By Abboud Zahr
The results of the recently closed third offshore licensing round are very promising, particularly in view that global oil prices are low and oil companies are slashing their exploration budgets. Reputable international companies have submitted bids for all three blocks on offer (6, 8 and 10). Eight energy companies filed six bids for the three offshore blocks as follows:
Block 6: ENI/Total.
Block 8: ENI, Cairn/Delek.
Block 10: ENI/Total, ExxonMobil/Qatar Petroleum (QP), Statoil.
Among the six bidders, four feature in the top ten oil majors in the world in terms of reserves; one is a national oil company (QP) with more than 5 per cent of the world proven reserves. ExxonMobil is the world’s second largest publically traded company with a market capitalisation exceeding $360 billion and the world’s number one integrated oil company. These oil majors have huge financial and technical capabilities and a proven track record in deep-water drilling.
The efforts and perseverance of President Nicos Anastasiades and Minister of Energy Giorgos Lakkotrypis to market the third licensing round were fruitful and led to a positive outcome.
The next step will be to award the three blocks to the successful bidder(s); a task which will not be easy, perhaps even more difficult than launching and marketing the licensing round. As is the case in licensing rounds across the world, it is not always the technical matters which dictate the award, but also political and geopolitical ones.
The most difficult block to award will be Block 10, which attracted all four oil majors.
The importance of Block 10 stems from ENI’s discovery of the giant Zohr field off Egypt located just six kilometres from Cyprus’ EEZ. This mega discovery is thought to host a massive reserve of 30 trillion cubic feet (TCF) of natural gas. The Zohr discovery revolutionised the industry in the Eastern Mediterranean as it was the first time that gas had been found in carbonate rocks rather than porous sands. It offers the hope that searches in similar geological structures will produce discoveries in nearby Cypriot blocks.
In fact, Block 10 attracted the greatest interest of the three available blocks due to its proximity to Zohr. ENI, naturally, is the most interested in winning the block. The geological knowledge gained from drilling several wells in the surrounding area gives the company an edge over other bidders. ENI’s decision to join forces with Total was not only driven by financial imperatives, but also technical reasons. Total worked in the block for more than two years before relinquishing it. It conducted seismic surveys and carried out modeling. All of these findings have been shared with ENI. For all these reasons, the consortium’s technical and financial bid is believed to be very competitive compared to the other bidders.
Furthermore, ENI and Total are already well established in Cyprus and they will have a lot of synergies by adding new blocks to their existing ones. Additionally, the under-used LNG plant in Damietta (Egypt), owned partially by ENI, will in time help export part of Cypriot production as LNG. This option will allow the consortium to monetise its production swiftly and with no major investments in infrastructure.
The second consortium bidding on Block 10 is ExxonMobil/Qatar Petroleum. ExxonMobil will be the operator of the block and QP’s main role will be co-financing. The consortium’s offer could not logically be as competitive as ENI/Total. This is largely because ExxonMobil does not have previous experience in the East Med and does not have easy access to market the discovered gas. The major advantage, however, which the American major brings to Cyprus, is its political influence. Having a company like ExxonMobil operating in its offshore, could be beneficial for Cyprus as it would reduce the credence of Turkey’s illegitimate pressure on Cyprus’s nascent oil and gas activities. It is well known that oil majors spend heavily on lobbying in Washington. ExxonMobil spent $12.6 million in 2014 alone. These lobbying activities are common practice in the US, and help direct US politics towards the companies’ interests in the US and abroad.
The third bidder on Block 10 is Statoil, a highly ethical and competent company which is not able to put more on the table than that, unlike the previous two consortia. Although technically it would prove to be very competent, its financial and political contributions are limited.
Taking all the above into consideration, and in order to award Block 10, the Cypriot government has to decide where its main interests lie and what its priorities are. Politics or technical-commercial? The answer to this question will let us know who exactly will be the lucky winner of Block 10.
The Remaining Blocks
As for Blocks 6 and 8, the two remaining blocks released for tender in this round, ENI has a good chance of winning them, alone for Block 8 or as consortium partner for Block 6. It is worth highlighting that ENI is bidding as operator for all three blocks (6, 8 and 10). However, the question, which will be raised here, is whether Cyprus is keen to put all its eggs in one basket and award to ENI almost half of its 12 offshore blocks, bearing in mind that ENI already holds licences for Blocks 2, 3 and 9.
It will probably be appropriate and to the advantage of Cyprus if only two blocks are awarded instead of all three.
The last question to be raised is when the official awards will be announced. It is clear that the ongoing peace negotiations will have a big influence on the timing of the announcement. This is a purely political decision in the hands of the government, which will be taken when seen appropriate.
Abboud Zahr is a Cyprus-based oil and gas specialist