Cyprus Mail
Cyprus Energy

Important move on gas, but still a long way to go

Flaring in the Aphrodite field in September 2013

By Elias Hazou

Declaring the Aphrodite gas field commercial is an important, but by no means the final step toward monetising the reservoir, officials said on Monday.

“We have transitioned from exploration to exploitation. But the declaration of commerciality for the Aphrodite reservoir is the first step as much more needs to be done before the Cypriot state can receive the first revenues,” Stelios Cheimonas, permanent secretary at the energy ministry, told state broadcaster CyBC.

Over the weekend, the partners in the gas field – Noble Energy, Delek and Anver – announced that they had filed a Declaration of Commerciality for developing Aphrodite.

Commerciality signifies the existence of recoverable gas in quantities sufficient to sell and turn a profit. Aphrodite holds some 4.5 trillion cubic feet.

According to Cheimonas, the gas is enough to provide electric power domestically for several decades, as well as for exports.

But the whole process, culminating in actual deliveries to customers, might take three to four years.

The official also ruled out pre-sales, noting that revenues to Cyprus will begin once the gas is delivered, not before.

The next stage now is the submission by the Aphrodite partners of their development and production plan. This involves the method of production and the timetable, with the concession holders finalising infrastructure and engineering designs. Following this, the partners must conclude gas sales agreements and line up the financing. The final – and most crucial – step is the Final Investment Decision (FID) by the partners.

The government expects the development plan to be submitted sometime over the next few days. After that, under the contract signed with the Aphrodite partners, the government has 90 days in which to comment on the plan.

Should any differences of opinion arise, negotiations will ensue. Once agreement is struck, the minister of energy will propose to the cabinet that it grant the partners a licence for exploitation of the field.

The development plan will include proposed export destinations. Back in April, Delek said they were examining options for the development of Block 12, enabling the supply of natural gas to the local market in Cyprus as well as the export of natural gas via pipelines to other markets, including Egypt.

“This will include a preliminary plan for the establishment of an FPSO with an estimated initial production capacity of approximately 800 mmcf/d,” the company said.

An FPSO (floating production, storage and offloading) vessel is a platform producing and treating the gas on-site. The gas is either piped to receiving terminals or compressed and loaded onto ships.

Although the declaration of commerciality is a welcome development, it is a formality merely confirming what we already knew about the Aphrodite reserves, said gas expert Charles Ellinas.

The worry, Ellinas told the Mail, is that there currently appears to be no Plan B as far as potential customers go.

“The government is focusing on Egypt, but if that falls through, what then?” he said.

Should that happen, it’s back to the drawing board for Noble and their partners, and that means more delays.

In a previous communication, Ellinas laid out the chief reasons why Cypriot gas sales to Egypt seem implausible under the current circumstances. First, the neighbouring country urgently needs gas for domestic consumption within the 2018-2020 timeframe, and Cyprus won’t be ready until 2020, under the most optimistic scenario.

Secondly, the Damietta LNG plant in Egypt – a possible customer for Cyprus – looks likely to clinch a deal with the Israelis (the Tamar gas field).

Finally, Cypriot gas would be too expensive for British Gas (Egypt), due to the cost of liquefaction, export and regasification in Europe.

Egypt has previously signed a memorandum of understanding with Cyprus for the purchase of gas. But MoUs are non-legally binding statements of intent.

Moreover, cautions Ellinas, significant proceeds from the sale of Cypriot gas should not be expected until three years after deliveries begin.

The Production Sharing Contract between Cyprus and Noble stipulates that during the first three years of gas production, most of the profit for the government will go toward paying for the offshore facilities.

“The serious money won’t start coming in until about 2023,” Ellinas said.

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