Cyprus Government considering its gas options

The government is said to be mulling its options after the consortium holding the license for the Aphrodite gas field proposed amending the revenue-sharing agreement with the Cypriot state.

Under the proposal recently floated by the consortium of Noble, Shell and Delek, the overall long-term revenues to the state would decline by €2.3 billion – according to daily newspaper Politis – or by up to 20 per cent compared with the current contract, daily Phileleftheros reported.

On Monday, energy minister Giorgos Lakkotrypis gave a behind-closed-doors briefing to MPs on the overall state of play in the hydrocarbons sector, with emphasis on Aphrodite gas.

According to information that has leaked, Lakkotrypis told lawmakers the government rejects the consortium’s specific proposal.

But for the time being the government wants to continue talks with the companies, so that the two sides can bridge the gap.

This is seen as preferable to the other alternative – the government dismissing outright the companies’ proposal to amend the production-sharing contract (PSC). Such a course of action would delay development of Aphrodite by eight to 10 years, thereby excluding the possibility of exporting the gas to Egypt, which is fast becoming energy self-sufficient.

The other option would be for the government to unilaterally withdraw from the PSC, which would result in drawn-out arbitration and litigation with doubtful prospects of success for the state.

Neither of these two options are desirable, Politis said.

Lakkotrypis is said to have told MPs that a preliminary agreement signed between the companies and a liquefaction terminal in Egypt was made possible due to rising oil and gas prices.

However, the companies reportedly claim that this deal still does not secure them a satisfactory return on investment.

They have therefore proposed that the PSC for Aphrodite be amended so that certain provisions are aligned to the PSCs that the state concluded in the second and third hydrocarbon licensing rounds.

The PSC for Aphrodite was signed during the first licensing round.

According to Phileleftheros, the amendments sought by the consortium would see the companies receiving a bigger share of revenues when oil prices are lower, and the government receiving a larger share when prices are higher.

Actual sales of gas from Aphrodite are expected to last from 15 to 20 years.

It is understood that, in either case, the revenues to the Cypriot state will grow over time as the companies recoup their investments for drilling and developing the gas prospect.

Lakkotrypis presented MPs with different revenue scenarios, based on oil prices, and laid out the government’s ‘line in the sand’.

Phileleftheros said that under present conditions and based on the current PSC, the state is estimated to earn some €19 billionn over a 20-year period.

Under changes to the PSC which the government is willing to consider – its ‘red line’ – these revenues would drop by 10 per cent.

By comparison, the companies’ proposal would see the state’s revenues decrease by 20 per cent, based on oil at around $60 a barrel.

Lakkotrypis agreed to begin a round of meetings with political parties to discuss the issue and get feedback. The meetings will reportedly be taking place in August.

Later, in September, the minister will reportedly be summoning representatives of the Aphrodite consortium for new talks, aimed at hammering out a revised deal.

Low oil prices and disagreements over revenue-sharing are not the only issues holding back development of the gas field, discovered in December 2011.

In addition, Israel is said to be demanding 5 per cent of more of the production from the distribution of natural gas from Aphrodite.

Since the gas in the Yishai gas prospect on the Israeli side of the reservoir is part of a single geological reservoir, its production depends on agreements between the two countries.

Israel and Cyprus signed a delineation agreement in 2010 but haven’t agreed to date on how to develop gas reservoirs straddling both economic zones.

Without a distribution agreement, Israel is refusing to allow Cyprus to develop Aphrodite, because pumping gas from it will also cause gas to be pumped from the Yishai prospect.

Source: Cyprus Mail