Cyprus And Noble Energy Start Negotiations On Block 12 Development

Cyprus has started negotiations with Noble Energy on development of the island’s first offshore hydrocarbon discovery as plans for future domestic use of natural gas become a priority. Meanwhile, the government has begun to define its policy as a potential producer. Gary Lakes reports.

The Republic of Cyprus and Noble Energy sat down in the Ministry of Commerce, Industry and Tourism in Nicosia on 3 April to begin discussions on how to proceed with the development of the natural gas discovered in Block 12 last December. Houston-based Noble discovered a resource of 5-8 tcf at the Cyprus A-1 well in the Aphrodite structure at the end of last year following a string of significant discoveries offshore Israel. The start of negotiations and recent decisions by the new Minister of Commerce, Industry and Tourism Neoclis Sylikiotis have to some degree cleared the confusion that has been hampering progress on the island’s energy future.

MEESunderstands that through the negotiations, the Cypriot government wishes to first gather Noble’s views on the commercial aspects of the Aphrodite reserve and how to proceed with development, particularly piping the gas to the island for domestic use, as well as Noble’s ideas for an LNG plant, especially identifying best markets. Given Cyprus’s pressing need to switch to natural gas for power generation by 2015, a timetable on first delivery of gas onshore will be important.

Noble has stated that it is looking to conduct appraisal drilling in Block 12 during the second half of this year. It is also keen to monetize the discoveries it has made in the Levant Basin of the East Mediterranean during the last few years, which now amount to around 33 tcf (935 bcm). Along with its Israeli partner Delek Group, Noble made an initial proposal to the Ministry of Commerce a year ago that an LNG plant could be built in Cyprus. While the discovery of gas offshore Cyprus has been seen as a solution for the island’s domestic energy problems regarding power generation, Noble has pointed out that the cost of a pipeline from Block 12 to Vassilikos on the south coast would warrant the inclusion of an LNG export plant to make it economically viable.

The Ministry of Commerce oversees the Cyprus Energy Department. The team assembled by the ministry to negotiate with Noble includes the permanent secretaries from the ministries of commerce, finance, interior, and agriculture, plus representatives from state utility DEFA and an advisory group appointed last autumn. A Cypriot official told MEES that the negotiations between the government and Noble are expected to take no more than two months. During that time, the government of Israel, which has engaged in its own energy cooperation discussions with the government of Cyprus, is expected to clarify its own natural gas export policy. Israel’s decision will help Cyprus clarify what its own best export plan might be.

When Noble announced the Block 12 discovery it put the gross mean resource at 7 tcf (198 bcm). This would be enough to meet the island’s natural gas demand (currently estimated at less than 1 bcm/year) well into the next century, but it is not sufficient to launch a successful LNG project without an additional contribution – be it from Israeli gas, most probably from the 17-20 tcf Leviathan field, an idea that has been put forward by Noble and Delek – or from gas that might be discovered offshore Cyprus in the future.

Gas Supply Time-Frame Crucial

If Noble is able to supply natural gas for local use within what the government considers to be a reasonable timeframe, negotiations on that issue will pass from the Ministry of Commerce and its energy team to the Natural Gas Public Company (DEFA), which is responsible for the procurement of natural gas supplies and their distribution throughout the island. DEFA would discuss with Noble the particulars of supply, gas specifications, a timetable for delivery and guarantees. Should Noble inform the Cypriot government that it would be unable to deliver Block 12 gas within a period that Nicosia considers suitable, DEFA would then pursue an interim bridging solution that would likely see the delivery of gas to the island in the form of LNG – for which it would be necessary to arrange an offshore regasification facility – or delivery of compressed natural gas (CNG). Either option would likely take up to three years to put into operation as either a floating regasification unit or a CNG vessel would need to be contracted and possibly constructed. DEFA would be the responsible authority to arrange an interim deal, not the Electricity Authority of Cyprus (EAC) as had been suggested by some government offices. But ultimately the island’s goal is to draw from its own resources to satisfy local gas demand.

“It is to Noble’s benefit and interest to expedite and accelerate the project for a pipeline coming from Block 12,” a Cypriot energy official told MEES. “I think they can do it and if they can within three to four years, then there will be no need for Cyprus to seek an interim solution, which would in any case take two and a half to three years to become operational.”

DEFA has ready for implementation an EU-backed project entailing the construction of a gas pipeline system, phase one of which would transport gas to the Vassilikos power station, which is undergoing reconstruction following an accidental explosion last July, and the power plants at Moni, near Limassol, and Dhekelia on the southeast coast. Later phases of the DEFA pipeline would extend supplies to other parts of the island. Public discussion on the routing of the pipelines is likely to begin with authorities from the municipalities that the project would transit by early summer and work would begin as soon as practical.

Minister Outlines Cyprus Energy Policy

Mr Sylikiotis outlined what might be understood as the government’s policy regarding energy resource development for Cyprus at a conference in Athens on 28 March. “The [Cyprus] government’s strategic objective is to turn the country into a regional energy center that will gather, process and transport or transit resources from the area to international markets,” Mr Sylikiotis said. “Such a venture requires the necessary infrastructure, construction in Cyprus of underwater hydrocarbon transportation pipelines but also oil storage terminals. It is clear that to build such infrastructure, particularly when we talk about a natural gas liquefaction plant, the cost is extremely high. That’s why we are seeking multilateral cooperation with the participation of other important countries, particularly from the region, and also other big energy companies. Our state will have to hold a significant stake in the project because we are talking about strategic infrastructure.”

The minister noted that recent discoveries in the Cyprus exclusive economic zone (EEZ) and the Israeli offshore “confirm that the Levant Basin and the wider sea region of the southeastern Mediterranean is a significant energy source and this changes both the geopolitical and geo-economy of the wider region, signaling a geostrategic upset. Undoubtedly, the results of exploratory drilling…create new prospects and a new dynamic as far as Cyprus’s role is concerned in the wider political and energy field in the Eastern Mediterranean. It signals positive prospects and long term economic development.” He said that for Cyprus “strategic cooperation with Greece and Israel aims at creating the necessary infrastructure and exploiting hydrocarbons in the area in such way that we will offer prospects of peace, welfare and progress for the wider region. That is why clinching bilateral agreements with the countries of the wider southeastern Mediterranean is high on our agenda.”

Mr Sylikiotis said the new circumstances could lead to a redrawing of Europe’s energy map and that that is “completely in line with our strategic aim to turn Cyprus into a regional energy hub, securing the continuous and uninterrupted supply of energy for the permanent markets of the EU. On this basis, Cyprus’s and Greece’s contribution, as member EU states, assumes an even greater weight,” he said, adding: “Cyprus can play a pivotal role as a bridge for peaceful cooperation and coexistence of the countries of the region [and] also between Europe and the Middle East.”

© Copyright MEES 2012.