By Constantinos Hadjistassou
DESPITE the economic woes visited upon Cyprus by the haircut on deposits, also known as the ‘bail-in’, the economy has demonstrated remarkable resilience. The scheduled drilling programme for hydrocarbons in blocks 2, 3, 9, 10 and 11 – beginning in late 2014 – could well nudge the economy out of the slump.
Until then, there are constructive things that could be done to spur growth and contain the scourge of unemployment. Within three years from signing the contracts with the Republic of Cyprus, in early 2013, companies are scheduled to drill at least five exploratory wells. If we add to this another three appraisal wells, it is expected that about eight offshore wells in all will be completed.
Given that the cost per offshore well comes to $100m – a conservative calculation – the value of investments that will be channelled into Cyprus is expected to reach $800m. But the real question is what proportion of these investments will diffuse into the real economy? Put differently, how can Cyprus best take advantage of this juncture through job creation?
The interim – until the construction of the liquefaction plant at Vassilikos – can be used to craft a national energy policy designed to lure companies specialising in providing support services and equipment to the concession-holding companies in the Cyprus Exclusive Economic Zone (EEZ) and the region.
Inevitably, major opportunities arise in the energy sector. But in order to make the most of these, we need a fundamental understanding of the structure and operation of the oil industry. In a nutshell, the industry is comprised of: national oil companies (NOCs); oil majors like BP, Total, Chevron; independent oil and gas producers like BG, Occidental and Noble Energy; and Oil Field Service (OFS) companies, such as Halliburton, Baker Hughes and Schlumberger. Whereas the latter do not hold oil and gas rights, they do provide support services and equipment to the other companies covering almost the entire spectrum of the oil industry.
OFS outfits are broadly divided into three types: construction and contracting; services; and equipment vendors. Examples include designing drilling rigs, laying pipelines, well drilling, laying and fitting cables, well cementing, logging, drilling mud suppliers, seismic surveys, and catering and ferrying personnel. The provision of such services and gear draws on specialised technical know-how that needs to be developed in Cyprus.
As fascinating as plans to develop the Larnaca port and marina quayside may sound, they seem far-fetched amid the current economic crisis. In reality, following the relocation of container traffic to Limassol, the Larnaca port has to all intents and purposes turned idle. Without wanting to downplay its significance, the port is not working at full capacity, to say the least. One need only look it up on Google maps to realise that it’s essentially a ‘ghost’ port.
With a sea area of 250,000 square metres, a land area of 445,000 square metres and a water depth of 12 metres, the Larnaca port could easily become the base of operations for several companies interested in doing business here. Through slight modifications, the port could relatively easily host the vast majority of vessels used in developing hydrocarbon fields.
So far a few companies have been granted permission to use the port to provide services to the emerging oil and gas industry, but a long-term national policy is lacking. This is due to three main reasons. First, there is an inadequate understanding, both among the public as well as decision-makers, of how the oil and gas industry operates. Second, there seems to be resistance to the idea of allowing these companies to set up operations. And lastly, there exists an impression that the tourism industry can create greater value. There’s a misguided mindset that some of these companies would pollute the environment. In reality, though, the companies’ operations can be regulated and subjected to strict environmental protection rules and compliance regulations.
Tapping the island’s comparative advantages
The government could, via the Ports Authority and local authorities, provide incentives to the companies so that they choose Cyprus as their base of operations. The companies would be granted space at Larnaca port on long-term contracts. In return, the companies would commit to hiring a number of local technicians, engineers and scientists. Moreover, synergies could be promoted between the foreign companies and local businesses and universities.
The goal would be for the companies to gradually move their oil and gas support operations to Cyprus. The island’s geostrategic location, low corporate taxes, highly educated labour force, and a host of other advantages can contribute towards turning Cyprus into a petro-cluster. Naturally, it would take time for such plans to yield tangible results. But the benefits would be sustainable and long-term.
This is how Norway started out in the 1970s, developing into a country generating added value to the oil and gas industry. Today, Norway’s economy extracts more benefits from the support services and the technology provided to the oil and gas industry than from the value of the hydrocarbons themselves. Thus also in the case of Cyprus the development of hydrocarbon reserves will form the cornerstone for the genesis of an oil and gas industry and of a hub for support services. The high level of technical and scientific training required in the industry is ideally suited to Cyprus, which boasts the second highest rate per capita of college graduates in the EU.
But all this will take systematic efforts, hard work and flexibility (training and living abroad) from the work force. The energy sector can act as a catalyst for the (re)training and employment of a large proportion of the some 78,000 unemployed people. A profound understanding of the oil and gas industry would help wipe out the stigma, that is, the impression that the industry carries a heavy ecological footprint. No doubt the energy sector is so much more than the construction of a natural gas liquefaction terminal. It is possible for tourism and the oil and gas industry to coexist, provided we develop sufficient knowledge and a culture of competency on these two subjects.
Constantinos Hadjistassou is a lecturer in Marine Hydrocarbon Technologies at the University of Nicosia. Website: www.energysequel.com