Liquefied natural gas
Memorandum of understanding
The discovery of natural gas in Cyprus's exclusive economic zone is expected to reduce fuel import costs significantly and redefine energy consumption-related policies. In developing future export plans for local natural gas reserves, the government examined various options and eventually ruled some out.
The government primarily focused its attention on liquefied natural gas exports. Liquefied natural gas is natural gas converted into liquid form using advanced technology, which can be exported in tankers. It is easier to store and transport than natural gas in its pure form, which is transferred via sub-sea pipelines, allowing access to a single market.
The production of liquefied natural gas could potentially provide Cyprus with the flexibility to access EU and Asian markets. Further, it would offer greater flexibility to adjust production to changing natural gas prices and supplies. In this context, the government commissioned a study to examine the export of liquefied natural gas, with the aim of establishing Cyprus as a viable exporter.
The government favoured building an onshore liquefied natural gas plant at Vassilikos, which would render Cyprus a major energy hub. The onshore terminal could potentially generate profit from the export of gas to significant export markets irrespective of geographical location and provide potential income from gas processing for other countries in the region for the global export market. Further, the terminal could create local employment and boost the Cypriot economy. Such an endeavour would be a milestone for Cyprus's economic growth, as the project would exploit Cypriot natural gas reserves and those of neighbouring countries.
To this end, a memorandum of understanding was signed between the government and Noble Energy, Delek and Anver defining the framework of negotiations for the conclusion of a comprehensive agreement regarding the construction and operation of the onshore liquefied natural gas plant. The construction of the onshore liquefied natural gas terminal was dependent on the gas reserves found in Cyprus's exclusive economic zone – in particular, in Block 12.
However, concerns were expressed that the available Block 12 reserves – namely, the Aphrodite gas field (operated by Noble Energy) – were insufficient to justify the construction of an onshore liquefied natural gas plant. At least 5.5 trillion cubic feet are required for the commercial viability of such a project. While the results of the Aphrodite gas field's appraisal drilling (announced by Noble Energy in 2013) estimated that there were 5 trillion cubic feet of recoverable resources, the actual recoverable Block 12 reserves are likely to be downgraded to less than 5 trillion cubic feet.
In light of the recent official announcement regarding the size of Block 12 hydrocarbon reserves and the fact that the Cypriot political establishment had expected greater reserves, the government was forced to abandon the liquefied natural gas project, as the quantity of gas reserves did not justify the cost and infrastructure required to develop an onshore liquefied natural gas facility and the negotiations with the three companies were concluded unsuccessfully.
Other export alternatives included floating liquefied natural gas and marine-compressed natural gas. However, these options have considerable disadvantages, as international liquefied natural gas prices have fallen during recent months and marine-compressed natural gas is untested.
Exporting natural gas through a pipeline connecting Cyprus and Turkey is not an option unless a viable political solution to the Cyprus issue can be achieved. Even then, such a project would need to be economically and politically beneficial for all parties concerned.
The only realistic option for natural gas exportation is the export of Cypriot gas to Egypt through a marine pipeline connecting the two countries. Egypt has two liquefied natural gas facilities that could be used to export Cypriot gas to foreign markets. In February 2015 Cyprus and Egypt signed a memorandum of understanding pledging their cooperation in the energy sector. The memorandum defined the legal framework for companies to sign exportation contracts for natural gas from Block 12 to Egypt.
In August 2016 Egypt and Cyprus announced the signing of the first of three bilateral agreements with a view to transferring Cypriot natural gas to Egypt via a pipeline. The bilateral export agreement authorises state-owned Egyptian companies to examine technical solutions for transporting natural gas through a direct marine pipeline from Block 12 to Egypt. The agreement was signed between Cypriot Minister of Energy, Commerce, Industry and Tourism Georgios Lakkotrypis and Egyptian Minister of Petroleum and Mineral Resources Tarek El Molla. The agreement is one of a series of legal agreements for the sale of Cypriot natural gas to buyers in Egypt.
For further information on this topic please contact Kypros Louca at George Y Yiangou LLC by telephone (+357 22 767 630) or email ([email protected]). The George Y Yiangou LLC website can be accessed at www.yiangou.com.cy.