Cyprus' Strategic Advantages as an Energy Hub
Cyprus’ LNG terminal in Vasiliko remains the island’s strategic national project. Building an onshore LNG facility in the Vasiliko area between Larnaca and Limassol would not only allow the island to reach international markets, but could also potentially turn the cash-strapped Republic of Cyprus into a regional energy hub. The island’s Eastern Mediterranean neighbours could use Cyprus’ facility to process and export their own natural gas. Or at least, that’s what Cyprus is hoping.
A discovery made by Noble Energy in late 2011 promised to financially justify the multi-billion dollar project. At least 5 to 8 Tcf of natural gas were to be found under Cyprus’ seabed, in Block 12 of its exclusive economic zone. The Aphrodite field carried dangerous hopes that the island could turn around its economy and honor its debts by monetizing its offshore riches. Only in October 2013, Noble Energy downsized its estimates for the Aphrodite field to a range of 3.6 to 6 Tcf. Despite the disappointing results of the appraisal drillings in the Aphrodite field, Noble Energy believes that Block 12 holds additional amounts of recoverable gas and will be undertaking further exploratory drilling in the year to come.
Cyprus was not only counting on its own riches to afford its expensive project. It was hoping that Israel could join in and pool costs. Israel and Cyprus maintain friendly relations. They have reached a maritime border agreement and often discuss energy matters in sight of future energy collaborations. Cyprus repeatedly invited Israel on board of the project. Israel never said no. But Israel never said yes either.
The thing is, for Israel, the new gas discoveries mean just as much. For a very long period of time, the state of Israel was reliant on imported energy to satisfy its domestic needs. And being surrounded by Arab neighbours made the situation very vulnerable. Egypt supplied Israel with 40% of its natural gas needs. Despite the peace treaty between Egypt and Israel signed under Mubarak, the turmoil caused by the Arab Spring in 2011 put an end to the natural gas trade between the two countries. Several disruptions in the flow of gas from Egypt to Israel caused a jump in Israel’s energy bill and a severe increase in electricity prices.
Luckily for Israel, the natural gas in its waters turned out to be abundant. And in good timing. The Tamar field alone contains up to 10 Tcf of natural gas. The Leviathan, a lot more: 19 Tcf. Israel’s long history of dependence on imported energy commended the country to be cautious. The new riches will not be wasted and the priority for Israel is to achieve energy security and energy independence. Selling the natural gas to thirsty customers has its benefits too as it would generate billions of Shekels that would fill the state’s coffers. To achieve an equilibrium between those two important goals, Israel formed a committee and engaged the whole country in a lengthy debate until it reached the decision that approximately 40% of the gas discovered so far will be allocated for exports, and the rest kept at home to satisfy the country’s domestic demand for decades to come.
Cyprus was hoping that Israel’s exports would transit via the island’s Vasiliko LNG. Israel has not yet decided how it will choose to proceed, whether through the Cyprus’ LNG, a Turkish pipeline or its own (floating) LNG, but it recently expressed its intention to start by exporting to immediate neighbours: an Egypt suffering from domestic natural gas shortfalls due to a growing population and export commitments; a Jordan that has suffered too from disruptions in the flow of Egyptian natural gas; a Palestinian authority in need of natural gas supplies.
Cyprus will however not halt its LNG plan if Israel chooses not to cooperate. Lebanon could be a potential partner, but Cyprus realises that its Lebanese neighbours needs time to join the energy game, delayed by domestic political rivalries. The country has postponed the start of its bidding round on several occasions and is suffering from major security concerns due to the civil war next-door in Syria. Cypriot officials believe that Cyprus has a lot to offer nevertheless and that focusing on the island’s strategic advantages will attract investors and develop the country’s offshore resources.
O&G companies are interested in Cyprus’ LNG
Cyprus’ first asset is the interest of major oil and gas companies such as Texas-based Noble Energy, Israel’s Delek and Avner, France’s Total and the Italian-South Korean consortium ENI/Kogas. While Total and Noble/Delek/Avner have signed MOUs to participate in the LNG project, ENI also revealed its interest in joining in the project should the company encounters recoverable gas during gas explorations in the island’s EEZ/
Cyprus’ Common Law system and efficient tax regime are key advantages
Cyprus has a well-functioning common law legal system based on principles established through historical links with the United Kingdom. The familiarity of the legal and commercial systems assists international business people in working within the Cypriot commercial environment. Common law is usually the system of choice when it comes to international commercial transactions which puts Cyprus in an advantageous position. Cyprus also has all the tax attributes expected from an international financial center: its tax legislation is predictable and straightforward. Relations between the business community and the tax authorities are excellent and efficient. The transparency of the tax system enhances Cyprus’ competitiveness and contributes in making Cyprus a jurisdiction of choice for international operations. Cyprus has a corporate income tax rate of 12.5%. which is the lowest corporate tax rate in the European Union.
Cyprus’ EU membership provides reputation and stability
Cyprus joined the European Union in 2004, resulting in an economy offering a great number of advantages within a common European market, further confirming the country’s macroeconomic stability and its commitment to low inflation, low interest rates and high growth.
Cyprus has a strong banking system
Cyprus was severely hit by the Eurozone crisis and its banking sector was seriously impacted by the outcome of the Troika deal and the winding down of Laiki Bank. Cyprus is currently undergoing a restructuring process launched in March 2013. Cypriots are however confident that the outcome will only benefit Cyprus and will result in a stronger banking sector that will serve the interests of businesses and individuals with interests in Cyprus.
Cyprus offers strong legal and professional services
Cyprus’ ancillary industries create the ideal environment for the development of the energy industry. Cyprus has an excellent multi-lingual workforce that will no doubt contribute in ensuring the natural gas industry operates at a high level of excellence and professionalism.
Conclusion
Cyprus has a new learning curve to embrace and a lot of efforts to invest in order to achieve its strategic and national ambition of becoming a regional energy hub. There is however no doubt that the island will overcome the various obstacles encountered and use its hydrocarbon blessing not only to the benefit of its economy and its people but also to restore peace and stability in the region and create an atmosphere of positivity and cooperation that will boost the whole Eastern Mediterranean region and resolve current geopolitical deadlocks.
Karen Ayat is an analyst focused on energy geopolitics in the Eastern Mediterranean. Email Karen on ayat_karen@hotmail.com. Follow her on Twitter: @karenayat