By Andrew Demetriou LLB (Hons.) Barrister at Law, Director, IOANNIDES DEMETRIOU LLC

The discovery of sizeable deposits of natural gas off the Southern coast of Cyprus has not only changed the economic outlook of Israel and Cyprus but has also brought the two countries closer together as they seek ways to jointly exploit the hydrocarbon deposits of the Eastern Mediterranean. 

At the end of 2011, on 28th December to be precise, Noble Energy International Inc. a Texas based oil company announced that it had made a significant discovery of natural gas resources off the southern coast of Cyprus in a geological area known as the Levantine Basin which is shared with Israel.

The discovery well was drilled to a depth of 19,225 feet in water depth of about 5,540 feet. Results from drilling, formation logs and initial evaluation work indicate an estimated gross resource range(1) of 5 to 8 trillion cubic feet (Tcf), with a gross mean of 7 Tcf. This discovery can meet Cyprus gas requirements for several decades and transform Cyprus into an energy exporter.

A similar outlook exists in the case of Israel which has reserves slightly surpassing those discovered to date off Cyprus.

Since the above discovery Cyprus and Israel have entered into a delineation agreement and resource sharing agreement which will enable the sharing of natural gas and hydrocarbon resources where a reservoir lies across the median line separating the exclusive economic zones of the two countries.

This find has encouraged the government of the Republic of Cyprus to launch a second round of bids for the licenses to explore and exploit remaining 12 fields off the southern coast on Cyprus. The bidding process follows the EU model and is in accordance with article 3(2)(a) of Directive 94/22/EC of the European Parliament and of the Council of 30th May 1994.

The bidding and licensing round is based upon a negotiated production sharing contract (PSC) with the initial expenses being funded by the licensee who recoups expenses once production commences.

The governments of Cyprus and Israel are now actively pursuing joint projects which aim at maximizing the benefit which arises to both countries as a result of the hydrocarbon finds of the Eastern Mediterranean.

In a meeting held between the Prime Minster of Israel and the President of the Republic of Cyprus in Nicosia last week the political leaders of the two countries had detailed discussions around the development of an energy hub based around an LNG facility which would help pump natural gas upstream from the Israeli and adjacent Cypriot offshore fields and take advantage of the strategic location of Cyprus to provide the hub through which natural gas can be transported to customers in Europe, thereby avoiding the need for long and politically sensitive pipelines through other countries and would at the same time provide a possibility of shipping the gas to Asia where prices paid for LNG are considerably higher. The estimated cost of the abovementioned LNG facility is Euro 20 billion.

A recent UBS report has stated that “given that the Levantine basin is half way between Israel and Cyprus setting up an LNG facility in Cyprus would avoid what it describes as a cumbersome regulatory process in Israel while at the same time enabling the partnered to benefit from EU status when shipping to Europe.”

An ambitious project launched by ΔΕΗ/QUANTUM a joint venture between the Greek Public Electricity Corporation (ΔΕΗ) and QUANTUM ENERGY a significant power producer in north eastern Europe promoting the establishment of a submarine cable from Israel through Cyprus and then on to Crete with the objective of thereafter using the existing network of the ΔΕΗ which is part of the integrated European grid in order deliver power derived from the hydrocarbon deposits of the eastern Mediterranean to western Europe is also being actively pursued. This project has attracted the interest of the Israeli and Cypriot electricity companies despite the fact that the project has considerable technical problems to overcome such length (it will be over 1000 km in length in depths of over 2000 meters as in indicative of the optimism surrounding the power industry in this area of the world.

The above activities have opened up a new area of work for local legal firms. Ioannides Demetriou LLC is at the forefront of this work. The firms predominance in the energy sector born initially out of its representation of the Cyprus only significant power producer, the incumbent Electricity Authority of Cyprus and enhanced by its significant involvement in the first major Renewable Energy Project to be launched in Cyprus has been cemented by the fact that it was selected as the legal advisor for the Government of Cyprus for the first licensing and bidding round for hydrocarbon deposits off Cyprus and its on-going role advising the Government with respect to its PSC with Noble Energy International Inc.

It is anticipated that this work stream will expand with the advent of the second bidding round either in the form of a further appointment by the government or in the form of representation of bidders. It is public knowledge in Cyprus and in the oil and gas industry in general that a number of major oil companies have purchased the bid documents for the second bidding round and vibrant bid process is anticipated as other oil companies will seek to cash in and take a share in what appears to be a major hydrocarbon production region.

Andrew Demetriou

Director

ioannides demetriou L.L.C.,

2 Diagorou Street, ERA House, floors 7-12, 1097 Nicosia, Cyprus.

P.O. Box 20106, 1601 Nicosia, Cyprus.

Tel: +357 22022999

Fax: +357 22022900

Website: http://www.idlaw.com.cy

Email: a.demetriou@idlaw.com.cy