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Cyprus eyes natural gas era

LNG imports are a first step. Exports and bunkering may come next

Cyprus is a rare bright spot for LNG trade amid the demand destruction and project delays that the Covid-19 pandemic has wrought in the industry. Construction started in July on the EU-funded Cynergy floating storage and regasification unit (FSRU) and LNG terminal project, which will bring first gas, energy diversification, greater supply security and reduced carbon emissions to the island from 2022.

The country, currently almost completely isolated from EU energy links, sits on top of at least 13tn ft³ of offshore gas, including the 4.5tn ft³ (370bn m3) Aphrodite field in block 12, the 3-5tn ft³ Calypso in block 6 and, most recently in February 2019, the 5-8tn ft³ Glaucus in block 10. Paradoxically, the discoveries have served only to delay gas’ introduction as a generation fuel, while Cyprus continues to mostly rely on imported liquid fuels such as diesel and fuel oil.

A previous plan for an LNG import project was shelved when the Aphrodite gas field was discovered in 2011 on the mistaken hopes that indigenously extracted gas would be available quickly—rather than, experts now estimate, not being piped ashore to Cyprus before 2025-2026. 

“LNG is a long-running story for Cyprus, where initial plans emerged back in the early 2000s but have failed to materialise until lately" Voloshin, Aperio

“LNG is a long-running story for Cyprus, where initial plans emerged back in the early 2000s but have failed to materialise until lately,” says George Voloshin, a senior analyst at Aperio Intelligence, a UK-based strategic intelligence firm. “The recent start of construction of an FSRU terminal at the port of Vassilikos is welcome progress towards what should be a boon for the island in all respects.”

Price boon for imports

The low hydrocarbons prices that have made developing the East Mediterranean’s gas discoveries so challenging will conversely benefit the Cynergy terminal. As many as two dozen different suppliers having already expressed interest—despite the island’s relatively low contract requirements of 17.7bn ft³/yr, which has put off would-be sellers in the past. Rising regional tensions, a further complication for the country’s upstream exploration programme, are also not expected to impact it significantly.

So intense is the interest to sell gas to Cyprus that UK-headquartered Energean offered an alternative to build a pipeline to import gas from Israel—an offer that still stands on paper but is unlikely to be taken up for now due to the greater flexibility an FSRU provides, according to Cypriot officials.

The 136,000m³ FSRU, a converted LNG tanker that is being outfitted by a consortium led by China Petroleum Pipeline Engineering, can easily be upgraded for LNG exports and may, in the future, also facilitate LNG bunkering, says Symeon Kassianides, the chairman of the board of directors of Cyprus’ Natural Gas Public Company and Natural Gas Infrastructure Company. First gas imports are expected by 2022.

Diversifying the mix

The project will allow the state monopoly over electricity generation to be broken and will foster growth of sustainable energy sources, explains Panos Papanastasiou, an engineering professor at the University of Cyprus. The liquid fuels currently available are a poor choice for new investment in thermal capacity for any prospective independent producers, he adds.

17.7bn ft³/yr – Cyprus's gas contract requirements

“For the time being, independent producers are investing in renewables projects, but you cannot base your business [model] completely on renewables,” says Papanastasiou. “You need to have also the possibility to generate with conventional sources like natural gas.”

The supply agreement framework is structured in such a way, he continues, that only a part of the island’s total requirements will be brought in under fixed long-term contracts. The rest will be bought on the spot market—although gradually these quantities are expected to reduce as the share of renewable energy in Cyprus’ generation mix grows.

This helps to explain why the EU has been an enthusiastic backer: all in all, the Cynergy project is expected to reduce the carbon footprint of the country’s power sector by about 30pc, and to lighten electricity bills for its citizens by a similar percentage. More than a third of the money, €101mn, comes from a grant by EU funding instrument the Connecting Europe Facility, while most of the rest comes in loans from the European Investment Bank (€150mn) and the European Bank for Reconstruction and Development (€80mn). The Electricity Authority of Cyprus is investing only €43mn of its own money.

The main challenge, says Kassianides, is successfully managing such a big project—the most expensive undertaken by the Cypriot government to date—but, as of now, everything is going to plan. US construction risk management specialist Hill International was hired to assist in supervising the terminal’s building in late July.

Gas future

The future looks bright, especially if and when the island’s indigenous gas resources come onstream, tentatively towards the middle of the decade. Right now, those plans are on hold for at least a year and possibly longer, as offshore operators mull the impact of gas prices in Europe and other potential destination markets remaining lower-for-longer in a post-Covid world, and Turkish and Greek warships manoeuvre aggressively in the area.

Turkey, which sponsors a breakaway Turkish republic in the north of the island that no other country besides it recognises, insists that Cyprus should wait until unification to develop its natural resources. The country’s warships have on several occasions harassed drill ships operated by IOCs off the Cypriot coast.

“For the time being, independent producers are investing in renewables projects, but you cannot base your business [model] completely on renewables” Papanastasiou, University of Cyprus

Although Turkey lays claim to some of Cyprus’ exclusive economic zone—most recently through a controversial agreement it struck with Libya’s internationally recognised government late last year, which is being disputed by the EU and other regional players including Egypt and Israel—the island’s main gas finds so far are outside the areas Ankara claims. This, says Papanastasiou, offers hope that the territorial dispute will not impact heavily on eventual plans for their development.

Some of Cyprus’s gas may be shipped to Egypt via a pipeline that is currently on the drawing board of the Aphrodite partners, operator US independent Noble Energy (in the process of being taken over by Chevron), Shell and Israel’s Delek. But, just like Israeli discoveries also targeting a pipe-to-Egypt solution, it is at the mercy of the willingness of Egypt to give foreign gas access to existing or new LNG export facilities, or even to its domestic market, over its own production.

Keeping options open

Other pipelines, such as the proposed East Med project to Italy via Greece, could also bring to the island Cypriot and other regional gas, in particular Israeli volumes. The more interconnections, the better, the Cypriot government logic goes.

The Cynergy terminal is being designed so it can tap into various plans—including LNG production capabilities also under discussion. ExxonMobil, operator of the Glaucus find, has declared an interest in building an LNG plant in Cyprus in the future, not far from where the Cynergy jetty will be.

“Our infrastructure has been designed in a way that… will allow an expansion of the jetty so that it can also be used for export purposes,” says Kassianides.

There may even be a future synergy with the island’s economically key tourism sector: the FSRU could facilitate LNG bunkering of anchoring cruise ships via smaller LNG bunkering vessels. “The fuel of choice for cruise liners is becoming increasingly LNG, so our facility will be able to support bunkering,” Kassianides says.

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