Risky Business: The Tensions and Triumphs of Cyprus' Gas
Maplecroft examines developments related to Cyprus gas discovery
As the calendar neared the end of December 2011, the beginning of a new year also appeared to herald a new era for gas production in Cyprus. On the 28th of December 2011, American explorer and producer Noble Energy Inc announced that it had confirmed the presence of gas in the Aphrodite gas field, located in its Block 12 concession in Cyprus's offshore Exclusive Economic Zone. With estimated reserves of 7 trillion cubic feet (and an estimated gross resource range of 5–8 trillion cubic feet), in the days that followed, Cypriot Minister for Commerce Praxoulla Antoniadou said the find could be worth up to €100 billion.
With Cyprus expected to narrow down bids for nine additional offshore oil and gas concessions later this month, the future would at first appear to be bright for Cypriot gas. However, despite the country’s promise, the bidders should be aware of the risks that could stymie activity in the country. Maplecroft, a UK-based risk and strategic consulting firm, has identified a number of areas for consideration in its 2012 Country Risk Report for Cyprus.
Changing Government
Though currently headed by President Dimitris Christofias, inevitable changes to the political landscape will occur in February 2013 as the electorate vote for a new head of state, according to Maplecroft. With President Chistofias’ popularity waning following an economically unstable period, which included the necessity for bailout applications, as well as a munitions explosion scandal in July 2011, at the Mari Naval base, President Christofias will not stand for re-election. In his place, the report says, the most likely front-runner for the position will be Nicos Anastassiades, leader of the centre-right Democratic Rally (DISY). With a new president will come different governmental priorities and different challenges.
Tensions with Turkey
Friction between Turkey and Cyprus is likely to continue to frustrate exploration and production activities for gas in Cyprus, particularly in the maritime region. With Turkey refusing to recognise Cyprus as a sovereign state (including during Cyprus’ current six-month presidency of the European Union), disputes between the two countries have been rife over who holds the rights to certain offshore waters.
These tensions have already flared several times in the gas arena over the past year. In May of this year, the Turkish government said that it had approved state-owned TPAO to move into Cyprus to commence drilling in Cypriot waters. This followed the moving of a Turkish warship into Cypriot waters in November last year in response to the drilling activity of Noble Energy.
In May 2012, Turkey also issued a warning to potential bidders for the nine offshore concessions Cyprus was offering for licensing. The Turkish government said that it viewed these waters as disputed areas and as such, interested companies should not bid for the licences.
This dispute over territories is a major consideration, the Maplecroft reports says. Turkey continues to state that the granting of licences in waters to the south of the island is depriving the north of Cyprus (where a majority of Turkish Cypriots live) of revenue it is entitled to. Though Cyprus has successfully negotiated agreements with Israel, Egypt and Lebanon for economic zones, it is unlikely that such an agreement will be reached with Turkey, the report warns.
“Turkish objections to Cyprus’ attempts to develop a stable business and regulatory environment for foreign investors could potentially result in international arbitration launched against foreign firms that participate in exploration, production or infrastructural programmes intended to exploit the hydrocarbon wealth found to the south of Cyprus,” the report says. “Worse still, if objections are sufficiently strong and both sides fail to reach a compromise, an increase in military activity may occur which will severely disrupt operations and potentially jeopardise the entire development of Cyprus’ offshore industry for the foreseeable future.”
Labour Force Risks
Maplecroft warns that, given a massive number of migrants in the construction industry (approximately 50 per cent), the risk of exploitation in the workforce is high. With migrants—often undocumented migrants—afforded less rights than Cypriot nationals, awarding equal rights to all workers through contracts should be a priority for companies operating in the country, the report advises. Companies should also use their influencing power to ensure that sub-contractors uphold these same rights. Besides ensuring equality in the workforce, this sort of proactive labour relation will help to mitigate strikes, which are prevalent in the construction industry. This will help oil and gas companies to avoid delays in the initial construction stages.
Weak Economy
With Cyprus’ proximity to troubled Greece and financial crises hitting Europe-wide, the country is facing record highs of unemployment (10.8 per cent in May 2012) and reduced disposable income levels. The outlook for 2012 sees gross domestic product (GDP) remaining in negative figures throughout the end of the year, particularly as a result of the destruction of the Vassilikos power plant in July 2011 due to disruptions in economic activity, the report says. Growth is expected to remain in negative figures throughout 2013.
The banking industry in Cyprus has also been a victim of the economic recession with the government seeking to recapitalise the two largest banks in the country, the Banks of Cyprus and Popular Bank, with a support package from the EU.
As a result of this continuing economic crisis, the government will decrease spending in the public sector, including in wages, pensions and outgoings.
Environmental Risks and Opposition
A lack of freshwater in Cyprus, caused in large part by overexploitation of water and pollution from various sources, could see a strain being placed on normal business activity as operations could be interrupted or constrained.
Weak environmental practices, including a lack of skill in environmental institutes, may negatively impact on the oil and gas sector. Environmental protest is likely especially given questions from protest groups on whether a Strategic Environmental Assessment (SEA) carried out by the Ministry of Commerce, Industry and Tourism was conducted before exploration began in Cyprus.
Additionally, weak monitoring could see the potential degradation of environmentally sensitive areas, which would draw ire and dispute action from environmental groups. So far, the environmental NGOs WWF and Oceana have already raised concerns about drilling in the Eratosthenes Seamount area, located 100km south of western Cyprus - an area with deep-sea marine organisms. Within this area, there are a number of rare species of corals and invertebrates which are particularly sensitive to human impacts.
For more information on Maplecroft's Cyprus Oil and Gas Report, click here.