Introduction

On July 22 2016 the Ministry of Energy, Commerce, Industry and Tourism announced that the application deadline for the third licensing round for the exploration of Offshore Blocks 6, 8 and 10 in the exclusive economic zone had expired. A total of six applications were received from eight companies for the three blocks available.

A consortium consisting of BG Group (35% stake), Noble Energy (35% stake), Delek Drilling Limited Partnership and Avner Oil Exploration Limited Partnership (each with a 15% stake) holds a concession in Block 12. French oil giant TOTAL holds a concession in Block 11 and a consortium consisting of the Italian oil company ENI and the Korean oil company KOGAS holds a concession for Blocks 2, 3 and 9.

The names of the interested companies were made public on July 27 2016 after President Nicos Anastasiades and the Council of Ministers were officially briefed during a scheduled meeting.

Applications

According to the ministry, ENI and TOTAL applied as a consortium for Block 6, with ENI as the operator. Further, Cairn Energy's subsidiary Capricorn Oil applied together with Israel's Avner Oil and Delek Drilling for Block 8, with Cairn as the operator. ENI applied for Block 8 independently.

The most sought-after block in the open competition was Block 10, which borders the Egyptian gas field Zohr, consisting of 30 trillion cubic feet of lean gas. Block 10 was claimed by a consortium between ENI and TOTAL and another between ExxonMobil and Qatar Petroleum. Statoil Upsilon Netherlands applied independently.

Evaluation

By virtue of the Hydrocarbons (Prospection, Exploration and Exploitation) Law 2007, the six applications will be evaluated by the competent advisory committee, which will then draft its opinion in a preparatory report. Based on the report and the minister of energy's recommendations, the Council of Ministers will appoint a team to negotiate the final terms of the exploration and production sharing contracts with the companies selected. The final decision for granting exploration licences will be at the Council of Ministers' discretion.

Terms and conditions

The successful candidates will be granted a hydrocarbon exploration licence for an initial period of three years, which may be renewed for a period of:

  • two contract years (first renewal period); and
  • two additional contract years on expiry of the first renewal period (second renewal period), provided that the licensees have fulfilled their obligations regarding any existing exploration period.

The licence authorises geophysical surveys and exploration drilling to be carried out. With each renewal of an exploration period, the licensee relinquishes at least 25% of the licensed area. In the case of a discovery, the licensee has the right to be granted an exploitation licence for that discovery. A hydrocarbon exploitation licence is granted after the approval of a development and production plan for a period not exceeding 25 years and may be renewed for a maximum of 10 years.

The terms and conditions of the revised exploration and production sharing contract illustrate that Cyprus wants to ensure drilling in Blocks 6, 8 and 10 during the initial licensing period or the first renewal period within five years from the effective date of the exploration and production sharing contract. Specifically, on the effective date of the contract, the contractor must provide the minister of energy, commerce, industry and tourism with an irrevocable bank guarantee that:

  • secures its exploration work obligation for the initial licensing period; and
  • equals 20% of the total estimated costs of the exploration work obligations of the relevant exploration phase.

In accordance with the contract, if the contractor fails to fulfil the applicable exploration work obligations for the exploration phase in question on the expiry of the initial licensing period or the first renewal period, the minister of energy can:

  • call on the guarantee as compensation for the non-performance of the exploration work obligations (the contract and licence will be terminated and the contractor will have no further liability); or
  • give the contractor the option to pay 80% of the total estimated costs of the unfulfilled exploration work obligations in the relevant exploration phase.

If the contractor exercises this option (and after payment has been received by the minister), the contractor will be deemed to have fulfilled its exploration work obligations for the relevant exploration phase under Annex D of the contract.

For further information on this topic please contact Kypros Louca at George Y Yiangou LLC by telephone (+357 22 767 630) or email (kypros.l@yiangou.com.cy). The George Y Yiangou LLC website can be accessed at www.yiangou.com.cy.

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