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Hopes are high for Cyprus' NOC despite financial crisis

CNHC, the world’s youngest NOC, wants to turn Cyprus into a world-class natural gas hub

In the grip of a financial crisis that will probably wipe off more than 5% of its GDP in 2013, Cyprus needs a boost. Riches buried under the Mediterranean Sea offshore the island’s south coast might just be the answer.

Cyprus, believes Charles Ellinas, chief executive of Cyprus National Hydrocarbons Company (CNHC), is sitting on natural gas reserves amounting to 40 trillion cubic feet (cf). It’s enough to support exports of 40 million tonnes a year of liquefied natural gas (LNG) – and rescue the island’s economy. “It’s a huge gift,” he says. “If we make Cyprus the LNG hub for the region the employment it would create would be beyond belief.”

By 2025, he thinks, Cyprus’s economy, which until the crisis struck this year was heavily dependent on its financial services industry, would be “totally turned around”. There’s work to be done first, though. CNHC itself has only been operating since the beginning of the year, making it the world’s youngest national oil company.

For now, it has to wait on the foreign companies drilling offshore Cyprus before the optimism becomes reality. Noble Energy, which is completing appraisal drilling of block 12, in the Aphrodite field in Cyprus’s Exclusive Economic Zone, is expected to confirm reserves of about 7 trillion cf as early as this month.

Half of the zone’s 12 blocks have been licensed. Eni, Kogas and Total are gearing up to drill, too. Eni’s Block 9 may be even bigger than block 12, believe some analysts. In Israeli waters east of Aphrodite, some 35 trillion cf has been found and Ellinas is confident that the Cypriot acreage will be at least as prolific.

Market makers

Unlike Israel, however, Cyprus has made no bones about its ambition to use these reserves to build a lucrative export market – including, if Nicosia has its way, extra Israeli gas piped ashore to the island. (Israel has decided to export up to 40% of its gas, but how it does this has not yet been decided.)

Preliminary agreements for the LNG complex are already in the works. Cyprus signed a memorandum of understanding (MoU) with Noble and two Israeli partners in June. First-phase engineering work will be carried out by Technip and Bechtel.

The agreement with the Israeli investors made some think the LNG project would be for Israeli gas, but Ellinas says the first train will be sourced from Aphrodite. Leviathan, Noble’s Israeli field, could supply another.

Total and Eni, which will be drilling in 2014 and 2015, are also keen to develop the LNG complex, says Ellinas, and have asked for MoUs. Total is thought to be in the running for the second train.

The government has set aside land in Vassilikos, on the southern coast, for the LNG complex. Ellinas says it could hold four trains; but a regional development plan could see more land bought up to cater for another five. Ellinas says Cypriot reserves on their own could support eight trains.

As the world’s least experienced NOC, meanwhile, CNHC is plotting a modest role in the developments. While it will own the LNG plants, it will not – for now – do any drilling itself. That may change later after the company learns from its joint ventures. Cyprus’s government will do all licensing and regulation.

As for marketing the gas, CNHC will let the companies do the legwork, says Ellinas. Woodside Petroleum may join the Noble consortium, which would allow it to tap the Australian firm’s sales network, especially in Asia – a key destination for the gas.

Europe is the other destination. Ellinas is not worried about the weakness of the EU’s economy or its lacklustre thirst for gas in recent years. He points to projections showing a gas supply shortfall of 100bn cubic metres in 2020. “There’s plenty of room.” Europe wants secure and indigenous gas supplies, he says. “Ours is both.”

The LNG developments may receive backing from European bodies. Ellinas says the head of the European Investment Bank recently assured CNHC of his support. A three-train facility could easily cost more than $12bn, and further expansion could be costly.

Cyprus is forming a special-purpose vehicle to raise the money. Investors could foot the bill or debt finance may be used, says Ellinas. Once the preliminary engineering work is done, a final decision to go ahead with LNG could be taken in 2016.

That would allow for first gas exports sometime after 2020 – and then the bonanza would begin. “It won’t be till 2024 that we see serious income,” says Ellinas. A sovereign wealth fund will be set up to handle the income, with Norway’s fund providing the model. If it goes to plan, the economic impact for Cypriots will be enormous. The project and offshore drilling will create 10,000 jobs, thinks Ellinas.

Using gas locally will also replace costly and dirty oil burned in generation, lowering electricity prices. Once the LNG is up and running, says the CNHC chief, export revenues could amount to 20% of Cyprus’s GDP. 

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