Why Cyprus needs a comprehensive energy policy

By Dr. Charles Ellinas

We urgently need a major rethink and change in direction.

I have called repeatedly, and have been advocating through my articles in this newspaper, for the need to develop a comprehensive energy plan and policies for the future – but it is not being heeded.

Hydrocarbons

Exploration in Cyprus EEZ, and exploitation of our discoveries so far, is not progressing. It is at a standstill and may remain so for some time to come, for two main reasons: Turkey’s belligerent actions and the state of the international oil and gas companies (IOCs). The first is beyond our control. Hopefully the resumption of Cyprob negotiations in April will lead to a way forward.

But we have choices with regards to the second. The global industry is moving in a direction that does not bode well for East Med hydrocarbons – the inexorable march of renewables, at the expense of fossil fuels, is leading to an abundance of natural gas and LNG over-capacity, with prices remaining low in the longer-term.

Chevron is an example of the predicament the IOCs are in. Following a $5.5 billion loss in 2020 and a near $20 billion write-downs in 2019/2020, the company stated last week that it will be holding investment in oil and gas exploration and production flat until 2025 – at about 75 per cent of pre-Covid-19 levels. In addition, it will concentrate this reduced spending on large projects with high returns. Investing in the development of Aphrodite may not fit into these plans.

Cyprus should continue pressing the IOCs to resume exploration and development of hydrocarbon discoveries, but given the above challenges it should also formulate alternative plans.

The North Sea provides an example of how Cyprus could proceed. Under pressure, the major IOCs are pulling out, selling their assets to smaller, leaner and meaner, independents, who are able to carry-on with oil and gas production at substantially lower costs. This makes it possible to continue operating these assets even in the new low-price era.

Similar plans should be drawn-up for Cyprus EEZ. The IOCs should be held to their commitments under their production sharing agreements. If they are unwilling to do so, or are dragging their feet’, then Cyprus should have, and press for, alternative options.

Energean is showing the way in Israel. Having been brought-in by the government to increase competition, it is expected to start producing gas from its Karish and Tanin gas-fields later this year. Low development costs have allowed it to sell this gas in Israel at about $4/mmbtu.

This could be replicated in Cyprus. Such low-price gas opens many avenues for exploitation in the whole of the island – use in power generation, transport, industry, petrochemicals and even exports to neighbours such as Lebanon.

With the expansion of its renewable energy – aiming to achieve 42 per cent penetration by 2035 – Egypt is successfully expanding its petrochemicals industry using surplus natural gas. Despite the shift to clean energy, globally demand for petrochemicals continues to grow in response to increasing populations and standards of living.

We had proposals to set up petrochemicals in Cyprus in the past but unfortunately, we did not take them up. They are still an option.

Instead of creating opportunities to exploit our own natural gas-finds, we have committed to importing LNG that is likely to close the door to Aphrodite gas for the longer-term. Not only this is a more expensive option, but it may not even solve our endemic emission problems. EU’s new methane emissions strategy means that Cyprus will need to account for emissions and leakages associated with the import and regasification of LNG.

Cyprus needs a new direction and new policies if it is to benefit from its hydrocarbons sector.

Clean energy

Bringing emissions under control continues to present a big challenge for Cyprus. So far it has not done well in achieving its climate targets, attracting heavy criticism and penalties.

Cyprus current ‘National Energy and Climate Plan’ (NECP) for the period 2021-2030 admits that this sorry state of affairs may continue during this decade. With the EU emissions trading system (ETS) carbon-price now over €40/tonne CO2, the cost of high emissions will more than double.

But it does not have to be like that. Cyprus is blessed with renewable resources, with huge potential if properly utilised. Cyprus can learn from its neighbours, Israel, Egypt and Greece and adopt much more ambitious renewable and carbon emission reduction targets.

In any case, it may actually be forced by the European Commission to do so. With Europe aiming for a 55 per cent cut in emissions by 2030 and net-zero by 2050, member states will be requested soon to increase their national targets accordingly.

Achieving the new targets will require a faster and bigger switch from fossil fuels to renewables and a faster shift to electric vehicles, requiring huge investments in the energy sector. The funds from the European recovery package are meant to assist with that.

For Cyprus, how the EU recovery package will be used is key. Allocating funds to projects without a central strategic plan to guide this may plug short-term holes, but risks failing to have a long-lasting impact on energy transition and the island’s economy.

A major challenge to achieving the 2030 and 2050 climate change targets is Cyprus’ outdated electricity grid. Without upgrading it to a ‘smart-grid’, it will not be able to accommodate a high level of renewables securely and reliably. Such a limitation, if it persists, will always limit Cyprus’ ability to achieve future climate change targets.

Other priorities include completion of liberalisation of the electricity market, with a functioning TSO and DSO, electricity interconnectors, implementation of electricity storage, biofuels, smart technologies, major improvements in electricity systems, operations, market design, business models and regulations so that adoption of renewables receives the priority and support it deserves – all to fit within a coherent plan, supported by policy.

What is also essential is better coordination by the various ministries and energy agencies. At present this is too fractious to achieve comprehensive and coherent energy policies.

The priority for Cyprus should be the development of more realistic and up-to-date energy plans and policies, based on regional exploitation of natural gas in support of renewables. Otherwise, Cyprus will be overtaken by developments