By Peter Stevenson*
Despite its small size, Cyprus’ significance within the East Mediterranean is evidenced by the presence of a host of major energy companies in its offshore points. US supermajors Chevron and ExxonMobil, European majors Shell, TotalEnergies and Eni, and Gulf national oil company (NOC) QatarEnergy all hold stakes in Cypriot waters and have made sizeable gas discoveries in the last 15 years.
Unfortunately for Cyprus and its residents, to date, no gas has been produced, and no gas-related infrastructure completed on the island.
Having covered the Eastern Mediterranean and all the major players in the game for over a decade now at MEES, it is apparent that Cyprus repeatedly oscillates between grand visions and hesitant execution. Political caution, local vested interests, and shifting international dynamics narrow every window of opportunity.
Discoveries are announced with great fanfare, but without the accompanying governance, infrastructure, and strategic alignment needed to translate resources into lasting national advantage.
The energy missteps of more than a decade ago share similarities to ongoing fiascos. The recurring theme is one of “damage limitation” for the government, whether it is the LNG (liquefied natural gas) import debacle or ongoing talk regarding the Great Sea Interconnector.
Commentators point to entrenched local interests as a key factor stunting progress. Actors are seemingly intent on protecting the status quo of oil-based electricity generation with the high consumer prices it sustains, even at the expense of projects widely seen as beneficial for Cyprus’ energy security and affordability.
It is no secret that vested interests play a pivotal role in both the private and public sector. Perhaps more surprising is how this has, so far, proven to be an insurmountable hurdle even for the largest energy firms in the world.
Throw in Cyprus’ geostrategic positioning and foreign powers’ reluctance to upset the apple cart of East Mediterranean hegemony and you have a recipe tailor-made to hamper any Cypriot progress.
How does Cyprus solve this conundrum and more importantly does the government want to solve it? It may take external forces to corner Cyprus into moving ahead with a project that will finally see the light of day and save the beleaguered public from exorbitantly high electricity bills.
Failure until now has not been for a lack of offers or potential. To understand why we find ourselves in the current predicament we must look to the past.
Shell shocked
The first attempts to ‘gasify’ Cyprus began more than two decades ago. Tentative approaches were made to build LNG import infrastructure on the island as far back as 2004 but those were rebuffed by the Papadopoulos government initially.
Talks continued with various firms until 2008 when a consortium led by Shell, one of the top global LNG players, appeared to have succeeded in convincing the Christofias government to build an onshore LNG import terminal. Unfortunately, the former president succumbed to political pressure from various quarters and cancelled the Shell deal that envisaged supplying Cyprus with LNG for 20 years.
The reasoning given at the time was that gas discoveries were going to be imminently made offshore Israel and Cyprus. This was supposed to translate into gas riches that would enable Cyprus to export gas, rather than import LNG.
Noble intentions?
As anticipated, in 2009, 2010 and 2011 US independent Noble Energy (taken over by Chevron in 2020) made three consecutive discoveries in the East Mediterranean offshore. The first two in Israel with the 10 trillion cubic feet (tcf) Tamar field (since upgraded to 14tcf) and the 22tcf Leviathan, followed by Cyprus’ virgin gas discovery, the 3.5tcf Aphrodite.
With Israel’s market largely sated by Tamar, this left Leviathan and Aphrodite without much of a market. Cyprus’ own gas demands are puny at around 1 billion cubic meters per year. This equates to about 1% of Aphrodite’s reserves and 100 years’ worth of production.
A consortium led by internationally renowned funds and investment firms tabled a proposal to the Christofias government in 2012 to build an onshore LNG export terminal this time, that would combine gas from Aphrodite and Leviathan and send the gas to Europe and Asia.
Israel precluded itself from building its own land-based LNG export facility due to security concerns. Cyprus was the obvious choice, due to its proximity and friendly ties, with the added bonus that it was an EU member state.
While the proposal gained traction under the Christofias administration, his ouster the following year saw the entry of Nicos Anastasiades and his cavalcade of cronies. Initially, talks continued under the Anastasiades government. Engineering experts Technip delivered a pre-FEED (front-end engineering design) study in June 2013 indicating an LNG export facility was technically credible.
An MoU (Memorandum of Understanding) was signed on 26 June 2013 between the Cyprus government and Aphrodite partners (Noble and Israeli firms Delek and Avner) to negotiate a binding project agreement by December of that year, providing political momentum and a timeline for a final investment decision (FID).
In April 2014, a delegation from Germany’s Deutsche Bank was ready to lead a financing consortium, proving that investor appetite existed.
Even government officials continued to peddle the idea that the main objective was the construction of an LNG export facility. Noble too had set up specialized LNG teams to promote and progress the project but they were unexpectedly re-routed to other areas of interest.
A second well at Aphrodite in late 2013 downgraded the field’s reserves, meaning that an LNG project that did not include Israeli volumes became less viable. The Anastasiades government then began its own internal restructuring that saw the acrimonious departure of leading figures from the state-backed hydrocarbons company.
Recent local media reports have suggested that orders to scrap the project came from “higher powers” though this has never been proven.
What followed was years of stasis, with cash-strapped Noble suddenly arguing it was unable to justify the standalone development of Aphrodite. Years of renegotiating Aphrodite’s production sharing contract finally yielded what was considered a positive result in 2019, with new terms providing milestones that would eventually see the field developed.
Unfortunately, that hasn’t been the case. Chevron’s takeover of Noble a year later led to more delays as the US major wanted to re-examine the project and propose a new development plan.
Ultimately Chevron appears to have acquiesced to Nicosia’s demands on how to develop Aphrodite, which include a floating production unit and pipeline to Egyptian onshore infrastructure. Delays have meant that initial first gas envisaged for 2025/26 has now been pushed back to 2031, 20 years after the field was discovered.
There are likely more twists and turns along the way.
Tender scandal
Around the same time in 2019 that the Aphrodite contract had been renegotiated, Cyprus was also seemingly making progress with a planned LNG import terminal that included a floating storage and regasification unit (FSRU) as part of a €500mn EU-funded project.
Awards were made in late 2019 to a Chinese-Greek consortium (CMC) after more experienced consortia had either been disqualified or withdrawn from the tender process altogether.
Just months after the award, it was discovered that one of the Greek firms involved in the winning consortium was banned from taking part in Cypriot tenders. Instead of relaunching the tender process, the firm was simply removed, and the government turned a blind eye.
This raised alarm bells at the Audit Office and has instigated a European Public Prosecutor’s Office (EPPO) investigation into the tendering process. Even if the investigation does find guilty parties, it is only likely to involve a slap on the wrist for any wrongdoing.
According to the project’s initial timeline, Cyprus was due to begin importing LNG in late 2022. While the Covid pandemic can be partly blamed for a slight delay, given the current status of the project – the FSRU sits in Malaysia awaiting spare parts, the onshore terminal in Cyprus is less than 50% complete having changed hands in recent months – the timeline for gas imports remains up in the air.
Meanwhile, CMC exited the project in July last year, but before doing so, it filed an arbitration case in London against the Cyprus government for late payment.
Recent revelations that new project manager Technip Energies could recommend the project begin again from scratch are even more troubling. As was Energy Minister George Papanastasiou’s seeming admission that the government is looking to limit its exposure to the whole scandal.
Cyprus has also resisted overtures from London-listed Energean to supply the island with gas via a 200km pipeline from its Karish field offshore Israel. The Greek firm tabled a proposal in 2019 and again in 2022, this time backed by Papanastasiou who was managing director of Vitol’s VTTV terminal at Vasilikos, before he was handed the energy minister portfolio the following year. Neither proposal received any traction, even following Papanastasiou’s appointment.
It remains anyone’s guess when Cyprus will eventually begin importing natural gas.
Where to now?
If Cyprus’ inability to get an energy-related project off the ground was only rooted in incompetence, then maybe the government could eventually find a way by appointing capable people to lead the projects.
Unfortunately, Cyprus is plagued by a mix of incompetence and dealings of a less honest nature.
Until politicians are held to account, and until the electorate starts putting the country’s interests before personal interests, Cyprus is doomed to keep falling into the same traps. Sadly, the public continues to suffer the consequences and to pay exorbitantly high electricity prices for a service that has proven more recently to be unreliable.
Cyprus’ lacking electricity capacity should be a wake-up call to both authorities and the public that the Great Sea Interconnector (GSI) is a necessity. Even if arguments have been made that GSI is not financially viable, a provision that would allow Cyprus to improve its electricity supply security is imperative considering local power inadequacies.
Cyprus imports and burns heavy fuel oil and diesel for the lion’s share of its electricity generation – with recent revelations showing it has paid over €1 billion in fines to the EU for missing carbon emissions targets. The longer the government drags its feet on these projects, the longer electricity bills will continue rising.
Hope floats
When it comes to its own gas, Cyprus has currently put all its eggs in the Egypt basket. According to their development plans, Aphrodite and Eni’s 2022 Cronos discovery are both headed south to Egypt. Even the most recent discovery, ExxonMobil’s Pegasus could be headed to Egypt, according to Energy Minister Papanastasiou.
This will be another test of whether Cyprus can get an energy mega project up and running. All bets are currently off.
To add to Cyprus’ obvious shortcomings, it also remains a risky gambit to send all Cypriot gas to Egypt, considering Cairo’s perennial financial struggles. Nicosia has been convinced that Cronos and Aphrodite will be exported to other markets as LNG from Egypt’s two facilities on the Mediterranean coast. However, the likelihood is that Cypriot gas will largely be re-routed to the insatiable Egyptian domestic market, with payment dependent on Cairo’s stretched finances.
While Nicosia and the partners at Cronos are proceeding under the assumption that the gas will be exported as LNG, if Egypt has domestic gas shortages it is very likely Cronos gas will head to the Egyptian domestic market. If that happens then it is unclear what payment Cyprus and the partners will receive and when.
Discoveries to date are: Aphrodite 3.5tcf, Glaucus 3.2tcf, Pegasus 5tcf, Cronos 3.1tcf, Zeus 2tcf, Calypso 1tcf. This gives 17.8tcf though Pegasus estimates are very preliminary and some fields’ estimates are gas in place rather than recoverable reserves.
With around 15tcf of gas discovered to date shouldn’t Cyprus be looking at building an onshore LNG export terminal or even a floating LNG (FLNG) facility to process its gas? That was the desired gas figure bandied about by Cypriot officials when arguing that Aphrodite on its own wasn’t large enough to justify the level of investment needed (around $10bn) to build an LNG plant.
Papanastasiou himself had floated the idea of the Cyprus Gateway, which would see regional gas tied back to Cyprus and exported as LNG, when he first came to office two years ago. But that now appears to have gone cold.
So why has the government decided to scrap those plans and send all the gas to Egypt? Some argue vested interests are to blame. Others point to a reluctance to move ahead with a project that risks irking Turkey. Likely, a combination of factors.
If Cyprus continues to move like a pawn, it will continue to be treated as such by the other pieces on the regional and global chess board. Without a strategic long-term national plan, it could very soon be checkmate for any ambitions Cyprus may harbour of playing a significant role in the region.
*Peter Stevenson is the East Mediterranean Editor at MEES (Middle East Economic Survey). He is widely regarded as one of the leading analysts in the region.