STATUS AND FUTURE CONSIDERATIONS OF THE OIL AND GAS SECTOR IN CYPRUS NIKOLAOS GEORGAKOPOULOS MECHANICAL ENGINEER, MSC IN OIL AND GAS MANAGEMENT – FINANCE AND INVESTMENT ROUTE.

Nikolaos Georgakopoulos. Faculty of Engineering, Environment & Computing, School of Energy, Construction & Environment, Coventry University, UK. ...................................................................................................................... Manuscript Info Abstract ......................... ........................................................................ Manuscript History

. Following the recent upstream developments in the Eastern Mediterranean, this area can be seen as a source of natural gas and as a transportation route for supplying gas to Europe. The EU wants to create a Mediterranean gas hub in the South of Europe and began viewing LNG terminals as a way to diversify its natural gas suppliers.
Cyprus is fully dependent on Oil and Gas imports (dependency rate over 93%) but follows a very important exploration program within its Exclusive Economic Zone (EEZ). The EEZ delimitation agreements with Israel, Egypt and Lebanon created excellent investment opportunities, mainly due to the fact that natural gas discoveries are flourishing in Israel and Egypt (i.e. Zohr and Leviathan discoveries) (Leal-Arcas and Abu Gosh, 2013). Despite the worldwide drastic cuts for new exploration opportunities, the past ten years have witnessed a remarkable expansion of the upstream activities in the country. Major oil companies have expressed strong interest in acquiring exploration licenses, take advantage of the Oil and Gas opportunities and strengthen their position in the SE Mediterranean region. Depending on the future hydrocarbon discoveries, Cyprus aims at positively contributing to the European energy security of supply. In 2015, the European Commission presented a roadmap for a "European Energy Union" aimed at ensuring supply security, the creation of a fully-integrated internal energy market, reduction of GHG emissions, encouragement of research and innovation, improving energy efficiency by 20% until 2020. However, "energy islands", not connected to any energy system still exist, especially in SE Europe. These islands really need an exemption "across the board" from the provisions of the European Union Energy Law on their market design as well as on their regulatory framework. Within this context, Directive 2009/73/EC (L211/94) concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC, states that Cyprus may derogate from Articles 4, 9, 37 and/or 38. Such derogation shall expire from the moment when Cyprus is not qualifying as an isolated market. The Republic of Cyprus uses Production Sharing Contracts (PSCs) as the legal base between the Republic and the IOC"s in charge to develop the Oil and Gas reserves of the country. Cyprus Government published, as part of the second licensing round launched by the Republic of Cyprus in 2012, a "Model Exploration and Production Sharing Contract" (MEPSC). A combination of corporate income tax (CIT), capital gains tax (CGT), immovable property tax (IPT), VAT and excise duty is applied in Cyprus. No royalties are applied. Table 2 summarizes the fiscal regime concerning hydrocarbons exploration and exploitation activities in Cyprus. The corporate tax rate in Cyprus is at 12.5% being one of the lowest corporate income tax rates in the EU offering investors and fund promoters stability during the Oil and Gas production period (25-35 years   . Cyprus, being a small country, has limited market potential as well as small-scale energy domestic needs. Hence, discovered gas within its territory is forecasted and intended to be used mainly for exports. A pipeline to Greece, which is considered to be a possible export route, could potentially give access to European networks. One of the propositions made by the Republic of Cyprus is the development of an onshore LNG plant at "Vassilikos", located on the southern coast of the island, aiming at exports towards European and Asian markets. A private sector project 'EuroAsia Interconnector' that would allow for an underwater electricity cable to link Cyprus, Israel and Greece by 2022 was announced and the three countries committed to aid to the best of their capacity this aspiring project. The 'EuroAsia Interconnector' is one of the 'Projects of Common Interest' that the European Commission has approved regarding energy issues in the South-East Mediterranean region. Another proposed project is a pipeline that would link Cyprus gas fields via Crete to mainland Greece (PCI Eastern Mediterranean Gas Pipeline -East Med). As aforementioned it is of great importance for the European Union to diversify supply and ensure security. Towards supporting security issues, reform strategies have started being developed in the energy sector of plenty Mediterranean countries in the context of the Euro-Mediterranean Free Trade Area and many papers have been written in regard to such issues including, among others, Patlitzianas (2006) and Stergiou (2016Stergiou ( , 2017. Following the significant hydrocarbon discoveries, the huge "play opener" Egypt"s Zohr discovery just 6km from the boundaries of Cyprus" Block 11, as well as the intense exploration activities, it is expected that Oil and Gas resources could have in the future the potential to satisfy the domestic Oil and Gas requirements and generate large export revenues. Thus, policymakers are confronted with various challenges related to these new energy opportunities. Additionally, the European Union (EU) is looking toward Cyprus, an EU Member State, as an option to diversify sources of natural gas supply while EU"s projects also include the construction of LNG terminals to ensure access to flexible fuel alternatives as well as the development of smallscale LNG. Large capital investments are of course required to convert resources into reserves, especially in a period of declining oil prices, but the presence of energy giants such as ENI, Total, ExxonMobil, Qatar Petroleum and Shell in Cyprus, to explore for oil and gas, greatly encourage local expectations. Cyprus dependence on imported petroleum products is at 93%, recording an energy trade deficit (in GDP terms) among the largest in the EU. Following the natural gas discovery by Noble Energy in Block 12 and a recent lean gas discovery in Block 6 Offshore Cyprus by ENI (ENI, 2018), a radical change in the energy sector of Cyprus is expected, mostly if all other exploration activities currently under way, deliver the expected results. Based on expectations that in the near future oil and/or gas new discoveries would continue, Cyprus wants to become an LNG hub in the Mediterranean, and 1170 examines several export options. This first natural gas field is estimated to hold 4,5 TCF (trillion cubic feet) of recoverable gas reserves. Up to now, gas is not supplied to Cyprus and there is no relevant infrastructure already in place. A key success factor for hydrocarbon licensing rounds in Cyprus is the short completion time, within 9-10 months after the announcement, despite the fact that the negotiation committees have an "inter-ministerial character" with members from the Ministries of Foreign Affairs, Defense, Interior, Finance, and Environment. Another key success factor is the adoption of a corporate tax rate of 12.5%, one of the lowest corporate income tax rates in the EU, which offers investors and fund promoters stability during the Oil and Gas production period (25-35 years). According to Cypriot experts, under the PSC for Block 12, the Government's take will be 40 to 45% and Cyprus Hydrocarbons Company, having the responsibilityamong others -to market the Government"s ownership interest of produced hydrocarbons, can sell gas to the domestic market (Natural Gas Public Company -DEFA) or to other foreign markets. Cyprus is an "energy island", the last member of the EU to remain fully isolated without any electricity or natural gas interconnection capacity available. According to Article 49 (1)  The authors conclude:-"The Third Energy Package"s derogation system for energy islands should, strictly, be used to ensure the viability and attractiveness of the investments and, in particular, should not reduce the role, power and responsibilities of the national regulatory authority, especially on the issues of security of supply, transparency and consumer protection through the proper regulation of tariffs, bearing in mind that the market will be monopolistic".
Following the discovery of Aphrodite Gas Field, yet untouched, located at the exploratory drilling Block 12, the large natural gas discoveries in the Levant Basin, as well as the intense exploration activities within the maritime Exclusive Economic Zone of the Republic of Cyprus after three consecutive licensing rounds, experts agree that, despite regional politics, and territorial disputes, Cyprus is set to play a key role in the near future. An energy dilemma that arises is that the natural gas reserves of Aphrodite Field are more than enough to meet the domestic needs of Cyprus, estimated by experts at a maximum of 25 bcm / y of natural gas for the next 25-30 years. This represents around 10% -15% of the capacity of the field, in the hypothesis that natural gas will cover 75% of the power sector and 50% of the industrial demand. However, when examining the option to utilize Aphrodite Field"s natural gas domestically, some very important factors arise and have to be taken into consideration: 1. The remaining 85% -90% of Aphrodite"s recoverable reserves should be exported through a 15-year contract of 7-7, 5 bcm / y and through export infrastructures the location of which is still uncertain, 2. The lack of any natural gas infrastructures (overland pipelines, power plants in which fuel oil must be replaced by natural gas, industrial facilities) on the island, 3. The need to built a costly 200-km pipeline to bring the gas to the island.
One of the propositions made by the Republic of Cyprus was the development of an onshore LNG plant at "Vassilikos", located on the southern coast of the island. Aphrodite"s gas alone is insufficient for even a single LNG Train to be developed in Cyprus. A less expensive option, according to experts, is to send gas from Aphrodite field to Europe, using LNG terminals in neighboring countries, and more specifically the LNG terminals of Idku and Damietta in Egypt. Apart from the construction of an LNG terminal in Cyprus, several other proposals to export gas from Cyprus are being discussed. Funding opportunities and the support of the EU are critical success factors for these projects alongside the premise of exploration leading to new natural gas (and/or oil) discoveries. The following natural gas export options can be mentioned: The EastMed pipeline, a Project of Common Interest under the Energy Priority Corridor 7 -"Southern Corridor" them e: "Pipeline from offshore Cyprus to Greece mainland via Crete". The project aims at directly connecting the East Mediterranean gas resources to the European grid and two EU countries, Greece and Cyprus, are involved. 1171 the use of Egypt"s two LNG facilities, Idku and Damietta, for shipment to Europe. These two Egyptian LNG terminals can be used by Cyprus, despite the fact that Egypt is slowly moving closer to restarting LNG exports. In case of new discoveries, Cyprus can become a sole exporter. Until that day, regional cooperation with Israel and Egypt is the only option for addressing gas export challenges.

Conclusion:-
The European Union remains heavily dependent on energy imports from non-member states. Nearly all of EU"s crude oil and natural gas imports come from non member states while, with the exception of Cyprus and Malta, all member states use gas for their energy needs. Many countries in Central and South East Europe depend on a single supplier for most or all of their natural gas. Market-based forecasts give a natural gas dependence of 80% by 2020. A strong divergence in energy matters exists between Eastern and Western European Countries. Were we to make a basic, simple division of the map of Europe, countries located towards the western part have developed an integrated and competitive natural gas market, and have constructed LNG regasification terminals, gas storage facilities and underground storage facilities, electricity interconnectors, as well as reverse flow pipelines, while energy policies strongly support the development of renewable energies. Thus, Western Europe has become very attractive to the energy suppliers. On the contrary Eastern Europe Countries still rely much on coal or on lignite and to a lesser extent on oil, but these countries have also made significant progress concerning the development of natural gas supply infrastructures. In order to further open up the gas markets, the EU and the member states have adopted new Directives as well as new deadlines for their completion. The European Third Energy Package (March 2011), consisting of two Directives and three Regulations, is a legislative package with the aim to develop a more harmonized European internal market and to depoliticize natural gas. Moreover, as previously mentioned, in 2015, a roadmap for a "European Energy Union" was presented. Within this context Cyprus, an EU member state, aim at positively contributing to the European energy security of supply as well as to the diversification of supply routes. Up to now gas is not supplied to Cyprus, which still remains an isolated energy island, and there is no relevant infrastructure already in place. Cyprus has adopted a modern legal and regulatory framework. The new Hydrocarbons legislation is considered as a tool to integrate adaptation of relevant international policies, experiences and best practices. It also aims at being a business-friendly framework, and build confidence to investors by establishing competitive, clear and transparent procedures. The Republic of Cyprus uses Production Sharing Contracts (PSCs) as the legal base between the Republic and the IOC"s in charge to develop the Oil and Gas reserves of the country. In order to evaluate the hydrocarbon potential and further promote offshore areas for hydrocarbon exploration and exploitation, Cyprus has launched, in the last decade, international calls for proposals inviting companies to apply for hydrocarbon exploration and exploitation within the EEZ. The EEZ delimitation agreements with Israel, Egypt and Lebanon created excellent investment opportunities, mainly due to the fact that natural gas discoveries are flourishing in Israel and Egypt (i.e. Zohr and Leviathan discoveries). Exploration for new oil and gas fields led to an important natural gas discovery by Noble Energy in Block 12 and a recent lean gas discovery in Block 6 by ENI within the EEZ of Cyprus. Following these discoveries, a radical change in the energy sector of Cyprus is expected, mostly if all other exploration activities currently under way, deliver the expected results. Based on expectations that in the near future oil and/or gas new discoveries would continue, Cyprus wants to become an LNG hub in the Mediterranean, and examines several export options. In case of additional new discoveries, Cyprus can become a sole exporter. Until that day, regional cooperation with Israel and Egypt is the only option for addressing gas export challenges. Cyprus is cooperating with Greece, Israel and other countries in several EU"s Projects of Common Interest. The European Union has to fortify its energy diplomacy, support and expand PCI"s in this part of the Mediterranean region, and also assist efforts aiming to build regional cooperation. Through good governance and effective management, Cyprus tries to achieve his national energy development goals.