to the market and receiving revenue.
To determine the most beneficial monetisation option and make a prudent investment decision, monetisation
options are evaluated over the entire lifetime of the project. Some of the factors that influence the investment
decision are:
The monetisation option that provides the best returns for the oil and gas companies investing in Cyprus will
be chosen. Any political influence that alters this decision will result in project delay, and in extreme cases,
cancellation [8].
Currently there are eight main monetisation options for Cypriot natural gas. These are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
On 14th of October 2013, the European Commission published a list of projects of common interest (PCI). The
list consists of 248 key energy infrastructure projects, which will benefit from faster and more efficient permit
granting procedures and improved regulatory treatment. The Member States may also have access to financial
support from the Connecting Europe Facility, under which a 5.85 billion budget has been allocated to transEuropean energy infrastructure for the period 2014-20. For a project to be included in the list, it has to have
54
Figure 46 Noble Energy's proposed monetization options. Source: Noble Energy [113]
Figure 47 can be used as a rule of thumb for the selection of export option based on field production rate and
distance from market. It shows that pipelines and CNG give higher RoI than LNG in short distances (regional
markets) whereas the LNG is more suitable for markets more than 2000km away from the gas field. This graph
does not take into consideration CAPEX costs and possible difficulties such as geography, geomorphology and
politics.
Figure 47 Production Volume Versus distance to market framework for gas technologies. Source: Mokhatab [138]
14.1.
Liquefied natural gas is a form of gas that is cooled and liquefied at below -162oC and stored at less than
125kPa. Liquid natural gas takes up 1/600 of the volume it takes as a gas at room temperature reducing the
55
Figure 48 Typical illustration of LNG production plant; sequence and requirements. Source: Mokhatab [140]
c. Shipping the LNG. LNG tankers are double-hulled ships particularly designed and exceptionally
insulated to prevent leakage or rupture in an accident. The LNG is stored in a special containment
56
Figure 50 Cargo Containment System for LNG carriers. Source: Janseens [142]
The global LNG fleet consists of around 380 vessels. The standard size for an LNG carrier has
traditionally been 155,000 mcm. However over the last 3 to 4 years the size of many delivered carriers
has increased to 170,000 mcm as infrastructure has evolved to deal with larger vessels. The typical
carrier has similar proportions to that of an aircraft carrier but significantly smaller than that of a very
large crude carrier used to transport crude oil. LNG tankers are generally less polluting than other
vessels because they burn natural gas (boil off) in addition to fuel oil.
xxv
Details on LNG tank design, construction and materials can be found in CEEs report, LNG Safety and Security, at
www.beg.utexas.edu/energyecon/lng
57
xxvi
xxvii
58
Figure 52 Number of trains commissioned vs. average train Capacity 1964-2017. Source: IGU [17]
Total global natural gas demand is estimated to have grown by about 2.7 per cent per annum since 2000;
however, global LNG demand has risen by an estimated 7.6per cent per annum over the same period, almost
three times faster. LNG demand growth is expected to be even stronger particularly through 2020-2030 as
shown in Figure 53. After 2020, demand growth is expected to continue, albeit at a slightly slower pace as
markets mature.
59
xxviii
In 2012, 42 per cent of primary energy was converted into electricity in the power sector, up from 30 per cent in
1965. By 2035 that share will rise to 46 per cent. Fuels for power generation account for 57 per cent of the growth in
primary energy consumption 2012-35.
xxix
China is the most promising country for shale growth outside North America, accounting for 13 per cent of world
shale gas growth.
60
For the next 10 to 20 years, due to decrease in the indigenous production of gas in Europe (as shown in Figure
57), Europe will require substantial growth in both oil and gas imports. Shale gas in Europe (notably in Poland)
is in its very early stages of resource appraisal. Its development is not expected to be as significant as in the
US, due to the different geological, regulatory, social and environmental issues. France and Bulgaria have
banned hydraulic fracturing activities and other countries have expressed concerns with Germany currently
assessing the impacts of hydraulic fracturing. Poland and Ukraine (which are reported to hold significant
unconventional resources) are pushing hard to stimulate the shale gas industry. Consequently, no significant
production is expected in Europe before 2020 and by 2025 the EU will require an increase of almost 75bcm in
gas imports per annum (Figure 58) [126].
61
14.1.3. Quality
LNG contains mainly methane, but also other heavier hydrocarbons such as ethane, propane, hydrogen
sulphide and other inert components. The quality of LNG is normally measured in terms of the amounts of
these components and the heating value of the mixture. This is of paramount importance to buyers, and they
specify allowable ranges for the quality of the LNG [146]. Quality specifications vary in different markets;
however if the LNG does not conform with the required specification agreed, then is regarded as offspecification or off-quality gas and the buyer may refuse to accept delivery of all or part of any off-specification
LNG, while the seller has to pay liquidated damages for the off-specification volumes. LNG quality
specifications serve three main purposes [147]:
62
Gas quality can be adjusted to the desired level before being transported downstream. If the calorific value
needs to be increased then liquefied petroleum gases (mainly propane and butane) can be injected. This is a
widely used technique in Japan. If the calorific value needs to be decreased, inert gases such as nitrogen can
be added to the LNG or butane and propane can be extracted. Another solution is to blend the off-spec LNG
with LNG or gas from other sources, in order to achieve the required specifications. For the purpose of
adjusting gas quality, blending is the least costly method, and is preferred whenever possible. All other
solutions are technically feasible, although they can be costly and difficult to implement at a large scale [147].
63
Methane 94.7%
Ethane 4.8%
Propane 0.4%
Butane 0.06%
Pentane 0.01%
Hexane 0.01%
Nitrogen 0.02%
The difference in composition, between LNG and pipeline gas is evident in Figure 61. The graph shows the
composition of various sources of natural gas that supply the EU market. The composition is determined in
terms of methane, non-methane hydrocarbons and inert gases. The majority of pipeline gas sources (orange
spots) are further to the left of the graph, compared to LNG sources (green spots); this testifies the lower
percentage of inert gases and subsequently the higher calorific value of LNG. A notable exception to this rule
is Russian pipeline gas, which is of relatively high quality.
64
14.1.4. Safety
The LNG tanker industry can take pride in its safety record, with no recorded severe accidents since the
beginning of its operation in 1959. However, the safety record of LNG terminals has been marred with some
accidents. The most severe accident recorded was in Cleveland, Ohio in 1944, which resulted in the death of
130 people [152]. This accident led to public fear about the safety of LNG facilities and subsequently
technology has since improved the safety of LNG facilities. Infrequent accidents, such as the incident that
occurred in Skikda, Algeria in 2004 which claimed the lives of 27 people, keep safety concerns a high priority.
The hazardous nature of LNG is debated, with the US being the most cautious in its assessment, and classifying
LNG as a hazardous material. The greatest hazards that can arise in an LNG facility are the following:
Freezing Liquid: LNG is a cryogenic liquid, stored at -162oC. As a result, direct human contact with the
liquid will freeze the point of contact, resulting in cold burns and frost-bite. The main safety measures
which are taken for this hazard are containment systems that separate storage tanks from other
equipment and personal protective equipment (PPE) worn by staff in hazardous areas in close
proximity to LNG [153].
Asphyxiation: When LNG is vaporised in a confined and unventilated area, the oxygen concentration
is reduced, which can result in asphyxiation.
65
14.1.5.1. Onshore
The construction of a liquefaction facility is the option publicly favoured and actively sought by the
government and companies in the area. This is mainly because it has been linked to high profit returns which
will remove the country from the economic recession and is an endless source of jobs.
The favoured option involves the construction of an onshore multi train LNG facility [156]. Working towards
this direction, the government of Cyprus signed a memorandum of understanding in June 2013 with
companies that had an interest in block 12 [157]. This included Noble Energy, Avner Oil Exploration and Delek
Drilling. The memorandum was a statement of intent to develop a liquefaction plant in the Vassiliko area
(Figure 64) of Cyprus.
66
Figure 64 Vassiliko Energy Park - area and current stakeholders. Source: Kassianides [159]
Figure 65 Vassiliko Energy Park Proposed master plan. Source: Varoshiotis [160]
67
Figure 66 Plan view of proposed LNG Liquefaction terminal, Vassiliko. Source: Noble Energy [38]
The main elements of an LNG supply chain, from the gas field to the buyer are shown in Figure 67.
Figure 67 Key elements of a traditional LNG supply chain. Source: Mokhatab et al [93]
68
Demand for LNG has increased to three times the rate of the increase in demand for natural gas as a
whole. An expanding market is always attractive for investors with most of the interest in LNG demand
from the Asia Pacific region.
LNG production offers the ability to expand into new markets. One potential such market is the
replacement of marine fuel with LNG. Cyprus could then use its LNG production and geographical
position to offer bunker services. Another potential market is the increase in demand to replace
gasoline with LNG for road transportation vehicles [8].
LNG can be exported to markets further away, which compared to pipelines are restricted by pipeline
length and direction. The markets with the highest profit margins are the Asian and Latin American
markets, which cannot be reached via pipeline. In these markets it is more feasible to sign long-term
oil-indexed contracts. In contrast, European buyers are trying to escape oil-indexation. In addition, if
this flexibility is embedded in sales contracts, there is also room for potentially profitable arbitrage
opportunities between the Atlantic and Asia-Pacific Basins [161].
14.1.5.2. Offshore
Currently all liquefaction plants are based on onshore, compared to many re-gasification plants which have
both onshore and offshore facilities. The floating LNG is a new and emerging technology that liquefies gas
offshore. FLNG is considered to be an alternative liquefaction process, that will be most suitable for cases
where the gas reserves are far away from the shore, or there is a lack of available land to build a liquefaction
plant.
The main elements of an offshore-based LNG supply chain from the gas field to the buyer are shown in Figure
68.
FLNG technology started as a concept idea in the 1970s and still to date the technology is not fully operational.
This is expected to change in the near future, with facilities expected to be developed before the end of the
decade. The first such facility is under development by Royal Dutch Shell and is expected to be completed by
2017. The development is titled Prelude FLNG project and is estimated to cost USD$10-12 billion. It will have
a capacity of 3.6mmtpa and will be based in Australias Browse Basin. Various super major IOCs are also
requesting FEED for FLNG instead of onshore LNG in locations were they face opposition from
environmentalists or inadequate reserves. However, they even do preliminary analysis for gas rich countries
such as Tanzania, Mozambique (ENI in particular), Brazil, Nigeria, Iraq, Indonesia and Malaysia. Shell and
ExxonMobil are also working towards development of FLNG versions better suited to other non-wet natural
gas wells and higher production rates [8].
Israel on the other hand is considering FLNG as a serious monetisation option for some of its fields. However,
with Woodside outside of the consortium and with no super majors with the relevant experience involved, it
is doubtful that the technical difficulties of such a demanding project could be overcome.
69
USD/pty
300
200
100
0
xxx
The investors are considering the following typical items: reservoir size and asset quality, expandability, stability of
reservoir owner, predictability of tax regime/regulations in host country, level of proven technology, participating
company track record, by-product economics, transportation advantages, access to open and proven markets, long term
contracts for the entire LNG chain, customers and markets, pricing formula, strength of marketing entity, pricing stability
and location [312].
70
71
Variables
Constants
173
6,228,000,000
USD$0.6
USD$1.5
USD$200
USD$10.8
USD$3.0
USD$7.8
USD$8.0
USD$1.2
USD$6.8
Shipping to Japan
Shipping to EU
Net landed price in Japan using HH pricing
bcm
mmbtu
mmbtu
mmbtu
million
USD$2,000 million
USD$8,000 million
USD$10,200 million
mmbtu
mmbtu
mmbtu
mmbtu
mmbtu
mmbtu
USD$5.7 mmbtu
USD$3.0 mmbtu
USD$2.7 mmbtu
USD$1,026 million
USD$846 million
USD$108(theoretical) million
Shipping to Japan
USD$25,300 million
Shipping to EU
USD$22,808 million
If we had enough proved gas (5.2tcf) and the timeframe was proceeding as proposed(online 2019), then
the profits would be as follow:
Net Revenue per
Shipping to Japan
USD$1,350 million
annum (excluding
Shipping to EU
USD$1,278 million
maintenance cost,
Net landed price in Japan using HH pricing
USD$ Negative million
interest rate)
Total Net Revenue
Shipping to Japan
USD$34,773 million
(until Blocks 12
Shipping to EU
USD$32,282 million
depletion)(excluding
maintenance cost,
Net landed price in Japan using HH pricing
USD$ Negative million
interest rate)
xxxi
xxxii
LNG onshore terminal cost estimates by Technip and Bechtel USD$6bn for 1 train and USD$9bn for 2 trains.
The Spot Prices are based on conservative values and therefore are not similar to what Dr. Ellinass estimates.
72
The RoC might prefer to exploit its natural gas by an offshore liquefaction vessel rather than an onshore
liquefaction plant to reduce the time its gas reserves will be available for the market and keep the investment
to a minimum without any rise in costs thus increasing the possibility of securing funding. The drawback of
73
Variables
Constants
173
6,228,000,000
USD$0.6
USD$1.7
USD$200
bcm
mmbtu
mmbtu
mmbtu
million
USD$0 million
USD$10,000 million
USD$10,200 million
USD$12.0
USD$3.0
USD$9.0
USD$9.8
USD$1.2
USD$9.3
USD$5.0
USD$3.0
USD$2.7
mmbtu
mmbtu
mmbtu
mmbtu
mmbtu
mmbtu
mmbtu
mmbtu
mmbtu
Shipping to Japan
USD$1,206 million
Shipping to EU
USD$1,134 million
Shipping to Japan
USD$31,528 million
Shipping to EU
USD$29,036 million
14.1.5.3.1.
Egypt as an example
Giamouridis in his report titled The offshore Discovery in the Republic of Cyprus brings to the surface an
example of a country which did not manage wisely Gods gift of natural gas and run into serious economic
74
14.1.5.5.1.
Primary Buyers
The LNG primary buyers according to PCF [179] are Japan, South Korea, China whereas the secondary buyers
are Singapore, Thailand, India, Vietnam, Malaysia and Indonesia.
Japan is the largest LNG market having imports of nearly 87.49mmtpa in 2013. After 2020, when existing
contracts expire, long-term LNG imports are expected to fall. This will create a projected supply-demand gap
of 47mmtpa by 2025, and 63mmtpa by 2030. The gas demand will be affected by whether or not the Japanese
government decides to bring back online or permanently leave offline its nuclear power plants. Gas demand
growth will be suppressed by the greater use of nuclear power and renewable energy in electricity generation.
xxxiii
Lithuania has accused Moscow of manipulating gas prices for political gains and the European Commission has been
investigating Gazprom's pricing policies in Eastern Europe based on complaints from a number of countries in the region.
xxxiv
The driver of utilising LNG as a prevention measure to penalties for Greenhouse gas emissions can be demonstrated
in Swedens strategy to construct the 2nd LNG terminal in Lysekil. The city is located 100km away of Sweden's key
industrial areas and northern Europe's largest port of export. It is located in a so-called "Emission Control Area" (ECA),
where stricter sulphur emission limits will become applicable in January 2015.
76
14.2.
Pipelines
As discussed in the previous sections, Europes slowly increasing need of natural gas (CAGR 0.6 per cent
between 2008 and 2030), combined with a decline in indigenous production (-1 per cent per annum), will
create a supply gap of more than 100bcm by 2030. Except from the Liquid Natural Gas, there is another way
78
Gas pipeline
Blue Stream-2 (extension)
GALSI
ITGI (Interconnector Turkey-GreeceItaly)
Nabucco West
Next (Nord Stream-3 & 4)
South Stream
Origin
Russia
Algeria
Azerbaijan (Shah-Deniz-2)
16 and more
55
2 x 15,5bcm (or 4 x
15,5bcm)
12
Azerbaijan
Turkmenistan
Iran
Greece
On-stream
2015
2014
Probably
cancelled
2018/1
2016
2016-2018
(maybe delayed)
2017
2018
2018
TBA
2014
TBA
With regards to the Eastern Mediterranean Region, the active gas pipelines are key factors for its energy
outlook. As shown in Table 8 the most important pipelines in the region are inactive, which caused the gas
crisis for Jordan and Lebanon.
Table 8 Regions Pipelines. Source: Bonhomme [126]
Inactive
Active
Pipelines
Egypt-Jordan-Syria-Lebanon (Arab Gas
Pipeline)
Iraq-Syria (Ain Zalah SufayahSuweidiya)
Egypt-Israel (el-Arish-Ashkelon)
Iraq-Syria (SCOTLINE)two pipelines
Saudi Arabia-Jordan(Trans-Arabian
Pipeline)
Capacity bbl/d
MMcf/d
966
1,400,000
315,000 500,000
677
-
Notes
Egypt Jordan flows intermittent and at
volumes less than contracted; flows to
Syria, Lebanon offline
xxxv
The real reason as to why South Stream is on stake has to do with the participation of Russian firm Stroytransgaz whose
main stakeholder, Gennady Timchenko, was placed on the US's sanctions list against Russia in April [341, 342].
79
300
Non operational
An overview of the pipelines currently installed in Europe can be seen in Figure 72.
Figure 72 Existing and Planned pipelines in Europe for 2013. Source:Eurogas [191]
Various events, with the latest being the Russia-Ukraine crisis, have forced Europe to redefine its long-term
energy policy. The crisis led to a reduction in the risk of investing in energy infrastructure in Cyprus with the
EU looking to ensure its energy security and decrease its energy dependence on Russia by exploring more
costly actions. Notably, Pasquale De Micco, a national expert from the European Parliament`s policy
department said in an interview with Reuters that "the energy security scenario is completely changed and
none can exclude that more expensive investments will be done in the light of energy security, more than on
return of investments," [192].
80
14.2.1.1. Cyprus-Greece
The relation between Cyprus and Greece dates back many centuries. Actually, the vast majority of Cypriots
are of Greek origin and speak the Greek language whereas Greece has been Cypruss most entrusted supporter
and ally in its history.
This monetization option suffers from the high initial cost of the LNG terminal, which must be subsidized by
RoC (currently under IMF loans) and the companies involved. According to preliminary studies the proposed
pipeline would first travel 200km from Block 12 to Vassiliko, and then to Greeces mainland as shown in Figure
73 having an overall distance of almost 1150km.
The region characterised by its ultra-deep waters, non-uniform terrain with many canyons and heavy
earthquake activity (Figure 74) makes this project technically difficult even though Greek Minister George
Papaconstantinou has said the project is entirely feasible xxxvi. It has been stated by the Public Power
Corporation of Greece (DEPA) that the pipeline would have a capacity of 8bcm per annum but RoC plans to
xxxvi
On 10th March 2014 Greece launched an international tender for a study on the feasibility of a proposed pipeline to
carry gas from Israel and Cyprus in an effort to reduce dependence on Russian supplies.
81
Figure 74 Earthquake activity in the Mediterranean Sea for 1-15th June 2014. Source: EU-MED Seismological data [195]
From the financial analysis (Table 9) it is obvious that this pipeline is feasible under economies of scale which
envisage gas input from Israel. Hence its viability, just like the LNG option, may depend on either further
significant gas finds in Cyprus or Israels final export method. Investment cost is another obstacle to the
Cyprus-Greece pipeline. Gas sold via pipeline to Greece would be worth USD$61.3 billion at current prices (this
is before investment but after an estimated 5 per cent loss in transit). However, a large amount of capital
expenditure is needed to build a pipeline at such depth and at such long distances, which is capital that is
almost 1.5 times greater than that for LNG and neither Greeces nor Cyprus current economies can support
that.
14.2.1.1.1.
Financial Analysis
According to a rough cost analysis, the investment cost for a pipeline from Vassiliko to Greece and then on
land within Greece would be around USD$37.1 billion. This would result in a reduction of revenue that could
be generated to USD$24 billion. This is not very different in value to the USD$22.8 billion gained from
exporting gas to the European market from an onshore LNG. Because investment costs are so high, this also
raises the same issues as an LNG plant i.e. whether financing can be secured particular in the current absence
of larger volumes [78].
82
173
9
2
155
USD$396
USD$61,380
bcm
bcm
Cost of exploration
Cost of submarine pipeline from Block 12 to Vassiliko
Distance from Cyprus to Crete and Peloponnese
Estimated cost per 100km
Cost of submarine pipeline from Vassiliko to Greece
USD$600
USD$2,000
1050
USD$1,489
USD$31,370
million
million
km
million
million
bcm
/bcm
million
480 km
USD$670 million
USD$3,216 million
USD$37,187 million
USD$3,168 million
USD$24,000 million
14.2.1.2. Cyprus-Turkey
The relations between Greece and Cyprus, Turkeys military invasion in Cyprus in 1974 and their long-term
strategy of not recognising the (the government of the Republic of Cyprus) as the only
legitimate government of Cyprus (a recognition which comes from the rest of the world), make this option
unrealisable.
On the other hand, it is of no doubt that a pipeline to Turkeys vast network of domestic and international
pipelines would be a serious option if relations between RoC and Turkey were normal. Investment costs for
this export option are considerably lower than construction of the LNG terminal and the export option to
Greece (as shown in Table 9) thus maximizing the profits for both Cyprus and companies involved. In the
scenario that finds the countries in good relations (envisages the solution of the Cyprus problem), there are
still other drawbacks that can stop this monetization option from going to fruition and are elaborated further
in section 17.2.
14.2.1.2.1.
Financial Analysis
According to the estimates in Table 10, the net revenue by exporting gas through a subsea pipeline to Turkey
totals USD$29.4 billion, compared with USD$24 billion via pipeline to Greece and USD$22.8 billion for the
onshore LNG plant. Gross value of gas via pipeline after domestic consumption and losses in transit is USD$33
xxxvii
On 5th June 2014 Georgios Chelikidis, the General Manager of Prometheus Gas, announced that Greece will buy
Russian gas at a price of USD$396 per bcm. He said Greece had recently signed a contract with Russias gas giant Gazprom
within the framework of the current intergovernmental agreement on gas supplies up to 2016, with an option of
extending it for ten years more [250].
xxxviii
The total investment cost does not count the cost of buying the land required/license fees/Category 2-3 checks.
83
173
9
1
164
5,904,000,000
USD$5.6
USD$33,062
bcm
bcm
bcm
mmbtu
/mmbtu
million
Cost of exploration
Cost of submarine pipeline from Block 12 to Vassiliko
Distance from Cyprus to Crete and Peloponnese
Estimated cost per 100km
USD$600
USD$2,000
100
USD$1,000
USD$3,604 million
14.3.
million
million
km
million
USD$29,459 million
xxxix
Price given by Turcgas in the Turkish Stock Exchange for buying gas from Israel.
84
However, CNG has never been tried on a large scale and thus the government and investors are reluctant to
invest in such a technology. Also, by using CNG this would limit the markets to which Cypriot gas can be sold,
as long distances render it inefficient.
14.3.3. Electricity Transmission
In the scenario that finds RoC with neither export option (LNG/CNG/Pipeline), monetizing natural gas through
a different form can provide the solution. With strict limits to greenhouse emissions, expensive gas-fired
power plants become more appealing. Those two points can become the drivers for exporting electricity via
sub-sea cable to both Israel and Greece which will be ultimately linked to the pan-European electricity grid.
This concept is behind the EuroAsia Interconnector project, which is the 3rd PCI listed by EU Commission.
The project led by RoC will consist of a 600 kV DC and allow for reverse transmission of electricity enabling
delivery to any country of the three involved (i.e. Israel, Cyprus and Greece) to satisfy its peak demand. The
project will have a capacity of 2000 MW and its total length is estimated approximately 1518 km (329 km
between Cyprus and Israel, 879 km between Cyprus and Crete and 310 km between Crete and Athens) and
will allow for reverse transmission of electricity. The dumping depth of the cable will exceed the 2000m and
2500m for Israel Cyprus and Cyprus Greece respectively and will pass through a region of non-uniform
terrain with many canyons and heavy earthquake activity [197].
85
Similar to the pipeline, depth and distance can become a threat which could potentially stop the project from
reaching fruition. The cables distance between Greece and Cyprus is only 16km longer than the NorNed
transmission system xl but will cross deeper water compared to the SAPEI xli transmission system linking Sardinia
to mainland Italy. According to Quantum Energy, projects main stakeholder, the cable should cost 1.5 billion
to build but having SAPEI at a third of the distance and shallower water at a cost of 0.730 billion the EuroAsia
is certainly underestimated. Regardless of that, its low initial low cost should translate to high profits but the
energy losses and low netback price make this option the least favoured with an estimate net revenue of 17.5
billion [78, 199].
14.3.4. Conversion of Gas to Liquids
The GtL industry relies on taking methane (which would be transported by pipeline to Cyprus), converting it
into syngas, and using it to produce higher-value products. The various pathways to producing higher-value
products, is shown in Figure 77.
GtL would allow for diversification of Cypriot exports, as GtL prices are usually linked to the oil, rather than
the gas markets. Also the GtL industry is more labour-intensive than other monetisation options, hence
boosting the local economy.
The main reason such an option seems unfeasible at the moment, is that the development of such an industry
will require a large capital investment, and the Cypriot economy due to its small size and current recession,
will find it difficult to fund such an undertaking. A second but less important limiting parameter is the fact that
xl
The NorNed transmission system was inaugurated on 12 January 2011. The cable links Norway and the Netherlands,
has a total length of 580km making it the longest cable in the world and a construction cost of 600 million. [313]
xli
The SAPEI transmission system was inaugurated on 17 March 2011. It has a total length of 435km and runs at 1600m
below sea level making it the deepest HVDC in the world.
86
15.
Cyprus is expecting to maximize its profit by monetizing its hydrocarbons through pipelines, CNG or LNG. In
the meantime, prior and during the exploration phase, the RoC will be able to have substantial profits from
various hidden sources. Such profits can give relief to the economy but also to the society.
Through the exploration phase, the government received fees for the licences. For example, in February 2013,
the government received 150 million from the ENI/KOGAS consortium as well as 100 million from TOTAL as
signature bonuses for Blocks 2, 3, 9 and 10, 11 respectively. TOTAL paid 100 million euros for its licenses in
two southernmost blocks in February [200] [201]. Furthermore, Table 11 shows the pricelist with regards to
the cost of the seismic data the companies had to buy for the interpretation of the results, which formed the
basis of their bid [202]. Table 12 shows the tariff for the annual surface fees each company has to pay for the
usage of its block(s) as agreed in the ESPC (the RoC takes only 40 per cent of the profits).
87
MC2D CYP2006
Quantity
2,000-4,000 Line-km
4,000-6,000 Line-km
The whole survey
Uplift Licence fee
Price
USD$350 per Line-km
USD$310 per Line-km
USD$280 per Line-km
USD$500 per Line-km on seismic data within the awarded licence
MC3D CYP2007
Quantity
659km2
Uplift Licence fee
Price
USD$2,500 per km2
USD$5,000 per km2 on seismic data within the awarded licence
MC2D CYP2008
Quantity
2,000-6,000 Line-km
6,000-10,000 Line-km
The whole survey
Uplift Licence fee
Price
USD$400 per Line-km
USD$380 per Line-km
USD$300 per Line-km
USD$500 per Line-km on seismic data within the awarded licence
35,000
40,000
On 9th May 2014, Halliburton xlii concluded a deal with the government to use Cyprus as their base of operations
for the eastern Mediterranean region [204]. This vote of confidence is of critical importance since rival
companies of Halliburton see their presence in Cyprus as a sign of stability there. If one of them is happy
operating in Cyprus, word spreads and more companies will look to Cyprus as their destination to establish
their offices. Halliburton plans to collaborate with Cyprus-based universities and set up a local management
team. Furthermore, Ellinas noted that once the company secures contracts for its services, local companies
would have an opportunity to increase their activities and provide support services like storage space,
servicing of equipment, providing supplies and equipment [204].
Although there will be no taxation on the companys revenues, the Cypriot government will tax the income of
domestic and foreign workers employed by these companies at the countrys standard income tax rates. Tax
xlii
Halliburton business model is based on providing drilling services and specialised equipment to oil/gas companies.
Halliburtons activities in Cyprus would likely be of passive role mainly storing their drilling gear, opening up offices and
enhancing overall the physical presence to the East Mediterranean region.
88
16.
During the Christofias administration (2008 -2013) a reshuffle of the cabinet of Ministers took place in August
2011, allowing Praxoulla Antoniadou, a leftist to take over the Ministry of Commerce, Industry and Tourism.
The first priority for the new Minister was to clash with Solon Kassinis, the Director of the Ministrys Energy
Service, instigating a disciplinary hearing against him for speaking to media without prior permission. On top
of that, in October 2011 she revoked the authorisation of Kassinis and his team to oversee Noble Energys
operations as per the PSCs terms. This resulted in severe delays causing losses of tens of millions. At the end
of the day it was obvious that one of the major objectives of the ruling party AKEL, through the new Minister,
was to remove Kassinis and take the destiny of hydrocarbons in AKELs hands. In late February 2012 the Cypriot
parliament amended (with AKEL voting against) the Hydrocarbons Law of 2007 and repatriated operational
oversight of upstream licence holders to the Energy Service Director (and also to the Ministrys Director
General), this time assigning them responsibility on that level, rather than merely reinstating earlier Ministerial
authorisations to that end.
Moreover, the amendment put aside a previous Advisory Committee which consisted of the Director General
of the Ministry of Commerce Industry and Tourism, the Attorney General, the Director General of the Ministry
of Foreign Affairs, the Director General of the Ministry of Finance, the Director General of the Ministry of
Agriculture Natural Resources and Environment, the Director of the Geological Survey and the Director of the
Energy Service. According to the Law of 2007, the major objective of this committee was to evaluate upstream
bids and make relevant recommendations to the Minister of Commerce, Industry and Tourism. However, the
2012 amendment replaced the Technical Committee with the same composition plus the Accountant General
and the Auditor General who participates in meetings as an observer. The major difference compared to that
basic Law of 2007 (as now termed) is with reference to the committees actual responsibilities, which now
expand to include, besides the evaluation of upstream bids, also contract negotiation with the selected
bidders.
The Cypriot government in the form of its Council of Ministers still needs to approve bidders, both initially and
after the completion of negotiations (and may even ask for renegotiation). Furthermore, the government
retains the right to proceed with direct assignments of upstream licenses in cases of overriding national
security and / or of public interest considerations. However, under normal circumstances, neither the Council
collectively, nor individually the Minister of Energy Commerce Industry and Tourism can engage directly with
contract negotiations. These provisions have been very strongly criticised and opposed by the AKEL
administration, which has expressed fears that non-elected officials will control core strategic state affairs.
Against this backdrop, and following a failed referral of the amended Law back to Parliament by President
89
90
17.
In the forefront, there are two main gas export pipeline options, which could supply the European market and
monetise RoCs upstream reserves. Those two options are either through Greece or Turkey and both of them
will be examined and presented.
On the drawback side of this scenario are the low prices (compared to LNG sold in Asia), Cyprus current
economic state, supply security issues and the cost of the pipelines due to the water depth in the eastern
Mediterranean Figure 78 (~3080m xliii) which limit the size of pipelines.
xliii
While onshore pipeline technologies are well established, offshore pipeline technologies continue to pose difficult
challenges in their deployment and maintenance. Consequently, due to high demand and increasing budget, the industry
is constantly involving by innovating and pushing the limits of the technology to date.
92
Figure 78 Submarine Bathymetry of Mediterranean Sea. Source: Universit degli Studi di Pavia [212]
17.1.
Pipeline to Greece
One of the main keys for success of such a project with this depth is the manufacturability of the pipeline with
the requisite wall thickness. Several technology advances need to be applied to achieve feasibility and a
rigorous development program is ongoing for successful implementation which could allow for deeper pipes
to be installed rather than the 34.6mm used for the North stream (water depth ~200m,two pipelines,
maximum capacity 55bcm per annum, overall distance 1,222km, two years to build xliv) and Blue stream (depth
of 2200m, length 395km, diameter of 24inches, capacity of 16bcm per annum and a construction cost of
USD$3.4 billion) [213].
Greece appetite for the pipeline is more than obvious; it has been demonstrated by intensive public support
of the idea as the best monetization option for Cyprus and Europe. Why wouldnt they? An entry route
through Greece will bring multi-million dollars to the country. The money will be generated from gas transit
fees for using its national gas grid to transport gas to the Balkans and the EU. Furthermore, the prospect of
closer energy-related commercial ties between Greece and Israel will draw support from the US, a
development that in the mid-term could help Greece overcome its debilitating fiscal and economic crisis.
On 10th March 2014, Greece launched an international tender for the feasibility study of a proposed pipeline
to carry gas from Cyprus (and possibly Israel) in an effort to become Europes alternative gas entry point which
will reduce dependence on Russian supplies and Turkeys mood. The Eastern Mediterranean Pipeline is
designed to initially carry 8bcm per annum of Israeli and Cypriot gas. It would stretch from Cypruss Aphrodite
natural gas field to Greece and then to European markets through the IGI-Poseidon pipeline, led by Italian
utility Edison and state-controlled Greek utility DEPA [214].
This option can be realised by constructing a subsea pipeline:
xliv
93
The commercial justification for having a pipeline to Greece is that Cypriot (and possibly Israeli) gas, could
access a relatively high gas import prices market, despite all the current economic difficulties. In addition, they
can capture peripheral synergies which have existing and planned natural gas infrastructure in Greece and the
wider region, including the:
This concludes that East Mediterranean volumes reaching Greece could flow westwards to large European
markets (Italy) and northwards to South Eastern and even Central Europe. Furthermore, there are
expectations that markets, in particular those in South East Europe could offer opportunities for increased
natural gas imports from new sources in the future because of:
Estimations from DEPA shown that pipeline tariffs will be very competitive (similarly to the LNG prices) in
respect of gas deliveries to Greece as well as across South Eastern Europe and even Italy xlvi. A statement which
is easily questionable since it depends on the future gas prices, future re-gasification units and possible gas
quantities coming from Greeces hydrocarbon exploration and production.
xlv
The crisis in Ukraine has alarmed Europe with most of the concerns coming from Russian-depended countries for
natural gas imports. The prospect of war, or chaos on its borders becomes a backseat since a row with Russia over
Ukraine's unpaid gas bill threatens energy security in the rest of the continent. Due to the mild winter temperatures,
Europe could survive a short interruption of a few weeks to the pipelines across Ukraine provided that other Russian gas
is kept flowing. The European Union has taken since the last Russian gas interaction in 2009 and has built in more
resilience by securing contracts with other suppliers. The EU has taken measures to reduce its reliance further such as
better storage, more interconnectors and diversification of supply but those options will become available in the long
term. For now, though, being 36 per cent depended on Russia for natural gas imports, Europe cannot do without Russian
gas. Quaintly, the Kremlin by signing on the 21st of May 2014 (after 10 years of talks) the historic USD$400bn contract to
supply 38bcm of natural gas to China for the next 30 years changed the geopolitics and Russian can do without its
European customers. With an alternative market in the East, Russia might be less inclined to belligerent tactics against
its European clientele but this might change depending on US/Europe/NATOs suctions towards Russia [218].
xlvi
Compared to the gas markets in Western Europe, the market in the South Eastern Europe allow for increased profit
margins for the producers of natural gas due to the contractual framework which remains fixed to long-term oil-indexed
(high) gas pricing mechanisms.
94
There are many concerns about the proposed gas pipelines technical complexity because of its
significant length as well as sea depths in which it will need to be located. Furthermore, the final cost
will be higher than the proposed due to unforeseen issues rising during construction and geohazards
which can potentially increase the pipelines wall thickness thus increasing the cost;
Equipment availability such as the J-Lay vessels is another point of concern;
This project is strongly dependent on successfully finishing other downstream infrastructure projects
including both Greek natural gas systems upgrades and new regional interconnectors;
The project limits the RoC into a relatively small number of natural gas markets, even if these technical
and economic obstacles are successfully overcome, in comparison to the more flexible LNG option,
which could offer to RoC access to the Asian markets;
Due to the South East Region uncertainties regarding the economic recovery there are significant
uncertainties in relation to anticipated market opportunities, particularly around the realisation of
their demand potential and pricing and
Pipeline exports to South Eastern Europe (and even to Central Europe and Italy) will have to compete
with the new Azeri pipeline gas from Shah Deniz Phase 2 xlvii.
Regarding the proposal from DEPA for the bilateral development of a pipeline and liquefaction terminal
theoretically will offer the best of both options which are
Practically however, it does not take into consideration how important the brownfield economics and
economies of scale are in relation to the costly construction of liquefaction plants. As indicated in section
xlvii
The Shah Deniz field discovered in 1999 is one of the world's largest gas-condensate fields with its reserves being
estimated at 1.2tcm of gas. The gas which will be produced at the second stage of Shah Deniz field development will be
the main source of the Southern Gas Corridor, which envisages the transportation of the Caspian gas to European markets
[221].
95
17.2.
Pipeline to Turkey
There is also a second scenario that could be followed and it involves the construction of a subsea pipeline of
roughly 100-km to the Vassiliko. Then, continuing for approximately 95 km l onshore and another 125 km
through deep waters to Ceyhan port [217].
Figure 79 Cyprus-Turkey proposed pipeline (edited by Author). Source: Natural Gas Hub [218]
This monetization option has a commercial logic but due to the Cyprus problem, a lot of political issues would
have to be overcome. Turkeys annual gas demand reaches about 50bcm which will be growing with a rate of
xlviii
The other option would be to link this pipeline to Turkey and then to Europe (reducing the costs of submarine pipeline)
but still it would need to pass through volatile regions.
xlix
No one within Europe would like to see Russia having under control another natural gas entry point.
l
For demonstration purposes only, the distance has been assumed as a straight line. In practice this is impossible and a
proper analysis should be conducted.
96
li
Less expensive because of the relatively short distance between Cyprus and Turkey.
The last time an American VP, Lyndon Johnson, came to Cyprus was in 1962.
liii
SOCAR is the Azerbaijan's state energy company which with collaboration with Turkish Botas and the energy company
TPAO developed TANAP.
liv
In case there would be spare transportation capacity in the TANAP system available to Cyprus/Israeli exporters, this
would be limited to less than 5bcm per annum.
lii
97
18.
LNG offers the advantage to the seller to choose the optimum market. This is mainly because like oil, LNG can
be shipped to all the premium markets e.g. Japan, China and South Korea. Thus the high selling price is the key
element that drives the LNG market. Its high demand is due to its ability to be stored (since the trading
98
2014
2015
2017
2018
2019
Domestic Project
Appraisal Program
Process and Facilities studies / FEED
Detailed Engineering
Procurement, fabrication, construction
commissioning
Export project
Government approval and alignment
Site evaluation and Pre-FEED Design work
FEED and EPC bidding
LNG marketing
Train 1 construction and commissioning
Unfortunately, the results of the latest appraisal drilling failed to provide concrete estimate of the actual
reserve and significantly downgraded expectations as the estimated results dropped from 7tcf to 3.6-5tcf
(having a mean of 4tcf). In effect, the appraisal confirmed as an intermediate estimate 4.9tcf, which was the
worst-case scenario of exploratory drilling completed back in December 2011. Thus, although the timeframe
seems valid, the volume of the reserves, as estimated by the appraisal drilling, were not enough to give the
incentives for the onshore LNG facility and the timeframe is postponed until the discovery of more gas
volumes.
99
The high unit costs of greenfield lvi liquefaction facilities, which for a single-train plant are estimated at
between USD$4.5 to 6 per mmbtu (that includes only midstream and downstream costs);
The emerging competition from Gazprom. By offering cheaper lvii gas, Gazprom is making the regasification terminals less appealing which could potentially reduce the growth of LNG in Europe;
The emerging low production costs from future LNG export countries such as U.S.A., Mozambique and
Tanzania;
The current high shipping rates;
Asias demand for gas cannot be assumed to last forever;
Oversupply, the sellers-buyers will change as new LNG projects are set to come on-stream (Figure 81)
(especially from North America and East Africa, U.S.A. - becoming a LNG exporter by 2020 rather than
an importer today) which will have a downward impact on the price;
Crude oil price volatility, will influence future profits since most Asian LNG prices are under long-term
contracts linked to oil-index mechanisms and
Due to changes in pricing mechanism, the Asian buyers are constantly seeking to decrease the netback
by signing short-term contracts based on Henry Hub pricing lviii.
The reader is exhort to read the articles from Vidal et al (2000) titled Internal configuration of the Levantine Basin
from seismic reflection data (eastern Mediterranean) [324],
Montadert et al (2010) Petroleum Systems Offshore Cyprus [325] and
Steven A. Bowman (2011) Regional seismic interpretation of the hydrocarbon prospectivity of offshore Syria [326]
lvi
For Brownfield (adding trains to existing LNG plant) the cost can be reduced to USD$3-5 per mmbtu.
lvii
The Prime Minister of Lithuania, Algirdas Butkevicius, announced that his country is in talks with Gazprom for a 20 per
cent reduction in the cost of natural gas [162].
lviii
For example Japan, the gas buyer with the largest share of worlds LNG, is already seeking to introduce some HenryHub priced LNG volumes to its portfolio. After the multimillion cost of the triple Fukushima disaster of March 2011 is
trying to counterbalance its costs in generating electricity by using other price indexation mechanics. Furthermore,
another key candidate for natural gas exports, China in the long term could become less willing to pay high LNG prices as
its gas pipeline import options grow with the latest agreement being the supply of gas worth of USD$400 billion from
Russia.
lv
100
It must be highlighted that compared to the proposed subsea pipeline of the scale and complexity required in
this scheme, even a pipeline to Turkey (shortest distance) could face difficulty competing with an expandable
liquefaction terminal having more than 4 trains. Of equal importance are the shipping rates. The high shipping
tariffs (in 2011 were approximately USD$140,000/day) suggest that LNG exports to remote destinations could
become economically viable to reach in the future since more LNG carriers are under construction, which
should push the stakeholders to reduce the shipping tariffs in order to secure the sustainable market. This can
be seen in effect as since March the shipping rates were dropped by as much as 50 per cent [228].
As stated in the above sections, the major profits of an LNG terminal are usually generated from the second
and third liquefaction trains that are significantly less expensive to construct than the original 1-train
installation. Thus, the results of the following appraisal drillings are of great importance because if the future
results are not sufficient, then the LNG export could become financially unfeasible (assuming Cyprus does not
pool its natural resources with Israel).
As a result Cyprus is faced with various options:
(a) In the likely scenario that the next appraisal and exploratory drilling Noble Energy plans for late 2014
in two other promising targets within Block 12 increases the combined reserves estimate to 7tcf, then
Nicosia can go ahead and take the FID for a single LNG train within 2015-2016;
(b) In the other likely scenario that the exploratory and appraisal drilling ENI/KOGAS and TOTAL plan for
late 2014 - 2015 in their blocks increases the combined reserves estimate to the desired amount, then
Nicosia can go ahead and take the final investment decision for an onshore LNG train within 20162017;
(c) Consider a floating LNG option which will maximise the profits (assuming all planned international
LNG terminals come online) and
(d) Directly or indirectly (through U.S.A.) convince Israel to export 8-10bcm/y of Leviathans gas for
liquefaction at Vassiliko.
101
lix
A day after EUs plan to bail in Cypriot banks, Gazprombank (a subsidiary of Gazprom) delivered its own bail out proposal
to the office of the president of Cyprus! Although Gazprom refused to confirm it even made an offer, there were rumours
that they offered to take over the bail out (which sunk a whole country!!!) in exchange for exploration rights within
Cyprus EEZ! A proposal which literally shocked the US and EU who were behind the unprecedented and inhumane plan.
An article on The New Yorks times says it all it (meaning the proposal) illustrates how a sprawling, wealthy company so
deeply entwined with President Vladimir V. Putin of Russia that it is often called a state within a state is willing to seize
an opportunity and exploit weaknesses and divisions within Europe to cement its position and power [293].
lx
for the largest (based on available seismic (but no drilling) data, block 9 is considered to be the most prolific of all
offshore blocks in Cyprus, with potentially as much as twice the quantity of gas discovered in Aphrodite.
102
lxi
Floating production, storage and offloading (FPSO) vessels are particularly used in remote or ultra-deep water locations
in contrast to seabed expensive long-distance pipelines to onshore terminal since the FPSO offer a cost effective solution.
The reduction in overall costs provide an economically attractive solution for gas fields which can be exhausted in a few
years and do not justify the expense of installing a pipeline thus enabling the development of small gas fields.
Furthermore, once the field is depleted, the FPSO can be moved to a new location thus increasing their lifecycle and life
expectancy of the field by providing a constant supply of natural gas from different plays enabling the companies involved
to maximize their profits through extended long-term supply contracts.
lxii
Australian oil/gas workers earn USD$163,600/year on average, compared to USD$106,340 in the USA and USD$93,400
in the UK.
103
According to Tsakiris and Songhurst [226, 168] there are seven ways to reduce the overall cost for RoC are
presented below,
1. Use barge mounted liquefaction plant built in a shipyard in a low production cost country (such as
China) and take advantage of the lower cost base and higher productivity (thus reduced time). The
barge can be moored/grounded at Vassiliko. This approach has been used for the two onshore LNG
plants in China at half the cost /tpa of a typical LNG onshore terminal [231];
2. Use of Black and Veatch PRICO process. The PRICO process is optimised for smaller production of
around 2mtpa but higher capacity could be provided as multiple units. One of its greatest advantages
is its short construction time currently set to 30 months. There are plants currently using this process
in China and there are pre-FEED studies to be used in Mozambique and Tanzania [232];
3. Drop its share in the control of the offshore pipeline connecting the Aphrodite field with Vassiliko thus
reducing the overall cost;
4. Drop its share in the control of the 1st liquefaction train lxiii;
5. Bring external super majors such as Chinas state owned CNOOC. The first company that supplied
China with LNG came to Cyprus on the 2nd of March 2012 to present their views on how to proceed
with an LNG terminal. Furthermore, on 19th February 2014, Minister Lakkotrypis announced the
interest of Chinese delegates (including China Shipbuilding Industry Corp.) in the development of a
floating LNG export terminal [233];
lxiii
If Noble/Delek were to limit their shares of the profits from the Production Sharing Agreement (PSA) and take the
entire upstream cost from Production to Liquefaction, Nicosia would still make major profits as a result of its dominant
share in the PSA, get gas from Aphrodite for its domestic consumption that would allow it to reduce the cost of electricity
by 50 per cent, limit its debt liabilities to a minimum and increase its bargaining position vis--vis ENI/KOGAS and Total
when the time comes to discuss the ownership of their liquefaction trains.
104
105
18.1.
Cyprus aspiration to support EU gas supply security can be achieved through the LNG. Most importantly, LNG
can be directly shipped to Greece, ignoring commercial loss from not selling to downstream premium Asian
markets, which would serve the same political objectives as piped gas to Greece.
Greece has included its 80 per cent capacity increase of the Revithoussa LNG terminal, which will aim to boost
Greece's ability to supply and further diversify southeast Europe's gas systems. Furthermore, two additional
projects - floating LNG stations - were included as PCI's, with at least one to eventually go ahead in the coming
years. The goal is to upgrade incoming transit gas inflows within the country by at least 5bcm per annum giving
another entry point to natural gas to reach the European market [241].
DEPAs planned lxvii FSRU (floating re-gasification) in northern Greece could provide gas security (from Russia
and from Turkey) in South East Europe which is one of the most vulnerable regions because of their security
of natural gas supply in Europe. Experts have suggested that the FRSU will guarantee Bulgaria's energy
security. This can be achieved by committing part or all of its output to European gas buyers under firm longterm contracts, including through Balkan gateway re-gasification terminals such as the planned FSRU lxviii
lxiv
The first FLNG that is to be online (~2017) is the Shells Prelude which is expected to have a capacity of 3.6mtpa per
annum of LNG as well as process 0.4mtpa of LPG and 1.3mtpa of condensate.
lxv
ExxonMobil and partners BHP Billiton are looking to build an FLNG with a capacity of 6-7mtpa per annum and will
become operational in 2020-2021.
lxvi
It has to be noted that DEFA ended talks with ITERA in September 2013 and ITERAs bid involved procuring liquefied
natural gas (LNG) and re-gasifying it aboard Floating Storage and Re-gasification Units.
lxvii
DEPA at the final stages of finishing environmental impact and feasibility studies. The completion of the floating LNG
terminal project offshore Kavala will further enchase the chances of a meaningful transfer of gas from Greece to countries
such as Hungary and Croatia.
lxviii
Initial LNG storage capacity of 135,000m3 and projected annual gas send-out of 2.6bcm.
106
19.
The financial crisis into which the country was led from poor Government decisions does not allow the fruition
of most of the export options. The RoC considers the strategic partnership with Israel as the best possible
means to draw foreign investors to the island.
lxix
Upgrade of a liquefied natural gas (LNG) terminal to increase gas reception, storage and output capacity. The project
involves the construction of a third tank, upgrade of the marine facility, the installation of cryogenic equipment and an
upgrade of metering. Approximate total cost 166million.
lxx
Speaking after the EU summit on 27th May 2014, Commission President Jos Manuel Barroso made it plain that the EU
executive would impose infringements on Bulgaria regarding the Gazprom favoured South Stream pipeline, the
construction of which is about to begin in breach with EU laws. Therefore, Bulgaria will need to find other ways to get
supplied with NG (not only from the TANAP) [258].
107
lxxi
RoC and Israel signed on 28th April 2014 an agreement on the exchange and protection of confidential information on
hydrocarbons discovered in Block 12 and in the adjacent Ishai offshore licence with the purpose of assisting the two
governments assess extent of hydrocarbons discovered in their respective offshore blocks [60].
lxxii
The Leviathan partners are expected to reach a decision on the second phase of development (FLNG) by the 3rd quarter
of 2014. That in turn indicates that discussions between the government here and Noble over the next few weeks or
months will be critical.
108
19.1.
Israeli plans
As aforementioned, Cyprus monetization option through an onshore LNG terminal depends on Israels export
plans and/or its total available recoverable natural gas. Currently, there are three phases which compromise
the development of Israels richest gas field, Leviathan.
Phase I
Exports to Israel and local markets such as Cyprus
(for Electricity production) estimated in 2017.
Phase II
Exports of liquefied natural gas (probably using
FLNG).
Phase III
Involve regional markets such as Turkey, Cyprus,
Egypt.
Based on the three phases shown above, it is fundamental to investigate Israels possible export options which
consist of:
Pipeline to Turkey;
Pipeline/LNG to Greece;
CNG to Greece/Turkey;
Use of existing pipeline to Egypt;
Onshore LNG terminal and
Offshore LNG terminal.
lxxiii
109
Russia will oppose anything they perceive as being in the interests of the US lxxv.
The concerns of the Government of Cyprus should be similar to those of the Israeli Government. What would
happen if Israel had another Mavi Marmara lxxvi incident during the lifetime of the offshore pipeline
connecting the two countries? Automatically, the Turkish-Israeli relations would return to a status of hostility
where Israel would be in hostile position since Turkey could cancel its own imports or stop the transit of Israeli
gas through its territory. As in the case of Cyprus, Turkey can find an alternative gas source to meet its demand,
but Israel will not have readily available alternative export destinations. Some might believe that having a
pipeline might bring the two countries to peace. According to Dr. Brenda Shaffer, an expert on Central Asia,
the gas pipelines between countries don't ensure peaceful relations between them. As an example, Shaffer
cites the blowing up of the Egyptian gas pipelines in Sinai, which led to energy crises in Israel and
Jordan. Furthermore, Turkmenistan and as the threat of sanctions against the Iranians and the Kurds of
northern Iraq dissipates, might also compete for the Israeli gas and increase tensions in the area (Figure 84)
[249] [250] [251].
This export option is particularly attractive to the two minor oil companies, Delek and Ratio who might struggle
to raise international bonds to finance their part in developing the Leviathan gas field which is estimated to
cost USD$4.5 billion excluding the export infrastructure needed. A solution which is provided by the money
brought on the table by the Israeli-Turkish pipeline option.
The prerequisite to such a solution remains the same: a solution to the Cyprus conflict given that such a
pipeline would have to cross Cyprus exclusive economic zone. Joe Bidens recent visit to the island created
new hopes that the talks would this time progress and potentially reach a settlement. The second necessity is
the reestablishment of trust between Israel and Turkey: despite Netanyahus apology to the Turks in March
2013 over the Mavi Marmara flotilla incident and the restoration of their diplomatic ties, to date, their
relationship remains fragile [252].
Israeli gas would be delivered to Turkey via an undersea pipeline from a FPSO ship at Leviathan. For an onshore
pipeline, it has to pass through Syria which is highly unlikable due to Turkeys military presence and
interaction lxxvii during the ongoing Syrian civil war. Thus, one can suggest that Turkey and Israel have one
theoretical option, offshore. Thus, if it is constructed offshore then the pipeline should pass either within the
Cypriot EEZ (Figure 85) or Lebanese EEZ which means that political breakthroughs must happen for one of the
solutions to become realistic.
lxxv
110
The three theoretical scenarios are explained further in sections 19.1.1.1 - 19.1.1.3 below:
19.1.1.1. Onshore through Syria
The first theoretical route of such a pipeline to Turkey is via Syria. Apart from the evident problems of
stabilization, the Syrian president called the Turkish Prime Minister Recep Tayyip Erdogan bigoted and said
Ankara was allowing terrorists to cross into Syria to attack the army and Syrian civilians. Furthermore, the
Syrian Ambassador to the United Nations, Bashar Al-Jaafari, accused the governments of Turkey and Israel of
a "public alliance of supporting terrorism" in his country (trying to remove Assad-regime with the hope that
the new government-placed by them- would satisfy their needs and aspirations) [254] [255].
Furthermore, the Assad regime is likely to have higher priorities than to facilitate the transit of Israeli gas such
as reconstructing its country, which has collapsed during the civil war. Even if Assads regime had no other
priorities, with all the political and military games that took place by Israel and Turkey, Assads regime is closer
to Moscow (they provided the Syrian army with military equipment and training against the rebels) rather
than Ankara/Tel Aviv and Russia would not allow the transit pipeline to proceed and its gas reach EU.
19.1.1.2. Offshore through Cyprus
The second theoretical route of such a pipeline to Turkey is via Cypriot EEZ. This plan was suggested by former
U.S. ambassador Matthew Bryza, who currently sits in the Board of Directors of Turcas Enerji, as the most
commercially efficient lxxviii export option for Israeli gas. According to him, the pipeline would cross through
lxxviii
According to feasibility studies conducted by the Turkish energy company Turcas Enerji a CAPEX of USD$2.5bn would
be required to construct the subsea pipeline from Israel to Turkey having a total distance of 470km. Two pipelines will
111
need to be constructed having a diameter of 24inches. The pipelines will have a capacity of 8bcm of gas per annum each
totalling to 16bcm per annum. An additional USD$83 million would be required to build a 40km pipeline on land to
connect the landfall at Ceyhan to the Turkish national gas grid. More ambitious plans to integrate Leviathan gas into the
EU-supported Southern Corridor project would require either: USD$647million for a 470km connection from Ceyhan to
the TANAP; or USD$1.93bn for a 1,215km pipeline from Ceyhan to the start of the Trans-Adriatic Pipeline (TAP) on the
TurkeyGreece border, for a total of USD$4.4bn to connect Leviathan gas directly with the EU [197].
112
What the overall background of CNG suggests and was backed up by energy experts is that if Cyprus does not
solve its dispute with Turkey, Delek who pushes hard to export gas to Turkey, might move for an agreement
with Turkey using CNG instead of piped or LNG gas [260].
lxxix
Delek submitted its tender for the supply of natural gas to Cyprus electricity power plant. The raw value of gas from
Tamar is estimated at USD$7 per mmbtu and the transportation cost of gas from Israel to Cyprus is estimated at USD$2.50
per mmbtu. Thus giving a final price of around USD$10 per mmbtu, USD$8 less compared with the current price of
USD$18 per mmbtu for LNG.
113
In order to overcome the penalties from its buyers, Egypt agreed with Qatar in September 2013 to make LNG cargoes
available to be delivered to Egypts export customers.
lxxxi
The re-gasification terminal would be more expensive than piping gas from Israel due to the cost of erecting the
terminal compared to fixing the existing pipeline network.
lxxxii
A joint venture of Italy's ENI and Spain's Gas Natural operating the LNG terminal at Damietta.
114
There were fears (from Israeli Government officials) that the Muslim Brotherhood-dominated government in Egypt
would slow down or even prevent Israeli LNG cargoes transiting the Suez Canal to Asian customers (although treaty
obligations guarantee free passage, politically motivated inspections of Israeli cargoes on spurious safety grounds could
render the route unviable.) With the new Egyptian Government, such fears are eliminated since they are more likely to
allow Israeli LNG cargoes transiting the Suez Canal.
lxxxiv
There was a great debate in Israel about whether sending gas to Cyprus would simply extend security vulnerabilities,
while putting a national strategic asset in the hands of a third-party country [220].
lxxxv
Gazprom is evidently repeating what is trying to do in Azerbaijan, that is, absorbing as much gas as it can from
potential competitors and preventing them from reaching the traditional markets of Gazprom. Economic considerations,
such as the prices, have nothing to do with this strategic purpose. When the Russians buy gas from Azerbaijan, they pay
a European price but deliver this gas to North Caucasian regions, which do not pay for it. The deal with Tamar can be
regarded from the same angle. Gazprom wants to control the gas flow from Eastern Mediterranean before it reaches
South European markets. With the same goal in mind, the Russian behemoth is making an attempt at establishing control
over DEPA.
lxxxvi
The basic interest of Russia in South Eastern Mediterranean is to ensure a broad influence in the area gaining
importance on account of either its gas/oil richness or strategic position, a position which frets USA.
115
lxxxvii
Shell's Prelude FLNG vessel having a CAPEX of USD$5bn, is still under construction and will not be ready for
production until 2016-2017.
116
20.
Due to the fact that there has never been a scenario where one country has used another countrys LNG
facilities to export its own natural gas, especially in the case of Cyprus which does not have a strong military
presence, it would be risky for Cyprus to follow this route. Therefore, it is not practical for Cyprus to pursue
this option as this would extend security vulnerabilities while putting a national strategic asset in the hands of
a third-party country having a politically unstable environment.
Although it is risky to use Egypts LNG terminal, having Egypt as the end user is not. On the second quarter of
2013 Egypt gave the green light for companies to import gas. Such a move was highly exploited by Israel that
took all the necessary actions to sign a LoI for gas supply (discussed further in section 19.1.4 above).
Regardless of the fact that a LOI has been signed by the consortium Union Fenosa in which ENI is involved,
there is a tight timeframe which allows Cyprus, if it moves fast and makes the necessary arrangements, to
secure its first natural gas export.
Due to Israels high domestic gas demand; the pipeline from the Tamar field (having capacity 10bcm per
annum) to the onshore terminal is already struggling to meet peak demand thus Israel will not be able to
export gas during some hours of the day. However, the pipeline will supply gas to Egypt which is still connected
to Israel via the pipeline built by Egypt's East Mediterranean Gas Company (EMG) during off-peak hours at
night [274].
The Noble Energy-led consortium plans to complete by 2016-2017 the extra (3rd) pipeline which will double
the delivery of natural gas from the Tamar field to 20-22bcm per annum thus allowing the export of both
domestic and export volumes. The third pipeline will be able to deliver 6bcm of gas a year to the Israeli market
and the same amount to Egypt's LNG plant in Damietta.
On the other hand, significant progress has been made on the development of the Leviathan field, following
approval of Israel's natural gas export policy. Noble Energy is targeting to sanction the initial phase of
development at Leviathan by the end of 2014, with first production from the field currently planned for late
2017 [245].
Therefore until 2017, Cyprus will have the opportunity to sign deals with the Egyptian government.
Although RoCs long-term goal is to become a key energy player in Europe by supplying LNG (from an onshore
Liquefaction terminal), Egypt can serve as the short-term solution. By having another export option any
associated problems with the operation of the LNG will not prevent Cyprus from continuing its exports, an
ability which can increase investors confidence and finance the onshore LNG terminal.
117
21.
During a recent visit in Cyprus, Lebanese Minister Bassil confirmed to Minister Lakkotrypis that Lebanon is
considering using Cyprus facility to export some of its natural gas. Given the close proximity of the two
countries (265.3km away) it is a strategic plan that would allow Lebanon to increase its offshore exploration
and bring key companies in the bidding rounds. As shown in Figure 88, there are promising structures and
elements which are identified in the seismic data. Thus, it can be understood that if Lebanon speeds up its
exploration phase by leasing its offshore blocks, Cyprus will have another strategic ally that will favour the
construction/expansion of the proposed onshore LNG plant. This can only be a long-term strategy, since at
present, Lebanon is far from exploration. [277]
Figure 87 Seismic data offshore Cyprus and Lebanon. Source: Semb [278]
22.
The resource curse, also known as the paradox of plenty, refers to the paradox that countries and regions with
an abundance of natural resources like oil and gas. Studies have suggested that those rich in resources
countries tend to grow slower than those that have fewer resources. This resource curse is shown via the
Table 13 below where the resource-poor countries seem to grow exponentially.
118
BOTSWANA
CHILE
INDONESIA
MEXICO
NIGERIA
SAUDI ARABIA
1970-1980
15.4
3.0
7.9
6.7
6.7
13.5
1981-1989
11.4
4.0
6.1
1.5
0.6
-1.4
1990-2007
5.8
5.5
4.9
3.2
4.4
3.4
1981-2007
7.7
5
5.3
2.6
3.1
1.8
Many studies have tried to explain this unusual phenomenon and there is a general consensus that the
problem is hypothesized to happen for many different reasons such as, after Sachs [280]and Coutinho [281]:
1.
2.
3.
4.
5.
22.1.
Dutch Disease
This symptom was founded in the Netherlands as the name suggests. In the late 1950s there was a discovery
of natural gas off the North Sea coast, which resulted in the contraction of the trade sector such as
agriculture, manufacturing and tourism because of the increase in profits in the resource sector including
natural gas, coal, oil and minerals. This resource boom impacts the lagging sector of the economy in two ways.
Firstly, it switches labour away from the manufacturing sector towards exploiting the natural resources now
at its disposal. While this helps to increase the short-term revenue gained from these resources it lowers the
productivity of the trade sector of the economy. This has major impacts in the long-run when the resources
are all used up as now the tourism sector of the economy is extremely weak and unproductive and so the
economy has nothing to fall back on.
Secondly, the increase in spending in the economy as a result of the additional income provided by the
resource boom transfers yet more labour away from the manufacturing sector but this time to the nontradable goods sector. This shift thus increases the demand for non-tradable goods and thus drives prices for
these goods higher. However, as prices for the traded goods sector are set by demand over the world prices
for these goods would not change leading to an increase in the real exchange rate. In other words, Cyprus
being heavily dependent on the Tourist industry will a) not continue its development and b) face an apparent
decline in that sector if compensator measures are not taken [282].
22.2.
In more recent times, the resource curse has been linked with weak institutions. Economic groups tend to
have rent-seeking behaviour when natural resources windfalls occur as the government seizes large rents to
be re-distributed. Thus rent-seeking activities shift resources from productive areas and consequently give rise
to deadweight loss for the economy. Having a weak institution and pressure from different interest groups
leads to a misallocation of government revenues. The pressure from these interest groups gives rise to the
phenomenon voracity effect whereby the revenue windfall benefits are wasted.
119
22.3.
Another observation made regarding resource-rich countries is that they tend to use revenue on low return
overambitious projects and thus ignore private investment, which are consequently down-sized or abandoned
altogether. This uncertainty in revenues causes a continuous cycle of booms and busts in the government
investment sector, which are associated with high investment costs for adjustments. These can include costs
of training workers when investments are high or dismissing workers when investments are low.
22.4.
The resource curse can also be attributed to low investment in human capital. It can be observed that as the
natural resource abundance increases, measures of education such as school enrolment are said to be
decreasing. This can be due to the opportunity cost of investing in education increasing as natural capital
overshadows the human capital.
22.5.
Macroeconomic Instability
The business cycles of resource rich countries compared to resource poor countries is a determining factor
explaining the resource curse as the former have a significantly larger business cycle than the latter. The
determining reason can be attributed to pro-cyclical fiscal policies that translate the price volatility of the
natural resource into macroeconomic instability. This coupled by access to cheap credit in the capital markets
when there is a price boom further aggravates the situation. The resulting inflation from the cycles due to an
overheating economy causes the overvaluation of real local currency, which in turn damages the credibility of
the exchange rate and other monetary policies that are associated with it.
Also, when the natural resource prices are low, the high debts that have been accumulated lead to high
interest rates. Nigeria can be taken as an example; in the 1970s their oil was used as collateral to tackle their
debt when the prices were high; however, when the oil prices dropped a decade later, they were left with
little or no ability to tackle their debts lxxxviii.The debt stock increased with leaps and jumps, even when no new
loans were contracted. Nigerias external debt stock till 1977 was less than USD$0.8 billion. Beginning from
1978, the external debt stock began to grow astronomically, rising from USD$0.763 billion in 1977 to USD$5.09
billion in 1978 and USD$8.855 billion in 1980, an increase of over 73.96 percent between 1978 and 1980. By
December 2004, the total external debt stood at USD$35.94 billion indicating an increase of USD$3.03 billion
from December 2003. In 2006, the Paris Club creditors agreed to cancel a massive USD$18 billion of debt,
enabling Nigeria to use accrued savings to train 145,000 teachers; put over 3.5 million children into school;
build 166 new health centres and provide 79,000 doses of anti-retroviral drugs for HIV/AIDS patients [283].
The lack of proper management of the windfall revenues can also be attributed to the resource curse which
consequently leads to other determining factors of this phenomenon such as the appreciation of real interest
rates due to increased government borrowing and macroeconomic instability due to pro-cyclical fiscal policies.
Thus, it is recommended that the theories that determine the best use of abundant resource revenues be
reviewed.
For more information please read Origin of Nigeria's Debt available at,
http://www.dmo.gov.ng/ardrnigeriaexternalanddomesticdebt.php
lxxxviii
120
23.
Like almost all natural resources, oil and gas are exhaustible and have price trends thus measures of
permanent income have to take these characteristics into account. L. Coutinho describes seven points which
can be followed for optimal use of revenues however in this publication only the three will be presented;
emphasis will be given to the formation of National Revenue Fund (NRF) [281].
23.1.
Consumption Smoothing
Present value of expected revenues should form the basis of spending, taking into account price uncertainty,
and uncertainty about the time of resource depletion. This means that revenues should be saved and invested
in good times, so that returns on investment constitute a permanent stream of income.
23.2.
Binding fiscal rules can be used to limit the use of windfall revenues and guarantee an optimal level of savings.
There are different types of rules, which can be adopted. The key point is to insulate government expenditure
from fluctuations in natural resource prices. Decoupling fiscal policy from revenue fluctuations works to
minimize the Dutch disease (for more information read section above) through the containment of fiscal
spending. In addition, fiscal policy can also help to cushion part of the windfall by repaying public foreign debt,
taking away some of the pressure on the real exchange rate. This will also strengthen the fiscal position and
give the government room for movement during revenue downfalls.
23.3.
The above two points address the problems of price volatility and natural resource exhaustibility, but do not
guarantee that gas revenues are used to foster future financial growth and development. A medium which
takes into account the welfare of future generations and addresses both expenditure smoothing and intergenerational transfer (savings funds or future generation funds) can be provided with the formation of SWF.
A SWF is a state-owned investment fund investing in real and financial assets such as stocks, bonds, real
estate, precious metals, or in alternative investments such as private equity fund or hedge funds. Sovereign
wealth funds invest globally. Most SWFs are funded by revenues from commodity exports or from foreignexchange reserves held by the central bank.
Some sovereign wealth funds may be held by a central bank, which accumulates the funds in the course of its
management of a nation's banking system; this type of fund is usually of major economic and fiscal
importance. Other sovereign wealth funds consist of simply the state savings that are invested by various
entities for the purposes of investment return, and that may not have a significant role in fiscal management.
Growth and development can be achieved through sensible and credible fiscal policy choices. The National
Revenue Funds date back to 1956 when was established by Kuwait and currently Norway is been ranked as
the country with the most assets in its sovereign wealth fund, USD$878 billion as shown in Table 14.
Table 14 Sovereign Wealth Fund Rankings for up to 2013. Source: Sovereign Welfare Fund Institute [284]
Country
Norway
Assets
Billion
USD
878
Inception
Origin
1990
Oil
Linaburg-Maduell
Transparency
Index
10
121
773
1976
Oil
737.6
575.2
Not Available
2007
4
7
567.9
1997
410
326.7
1953
1993
320
1981
181
2000
173.3
1974
Qatar
Australia
170
90.2
2005
2006
NonCommodity
NonCommodity
NonCommodity
Oil and Gas
Oil and Gas
Singapore
Oil
NonCommodity
NonCommodity
Oil
NonCommodity
Saudi Arabia
China
China
Kuwait
China Hong Kong
Singapore
China
4
6
8
5
10
5
10
The guideline and the administration of the Norwegian Government Pension Fund Global is explained in more detail
in the annual national budgets and in the report to the Storting on the Government Pension fund.
lxxxix
122
Figure 88 Net Norwegian Government cash flow from petroleum activities 1976-2010. Source: MoPAE Norway [285]
24.
Human resources
With all the on-going uncertainty, there is nothing to be done apart from wait for more drilling to be
completed, which will allow for an FID to be taken. On the other hand, we as individuals must take this delay
as the opportunity to extend our knowledge and experience in the gas industry. Ellinas advised the young
Cypriots at Frederick University who would like to be employed in the islands natural gas industry, to leave
the country in order to have any employability chances later on [287].
123
Figure 90 Number of employees needed during construction of onshore LNG facility. Source:Ellinas [73]
However from the 7,500 only 2,500 jobs will go to Cypriots and that is mainly due to a lack of experience xc in
the construction of LNG plants but with initial preparation many jobs can be provided outside the LNG plant
with construction consultancy firms convincing firms like Noble Energy, ENI/KOGAS and Total to maximise
Cypriot participation since according to Ellinas for every job created during construction, three or more other
jobs will be also created in the fields of external support, security and supplies xci raising the overall number
to 26,250 [73].
Following that, during the 3rd energy symposium, the current chairwoman of the CHC, Toula Onoufriou urged
the people to think along these lines. She talked of an energy hub not only for producing and exporting but
also a centre of training and education and technological development. As a plan to develop the human
capital potential three training objectives have been highlighted [288]:
Train a new generation of young professionals and entrepreneurs who will have the knowledge and
skills to work and thrive in this new environment;
Train the staff that will man the various government and other bodies that will support this industry
(National Oil Company, Regulatory Bodies, Ministries etc.) and
xc
The famous and highly used meson cannot be used for gaining jobs in companies such as (Noble /Delek /ENI /TOTAL
/ Schlumberger /Halliburton /Technip /VITTOL etc.) whose main priority is their in house performance and sustainable
growth.
xci
According to Dr Richard Burns there will be areas such as the local hotel industry that could be adapted to meet
employment opportunities. A construction camp for the workers on the LNG plant will need to provide very similar
services to what the hotel industry provides so there will be opportunities for medium sized companies to thrive again.
124
Train skilled workers to support the various operations offshore and onshore related to the
hydrocarbon industry (e.g. major oil companies, LNG plant, specialized and other support services)
With regards to the first bullet point, ENI has offered scholarships to two Cypriots for postgraduate studies in
energy, the environment and economics at the Scuola Enrico Mattei, part of the ENI Corporate University in
Italy [289] and Noble Energy/Total contribute 1.5m towards degrees related to the oil and gas industry.
Furthermore, the Minister Lakkotrypis announced the allocation of 30million through four new schemes for
youth, clusters, Business Innovation Centres and Promotion of Innovation activities, during the new
programming period, as compared to 4mn in the period 2007-2013. This move comes to support
Governments long-term vision, which is to create a knowledge-based economy around the oil and gas
industry one that will enable Cyprus to export services in the region and beyond [290].
24.1.
During his talk at Frederick University, Ellinas said that if preparations such as young people going abroad to
seek experience, were not done correctly, ahead of the beginning of construction, Cypriots could even lose
out on the jobs that could be available to locals. This has been demonstrated by our neighbouring Israel.
Israel has become a regional natural gas power, and according to Ministry of Economy and Natural Gas
Authority estimates, 3,000 employees will be needed in the gas sector in the coming five years. As in most
cases, estimates are one thing, and reality is another. In 2012, the Technion Israel Institute of Technology in
Haifa launched a new MSc Engineering program with a focus on oil and gas, together with the prestigious
University of Haifa. Only four of the programs twenty graduates have found work with the oil and gas
exploration companies in the local market and none has found work in government services, which do not
even have many of experts in the field. A statement from an Israeli graduate student explaining that they
dont have much hope of finding work in the local market and that anyone looking for work in the field needs
to relocate abroad confirms Ellinas words. Professor Ove Gudmestad, an expert in developing offshore gas
fields from Norway's University of Stavanger, takes it a step further by stating that it is important for key
people in the Government to understand what the foreign companies that are drilling are proposing [291].
24.2.
At the end of the 1950s, few people imagined that the Norwegian continental shelf concealed wealth
consisting of vast volumes of oil and gas. However, the gas discovery in Groningen in the Netherlands in 1959
led to newfound optimism surrounding the North Seas petroleum potential. The Norwegian oil and gas
bonanza begun 10 years later with the discovery of Ekofisk in 1969, from which production started on the 15th
of June 1971. Since then several large discoveries are made making Norway a significant gas exporter for the
EU [292]. In the beginning of the exploration phase, the authorities chose to start with a model where foreign
(mostly U.S.A. based) companies operated the activities. This meant that foreign companies initially
dominated the exploration activities and developed the first oil and gas fields. Eventually, the Norwegian
involvement increased with Norsk Hydro joining in, and in 1972, Statoil was established with the State as sole
owner. In 2007, Statoil merged with Norsk Hydro and became one of the world's largest suppliers of oil and
gas. Statoil has been one of the most important players in the Norwegian oil industry, and has heavily
contributed in Norways transformation to a modern industrial nation (the petroleum sector constitute about
25 per cent of the States total income). The domestic oil and gas industry has since being pioneering and
expanding by former Statoil employees who established dozens of companies specializing in technical services.
Today, Norway is one of the world's most productive petroleum provinces and a test lab for technology
development [293]
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25.
Conclusion
Cyprus geological position stands at the crossroads of three continents, Europe, Asia and Africa which makes
it the best strategic position for the superpowers enabling Cyprus to have a key role in history. Britains main
motive in acquiring Cyprus in 1878 was to combat Russian influence in the Mediterranean and to protect its
route to India. In our times, (un)fortunately Cyprus lies in the strategic position of Russia and U.S.A. where,
Russia being Europes major gas supplier secures its position by controlling other possible gas entry routes
(such as the Islamic Pipeline) and U.S.A. trying to prevent Russias expansion by politically influencing countries
such as Syria, Egypt, Qatar, Israel, Turkey and Ukraine.
The hydrocarbon exploration could offer a very positive incentive for the resolution of the Cypriot question
but also increase Cyprus political leverage in EU since it can provide another gas supply route to the Russian
depended European market. Since the beginning of the 20th century, various companies tried unsuccessfully
to discover gas with the BP (named as Iraq Petroleum back then) being the most notable name. Since then,
technological improvements such as the use of P-up PSTM stack method and dual-sensor streamer (has the
ability to record more of the low frequency events in the seamount) have enhanced the possibility of
successful hydrocarbon explorations.
The presence of hydrocarbons seems for the citizens of Cyprus the best solution in reviving the countrys
economy which resulted from the bailout in 2013 and thus there is an enormous interest in Cyprus and abroad
in the role of hydrocarbons can play. The RoC under the presidency of Demetris Christofias had opened two
bidding rounds. Upon extensive negotiations an Exploration License for Exploration Block No 12 was granted
to medium-sized U.S.A. Houston based Noble Energy International Ltd, Exploration Blocks No 2, 3 and 9 to the
consortium led by ENI (acting as an operator with an 80 per cent interest) and KOGAS and Exploration Blocks
10 and 11 to French TOTAL.
A sustainable strategy looking towards the medium and long-term revenues, should take into consideration
the domestic market. Various research works has shown that regardless of the extent of domestic gas use in
the coming years, Cyprus will have sufficient resources for developing export capabilities. Hence, Cyprus will
monetize its natural resources through exports.
In order to determine the most beneficial monetisation option and make a prudent investment decision, each
monetisation option is evaluated over its entire lifetime. The main factors that influence the investment
decision are:
Eight long term monetisation options are examined based on those investment decisions. Given the
combination of Cyprus rating as junk, the low volume gas reserves, the possible decrease of LNG price and the
unsettled Cyprus problem, it seems that not all of the options can be feasible. However, the future is uncertain
and any change of the above factors can enhance the feasibility of options such as the FLNG and CNG. The
monetization options investigated in this publication are:
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Cyprus should re-align its export strategy and turn to regional markets if the Government does not secure the
necessary funds from either the EU through the projects of common interest scheme or private investors or
if the companies do not enhance their exploration programme. Regarding the future exploration, ENI/KOGAS
will commence geophysical surveys in 2014 with Noble Energy (despite the consortiums financial difficulties)
and TOTAL following in early 2014 and 2015 respectively. Noble Energys and TOTALs explorations are of great
importance since both will focus their activities in deep Mesozoic rock for oil. It is estimated that by the end
of 2015 Nicosia will have more realistic picture of its actual reserves in blocks under lease and thus continue
with their FID in 2016.
With the possibility of LNG price drop in the near future, time becomes an increasing critical factor in the
export option. Countries such as USA and Mozambique plan to start exports by 2020. Cyprus may lose out on
the Asian market if it is not in position to export natural gas within that period. The target date for gas exports
is 2020 and it already seems there will be delays of up to 3 years. It can be easily said that for high production
cost LNG projects which are delayed or are unable to secure contracts with oil-index pricing, may face
increasing pricing risks making their financing a challenge.
If RoC was to proceed with the onshore LNG, it should focus its efforts on the financing of the liquefaction plan
and in doing so reduce the requirement of its financial contribution by USD$1-USD$1.25 billion. One way to
decrease the construction costs is by changing the contract type to Cost Reimbursable with Fixed Price or EPC
Cost Reimbursable. The selection criteria between the two methods depend upon the factors on which RoC
places the greatest emphasis: reliance on a major design-construction firm and limited cost growth or owner
control and input.
Another way that could potentially reduce the overall cost for RoC is by using a barge mounted liquefaction
plant built in a shipyard in a low production cost country (such as China) and take advantage of their lower
cost base and higher productivity (thus reducing the delivery time). Similarly, RoC could utilise the Black and
Veatch PRICO process. The PRICO process is optimised for smaller production and one of its greatest
advantages is its short construction time currently set to less than 3 years (a typical onshore LNG terminal
needs approximately 6-7 years to build). In the light of the above statements, i.e. low prices and high
production costs, it might have more financial benefits to proceed with an FLNG, ready by 2019-2020,
sacrificing some of the indirect benefits but securing high netback prices rather than waiting for developing
an onshore LNG terminal, ready by 2023, and sacrifice high netback prices.
Regardless of the findings from future exploration, Cyprus could potentially continue with an onshore LNG if
Israel decides to pool its reserves. Thus Israels decision for export strategy is of great importance since it can
change RoCs export option. Israel is exploring various scenarios such as pipeline to Turkey either via Lebanon,
Cyprus or Syria, CNG to Greece, LNG from an FLNG and pipeline to Cyprus and then to Greece. With Noble
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128
26.
References
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[2]
[3]
Ministry of Interior, A Historical brief, [Online]. Available: http://www.aboutcyprus.org.cy/en/ahistorical-brief. [Accessed 7 April 2014].
[4]
W. Mallinson, Cyprus, A historical Overview, Nicosia: Press and Information Office, Republic of Cyprus,
2011.
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C. Data, Intercommunal Violence, 1963-67, January 1991. [Online]. Available: http://www.countrydata.com/cgi-bin/query/r-3600.html. [Accessed 1 May 2014].
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Reuters, Moody's cuts Cyprus to junk on Greece worries, 13 March 2013. [Online]. Available:
http://www.reuters.com/article/2012/03/13/cyprus-moodys-idUSL5E8ED0XW20120313. [Accessed 19
January 2014].
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