The next three months will be definitive when it comes to Aphrodite

The issue of a ‘notice-of-breach’ to Chevron – the Aphrodite gasfield operator – and its partners by the minister of energy, George Papanastasiou, on August 25 took everyone by surprise.

They have been given three months to remedy the breach of having failed to submit an acceptable, updated, development and production plan (DPP) for the Aphrodite gasfield and initiate the ‘Front-End Engineering Design (FEED)’. Should that not be remedied, the notice gives the government the right to issue a ‘notice-of-termination of the Production Sharing Contract (PSC)’. This came to light as a result of a filing by NewMed, a partner in Aphrodite, at the Tel Aviv Stock Exchange.

This is an ultimatum that in effect hardens positions. Having obtained approval by Cyprus’ Council of Ministers to issue the notice, the minister of energy is determined to take drastic action should the Aphrodite consortium fail to respond.

But where does President Nikos Christodoulides sit in all of these precipitous developments? So far, he has abstained from taking a position. He has not come out publicly to support his minister. Something similar happened last year, following rejection of Chevron’s DPP in August.

What happened then is revealing. As I wrote in an earlier article, In September last year, the president met Chevron management on his own in New York, with the participation of Amos Hochstein, the deputy assistant to the US president. They agreed on the strategic importance of Aphrodite to both the government and the company, with the president referring to the readiness of the government for “constructive cooperation, to achieve our common goals.” Later, leaked articles to the press implied that the president “saved the day” with Chevron.

In early December, when visiting the US warship USS Mount Whitney at Larnaca, the president said that the presence of the Americans “demonstrates the fact that our relations are as high as ever before” and that “Chevron’s presence in the EEZ is a vote of confidence”.

Leaked news early December said that “it seems that an agreement has finally been reached between Cyprus and Chevron, resulting in the definitive opening of the way for the development and exploitation of Aphrodite,” adding that “in its letter, Chevron confirms the alignment of the parties in terms of the broader framework for exploiting the field.”

It was even claimed that the deal ended “protracted negotiations that stalled development of the field for years, and now clears the way for hydrocarbon extraction twelve years after the field was discovered”.

On receipt of Chevron’s revised plan in April, the minister of energy was positive, stating that the point of contention had been “overcome”, adding that “provided the next steps are agreed, the consortium is expected to proceed within 2024 in the preparation of the relevant FEED studies, with a completion horizon of 2025.”

But despite all this positivity, by the end of April Chevron’s plan was rejected, accompanied by an ultimatum to proceed with the FEED studies within the next six months based on the 2019 plan. As now, this came as a shock.

Are we going to have deja vu? Again, all has been happening at the end of August, with the president not taking a position. He will be in New York for the UN General Assembly in September, where it is likely that meetings will be arranged with Chevron and the US administration, as happened last year.

The president places relations with the US at the top of his agenda. As he said in July “strengthening bilateral relations [with the US] is a priority for his government.”

Undoubtedly September and the next three months will be defining when it comes to development of Aphrodite, as with all other unsettled major energy issues that bedevil Cyprus: the GSI interconnector, the LNG import project at Vasilikos, the power supply system, an uncompetitive RES market, abolition of Defa’s gas import monopoly, opening of the competitive electricity market and so on. But do not ‘hold your breath’.

Overview

This saga started in August 2023 when Cyprus rejected Chevron’s revised DPP. This was followed by a re-revised DPP in March. By April that was also rejected by the ministry, with the issue of an ultimatum to proceed with the FEED studies within the next six months, adhering to the 2019 plan.

This ignores the fact that in the five-year period since the 2019 plan was agreed a number of things happened in the global energy industry and in the region that have moved the goalposts, requiring, as a minimum, revision of this plan. In addition, assessment of the appraisal well drilled in 2023 lowered Aphrodite’s estimated reserves from 4.5tcf to 3.5tcf, impacting the economics of such a development. But, irrespective, the ministry takes the firm position that “altering contractual terms is a non-starter”.

In its August 25 filing NewMed stated that the consortium is close to completing the updated DPP “in line with the requirements of the Cypriot government” and intents to submit this “in the coming days”. In fact, MEES reports that a revised DPP has been submitted to the ministry by Chevron, “largely consisting of a more detailed version of the proposals presented…in March”. It remains to be seen whether these go far-enough to lead to agreement.

The key factors I raised in October 2023 are still valid and must be taken into account before reaching a final decision. These include:

  • According to the IEA, the clock on fossil fuels has started ticking backwards. Demand may be substantially less into the next decade. In Europe gas demand is projected to be 30 per cent down in 2024 when compared to pre-Ukraine war levels
  • East Med is subject to geopolitical risk that – if instability is prolonged – may deter future investors
  • The East Med is not the centre of attention for Chevron and ExxonMobil, with their priorities fast-shifting
  • If agreement is not reached, Chevron and its partners may not depart willingly, leading to protracted disputes and more delays, leaving Aphrodite undeveloped. Chevron can afford to wait. It has many other, less risky, projects to get on with
  • Impact of such an outcome on others. A rift with Chevron could also deter others from stepping in – companies that Cyprus may want to attract to replace Chevron
  • With the US State Department having already supported publicly Chevron’s plan, it may also lead to unwanted political complexities
  • And then there is the question: if Cyprus closes the door to this plan, does it have any other credible options up its sleeve to progress development of Aphrodite?

If anything, the Aphrodite saga has intensified, adding more challenges to Cyprus’ daunting energy complexities and woes.

Dr Charles Ellinas, @CharlesEllinas, Atlantic Council councilor