Cyprushydrocarbons Scenariosandoptions Rev1

Cyprus Hydrocarbons: Scenarios and Options
CYPRUS
HYDROCARBONS:
SCENARIOS AND
OPTIONS
A Non-Political Review

GIANNIS KALLIKA


2014 Thoukidides Think Tank. All rights reserved.
ISBN 978-9963-2086-0-9
First published in 2014

No part of this publication may be reproduced or transmitted in any form or by any means without permission
in writing from Thoukidides Think Tank. Please direct inquiries to:
Thoukidides Think Tank
www.thoukidides.com
secretariat@thoukidides.com

i


About Thoukidides Think Tank
Thoukidides Think Tank (hereinafter TTT) is the first Cypriot Think Tank founded in 2012 as a non-profit
organisation.
Its vision is To constitute a credible source of strategic analysis over vital issues that concern Cyprus.
Its mission is To Collect and employ the views and expertise of distinguished scientists for the analysis of vital
issues that concern Cyprus.

TTTs first engagement, which has become the flagship of its future work, has been the preparation
of its vision for Cyprus. This has been labelled as Vision 2020 and is summarised in the following
statement: Cyprus to become a fully sovereign and democratically advanced state where all lawful citizens
will enjoy human rights, basic freedoms and liberties, and all the benefits entailed by the EUs acquis
communautaire under conditions of social and economic prosperity and security.

Further to Vision 2020, TTT has carried out research on key strategic issues related to Cyprus. To date the
Energy, Health, Economy, Education, Security, Cyprus problem and State Institutions committees have
presented in-depth scientific work. This work has been publically presented and is available on our website.

In relation to energy, TTTs vision is summarised in the following statement: to constitute a driving force for
sustainable development, reliable political, economic, and environmental benefits for all lawful citizens and
future generations of Cyprus through an effective and transparent management framework which will be
governed by the principles and values of our people.
Scope of the present publication
This publication reflects and states actions taken up and until 1
st
of July 2014. The scenarios are subject to
change and every strategy has to be re-accessed and adapted based on the prevailing state of affairs. The
present publication is the outcome of Mr. Kallikas work, and was instigated by TTTs Energy Committee for
the purpose of producing a publicly comprehendible and comprehensive scientific review of hydrocarbons in
relation to our country.
Comments from readers are highly welcome. E-mail to secretariat@thoukidides.com

ii


Short profile of Giannis Kallika
Giannis Kallika is a geotechnical engineer in the Infrastructure division of global
engineering consultant U.S.based URS. He holds a BEng in Civil and Energy Engineering
and he is currently enhancing his technical skills with an MSc in Geotechnical
Engineering. His expertise include site investigation, earthworks, onshore/offshore
foundations design, deep pilling, tunnelling/micro-tunnelling, building information
modelling and information management. For Giannis detailed and latest profile please
visit his page on LinkedIn at http://uk.linkedin.com/in/gkallika.

iii


Dedicated to the future
generations whose lifestyle is
highly dependent on our decisions.

iv


Preface
The subsurface of Cyprus has been under the microscope of oil and gas companies since 1938, when a
subsidiary of Iraq Petroleum (currently BP) undertook seismic surveys. Sixty years later and after two bidding
rounds, the consortium led by Houston-based Noble Energy has identified quantities of natural gas in its first
appraisal drilling. French TOTAL and the consortium of ENI/KOGAS (Italy/South Korea) are the other two major
companies that have been granted exploratory licences in Cyprus EEZ. Their exploratory drillings in 2014 and
2015 will allow the Republic of Cyprus to have a more realistic picture of its reserves in blocks 2,3,9,10,11 and
12. With only Noble Energys results from its appraisal drilling, it is accepted that there are not enough reserves
to allow the FID for an onshore liquefaction terminal with 2 (or more) trains. The current poor financial state
of the country, does not permit other export options which could be used for the gas quantities found to date;
such as the pipeline to Greece. The other highly advertised option (a pipeline to Turkey), realises the resolution
of the Cyprus problem. However, the current state of the proximity talks suggests that political breakthroughs
must happen, thus putting the scenario on hold. In anticipation of future price drops in liquefied natural gas,
the Cypriot Government and the companies involved are in a rush to find more gas that will enhance the
feasibility of the onshore liquefaction terminal; Cyprus Government top priority.
The available information is limited, technical and confusing making it difficult for the public to have a clear
view of the various events taking place; hence the need for an easy to read and understandable analysis. In
this publication, the reader will have the opportunity to get a sufficient knowledge of all the aspects regarding
the hydrocarbons exploration and production from multiple angles. The author describes the geopolitical
importance of Cyprus by showing the direct interest of Russia and U.S.A. and correlates that with opportunities
in the European market. Furthermore, an overview of the regional and international exploration is given,
followed by the stages of the exploration and production of natural gas. It highlights the importance of pricing
mechanisms, market trends, types of contracts and legality issues such as the Exclusive Economic Zone and
the Exploration and Production Sharing contract. Special interest is given to the monetization options available
such as the Compressed Natural Gas, Liquefied Natural Gas (onshore/offshore), pipeline to Greece, pipeline
to Turkey, pipeline to Egypt, EuroASIA electricity transmission line and Gas to Liquids.
The need for a strategic partnership in the region with a country having proven gas reserves is presumed, thus
a comprehensive analysis of various scenarios depending on Israels export options is given. Israels export
scenarios include export through a pipeline to Turkey, a pipeline to Greece, a pipeline to Egypts LNG facilities,
CNG to Greece and LNG through an offshore liquefaction vessel or onshore at Vassiliko in Cyprus.
Unfortunately the changeable economic/energy environments in Egypt, Lebanon and Greece could not be
marginalised from the analysis.

v


Acknowledgements
The author would like to thank all the contributors and reviewers for their input and comments.
The author would like to thank TTT and in particular Athos Kyranides and George Karagiorgis (author of section
16, Game of Thrones) who suggested the completion of this publication. Many thanks also go to other
colleagues in URS Corporation, Alison Horton, Daniel Evans and Ross Tyler who provided essential support in
terms of editing, production and context. The publication also benefitted from the challenging assumptions
and careful review of Andrea Lambi, Aris Kapsanakis, Daniel Kiremijian, Frango Marangou, Naheeda M-
Hussein; and Suzan Chatora who kindly took the time to comment on earlier drafts.
Many thanks also go to other specialists in the industry who shared their views on natural gas across the value
chain, notably to Anastasios Giamouridis, Charles Ellina, Fiona Mullen and Gary Lakes. Special thanks go to
Petros Isidorou (author of section 15, Indirect Revenues) for rigorously attacking my assumptions making them
either stronger or redundant.
The author also expresses his gratitude to Konstantinos, Maria and Eliana Kallika and Melpo Stylianou, whose
continuous support and encouragement has proven invaluable in this project.
Giannis faced various difficulties in finding the information and it is his promise that he will be at the service
of those who seek to know more about Cyprus hydrocarbons. Feel free to contact Giannis at
ykallika@gmail.com
The authors intention is to present a comprehensive and comprehendible review of hydrocarbons in relation
to Cyprus and emphasize the prospects and dangers associated with them. The author simply identified and
organised them into a sequential framework and takes no credit for them or considers himself as an expert in
the exploration and production of natural gas. The topic of hydrocarbons is rather new for the Cypriot people
and information about it not readily available. As a result Cypriots are currently deprived of the opportunity
to appreciate the extent of the opportunities and threats accruing from this precious gift of God.
vi


Disclaimer
While this publication intends to provide accurate and authoritative information in regard to the subject
matter covered, neither the publisher nor the author makes any representation, express or implied, with
regard to the accuracy of information contained in this publishing, nor do they accept any legal responsibility
or liability for any errors or omissions that may be made. Where values for parameters have been stated, these
should be treated as indicative only. Readers should independently verify the prices/values they are dealing
with as they may differ substantially from those referred in this book. This work is supplied with the
understanding that Thoukidides Think Tank and its authors are supplying information, but are not attempting
to render engineering or other professional services. If such services are required, the assistance of an
appropriate professional should be sought.
How to cite this book: Kallika G., 2014. Cyprus Hydrocarbons: scenarios and options, a non-political review.
Thoukidides Think Tank. ISBN 978-9963-2086-0-9. Available online from www.thoukidides.com.
vii


Contents
List of Figures .................................................................................................................................................... xii
List of Tables .................................................................................................................................................... xiv
Glossary ............................................................................................................................................................ xv
Abbreviation ................................................................................................................................................... xvii
1. Introduction ................................................................................................................................................1
1.1. Scope of this publication ....................................................................................................................2
2. Cyprus .........................................................................................................................................................2
2.1. Historical context ................................................................................................................................2
2.1.1. 1877-2005 ..................................................................................................................................3
2.1.2. 2005 - 2014 .................................................................................................................................5
2.2. Hydrocarbons impact on history .......................................................................................................6
3. Domestic use ..............................................................................................................................................7
4. International state ......................................................................................................................................8
4.1. Qatar ...................................................................................................................................................9
4.2. Russia ..................................................................................................................................................9
4.3. United States of America ................................................................................................................. 10
4.4. Australia ........................................................................................................................................... 10
4.5. Other significant natural gas producers .......................................................................................... 10
5. Regional exploration and current State .................................................................................................. 11
5.1. Egypt ................................................................................................................................................ 11
5.2. Israel ................................................................................................................................................ 13
5.3. Jordan .............................................................................................................................................. 15
5.4. Lebanon ........................................................................................................................................... 15
5.5. Syria ................................................................................................................................................. 15
5.6. Greece ............................................................................................................................................. 15
5.7. Turkey .............................................................................................................................................. 16
5.8. Pseudo Turkish Republic of Northern Cyprus.................................................................................. 18
6. Major sectors in the lifetime of natural gas ............................................................................................ 19
7. Stages in designing the production of Natural Gas ................................................................................. 21
7.1. Exclusive Economic Zone delimitation ............................................................................................ 21
7.2. Feasibility Design ............................................................................................................................. 21
7.2.1. Exploration and Appraisal........................................................................................................ 21
7.3. Detail Engineering ........................................................................................................................... 25
viii


7.3.1. Pre-Preliminary Front End Engineering Design ....................................................................... 25
7.3.2. Front End Engineering Design ................................................................................................. 26
7.4. Engineering, Procurement and Construction .................................................................................. 26
7.4.1. EPC Cost Reimbursable: ........................................................................................................ 27
7.4.2. EPC- Cost Reimbursable with Fixed Price: ............................................................................... 27
7.5. Start Up and Commissioning ........................................................................................................... 28
8. EEZ and Disputes ..................................................................................................................................... 29
8.1. Egypt ................................................................................................................................................ 29
8.2. Israel ................................................................................................................................................ 29
8.3. Lebanon ........................................................................................................................................... 30
8.4. Turkey and PTRNC ........................................................................................................................... 30
8.5. Greece ............................................................................................................................................. 33
9. Exploration .............................................................................................................................................. 34
9.1. First Licensing round ........................................................................................................................ 35
9.2. Second Licensing round ................................................................................................................... 36
9.3. Third licensing round ....................................................................................................................... 38
10. Estimated gas volumes and Appraisal Drillings ................................................................................... 38
10.1. Aphrodite A-1 well ....................................................................................................................... 39
10.2. Aphrodite A-2 well ....................................................................................................................... 40
10.3. Future Exploration ....................................................................................................................... 41
10.4. Oil ................................................................................................................................................. 42
11. Legalities .............................................................................................................................................. 43
11.1. Exclusive Economic Zone ............................................................................................................. 43
11.2. Model Exploration and Production Sharing Contract ................................................................. 45
12. Gas Pricing Mechanisms ...................................................................................................................... 46
12.1. LNG Gas Price projection ............................................................................................................. 48
13. LNG Contracts ...................................................................................................................................... 51
13.1. Short-term supply contracts........................................................................................................ 51
13.2. Long-term contracts .................................................................................................................... 53
13.2.1. Destination Clauses ................................................................................................................. 53
14. Downstream Options........................................................................................................................... 54
14.1. Liquefied natural gas ................................................................................................................... 55
14.1.1. General Overview of LNG Value Chain .................................................................................... 56
14.1.2. Market ..................................................................................................................................... 58
ix


14.1.3. Quality ..................................................................................................................................... 62
14.1.4. Safety ....................................................................................................................................... 65
14.1.5. Liquefaction terminals ............................................................................................................. 66
14.2. Pipelines....................................................................................................................................... 78
14.2.1. Market ..................................................................................................................................... 79
14.3. Other monetization options ........................................................................................................ 84
14.3.1. Combination of LNG and pipelines .......................................................................................... 84
14.3.2. Compressed Natural Gas ......................................................................................................... 84
14.3.3. Electricity Transmission ........................................................................................................... 85
14.3.4. Conversion of Gas to Liquids ................................................................................................... 86
15. Indirect Revenues ............................................................................................................................... 87
16. Game of Thrones ................................................................................................................................. 89
17. Scenarios for Pipelines......................................................................................................................... 92
17.1. Pipeline to Greece ....................................................................................................................... 93
17.2. Pipeline to Turkey ........................................................................................................................ 96
17.2.1. Cyprus problem ....................................................................................................................... 97
17.2.2. TANAP capacity and other uncertainties ................................................................................. 97
18. Scenarios for LNG ................................................................................................................................ 98
18.1. Greeces re-gasification strategy ............................................................................................... 106
19. Cooperation with Israel ..................................................................................................................... 107
19.1. Israeli plans ................................................................................................................................ 109
19.1.1. Pipeline to Turkey .................................................................................................................. 109
19.1.2. Pipeline/LNG to Greece ......................................................................................................... 112
19.1.3. CNG to Greece/Turkey .......................................................................................................... 113
19.1.4. Pipeline to Egypts LNG facilities ........................................................................................... 114
19.1.5. LNG ........................................................................................................................................ 115
20. Cooperation with Egypt ..................................................................................................................... 117
21. Cooperation with Lebanon ................................................................................................................ 118
22. Curse of natural resources ................................................................................................................ 118
22.1. Dutch Disease ............................................................................................................................ 119
22.2. Deterioration of Governance and Conflict ................................................................................ 119
22.3. Overinvestment in Physical Capital ........................................................................................... 120
22.4. Underinvestment in Human Capital .......................................................................................... 120
22.5. Macroeconomic Instability ........................................................................................................ 120
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23. Optimal Use of Revenues: The Theory .............................................................................................. 121
23.1. Consumption Smoothing ........................................................................................................... 121
23.2. Binding Fiscal Rules .................................................................................................................... 121
23.3. Sovereign Wealth Fund ............................................................................................................. 121
23.3.1. Norwegian Pension Fund Global ........................................................................................... 122
24. Human resources ............................................................................................................................... 123
24.1. Israel as an example to avoid .................................................................................................... 125
24.2. Norway as an example to follow ............................................................................................... 125
25. Conclusion ......................................................................................................................................... 126
26. References ......................................................................................................................................... 129

xi


List of Figures
Figure 1 Aftermath of Turkish Invasion ..............................................................................................................5
Figure 2 Cyprus ...................................................................................................................................................5
Figure 3 Years to Depletion of the Aphrodite Field with and without Exporting ...............................................8
Figure 4 Exports of natural gas in 2012 ..............................................................................................................9
Figure 5 Percentage of dependence on Russian Gas (per cent of total, 2012) ............................................... 10
Figure 6 Global LNG trade flows 2012 ............................................................................................................. 11
Figure 7 NEMED estimated gas reserves as high as 122tcf ............................................................................. 12
Figure 8 Global LNG Liquefaction Capacity Utilization by country for 2012 ................................................... 13
Figure 9 Israel gas demand outlook ................................................................................................................ 14
Figure 10 Barbaros' position within Cyprus EEZ .............................................................................................. 17
Figure 11 Natural gas pipeline system to Europe .......................................................................................... 18
Figure 12 PTRNC Proposed EEZ ....................................................................................................................... 19
Figure 13 Subsea wellheads system ................................................................................................................ 20
Figure 14 Typical layout of an LNG FPSO vessel .............................................................................................. 20
Figure 15 Seismic survey using hydrophone ................................................................................................... 22
Figure 16 Hydrophone vs Dual-sensor streamer ............................................................................................. 23
Figure 17 A typical Exploration and Production cash-flow ............................................................................. 24
Figure 18 Petroleum Resource Classification Scheme .................................................................................... 25
Figure 19 Influence of initial planning in the project ...................................................................................... 26
Figure 20 Typical overview of the Project Phases in the Oil & Gas ................................................................. 28
Figure 21 Cyprus Legitimate EEZ ..................................................................................................................... 29
Figure 22 Israeli-Lebanese EEZ Dispute Zone .................................................................................................. 30
Figure 23 Turkey's EEZ in the Mediterranean Sea ........................................................................................... 31
Figure 24 Turkey's proposed EEZ ..................................................................................................................... 32
Figure 25 Position where Turkish navy overextended their authority within Cypriot EEZ ............................. 33
Figure 26 Greece's EEZ .................................................................................................................................... 33
Figure 27 Onshore/offshore exploration 1938-2014 ...................................................................................... 34
Figure 28 Hydrocarbon Exploration Licences .................................................................................................. 37
Figure 29 Timeframe of hydrocarbons exploration activities ......................................................................... 39
Figure 30 A Cross section of the Messinian Evaporites and Tamar sands Geomorphology Aphrodite 1 ....... 40
Figure 31 A-2 Appraisal well map .................................................................................................................... 40
Figure 32 Gross unrisked mean resources ..................................................................................................... 42
Figure 33 Structural traps ............................................................................................................................... 43
Figure 34 EEZ Boundaries Schematic............................................................................................................... 45
Figure 35 LNG-Oil correlation typical formula ................................................................................................. 46
Figure 36 Notional LNG contract slopes .......................................................................................................... 46
Figure 37 World Price formation 2010-LNG imports ...................................................................................... 47
Figure 38 U.S.A. natural gas net export .......................................................................................................... 48
Figure 39 World LNG netback prices November 2013 ................................................................................. 48
Figure 40 LNG/Oils environmental impact ..................................................................................................... 49
Figure 41 Share of oil and gas in electricity generated in Japan ..................................................................... 49
Figure 42 LNG price per annum for various pricing mechanisms ................................................................... 50
Figure 43 LNG costs to Europe ........................................................................................................................ 50
Figure 44 Short vs Long-term LNG Contract (2000-2011) ............................................................................... 51
xii


Figure 45 LNG Carrier Fleet and Order book ................................................................................................... 52
Figure 46 Noble Energy's proposed monetization options ............................................................................. 55
Figure 47 Production Volume Versus distance to market framework for gas technologies .......................... 55
Figure 48 Typical illustration of LNG production plant; sequence and requirements .................................... 56
Figure 49 FLNG "Prelude" ................................................................................................................................ 56
Figure 50 Cargo Containment System for LNG carriers ................................................................................... 57
Figure 51 Liquefaction Trains .......................................................................................................................... 58
Figure 52 Number of trains commissioned vs. average train Capacity 1964-2017 ......................................... 59
Figure 53 Global LNG demand ......................................................................................................................... 59
Figure 54 Demand by fuel type ....................................................................................................................... 60
Figure 55 Shares of primary energy ................................................................................................................ 60
Figure 56 Re-gasification Terminals ................................................................................................................ 61
Figure 57 European Natural Gas Domestic Production ................................................................................... 62
Figure 58 European LNG demand outlook to 2025 ......................................................................................... 62
Figure 59 Existing gas network specifications ................................................................................................. 63
Figure 60 Typical LNG Composition ................................................................................................................. 64
Figure 61 Gas quality by country ..................................................................................................................... 65
Figure 62 LNG Flammability limits ................................................................................................................... 66
Figure 63 Pool fire ........................................................................................................................................... 66
Figure 64 Vassiliko Energy Park - area and current stakeholders ................................................................... 67
Figure 65 Vassiliko Energy Park Proposed master plan ................................................................................... 67
Figure 66 Plan view of proposed LNG Liquefaction terminal, Vassiliko .......................................................... 68
Figure 67 Key elements of a traditional LNG supply chain .............................................................................. 68
Figure 68 FLNG Supply chain ........................................................................................................................... 69
Figure 69 Plant cost versus train capacity (indicative) .................................................................................... 70
Figure 70 Euro-Dollar exchange rates since January 2000 .............................................................................. 73
Figure 71 Egypt's LNG Exports ......................................................................................................................... 75
Figure 72 Existing and Planned pipelines in Europe for 2013 ......................................................................... 80
Figure 73 Proposed Pipeline Cyprus-Greece ................................................................................................... 81
Figure 74 Earthquake activity in the Mediterranean Sea for 1-15
th
June 2014 .............................................. 82
Figure 75 Compressed Natural Gas Delivery System ...................................................................................... 85
Figure 76 Electricity Transmission Proposal .................................................................................................... 86
Figure 77 Gas to Liquids Conversion Pathways ............................................................................................... 87
Figure 78 Submarine Bathymetry of Mediterranean Sea ............................................................................... 93
Figure 79 Cyprus-Turkey proposed pipeline.................................................................................................... 96
Figure 80 Timeframe for the exploitation of natural gas ................................................................................ 99
Figure 81 Global LNG capacity and demand ................................................................................................. 101
Figure 82 Liquefaction CAPEX historic trend ................................................................................................. 104
Figure 83 Kavalas Re-gasification terminal ................................................................................................... 107
Figure 84 Leviathan Exploitation phases ....................................................................................................... 109
Figure 85 Israel-Turkey proposed pipeline ................................................................................................... 111
Figure 86 Arab Gas Pipeline .......................................................................................................................... 114
Figure 87 Seismic data offshore Cyprus and Lebanon .................................................................................. 118
Figure 88 Net Norwegian Government cash flow from petroleum activities 1976-2010 ............................ 123
Figure 89 Government Pension Fund Global ................................................................................................ 123
xiii


Figure 90 Number of employees needed during construction of onshore LNG facility ............................... 124
List of Tables
Table 1 Main periods in the prehistory and history of Cyprus ...........................................................................3
Table 2 Second round bidders ......................................................................................................................... 36
Table 3 Gas supply in EU.................................................................................................................................. 47
Table 4 Gas supply by Source and price mechanism ....................................................................................... 47
Table 5 Financial breakdown for onshore liquefaction facility ....................................................................... 72
Table 6 Financial breakdown for offshore liquefaction facility ....................................................................... 74
Table 7 Future Pipeline Projects ...................................................................................................................... 79
Table 8 Regions Pipelines ............................................................................................................................... 79
Table 9 Cyprus-Greece pipeline net revenue .................................................................................................. 83
Table 10 Cyprus-Turkey pipeline net revenue................................................................................................. 84
Table 11 Fees of data packages ....................................................................................................................... 88
Table 12 Annual surface fees .......................................................................................................................... 88
Table 13 GDP growth ..................................................................................................................................... 119
Table 14 Sovereign Wealth Fund Rankings for up to 2013 ........................................................................... 121

xiv


Glossary
Bright Spot
In reflection seismology, a bright spot is a local high amplitude seismic attribute anomaly
that can indicate the presence of hydrocarbons and is therefore known as a direct
hydrocarbon indicator.
Brownfield
It refers to the development of expansion in a physical commerce-related structure or
group of structures in an area where previous facilities exist. A brownfield investment
has lower cost than a greenfield investment.
Compressed
Natural Gas
Natural gas in its gaseous state that has been compressed.
Downstream
The downstream sector commonly refers to the refining of petroleum crude oil and
the processing and purifying of raw natural gas, as well as the marketing and distribution
of products derived from crude oil and natural gas.
Greenfield
It refers to a project that lacks any constraints imposed by prior work. A greenfield
investment is the investment in a physical commerce-related structure or group of
structures in an area where no previous facilities exist
Liquefaction The process by which natural gas is converted into liquid.
Liquefied
Natural Gas
Natural gas that has been cooled to -259 degrees Fahrenheit (-161 degrees Celsius) and
at which point it is condensed into a liquid which is colourless, odourless, non-corrosive
and non-toxic. Characterized as a cryogenic liquid.

LNG Train An LNG train is a liquefied natural gas plant's liquefaction and purification facility.
Lump sum A lump sum is a single payment of money.
Lump sum
turnkey
Lump sum turnkey is a combination of the business-contract concepts of lump sum and
turnkey. Lump sum is a complete payment consisting of a single sum of money while
turnkey means that product or service will be ready to use upon delivery.
Midstream
The midstream sector involves the transportation (by pipeline, rail, barge, oil tanker or
truck), storage, and wholesale marketing of crude or refined petroleum products.
Pipelines and other transport systems can be used to move crude oil/gas from production
sites to refineries and deliver the various refined products to downstream distributors.
The midstream operations are often taken to include some elements of the upstream
and downstream sectors such as LNG facilities.
Netback Landed price minus shipping.
Re-gasification The process by which LNG is heated, converting it into its gaseous state.
Reserves
Volumes of hydrocarbons that are considered to be economically recoverable using
current technology.
Reservoir
The portion of a resource, such as natural gas, that has been discovered and that is
technically and economically extractable.
xv


Taksim Turkish word for Division.
Upstream
The upstream oil sector is also commonly known as the exploration and production (E&P)
sector. The upstream sector includes the searching for potential underground or
underwater crude oil and natural gas fields, drilling of exploratory wells, and
subsequently drilling and operating the wells that recover and bring the crude oil and/or
raw natural gas to the surface.
Weather
Window
A weather window occurs when weather forecasts indicate that a given set of marine
operations or offshore construction activities can be performed within their maximum
limits for wave height, wind speeds etc.

xvi


Abbreviation
ALARP As Low As Reasonably Practicable
Bcf Billion Cubic Foot
Bcm Billion Cubic Meter
BIM Bilateral Monopoly
CHC Cyprus Hydrocarbons Company (former CNHC)
CNG Compressed Natural Gas
CNHC Cyprus National Hydrocarbons Company
CYTA Cyprus Telecommunications Authority
E&P Exploration and Production
EAC Electricity Authority of Cyprus
EPC Engineering, Procurement and Construction
ESPC Exploration Sharing and Production Contract
FEED Front End Engineering Design
FID Final Investment Decision
FLNG Floating LNG
FPSO Floating Production Storage and Offloading unit
FSRU Floating Storage and Re-gasification Unit
GCV Gas Calorific Value
GoG Gas on Gas
GtL Gas to Liquids
GtL Gas to Liquids
HH Henry Hub
IOC International Oil Companies
JVC Joint Venture Capital
LOI Letter of Intent
MCM Million Cubic Meter
MMBoe Million Barrels Of Oil Equivalent
MMcf Million Cubic Feet
MoC Ministry of Commence
MSPA Master Sale And Purchase Agreements
MTPA Million Tonnes Per Annum
NEMED North East Mediterranean Deepwater
NRF National Revenue Fund
OECD Organisation for Economic Co-operation and Development (Cyprus is not part of OECD)
OPE Oil Price Escalation
PCI Project of Common Interest
PTRNC Pseudo Turkish Republic of North Cyprus
RoC Republic of Cyprus
RoI Return of Investment
RoT Republic of Turkey
SCF Standard Cubic Foot
SPA Supply Purchase Arrangement
SPB Semi Prismatic Type-B Design
SPV Special Purpose Vehicle
TCF Trillion Cubic Foot
TTT Thoukidides Think Tank
USGS United States Geological Survey

xvii


1. Introduction
The delimitation of the Cypriot Exclusive Economic Zone in combination with the 3-D seismic analysis and the
successful drilling by Noble Energy in block 12, are expected to change completely Cypruss energy mix. From
the position of a net consumer of hydrocarbons, Cyprus is expected to meet the status of a producer of natural
gas and most probably the producer of oil. It is expected that the transition towards this transformation will
include turbulent periods. Apart from being an exporter of energy, Cyprus will produce natural gas for both
its transportation sector and the power generation.
The prevailing severe economic crisis which was exacerbated by the events of March 2013 has spread the view
that hydrocarbons can be a panacea for Cyprus financial problems.
The unsuccessful explorations due to technological limitations from various companies which date back to
1950 did not put off Cypriots who strongly believed in the existence of hydrocarbons in the Eastern
Mediterranean. The discovery of hydrocarbons in neighbouring countries such as Israel and Egypt and Noble
Energys results from the appraisal drilling in Cypriot EEZ confirmed the presence of natural gas.
Driven by the industrialisation of Asia, consumption of liquefied natural gas (LNG) has grown rapidly over the
last three decades which has increased the price for LNG. The geopolitical developments in Eastern
Mediterranean provide fertile ground for the evolution of Cyprus into an LNG regional hub.
As this publication highlights, the presence of hydrocarbons does not provide just a prosperous financial future
to the legitimate Republic of Cyprus but has drawn the attention of super powers such as USA, Russia, and
China; whose geostrategic position of Cyprus is of great importance. Furthermore, Europes strategy to
decrease its dependence on Russian gas, has been given a real chance of materialising as Cypruss
hydrocarbon reserves can cover a significant part of Europes energy needs in the foreseeable future. This
window of opportunity for Europeans appears much bigger if the prospect of securing the flow of the
hydrocarbons reserves of other Mediterranean countries (namely Lebanon, Israel and Greece) is taken into
account. These developments have alarmed Turkey which has raised its claims over Cypruss energy resources
and has made declarations of an increased will to solve the Cyprus problem. The descent of U.S.A.s Vice
President, John Biden in Cyprus signalled, as he stated, a new era for the Cyprus-U.S.A. relations. This visit
showed White Houses intentions to pave play a role in the evolution of energy developments in the Eastern
Mediterranean.
The monetization options, such as the widely discussed onshore/offshore LNG, pipeline to Greece/Turkey but
also some new options such as the pipeline to Egypt and CNG to Greece/Egypt are examined from various
angles. The highly advertised scenario that Cypriot gas can be supplied to Europe via Turkey is investigated
and discarded since the TANAP (gas pipeline starting in Azerbaijan and reaches Europe via Turkey) will have
reached its full capacity by the time Cypriot gas will be available for export.
The author meticulously examines the untold elements of each monetization option and presents them in a
unique way that anyone with limited background knowledge can understand. The reader will be able to
comprehend the drawbacks, limitations and benefits of each option as well as what is needed for the option
to become economically feasible. Except the various monetization options, there is a distinct reference to
Cyprus neighbouring countries and their strategic plans.
1


1.1. Scope of this publication
Natural gas has manifold aspects which extend beyond energy and economics. Especially in the case of the
Eastern Mediterranean where the geopolitical situation is very volatile and he size of hydrocarbon reserves
can change the balance of power. The objective of this book is to provide a general knowledge base of the oil
and gas industry and present the evolution of history in relation to hydrocarbons in Cyprus and the region.
The author has chosen to guide the reader through the history of Cyprus, explain the main phases of
hydrocarbon exploration and production and give genuine insight to market trends; monetization strategies
that concern revenue generation via exports price strategies and appraise the curse of natural resources. By
having a genuine overall picture of the actual geopolitics micro and macro-economics, the reader will be able
to make its own conclusions without the influence of the authors judgment/opinion.
2. Cyprus
Cyprus is the third largest Mediterranean Island in size having an area of 9,251km
2
and is situated in the north-
eastern part of the Mediterranean Sea, 33 east of Greenwich and 35 north of the Equator. The closest
country from their shore is Turkey (North) at 78km and Syria/Lebanon (East) 102/163km, Egypt (South) 356km
and Greek island Rhodes (West) at 415km. The population of Cyprus is 1,155,403 (with a population rate
growth of 1.52 per cent) of which the Greek Cypriots are 77 per cent, Turkish Cypriots are 18 per cent and
other 5 per cent with approximate 10,500 people of Russian origin. Since the Turkish invasion and occupation
of over 36 per cent of Cyprus mainland, around 115,000 illegal Turkish have settled dramatically changing the
demographic balance as a result of Turkeys policy [1].
(Nicosia) has been the capital of Cyprus since the 11th millennium BC. It is situated roughly in the
centre of the island and is the political headquarters as well as the main business centre. (Limassol),
extending along the south coast, is the second largest town and a prestigious tourist destination.
(Larnaca), a commercial centre and the seat of the European Consulates in the 18th century, has now Cyprus
main airport. (Paphos) in the south-west is a fast developing tourist resort. (Famagusta),
the centre of the pre-1974 tourist industry is now a ghost town. (Kyrenia), the main coastal urban
centre in the north, is now inhabited almost exclusively by Turkish Cypriots and Turkish settlers.
2.1. Historical context
The prehistory of Cyprus begins in the Late Paleolithic and Pre-Pottery Neolithic with the first traces of human
habitation 9,000 years ago. In the Bronze Age the island was influenced by the Achaean Greeks and in the Iron
Age there was a fusion of Cypriot, Mycenaean and Syro-Anatolian elements. The island experienced Assyrian
and Egyptian domination (9th8th Millenium BC), Phoenician settlement (Kition), Persian domination (6th
Millenium BC) until King Evagoras of Salamis, ruled from 411-374 B.C.), unified Cyprus and made the island
one of the leading political and cultural centres of the Greek world. Cyprus eventually came under the
Hellenistic state of the Ptolemy of Egypt until the Roman period. For almost eight centuries, Cyprus was under
the administration of the Byzantine Empire of the East until 1192 when it was sold to the Knights Templar and
Lusignan. After a Frankish period (until 1489) and a Venetian period (until 1571) Cyprus came under the
Ottoman Rule, until 1878 when it was sold to Great Britain [2]. After years of armed resistance with Britain,
the Republic of Cyprus was established as an independent state in 1960. On the 14th of August 1974 Turkish
premier, Bulent Ecevit, ordered a military attack and Turkey captured over 37 percent of Cyprus land. Since
then, the two communities have been in talks to reunify the islands but none has led to fruition [3].
2


Table 1 Main periods in the prehistory and history of Cyprus
Period Duration
Late Paleolithic 9000-7000 BC
Neolithic 7000-3800 BC
Chalcolithic 3900-2500 BC
Early Bronze age 2500-1900 BC
Middle Bronze age 1900-1650 BC
Late Bronze age 1650-1050 BC
Geometric 1050-750 BC
Archaic 750-475 BC
Classical 475-325 BC
Hellenistic 325-50
Roman 50-330
Byzantine 330-1191
Frankish 1192-1489
Venetian 1489-1571
Ottoman 1571-1878
British 1878-1960
Independent Republic 1960
Turkish Invasion 1974
EU member 2004
2.1.1. 1877-2005 [4]
In 1877 at the Congress of Berlin, the British signed a secret agreement with the Ottomans, whereby they
would rent Cyprus. When British Field Marshal Garnet Wolseley arrived on 22 July 1878 to take possession of
the island, the Bishop of Kition, Cyprus, referred in his welcome speech to how the British had ceded the Ionian
islands to Greece (some fourteen years before), thus putting down a marker for union with Greece.
In 1914, following the Ottoman Empires entry into the First World War as an ally of Germany, Britain annexed
Cyprus, and then offered it to Greece, provided that the latter entered the war against Germany. By the time
Greece joined in 1917 (following the victory of the Venizelists over the government of the King), this offer had
been withdrawn. Under the terms of the Treaty of Lausanne of 1923, the new Republic of Turkey ceded Cyprus
to Britain and renounced all claims over territories under its former jurisdiction. In 1925, Britain declared
Cyprus a Crown Colony.
In 1950, the Church of Cyprus organized a plebiscite among the Greek Christian Orthodox population on enosis,
political union of Cyprus with Greece, with 96 percent voting in favour. The Greek government had been
dealing with Britain bilaterally on the issue, but following the British Foreign Secretary, Edens, refusal to
discuss Cyprus self-determination with Greece, matters began to deteriorate with the Greek government
raising the issue to the UN General Assembly. In the meantime, the charismatic Bishop of Kition, the future
president, became Archbishop Makarios III, and assumed the political leadership of the anti-colonial struggle.
Colonel Georgios Grivas, a Greek army officer of Cypriot stock, launched and led a guerrilla campaign through
the underground EOKA (National Organization of Cypriot Fighters) on 1 April 1955, to oust the British and
achieve enosis.
After five years of armed resistance with Britain, the Republic of Cyprus was established as an independent
state in 1960. The mixture of national pride, strategic interests and an unwieldy and complicated constitution
proved too much for the new republic which resulted in actions of violence between the Turkish Cypriots who
3


wanted full reincorporation into Turkey to a demand for taksim (partition) and the Greek Cypriots who were
after enosis [5].
The period of 1964 to 1974 was a turbulent era for the island, with the apparent debacle of relations between
the Greek Cypriot and Turkish Cypriot sides right across the range of social and political ties. Britains response
was to enlist Turkish Cypriots into the police force that patrolled Cyprus. Thus, when Greek Cypriots were
vandalising police stations, not only British but also Turkish Cypriots died. As a consequence the deaths were
met with anti-Greek riots by the Turkish Cypriot community while the British authorities remained impassive.
Greek Cypriot shops and districts were burned and Greek Cypriot civilians were injured or killed. Such events
created chaos and drove the communities apart. Turkeys response was to bomb Greek Cypriot villages and
other civilian targets in the summer, using napalm in some cases [6].
Although the British and Americans had initially agreed not to prevent a Turkish invasion, they also feared that
a war between Greece and Turkey would seriously damage NATOs southern flank, to the Soviet Unions
advantage. When the crisis began, the people of Turkish descent were living all over the island, with no
majority in any administrative district. There were Turkish Cypriot quarters in all the main cities. Of the villages,
392 were exclusively Greek Cypriot, 123 Turkish Cypriot, and 114 of mixed population, all three types of village
being situated throughout the island.
With the military takeover in Greece in 1967 (Hounta), tensions in Cyprus, fuelled by the nationalist elements
in both mother countries, came to head, with Grivas return to Cyprus (he had agreed to leave in 1960,
returned in 1964 to lead the National Guard, left in 1967 and returned secretly in 1970). He had the support
of ultra-nationalist sections of the junta in Greece. President Makarios did his best to remain above the fray,
having rejected the 1964 US-proposed Acheson plan, which could have led to permanent division and double
enosis. Because of his balance-of-power politics and his high profile in the non-aligned movement in the UN,
he was consideredunjustifiablyto be pro-Soviet, particularly by the Americans and by parts of the Athens
junta.
With the junta hardliners taking power in Greece in November 1973, relations between President Makarios
and the junta reached a nadir. Grivas, who had returned to Cyprus with the blessing of the junta to lead an
underground movement (EOKA B) in Cyprus against the policies of Makarios gave even more power to the
elements of the junta seeking to depose the Archbishop. A combination of short-sightedness and fanaticism
led to the EOKA B coup against Makarios in July 1974. Britain refused to honour its obligations under the Treaty
of Guarantee, thus giving Turkey a pretext to invade Cyprus.
On the 20th of July 1974, Turkey invaded Cyprus to protect, as it claimed, the Turkish Cypriots (18 per cent
of population) by killing in response to a coup dtat. Turkish forces invaded and captured 3 per cent of the
island before a ceasefire was declared. The Greek military junta collapsed mainly due to the Turkish invasion
and was replaced by a democratic government. On the 14th of August 1974 Turkish premier, Bulent Ecevit,
ordered a second, and massive, military attack and Turkey captured over 37 percent of Cyprus land. The
summer of 1974 was a brutal affair: 200,000 Greek Cypriots were expelled from their homes and displaced to
the southern part of the island.
4


Figure 1 Aftermath of Turkish Invasion
Since then, Cyprus is halved with the Northern 37 per cent of Cyprus Island been under Turkish Cypriot
administration named as Pseudo Turkish Republic of Northern Cyprus (PTRNC) as shown in Figure 2. At
present, there are about 35,000 heavily armed Turkish troops and the North has been occupied by some
115,000 invaders from Turkish Anatolia, compared to the 89,000 Turkish Cypriots.

Figure 2 Cyprus
The Republic of Cyprus is the only sovereign on the island that is internationally recognised whilst the PTRNC
has remained unrecognised by the international community except Turkey. The last major effort to settle
the Cyprus dispute was the Annan Plan in 2004. The plan was put to a referendum in both the PTRNC and the
Republic of Cyprus. It only gained the support of the Turkish Cypriots and was rejected by the Greek Cypriots
(76 per cent), who perceived it to disproportionately favour Turks. In total, 66.7 per cent of the voters, both
Greek and Turkish Cypriots, rejected the Annan Plan V on April, 24th 2004 [7]. Five days later, May the 1st,
Cyprus became a full member of the European Union.
2.1.2. 2005 - 2014
Between 2005 and 2008, the Republic of Cyprus followed an adjustment program aimed at meeting accession
criteria for the euro, which was adopted as the national currency in January 2008. GDP grew by an average of
3.8 per cent year-on-year from 2000 until the start of the recession in 2008. Problems emerged in the
5


immediate aftermath of the global recession which hit the Cypriot markets and resulted in negative growth in
2009 [8].
The significant exposure of the local banking sector to Greek sovereign debt, and the disproportionate weight
of banking sector in the national economy, undermined RoCs previous economic model. In March 2012,
Moodys & Finch downgraded three banks to junk [9]. The Government submitted a request for support to
the European Financial Stability Fund and the European Stability Mechanism, a few days before RoC assumed
the EUs rotating presidency on July 1, 2012. The aftermath of 2012 found the countrys economy contracted
by 2.4 per cent.
By March 2013, Cyprus was faced with the prospect of an uncontrolled default and Eurozone exit [10]. Against
this background, and after a confused negotiating process, Nicos Anastasiades, current president, accepted a
rescue loan from the European Union and the International Monetary Fund of 10 billion euros.
The European Union and the International Monetary Fund provided Cyprus with a bailout loan of the
requested amount, subject to strict conditionality. This included a requirement for the government to reduce
by half the countrys banking sector to reach average EU levels by 2018
i
. The loan was insufficient to meet
essential government expenditure. The Government therefore, sought to meet these needs by imposing a levy
of up to 100 per cent on the uninsured deposits of both Cypriot and foreign nationals in Laiki Bank [11].
Additional measures to be met included the sale of the quasi-governmental organizations of Electricity
Authority of Cyprus and Cyprus Telecommunications Authority which the House of Representatives voted in
favour for in March 2014 [12]. The structural weaknesses and the stringent economic policies to be
implemented in the coming years, created substantial recessionary pressures that are likely to persist into the
medium term and place further pressure to the hydrocarbons exploitation.
2.2. Hydrocarbons impact on history
Against this bleak economic environment, there is a considerable interest in Cyprus and abroad in the role
that Hydrocarbons can play in reviving the countrys economy. Certain economic benefits are already realized
during the exploration phase, such as rent of space for the various companies and fees paid to the government
for the various exploration licences. Once key investment decisions are made, the construction of the
necessary infrastructure (increase in physical capital) will be a source of jobs (increase in human capital), will
bring multiplier benefits to the economy but also open the doors for the domestic economic growth and
revenue downfalls from gas export.
With regard to the geopolitics of the region, President Anastasiades said that the discovery of hydrocarbon
reserves in the Levantine Basin has opened up new avenues of cooperation for the countries of the region
changing the geopolitical context of the Eastern Mediterranean. He then continued by saying that the
possibility for a number of states to cooperate for the joint utilisation and exploitation of these resources to
the benefit of future generations has the potential to alleviate some of the stark security dilemmas faced by
almost every country, highlighting that doors have opened for the cooperation of Cyprus with Israel, Egypt
and Lebanon [13].
Furthermore, the hydrocarbon exploration could offer a very positive incentive for the resolution of the
Cypriot question but also increase the political leverage in EU since it can provide another gas supply route to
the Russian depended European market. Cyprus geological position stands at the crossroads of three
i
For more information see http://www.imf.org/external/country/cyp/
6


continents, Europe, Asia and Africa which makes it the best strategic position for the superpowers enabling
Cyprus to have a key role in history. Unfortunately/fortunately Cyprus lies in the strategic position of Russia
and U.S.A. where, Russia being Europes major gas supplier secures its position by controlling other possible
gas entry routes(Islamic Pipeline discussed in section 17.1) and U.S.A. trying to prevent Russias expansion by
politically influencing countries such as Syria, Egypt, Qatar, Israel, Turkey and Ukraine [14]
ii
. It should be of no
surprise, U.S.A. Vice President Bidens words when moments after landing at Larnacas airport said "I wanted
to come to primarily underscore the value the United States attaches to our growing cooperation with the
republic of Cyprus - this relationship is now a genuine strategic partnership which holds great promise" [15].
3. Domestic use
This publication focuses on monetization strategies that concern revenue generation via export price
strategies. A sustainable strategy looking towards the medium and long-term effects, should also take into
consideration how to exploit the natural resource domestically. However, opportunities for domestic
utilization are not assessed in this publication. What can be stated is that regardless of the extent of domestic
gas substitution in the coming years, Cyprus will have sufficient resources for developing export capabilities.
Energy, Commerce, Industry & Tourism Minister Lakkotrypis said that the target of this process is to have
natural gas for energy production in Cyprus in 2016 [16], thus Cyprus will substitute natural gas for oil for
power generation
iii
. One way of illustrating this point is by comparing the rather small energy usage profile
relative to the estimated (from A2 appraisal drilling well) volume size of Block 12 field. Even in the extreme
scenario where Cyprus gasifies its entire economy and no new discoveries are made from TOTAL, ENI and
Noble there will likely still be sufficient resources left to consider exporting (maybe not with an onshore
liquefaction plant but floating liquefaction plant).
Figure 3 demonstrates the number of years it would take Cyprus to deplete its estimated gas reserves, with
and without exporting. At the extreme scenario, which is with full gasification and no new discoveries, the
field would last about 10 years. Conversely, if Cyprus fully integrates gas into its power sector alone and does
not export, the gas would last nearly 24 years
iv
.
ii
History repeats itself, Britains main motive in acquiring Cyprus in 1878 was to combat Russian influence in the
Mediterranean and to protect its route to India.
iii
Delek announced that the Noble Energy-led consortium have submitted their application for Cyprus Natural Gas Public
Company tender for an interim gas supply starting in 2016 [293].
iv
For more information see MIT report, Natural Gas Monetization Pathways for Cyprus Appendix 3.
7


Figure 3 Years to Depletion of the Aphrodite Field with and without Exporting
v

4. International state
vi

Fast forward seven to ten years (2020-2023) and the LNG markets will be a different place says gas expert
Sikorski. Qatar has been the key exporter with 26 per cent share of the LNG market which will begin to decline
since the U.S.A., Australia and East Africa will start their LNG exports by 2018-2020 targeting the same market
as Cyprus would do; Asia [17, 18].
With regards to the total export, Russia is the largest exporter in the natural gas market with 196bcm exports
(in 2012), as shown in Figure 4, leaving Qatar in the second place with almost half the capacity.
v
There should be concern if the economy will become too reliant on natural gas. This is principally a security concern
since the natural gas infrastructure is vulnerable, and damage to it will have a disruptive effect on the economy.
vi
Australia is set to overtake Qatar and become the largest LNG exporter in 2020 with an overall share of 21 per cent in
the global LNG trade. With increasing gas exports from East and North Africa, Africa as a region is likely to overtake the
Middle East. Increasing diversification of LNG supply sources supports the globalization of the gas market which will exert
pressure on the landed prices [124, 344].
8


Figure 4 Exports of natural gas in 2012. Source: EIA [19]
4.1. Qatar
Exports of 3.7tcf per annum proclaim Qatar as the largest LNG exporter to date since 2006.
Qatar has even developed their own fleet of Q-Max carriers with a capacity of 267,000mcm (a typical size for
an LNG carrier has traditionally been 155,000mcm). Liquefaction terminals in Qatar are specifically designed
to cater for these large carriers, with the benefit of size being lower energy requirements (~40per cent) given
economies of scale with engine efficiency [20].
Qatar has committed over 90 per cent of its LNG production volumes between 2014 and 2020 as part of its
supply purchase arrangements (SPAs). LNG production growth elsewhere in the world over the next few years
may challenge some of Qatar's remaining spot volumes, although with the majority of its LNG already sold,
the impact on Qatar's natural gas exports should not be extended in the long-term.
Qatar's LNG exports began to shift to more short-term contracts and spot-market sales over the past few years
compared to the previous contracts which were part of long-term oil-index. According to Qatar National Bank,
in 2012 Qatar exported over 19.9mmt of LNG as short-term or spot-market sales accounting for more than a
third of short-term and spot-market sales in the world. Several recent agreements between Qatargas and
international LNG importers are of the short-term variety, including a deal based on continental European
prices rather than oil-indexation for the first time in Qatars history. [21]
4.2. Russia
Despite the vast gas reserves, Russia was not a significant player in the LNG market, until recently. Russia is
expanding in the LNG market through two terminals. The first, Yamal project, a 3-trains terminal located at
Sabetta will be fully operational by the end of 2018 which Russia has already signed a long-term supply
contract with China [22]. Their second LNG terminal will be the Shtokman Terminal located at one of the
worlds largest natural gas (Shtokman field) field having (estimated) 3.8 trillion cubic metres.
On the other hand, Russia, the worlds largest natural gas supplier signed a 30-year, USD$400bn deal with
China to export natural gas and plans to construct (by 2015) the South Stream pipeline delivering 63bcm of
gas per annum to Europe. With conjunction of the already established Nord Stream pipeline (delivering 55bcm
0
50
100
150
200
250
b
c
m
Russia Norway Qatar Canada Netherlands
Algeria Indonesia United States Malaysia Australia
9


of gas per annum) Russia establishes its status as the main supplier of natural gas in Europe. An important
aspect related to Russia is the fact that with its established pipeline network, Russia could monopolize the
market by lowering the piped gas prices thus increasing the competition and that should not be
underestimated since at the present point, one of the drivers for using LNG in Cyprus is the profit margin.
The turmoil in Ukraine on 28
th
February 2014 reminded Europe of the day they froze when Russia stopped the
supply of natural gas through Ukraine [23]. As an aftereffect, rumours suggest that the South Stream is
history as international companies secede from the investment
vii
and the European countries (Lithuania,
Estonia, Finland and Latvia) which totally depend on Russian gas (in the shadow of gas supply stop) seek to
curb dependence on Russian gas [24]. The extent of the political dispute regarding the Ukraine-Russia
relationship will govern the future of the Russian gas supply [24].

Figure 5 Percentage of dependence on Russian Gas (per cent of total, 2012). Source: The Economist [25]
4.3. United States of America
U.S.A. in the near future will be the second major gas supplier due its unconventional gas exploration in shale
rock.
The completion of the Panama Canal expansion will signal a new era for the U.S.A.. The U.S.A. has issued full
export licences for the export of 26mmtpa and has another 200mmtpa of applications for shale gas exports
pending. The projected increase of the USs supply is particularly important for the market as a whole, as most
of it is based on a model (Henry Hub) characterised by its low prices. The Henry Hub prices being reduced
compared to the traditional oil-indexed prices is becoming more appealing to the Asian buyers resulting in an
overall decrease of the price unit [18].
4.4. Australia
Australia has 62mmtpa of liquefaction capacity under construction and there are plans for operations in the
period between 2014 and 2018. Once the capacity goes online, Australia will match Qatars LNG export by
2018 [26]. However, there is a risk that excess supply will put future plans at stake.
4.5. Other significant natural gas producers
Meanwhile, recent big offshore gas discoveries in East Africa have opened up the opportunity for LNG exports
from Mozambique and Tanzania, which will most likely be available on the market in the early 2020s. The low
vii
For more information see http://www.al-monitor.com Crimea crisis may end USD$23 billion pipeline project
10


production cost from those countries will ultimately influence the LNG prices and that may put a risk towards
countries such as Australia where there are fears that this emerging competition (with conjunction to US shale
gas exploitation) will put at stake any future LNG terminals [27].
5. Regional exploration and current State
The Eastern Mediterranean region includes eight significant basins (Eratosthenes High, Latakia basin, Levant
basin, Judea basin, Nile Delta basin, Western Arabian province, Cyprus basin and Zagros province) with the
majority of the historical hydrocarbon production occurring in the Nile Delta Basin, the Western Arabian
Province, Zagros Province and lastly the Levant basin (being the largest gas field discovered in 2013). To date,
the overall estimation has increased to 233tcf after the significant natural gas discoveries in the Nile Delta
Basin and Levant basin.
The domestic conflicts in Syria and Egypt have dramatically redrawn the energy map for the region, as Syrian
oil and natural gas production is in freefall and natural gas flow from Egypt has declined severely. Israel and
Cyprus are the only other Eastern Mediterranean countries with significant hydrocarbons Israel since March
2013 produces gas but Cyprus officials still examine possible export options.
5.1. Egypt
Egypt, following Algeria is the second largest natural gas producer in Africa and the largest oil producer of the
non-members of the Organization of the Petroleum Exporting Countries (OPEC). Egypts geography is of great
importance in international energy markets since it is the sole operator of the Suez Canal and Suez-
Mediterranean (SUMED) Pipeline. The Suez Canal is the umbilical cord that provides the transit route for oil
and LNG shipments traveling Northbound from the Persian Gulf to Europe and North America and Southbound
shipments from North Africa to Asia (Figure 6). The importance of this transit route is highlighted by the
SUMED Pipeline which acts as a stand-by route for ships that are unable to navigate through the Suez Canal
[19].

Figure 6 Global LNG trade flows 2012. Source: IGLNGI [28]
The Nile Delta regions block North East Mediterranean encouraged the RoC back in 2003 to begin serious
offshore explorations. U.S.G.S estimated means of 1.8 billion barrels of recoverable oil, 223tcf of recoverable
Suez Canal
11


gas, and 6 billion barrels of natural gas liquids in the Nile Delta Basin province of the eastern Mediterranean
Sea region [29].

Figure 7 NEMED estimated gas reserves as high as 122tcf. Source:USGS [30]
Since April 2012, the period which the Egyptian Government cancelled its existing gas supply contract with
Israel, Egypt has struggled to fulfil its piped gas supply contract with Jordan due to political unrest and
militants attacks on the pipeline that runs through the Sinai Peninsula. According to researcher on Energy and
Economic policies El-Katiri [31] Egypts current domestic situation is shaped by continued natural gas shortage
and daily electricity blackouts, political turmoil, political corruption
viii
, dysfunctional governing institutions and
unexcelled budgetary pressure.
Egypt joined the club of LNG exporters in May 2005 by shipping its first cargo from the newly constructed Idku
terminal (capacity 10bcm per annum) [32]. However, intense turmoil has seen Egypt's LNG exports declined
by half over the past five years, from 496bcf in 2008 to 237bcf in 2012. LNG exports declined even further in
2013 because the Egyptian Government diverted additional natural gas supply to its domestic market, a
decision which had tremendous impact to its LNG plants. The Segas LNG plant in Damietta was forced to shut
down its operations in 2013 due to the lack
ix
of natural gas to feed the facility [33]. The Idku plant, which is
fed gas from the BP-operated West Delta Deep Marine (WDDM) offshore concession, is running below
viii
In a report published by EIPR and Platforms the revenues lost to Egypt by exporting during the six year period (2005-
2011) under-priced gas to Israel, Jordan and Spain sums to almost USD$10billion. During that period, Egypt lost more
than double the countrys annual health expenditure [288].
ix
Reminder, Egypt has proven gas reserves which correspond to 2 percent of the world total!
12


capacity. The Government diverts gas from the WDDM to the Idku terminal but this has an impact on the
domestic supply. This has given rise to the only option which is to import gas to satisfy the local demand and
keep Idku running. There were rumours that Egypt would seek to import gas from Israel [34] through Cyprus
but it was announced on the 8
th
of May 2014, Noble Energy-led consortium has signed an LOI with Egypts
Damietta LNG operator Union Fenosa. The company is desperate to find gas suppliers (they had no natural
gas deliveries since 2012) since the Egyptian government banned exports to satisfy domestic demand which
caused financial loses to the company as it has breached its contracts with customers in Europe and Asia. The
aftermath is that the company sued the government for USD$6 billion, a lawsuit which is still pending and is
used as a negotiation tool by the Egyptian Government to approve the Union Fenosa-Israel deal [35].
Furthermore, British Gas (BG) Group which owns 35.5% of the LNG plant at Idku (other key shareholder is
PETRONAS-owning 35.5%), reported a loss of USD$1.5 billion in 2013 because of reduced Egyptian gas
deliveries and led to its CEOs resignation. Importantly, BG Group is in discussions with Noble Energy-led
consortium for the purchase of double the quantity of natural gas than Union Fenosa for a total of up to
USD$40 billion.
In summary, Egypt has idle LNG facilities which worsen its economy and it is now in need of IMFs loans to
keep its economy from hitting the buffers making it a great example of the cost of (a) having the expensive
LNG trains idle (Figure 8 shows the countries that are underutilising their LNG plants currently 4) and (b) the
importance of estimating correctly the domestic demand growth [36].

Figure 8 Global LNG Liquefaction Capacity Utilization by country for 2012. Source:IGU [17]
5.2. Israel
In January 2009, the consortium consisting of US based Noble Energy and Israel based Avner, Delek Drilling,
Isramco and Dor announced a gas discovery of 8.4tcf in the Tamar 1 offshore (Matan (309) block) field
13


signalling a new era in the South-East Mediterranean sea gas exploration. As a result of this discovery, the
consortium made new drillings at Leviathan block which showed a gas discovery of an estimated 20tcf on
October 2009. Having an extra 0.5tcf gas discovery in Dalt, the gas outlook is estimated to be 29.2tcf and
according to the Israeli Ministry of Energy reserves are expected to rise to 45tcf in the following years [37].
As it can be seen in Figure 9, the annual average gas demand of Israel is currently at 700 MMcf per day and is
expected to increase significantly and reach demand of more than 1100 MMcf per day by 2020. The rapid
increase is due to the industrial growth and demand of cleaner fossil fuels. Furthermore, Israels target to
reduce its carbon emissions from coal burning power plants and turn them to energy efficient gas fired plants
increases the demand to more than 1500 MMcf per day by 2020. This increases the demand in domestic
market thus giving more value to the gas field found offshore of Israel.

Figure 9 Israel gas demand outlook. Source: Noble Energy [38]
For the reasons discussed above, in August 2012 the Tzemach committee recommended exporting 53 per cent
of Israels offshore gas and the cabinet office decided to accept the recommendations, but only after barring
exports from the Tamar field, confirming Israels main priority which is to cover its domestic energy needs for
the next 29 years. This meant lowering the overall percentage earmarked for export to 40 per cent which
decreases the export volume from 16.35 to 11.68tcf [39, 40].
Noble Energy, announced on the 4th of April, 2013, that the Tamar natural gas field offshore from Israel had
been successfully brought online at full capacity with all five of the subsea wells now producing at stable rates
totalling approximately 300MMcf/d. When combined with existing Mari-B volumes, the total current exports
are nearly 500MMcf/d and are expected to average 700MMcf/d through the remainder of 2013. Initial sales
commenced on 31
st
of March 2013 as natural gas flowed from the field to the Tamar platform and then to
the Ashdod Onshore Terminal [41].
On the 6
th
of January 2014, Delek announced the natural gas supply agreement with Palestine Power
Generating Company in the total scope of 4.75bcm (the overall contractual amount) for a period of 20 years.
Importantly, the price of gas determined in Supply Agreement will be linked to Brent Crude prices, and includes
"a floor price" [42].
14


Furthermore, as stated by Lawson Freeman, Noble Energys vice President for the Eastern Mediterranean, the
United States State Department advanced an Israel-Jordan contract, worth USD$500m, to supply for fifteen
years about 0.066tcf of natural gas from Israels Tamar field to Arab Potash and Jordan Bromine [43] beginning
in 2016. Sales of the gas are due to begin once minimal pipeline infrastructure has been completed at a price
of at least USD$6.50 per thousand cubic feet, with upside linked to Brent crude oil prices [44].
Concerning the LNG option that Cyprus is interested in and seeks to corporate with Israel, the Australian LNG
expert Woodside Energy (Australias second-largest oil and gas producer) signed on February the 6th, 2014,
an MoU for buying 25 per cent of the Leviathan field, 1.8tcf, at a cost of USD$2.5 billion [45]. In the long-term
the final agreement between the two parties could be the milestone to Cyprus plans since Woodside is mainly
interested in exporting liquefied gas and thus can use Cyprus proposed LNG liquefaction terminal. However,
the MoU was terminated in May 2014 due to different opinions with regards to the gas production strategy
[46].
5.3. Jordan
Jordan does not have significant oil resources (at just 0.213tcf). Jordan meets only 3 per cent of its domestic
demand with its domestic sources of oil and natural gas and relies mainly on imports to fill its energy gap.
Jordan whose power sector is heavily depended (more than 80 per cent) on Egyptian gas was arguably in a gas
crisis. However, their gas shortage crisis was resolved on February the 14
th
, 2014, when The United States
State Department advanced the Israel-Jordan contract for natural gas supply [47].
5.4. Lebanon
The government of Lebanon accomplished a pre-qualification bid in April 2013 for exploration in the countrys
territorial waters. The first licencing round should have begun in May 2013 but eventually after being
postponed for 4 times is set to open in August 2014 [48]. Results from seismic exploration indicate that
resources in the Southern sector Lebanons EEZ could total to 12tcf but validation of these estimates requires
further offshore exploration.
Regarding the domestic use of gas, Lebanon is facing a gas crisis due to the Egyptian pipeline sabotage. Thus
Lebanon is looking for another natural gas suppliers and Israel is not one of them due to disputes regarding
their EEZ.
5.5. Syria
Syria is the regions only significant oil producer. However, its on-going domestic conflict which peaked during
2012-2013 reduced the oil and natural gas production. The unforeseen length of the civil war led to significant
gaps between regional oil production and oil demand totals.
5.6. Greece
Greece has 10 million barrels of proved oil reserves as of 1 January 2011. Greece's oil production stands at
7,946 barrels per day (bbl/d), ranked 90th and imports at 496,600 bbl/d.
During 2012-2013, Greece's government awarded an exploratory contract to Petroleum Geo-Services. The
company has been licensed to conduct far-range offshore research for hydrocarbons in the western and
southern regions of the country, which based on previous indications, show great potential for substantial
amounts of oil and gas. It should be noted that in the summer of 2011, J. Robinson of PGS at a conference in
Athens discussed the Eratosthenes region which is geologically connected with the Cypriot EEZ, where large
discoveries have been made [49] [50]. However, Greece's dispute with Turkey over their EEZ poses substantial
15


obstacles to oil exploration in the Aegean Sea. Following the completion of seismic tests, the Greek
Government plans in its 2014 agenda to invite international oil companies to conduct offshore test drilling in
its western and southern waters.
On May 21
st
2014 Greece approved a request by Italys largest power company Enel to search for oil and
natural gas in three onshore blocks; Preveza-Arta (block of interest 1), the Aetolia-Acarnania region (block of
interest 2) in the central-western part of the country, and the North Western Peloponnese (block of interest
3), two of which had been unsuccessfully explored in 1997-2001 by oil firms including Hungary's MOL and
Greeces Hellenic Petroleum.
One of Greeces problems which could prevent oil giants like TOTAL or ExxonMobil to bid in future areas is
Greeces habit of changing policies and tax rates. According to Energean CEO Mathias Rigas, There is no way
any company is going to sign contracts without knowing what the tax regime is going to be. These are
investments that can last for 25 years they wont take the risk if next year they say, no more 25 per cent tax
now its a 40 percent tax. Oil companies prefer to be in politically stable environments and the fact that
Greece has had three governments in the last four years and with it, three different policies on oil and gas
exploration do not allow for much space to progress. While the countrys current Minister of Environment,
Energy and Climate Change Yiannis Maniatis endorsed the countrys hydrocarbon potential on a panel earlier
that day, there is no certainty that he or Samaras will be around next year [51].
5.7. Turkey
Turkeys extensive deep-water exploration in the Black Sea to find natural gas/oil was unsuccessful. Thus by
October 2011, their focus was shifted towards the Mediterranean Sea and the areas in Antalya. Turkeys
desperation to find natural gas in the Mediterranean pushed them to explore in a region within RoCs EEZ,
South West of Cyprus.
In December 2013 Turkey issued a NAVTEX informing mariners and the RoC that three ships will be conducting
seismic surveys in areas very close to the offshore blocks 2 and 3, which are licensed to ENI/KOGAS. It was
apparently a tit-for-tat move, coming just one week after the Cypriot Government decided to offer blocks 5
and 6 to the consortium of ENI/KOGAS.
In January 2014 Turkey issued a NAVTEX that Barbados
x
Hayrettin Pasa, a research vessel acquired by Trkiye
Petrolleri Anonim Ortakl (TPAO), will be conducting seismic surveys until May 2014. The defined sea area
trespassed into parts of offshore blocks 4, 5 and 6, which lie south-to-southwest off the coast of Cyprus. The
three blocks fall within an area which Turkey claims as its own continental shelf. However, online vessel
tracking website Exact Earth, tracked the Barbaros West of Paphos (Figure 10). Despite staying out of block 1,
the vessel had trespassed well into the EEZ, which encompasses a much larger area than the offshore blocks
[52]. Barbaros was escorted by two military ships, the M/V Bravo Supporter and the M/V Deep Supporter.
x
The Barbaros is a strategic asset for Turkey as it has the capability of carrying out seismic 3D surveys which can be used
to determine the presence of hydrocarbons.
16


Figure 10 Barbaros' position within Cyprus EEZ. Source: ExactEarth [53]
Due to Turkeys increasing need in CO2-reduced fossil fuels such as natural gas, the Turkish state-owned
upstream operator TPAO is planning to increase its domestic natural gas production by enhancing the
involvement of IOCs in offshore exploration and production operations in the Antalya, Mersin, and Iskenderun
regions. In November 2011 Shell increased its global activities by signing a partnership agreement with TPAO
for exploration licenses. The agreement aims to evaluate the hydrocarbons reserves by performing offshore
exploration and evaluation, as well as inland exploration works in the South Eastern Anatolian Region. In 2013,
Shell also signed an agreement with TPAO for deep water explorations in Black Sea [54].
Turkey being a gas distribution provider has a special and significant role in Europes future plans on energy.
European countries are importing 32 per cent from Russia (in 2012), making Russia the main supplier of natural
gas [55]. Europe pushes for an extra natural gas import option and Turkey will be the country into which gas
will be transferred by as shown in Figure 11. The Trans-Anatolian Gas pipeline is of great importance since it
will be the medium into which gas will be transferred from Azerbaijan through Turkey and split at Strandzha
for the Nabucco West pipeline and at Kipoi for the Trans-Adriatic
xi
pipeline to meet the demand of North
European and South West countries respectively.
xi
The initial capacity of TAP will amount to 10bcm per annum with the possibility of expanding to 20bcm per annum. The
TAP's construction project is planned to start in 2015. [221]
17


Figure 11 Natural gas pipeline system to Europe. Source: ReThink Institute [56]
5.8. Pseudo Turkish Republic of Northern Cyprus
On the 22
th
of September 2011 TPAO and the PTRNC (which still remains unrecognised by the international
community except Turkey) signed a Petroleum Services and Production Sharing Contract. The contract
permit to TPAO access for all onshore and offshore blocks and assumes 100 per cent of relevant development
costs [57].
Importantly though, the agreement entails blocks 1 (claimed also by Turkey), 2, 3, 8, 9, 12, and 13 which
overlap with offshore blocks in areas which are within RoCs legitimate EEZ as shown in Figure 13. The fact
that the TPAO-PTRNC agreement transcend on offshore blocks 1, 2, 3, 8, 9, 13, 12 appears to be politically
aligned with the recent statements of the Turkish Ministry of Foreign Affairs, which asserted that Cypriot
offshore blocks 1, 4, 5, 6, and 7 in reality transcend with Turkeys continental shelf (Figure 25). This could be
Turkeys strategy to deliberately increase the perceived political risk in Cyprus, and discourage bidders from
proceeding with exploration and production operations under the second round since the giant IOCs prefer
to be working in politically stable environments.
The TPAO has conducted 2D and 3D seismic surveys using Koca Piri Reis in areas offshore East Cyprus and
within RoCs EZZ, blocks 8, 9 and 13 as shown in dark grey in Figure 12, with the tolerance of international
community [58].
18


Figure 12 PTRNC Proposed EEZ. Source: ICG [59, 60]
6. Major sectors in the lifetime of natural gas
The oil and gas industry is usually divided into three major sectors: upstream, midstream and downstream.
The upstream oil sector is also commonly known as the exploration and production (E&P) sector which
includes the searching for potential underwater natural gas fields, drilling of exploratory wells, and
subsequently drilling and operating the wells that recover and bring the raw natural gas to the surface.
The decision regarding the exploitation of the gas field is taken after the Front End Engineering Design (FEED)
has been completed. Unfortunately, during the time this document was written, the FEED was not available.
Based on the methodology used by Noble Energy in the production of gas from the Tamar field, they will use
subsea wells (which are operated using special wires called umbilical) that will be connected to a Floating and
Production Storage and Offloading vessel by a tieback method (Figure 13). Furthermore,
xii
turbine/electric
compressors will be used to allow the gas to reach the desired pressure to feed directly into a pipeline
transport system.
xii
Turbine compressors gain their energy by using up a small proportion of the natural gas that they compress. The turbine
itself serves to operate a centrifugal compressor, which contains a type of fan that compresses and pumps the natural
gas through the pipeline. Electric compressor uses an electric motor to turn the same type of centrifugal compressor.
This type of compression does not require the use of any of the natural gas from the pipe; however it does require a
reliable source of electricity nearby.
19


Figure 13 Subsea wellheads system. Source: Ellinas [61]
The natural gas immediately after it is extracted exists in mixtures with other hydrocarbons; principally ethane,
propane, butane, and pentanes (more information can be found in section 14.1.3) and other gases such as
hydrogen sulphide (H2S), carbon dioxide, helium, nitrogen, and other compounds. At the Floating Production
Storage and Offloading vessel (FPSO), the natural gas will be processed and separated from all the various
hydrocarbons and fluids to produce what is known as 'pipeline quality' dry natural gas (Figure 14). Once the
gas is purified, a pipeline will carry it to the onshore facility.

Figure 14 Typical layout of an LNG FPSO vessel. Source: Festen and Leo [62]
20


Following the upstream, the natural gas will be transported in pipelines via compressors (if the field pressure
is adequate to transport the gas to shore then compressors are not needed) to the onshore LNG or Floating
LNG facility which would complete the Midstream sector.
From the facility, the LNG will be shipped to the designated buyer and that completes the three sectors of the
gas industry.
7. Stages in designing the production of Natural Gas
This author gives the opportunity to guide those who do not have prior knowledge of the Oil and Gas sector
to get a brief understanding of the various project phases.
In order to achieve natural gas production in the safest and quickest way possible in deep-water oil and gas
developments, effective planning of strategic operations are imperative due to the complexity and multitude
of disciplines that encompass those developments. To ensure an impeccable start-up, effective interfacing
between key engineering areas is crucial and must be maintained throughout the life of the project from the
preliminary FEED phase to sustainable steady-state production.
7.1. Exclusive Economic Zone delimitation
The first step for the oil and gas development is made when a country ratifies agreements with its
neighbouring countries for EEZ delimitation and cross median oil exploration. Following that, the company
invites the oil companies to bid for the offered blocks.
7.2. Feasibility Design
7.2.1. Exploration and Appraisal
By means of geoscience methods, such as 2D/3D surveying (Figure 15) oil companies that have been granted
with a licence make utmost efforts to gather/acquire data and interpret/analyse them. An exploration well is
drilled once the reserves and risks of a prospect pass the following decision criteria/processes:
Global basin analysis;
Develop play concepts;
Define exploration play areas;
Evaluate prospects;
Identify drillable prospects;
Rank the prospects by risk;
Drill exploration well and
Re-evaluate the prospects.
21


Figure 15 Seismic survey using hydrophone. Source: USEPA [63]
The best demonstration, which allows the user to understand the extent to which technological improvements
have helped the discovery of hydrocarbons, can be demonstrated in Figure 16. The picture on the left shows
the result from a hydrophone streamer analysed by the old conventional Kirchhoff PSTM stack method
whereas the picture on the right shows the results from a dual-sensor streamer which are analysed with the
new P-up PSTM stack method. The differences are more than obvious. The ability of the dual-sensor to record
more of the low frequency events in the seamount enhanced the possibility of successful hydrocarbon
explorations. Focusing on the seismic events as shown in the two pictures the Messinian Salt we observe that
it is possible to interpret the deep rotated fault blocks along the section on the P-up data which is not clearly
visible on the other data [64].
22


Figure 16 Hydrophone vs Dual-sensor streamer. Source: Lie and Semb [64]
With the prerequisite that promising amounts of oil and gas are confirmed from the exploration phase, the
gas field is appraised to establish its size and characteristics. The appraisal wells provide technical information
which is used to determine the optimum method for maximum recovery of the oil and gas. The potential social
and environmental impacts associated with appraisal drilling are similar to exploration drilling and an EIA and
SIA is usually carried out in advance if required by the Government of the country [65].
Well testing taking place before permanent well completion is referred to as drill stem testing. Quality tests
are mainly used to:
Quantify the production capacity;
Determine the pressure of the fluids within a reservoir;
Confirm the permeability and the porosity of the bedrock in the reservoir;
Delimit the area of the formation and
Determine the composition and quality of the fluids [66].
The exploration and production of hydrocarbons is a multimillion dollar high-risk venture which can drag
medium sized companies to bankruptcy (Figure 17). Thus special measures are taken to limit this potential
and enhance the overall picture of the reservoirs quantity since geological concepts are uncertain with respect
to structure, reservoir seal and hydrocarbon charge.
23


Figure 17 A typical Exploration and Production cash-flow. Source: Suslick et al [67]
In almost all cases, the results are accompanied with a probability percentage (risk elements)
xiii
. The economics
and risk of exploration are usually analysed through the use of the probability theory and an explicit modelling
of the sequential stages of exploration as shown in Figure 18.
xiii
Risk elements can be and are not limited to a)source presence, b)source maturity, c) reservoir quality, d)trap quality,
e)migration/trap timing.
24


Figure 18 Petroleum Resource Classification Scheme. Source: Suslick et al [67]
7.3. Detail Engineering
7.3.1. Pre-Preliminary Front End Engineering Design
The preliminary Front End Engineering Design (Pre-FEED) work typically provides complete basis for design
especially where this is neither available nor properly done at the conceptual design stage. At Pre-FEED stage,
engineers put great emphasis on developing proper process design basis and specifying the required process
parameter on which the main FEED work depends. The selected Design Case will be further optimised and
engineered generating PFDs and plant layouts. Value engineering reviews, based on PFDs, improve the design
and identify additional studies to be carried out during FEED phase.
When the design basis is complete, the following information is defined:
Raw material specifications;
Plant capacity requirements;
Product specifications;
Project development schedule;
Highlight show stoppers;
Critical plant operating parameters;
Available utilities specifications;
Individual unit operations performance requirements;
Pre- Energy Efficiency Study;
Pre- Green House Gas ALARP Demonstration Study;
Process regulatory requirements and
All other operating goals and constraints desired by the plant owners/operators/engineers.
25


7.3.2. Front End Engineering Design
The Front End Engineering Design (FEED) is undertaken by engineering firms and is the backbone of the
engineering design approach. In the engineering world it is the work required to produce process and
engineering documentation of sufficient quality and depth to adequately define the project requirements for
detailed engineering, procurement and construction of facilities and to support a 10 per cent project cost
estimate [68].
The proper execution of FEED is critical to the long-term success or failure of the overall objectives of the plant
project. The objective of FEED is to establish a price for the execution phase of the project and evaluate
potential risks. While the business plan identifies the economic opportunity, the FEED focuses on technical
requirements, establishes the set of process operating conditions and specifies the equipment to achieve the
level of reliability, efficiency, and safety required. Because this design phase sets the direction for the rest of
the project, proper process specification is imperative for the projects success [69].
The importance of the FEED can be demonstrated by realising the reduction of the overall construction time
needed and increase in the Return of Investment (RoI). Based on The National Research Council, the use of
FEED could lead to the determination of at least 70per cent of the costs of product development, manufacture
and use [70]. As Figure 19 shows, changes in scope are best made at a time when they have the least financial
impact to the project. The later a change is made, the more costly it becomes, thus reducing the RoI. The
higher the RoI the easier it is to raise the necessary funding for the project.

Figure 19 Influence of initial planning in the project. Source: Emerson [71]
7.4. Engineering, Procurement and Construction
The delivery model for the project is the most basic tool in the industry for risk mitigation.
The traditional construction project delivery model used in the construction industry i.e. design-bid-build is
not a common practice in the hydrocarbons industry. The oil and gas industry is characterised by its net
revenue and risk uncertainties. Thus the companies pushed the construction industry to the limits and set new
delivery models to reduce the delivery time. A design-bid-build approach requires an extended period of time,
delaying the first delivery of product to market. In addition, it creates the potential for gaps in responsibility
between the design and construction entities, often leading to delays, claims and sometimes cancellation of
projects [72].
26


In order to address these problems, the industry moved toward the Engineering, Procurement and
Construction (EPC) model which is the design and build. In this approach, the owner contracts with one entity
to design, procure equipment and commodities, construct, and commission the facility. The results of this
agreement are the following:
Reduction in overall time (from concept design to export) by allowing the contractor to overlap the
design and construction process and
Reduction in the amount of claims for design changes by eliminating any gaps in responsibility for
design and construction activities.
The limitation of a typical EPC delivery model is its financial risk for the contractor. Having to deliver at a fixed
price, called Lump sum, a gigantic project in undeveloped sites can increase the duration and cost of the
project resulting in great financial losses for the contractor. The industry has adapted to these challenges by
beginning to employ further by having two variations of EPC as follows:
7.4.1. EPC Cost Reimbursable:
This method allows the client to contracts with one entity to perform the engineering, procurement, and
construction management services on a cost-reimbursable basis. The EPC entity performs the engineering and
procurement work whereas the client with the assistance of the Construction Management team of that entity
is responsible to find its own contractors. The benefits of this approach are:
Avoids the problem of finding a contractor willing to accept the risk of a USD$8 billion fixed price
contract and
Provides the owner with the opportunity to have significant input regarding the purchase of
equipment, key design or technology issues and contractor selection.
The limitation of this approach is the risk to be borne by the client. The client must employ an experience team
to fulfil its substantial responsibilities and identify all possible risks which could cost budget overrun. If the
client fails to identify the various obstacles, the owner will bear the possible cost overruns.
7.4.2. EPC- Cost Reimbursable with Fixed Price:
This method allows the client to contract with one entity to perform the engineering, procurement, and
construction management services on a cost-reimbursable basis. The EPC entity performs the engineering and
procurement work whereas the client with the assistance of the Construction Management team of that entity
is responsible to find its own contractors. The benefits of this approach are:
The selection between these two methods generally depends upon the factors on which the owner places the
greatest emphasis: owner control and input as well as shortest duration (EPCM); or reliance on a major design-
construction firm and limited cost growth.
Typical Preliminary Liquefaction plant main features are summarised below, as given by Ellinas (former
chairman of the Cyprus National Hydrocarbons Company-CNHC) [73]:
Site preparation;
Civil works;
Piping works;
Mechanical erection;
E&I works;
27


Painting & insulation;
LNG storage tanks and
LNG jetty/loading platform.
Typical Preliminary pipeline main features are summarised below, as given by Nussbaum [74]:
Pipeline metering;
Corrosion Inhibitor injection skid;
Emergency Shutdown Valves and control systems;
Pipeline platform risers, J tubes, and subsea connection spools to the subsea pipeline connections;
Permanent pig launcher at the upstream and trunk line platforms;
Subsea Isolation Valves integrated into piled subsea structures;
Subsea spur lines tie-ins along the trunk line;
Subsea shore approach to a landfall beach valve;
Onshore pig reception facility and
Slug catcher.
7.5. Start Up and Commissioning
The commissioning and start-up activities incorporate a structured and consequent review of the constructed
facility plant with respect to the contractually specified scope of operation. This requires accurate planning of
start-up procedures [75].

Figure 20 Typical overview of the Project Phases in the Oil & Gas. Source: AACE [76]
This is currently the stage RoC is with regards
to the onshore LNG facility
28


8. EEZ and Disputes
The UN Convention on the Law of the Sea, a treaty now ratified by over 160 states excluding Israel, Turkey,
U.S.A. and Venezuela, came into force on the 16
th
of November 1994 [77]. The Convention produced the Law
of the Sea Treaty (LOST), an agreement of which some provisions are mandatory for every state regardless of
whether they have ratified it or not. Provisions on Exclusive Economic Zones are among the ones that have
gained this status [78].
The Republic of Cyprus ratified the treaty in 1988. As the treaty includes provisions on the Cypriot marine,
natural resources and EEZ, the state delimited its EEZ in the south-west, south, and south-east through
bilateral agreements with Egypt (February 2003), Lebanon (January 2007), and Israel (December 2010)
respectively [79]. The delimitations can be seen in Figure 21.

Figure 21 Cyprus Legitimate EEZ. Source: ICG [59, 60]
8.1. Egypt
In February 2003, the RoC delimitated its EEZ with Egypt and on the 13th of December 2013 ratified a
Framework and a Confidentiality Agreement on the exploitation of cross-median line hydrocarbon resources
[80]. According to Minister Lakkotrypis this ratification could potentially open the doors for a long-term gas
export since they have a joint technical committee which will look at possible ways of cooperation between
the two countries [81].
8.2. Israel
In December 2010 Cyprus delimitated its EEZ with Israel and established an agreement on the exploitation of
cross-median line hydrocarbon resources based on the principles of customary international law relating to
29


the delimitation of the EEZ between states (the UNCLOS Article 74 could not be used as reference since Israel
did not ratify the UNCLOS agreement).
8.3. Lebanon
In January 2007 Cyprus delimitated its EEZ with Lebanon, yet remains unratified by Lebanon. Lebanon
advocates that its EEZ extends up to point 23 (as shown in Figure 22), whereas Israel advocates its respective
zone extends up to point 1, creating an overlap area of 874 km
2
, stemming from a maritime-border dispute
between the two countries
xiv
. Minister Lakkotrypis has taken the opportunity to become the ombudsman and
is trying to find a solution regarding the disputed maritime border between Lebanon and Israel. Any progress
from either, Israel or Lebanon will have an indirect effect for Cyprus [82]. At the moment Cyprus and Lebanon
are in the process to sign a Framework and a Confidentiality Agreement on the exploitation of cross-median
line hydrocarbon resources [83].

Figure 22 Israeli-Lebanese EEZ Dispute Zone. Source: Menas [84]
8.4. Turkey and PTRNC
xv

RoC has yet ratified its EEZ with Turkey and PTRNC due primarily to relevant disputes Turkey has only formed
an agreement with the PTRNC in 2011 to delimit the continental shelf. Turkey is governed by its own territorial-
sea law as it has not ratified LOST and according to this law, the limits of the Turkish territorial sea are at 6
xiv
In reality, this dispute has little consequence for the RoC as the coordinates of the eastern boarder of its EEZ will most
likely stay unchanged.
xv
For an in depth review please see the report of Grel et al, 2013, The Cyprus Hydrocarbons Issue: Context, Positions
and Future Scenarios
30


nautical miles in the Aegean Sea, 12 nautical miles in the Mediterranean, and 200 nautical miles in the Black
Sea [78].
The agreement signed between the PTRNC and Turkey in September 2011 has been in favour of the claims
made by the Turkish side as the continental-shelf, delimitation agreement signed defines the territorial
boundary as not an equidistant line, but a line determined on the basis of international law and equitable
principles [85]. Therefore, the Turkish EEZ increases compared to what it would be had the equidistant
boundary been used as shown in Figure 23, enabling them to exploit the hydrocarbons in the area inequitably
compared to the PTRNC and, had a settlement occurred, the RoC. Both the RoC and Greece have denounced
the agreement as illegal.

Figure 23 Turkey's EEZ in the Mediterranean Sea. Source: Sea Around US Project [86]
The limits agreed between the RoC and Egypt are disputed by Turkey as they conflict with its interests
regarding its continental shelf in the region comprised by the area from Cyprus to Rhodes. The Turkish claims
in the area can be seen in Figure 24. The Turkish position is that the ability of an island, such as Cyprus, to
generate maritime zones should be limited when competing with a continental, coastal state, such as Turkey,
for these zones [78].
31


Figure 24 Turkey's proposed EEZ. Source: ICG [87]
As regards to the bidding process for the several research blocks of the RoCs area, the state included all 13 of
its blocks in its second licensing round. Block 12 was excluded as it had already been licensed to Noble Energy.
All blocks but 1, 4 and 13 have received bids (even by important players, such as KOGAS and TOTAL) although
the Turkish government has warned that companies bidding for disputed blocks will be excluded from its
energy projects. The lack of bids for blocks 1, 4 and 13 has been primarily because of limited, geological
potential. The fact that the Turkish threats have not had much effect indicates that, using the already existing
political backing from the international community, the Turkish opposition on the matter can be further
diminished in the future.
On the 2
nd
of February 2014 the Turkish navy expelled a Norwegian vessel (Princess), carrying out a survey on
behalf of French oil giant TOTAL in Cyprus economic exclusion zone as shown in Figure 25, claiming it had
entered an area under Turkeys jurisdiction [88].
32


Figure 25 Position where Turkish navy overextended their authority within Cypriot EEZ. Source: ExactEarth [89]
8.5. Greece
As a result of the Aegean dispute with Turkey, Greece has to date not delimitated its maritime boundaries in
the Eastern Mediterranean. However, Jerusalem recognizes the Greek Exclusive Economic Zone (EEZ) as the
continuation of the Cypriot EEZ in the West side of the island as shown in Figure 26 [90].

Figure 26 Greece's EEZ. Source: DefencePoint [91]
33


9. Exploration
Hydrocarbons were not formed during the period 2010-2014 when most of the Cypriots realised their
existence. . Hydrocarbons have been present at the area for thousands of years since their formation is a time
dependent process. Since 1938, various companies have been trying unsuccessfully to locate them both
onshore and offshore as seen below [92]:

Figure 27 Onshore/offshore exploration 1938-2014
34


The Council of Ministers is responsible for granting licences for prospection, exploration and exploitation of
hydrocarbons. Applications for exploration and exploitation licences are accepted in licence rounds and last
for a period of three years (with the option to extend). The three types of licences are as follow:
Prospecting licences. These are valid for up to one year. They do not permit drilling but allow
evaluation of potential by identifying geological structures by means of gravity, magnetic and seismic
surveys.
Exploration licences. These are initially valid for three years and allow the holder to undertake gravity,
magnetic and seismic surveys and exploratory drilling. They are renewable for two further periods of
two years. On each renewal, 25per cent of the initial licence area is relinquished. In the event of a
discovery the licensee has the right to be granted an exploitation licence for the discovery.
Exploitation licences. These are granted for an initial period of up to 25 years with the option of one
renewal of up to 10 years.
The criteria used for granting licences for the prospection, exploration and exploitation of hydrocarbon include
[59]:
National security;
Technical and financial ability of the applicants;
Financial ability of the applicants;
Ways in which the applicant intends to carry out the activities that are specified in the licence;
Financial consideration that the applicant is offering in order to obtain the licence and
Any lack of efficiency and responsibility that the applicant has shown under any previous licence or
authorisation of any form in any country of the world.
9.1. First Licensing round
Pursuant to Article 3(2) (a) of the Directive 94/22/EC of the European Parliament and of the Council dated
30th May 1994, Cyprus, represented by the Ministry of Commerce, Industry and Tourism, published a notice
in the Official Journal of the European Union on 4
th
May 2007 (Notice No. 2007/C 100/11) inviting interested
contractors to apply for hydrocarbon exploration licences and subsequent hydrocarbon exploitation licences.
From the 13 blocks, blocks 3 and 13 were excluded offering a total area of 46,000 km
2
. A total of 35,000 line-
km of 2D seismic data were purchased by interested parties and applications for three Exploration Blocks were
submitted. Following extensive negotiations an Exploration License for Exploration Block No 12 was granted
to medium-sized U.S.A. Houston based Noble Energy International Ltd on the 24th of October 2008 for an
initial period of three years for a contract area of 3.466km
2
.
In September 2012, Noble Energy following necessary preparatory work and data assessment carried out on
block 12 (including 2D and 3D seismic), the company proceeded with its first exploratory drilling. Upon
expiration of the initial three-year exploration period in October of the same year, Noble Energy successfully
secured an Exploration License Renewal from the government of Cyprus with a 25 per cent reduction of the
contracted area. At present, the company is working in an even reduced contracted area (50 per cent) in an
attempt to decrease its running costs.
In December 2011 RoC approved Noble Energy to transfer 30 per cent of its rights to Israeli based companies
Delek Drilling and Avner Oil & Gas, a strategic action which was part of an on-going co-operation between
Cyprus and Israel in drilling in Block 12 (probably as another negotiation key for convincing Israel to pool its
35


natural resources). Noble Energy has remained the sole operator of the concession and its obligations towards
Cyprus remained unchanged, according to a production-sharing contract
xvi
[93].
9.2. Second Licensing round
On February the 6
th
, 2012 Noble Energy announced significant discovery (1.2tcf) in the Levant Basin (Israel)
raising the total estimated reserves on that region to 35tcf [94]. Thus, The Republic of Cyprus, represented by
the Ministry of Commerce, Industry and Tourism, announced on 11 May 2012 the 2
nd
Licensing Round Offshore
Cyprus for the grant of Hydrocarbon Exploration Licences and subsequent Hydrocarbon Exploitation Licences
(upon a commercial hydrocarbon discovery during exploration) in twelve Exploration Blocks (except block 12)
within the Exclusive Economic Zone of the Republic. By the expiration of the three-month bidding period on
11 May 2012 five companies and ten consortia submitted 15 bids for 9 of the 12 remaining blocks. Bids were
not restricted to any one block and in total 33 applications for licences were made.
Having reference to the significant recent discoveries in adjacent Israeli offshore territory and Noble Energys
promising results from its exploratory well in Block 12, there were great expectations that the second round
would lure various IOCs including both super majors as well as key Asian players, a precognition which was
highly confirmed since there were 15 parties bidding for the blocks. The interested contractors bidding in the
second hydrocarbons' licencing round are outlined in the list below [95]:
Table 2 Second round bidders

Company name Country
I
n
d
i
v
i
d
u
a
l
s
Petra Petroleum Inc.
Canada
RX-DRILL ENERGY CYPRUS LTD
Cyprus
Winevia Holdings Ltd
Cyprus
TOTAL E&P Activities Petrolieres
France
C
o
n
s
o
r
t
i
u
m
s

TOTAL E&P Activities Petrolieres [operator], NOVATEC Overseas
Exploration & Production GMbH and GPB Global Resources BV
France/ Russia/ Russia
ATP East Med Number 2 BV, Naphtha Israel Petroleum Corp Ltd, DOR
Chemicals Ltd and Modiin Energy Limited Partnership
US/ Israel/ Israel/ Israel
PT Energi Mega Persada Tdk & Frastico Holdings Ltd and Emannuelle
Geoglobal Rosario
Canada/Indonesia/Cyprus/
Israel
Premier Oil [Operator] and VITOL UK/ UK
Premier Oil [Operator], VITOL and PETRONAS UK/ UK/ Malaysia
Edison International SpA [operator], Delek Drilling Ltd Partnership,
Avner Oil Exploration Ltd Partnership, Enel Trade SpA and Woodside
Energy Holdings PTY Ltd
Italy / Israel /Israel /Italy
/Australia
ENI and KOGAS Italy/ Korea
CO Cyprus Opportunity Energy Public Company Ltd (Norway) and AGR
Energy AS [Operator] (Israel)
Norway/ Israel
Oak Delta NG Exploration Joint Venture US/Israel
Capricorn Oil, Marathon Oil, Orange NASSAU Energie and CC Energie
SAL
UK/ US/ Netherlands/
Lebanon

xvi
Noble Energy operates Leviathan with a 39.66 per cent working interest with Delek Drilling and Avner Oil Exploration
following with 22.67 per cent each and Ratio Oil exploration with the remaining 15 per cent. Noble Energy operates Tanin
with a 47.06 per cent working interest with Delek Drilling and Avner Oil Exploration following with 26.47 per cent each.
36


The outcome of the 2
nd
licensing round was very promising for RoCs plans to become an energy hub since the
names of companies involved suggest that there will be sufficient skills and financial strength in ensemble to
maximise the upstream and monetisation/export potential of Cyprus. With the exception of a few companies,
most of the companies have a wide spread of business strategies, financial capacities with strong experience
in deep-water operations, subsea pipelines, LNG shipment, experience in design construction and operation
of onshore liquefaction plants and strong relations with Asian markets. It should come as no surprise that
Noble Energy was absent (although Delek took part in the bidding) in the second round. The medium sized
company was already in the exploration and production phase of one of the biggest gas fields in the Eastern
Mediterranean and any further involvement could potentially put at risk its financial viability due to
unsustainable exposure to the East Mediterranean region.
From the bidding results of the second licensing round of Cyprus, two conclusions can be drawn. The first is
that due to low recoverable gas potential and/or regional political risks blocks 1, 4 and 13 failed to receive any
bids. The second is that, based on the seismic surveys, blocks 2 and 9 seem to have the highest potential for
gas since both of the blocks were the most successful, receiving the most bids of all offered.
In January 2013, the consortium led by ENI (acting as an operator with an 80 per cent interest) signed
exploration and production sharing contracts with the government of the Republic of Cyprus for Blocks 2, 3
and 9 which encompass an area of 12,530 km
2
.
In February 2013 French giant TOTAL was also awarded production-sharing contracts for Blocks 10 and 11
which total 2,572km
2
[96].
The final picture of showing the companies with their blocks can be seen in Figure 28.

Figure 28 Hydrocarbon Exploration Licences. Source: RoC [59]
37


Cyprus considered the Italian-Korean ENI/KOGAS consortium to license blocks 5 and 6 of its EEZ and talks
begun on December 2013 [97] but the consortium issued a letter 5 days later stating that they are not ready
to start a negotiation process, because they cannot improve on the terms of their financial offer [98].
9.3. Third licensing round
Minister Lakkotrypis said that the government intends to proceed to a third licensing round with the date to
be announced in the near future [99]. The third licensing round will involve all the blocks with Cyprus Exclusive
Economic Zone which have yet to be licensed such as 1, 4, 5, 6, 7, 8 and 13. If the RoC proceeds with the 3
rd

licensing round, it will be of special interest and importance as Turkey is currently supporting the talks around
the Cyprus problem and any military or political reaction will certainly have significant impact. On the other
hand, RoC might not proceed with the third licensing round in order to avoid unwanted reactions from Turkey
and put a hold on the talks.
10. Estimated gas volumes and Appraisal Drillings
During the exploration phase, there are major uncertainties related to volumes and economies. As the level
of information increases, these uncertainties are alleviated and the interested companies proceed further with
exploration.
Appraisal drilling is carried out (immediately after exploratory drilling) once oil or gas has been discovered in
order to assess the extent of the field, total reserves, possible rate of production, properties of the oil or gas
and determine how to develop the field most efficiently. Based on the findings, a table which shows the low-
high risk areas is prepared and the final decision for the production is made.
The summary of the exploration and appraisal wells to date and planned works is shown in Figure 29.
38


Figure 29 Timeframe of hydrocarbons exploration activities
10.1. Aphrodite A-1 well
After analysing the results using probabilistic analysis, Noble Energy announced in December 2011 that they
discovered significant amount of gas in the Aphrodite A-1 exploration well. Drillings were made in high-quality-
Miocene-Sand at a total depth of 5,860m and water depth of 1,688m [100]. The analysis showed that there is
75 per cent probability to exceed 5tcf and 25 per cent probability to exceed 8tcf giving an estimate that 60 per
cent should be more than 7tcf. On the other hand, three months after Noble Energys announcement, the
NSAI using a different analysis method-deterministic methodology, gave an estimate of 5.1tcf with a 50 per
cent possibility to have more than that [101] which decreased the reserves and shocked the parties involved.
Noble
Block 12
Geophysical surveys
Exploratory Aprodite A1 well (2011)
Appraisal Aprodite A2 well (2013)
Exploratory Drilling (early 2015)
Appraisal drilling within Aphrodite
Structure (TBC)
Production well (TBA)
ENI/KOGAS
(blocks 2,3,9)
Geophysical surveys (2013)
4 Exploratory wells in blocks 2,3 and 9
(1st to be in September)
1 Appraisal drilling after the two
exploratory drillings (September 2014)
Total
(blocks 10,11)
Geophysical surveys (2013)
Exploratory well in each block of 10
and 11 (second half of 2015)
Appraisal TBA
39


Figure 30 A Cross section of the Messinian Evaporites and Tamar sands Geomorphology Aphrodite 1. Source: Noble Energy [100]
10.2. Aphrodite A-2 well
On the 3
rd
of October 2013 Noble Energy announced that the A-2 (Figure 31) appraisal well drilled on the Block
12 discovery offshore the Republic of Cyprus had successfully encountered approximately 120 feet of net
natural gas pay. The appraisal targeted Miocene sand intervals at a depth of 5,607m, 1,731m below sea level
[102].

Figure 31 A-2 Appraisal well map. Source: Noble Energy [100]
After production testing over a 39ft section of the upper, Miocene reservoir Noble Energy estimated a
maximum, flow rate of natural gas of 0.000056tcf/day, with performance modelling predicting an extractable
capacity of 0.00025tcf/day. 3.6 to 6tcf with intermediary approximately 5tcf were estimated by the drilling
40


data, wireline logs and reservoir-performance information, making the A structure the third-largest field ever
discovered in the Deepwater Levant Basin [103]. Unfortunately the total best estimate of resources fell from
5.2tcf to 4.1tcf, mainly because of a reduction in the estimate of the thickness of the C sands layer. The
estimate of the probability of success in that layer rose, from 79 per cent to 95 per cent. [104]
Keith Elliott, Noble Energy's Senior Vice President, Eastern Mediterranean, commented, "results from the
Cyprus A-2 well have confirmed substantial recoverable natural gas resources and high reservoir
deliverability. While the A-2 location has successfully defined the northern area of the discovery, we anticipate
additional appraisal activities are necessary to further refine the ultimate recoverable resources and optimize
field development planning. In the meantime, we continue to identify and advance multiple development
options. In addition to the Cyprus A discovery, we are also encouraged about the further exploration
potential in Block 12 [103].
By May 2014 the overall estimated but unproved reserves for block 12 were between 3.6 and 5tcf. According
to energy consultant Giamouridis [8] the high uncertainty should be expected at this stage of the exploration
process, and certainty regarding the commerciality of the block will increase as other exploratory drillings
continue expected to finish by late 2014/early 2015. Condensate yields and/or oil in a deeper reservoir within
the well can largely improve the projects economics, and accelerate the development of production and
export facilities, reducing dependence on Israels natural-gas reserves, and the existence of reserves in the
other, licensed blocks. Should this happen there is a potential need for economies of scale.
10.3. Future Exploration
Ellinas estimated 1.2bcm reserves basis for the six blocks which have been tendered off including Aphrodite.
Kassinis, the ex-Vice Chairman of CNHC has on several occasions estimated that all 13 Blocks of the Cypriot
EEZ could hold as much as 59.67tcf. Based on two highly respected gas experts, most of the Cypriot citizens
are eager for more hydrocarbons, which will enable the desired onshore liquefaction plant to proceed.
Neither TOTAL nor ENI/KOGAS have not yet presented their own estimates regarding their blocks. Minister
Lakkotrypis announced on the 12
th
of July 2013, after ENIs CEO meeting with President Anastasiades, that the
consortium will commence 4 exploratory and appraisal drillings starting in the second half of 2014 [105].
Following on, TOTAL carried out geophysical surveys in the third and fourth quarter of 2013 and plan to
proceed with two exploratory wells in 2015 for its two blocks.
David Stover, Noble Energys President and Chief Operating Officer, has mentioned in a teleconference in the
1
st
quarter of 2014 that we (Noble Energy) anticipate bringing a rig back into the Eastern Mediterranean late
this year (2014) or early next year for a multi-year program covering additional Cyprus exploration, deep
Mesozoic oil exploration and development activities at Tamar and Leviathan. For Block 12, Noble Energy
targets to withdraw 28-56bcm by the beginning of 2015 (they carried out a detailed, 3D, seismic survey in
August 2013). It was estimated that by the end of 2015 Nicosia and Noble Energy/Delek should have a clear
view of the amount of commercially retrievable gas in Aphrodite, and a dependable estimate of the amount
in Block 12, a time frame which is subject to change due to financial difficulties of Delek group and available
drilling rigs in the region [106].
One can suggest that the withdrawal of Woodside from Leviathan influences the exploration in Cyprus since
the consortium must find the USD$2.71billion needed for the development of the gigantic field which
translates to cuts in other activities. This can however open doors for an expansion of the members of the
41


consortium. To minimise the risks and costs, the consortium and mainly Noble Energy, would prefer to
decrease their share by selling them to other IOCs.
According to the Israeli based news agency Globes, Woodside is interested in participating in the consortium
for block 12. This will give the necessary impetus for more rigorous exploration to commence. Furthermore,
China National Offshore Oil Corporation (CNOOC) has shown interest to buy 30-40 per cent of the Aphrodite
field, a scenario which looks more likely to succeed than Woodsides [107] [108].
In March 2012, rumours that CNOOC submitted a proposal to buy off exploration and exploitation rights in
Block 12 were denied by the ex-Minister of Commerce, Praxoulla Antoniadou [109]. According to Ellinas, Noble
Energy opened its data room
xvii
for Aphrodite block in April 2013 for which ENI, Total and possibly CNOOC
showed interest. CNOOC was also interested in participating in the development of the Leviathan gas field but
Woodside was preferred due to their experience in FLNG. The interest was confirmed by CNOOC going through
Nobles data room which was open in the second quarter of 2012 [110].
10.4. Oil
On the 13 of December 2013, Noble Energy announced that there is evidence of multiple opportunities in
the Eastern Mediterranean with approximately 3.034 billion barrels of gross unrisked oil potential in the deep
Mesozoic play in both Cyprus (1,496MMBoe) and Israel (1,538MMBoe) (Figure 32). They followed saying that
they are evaluating 3D seismic data on an on-going basis and plan to resume exploration drilling in the Eastern
Mediterranean in late 2014 or early 2015 announcing directly their oil exploration in the region [111].
Based on the profit-sharing agreement between the government and Noble Energy, having a current price of
more than USD$107 per barrel
xviii
, the above statement translates to revenues of approximately USD$104bn
for RoC whilst the overall revenue for both Noble Energy and RoC could be as high as USD$160bn. The term
unrisked is industry jargon for a rough estimate of reserves and it is too early to tell whether Cyprus struck
gold since the terminology does not reflect the probability of geologic success [112].

Figure 32 Gross unrisked mean resources (* includes gas, oil and natural gas liquids). Source: Noble Energy [113]
xvii
Data rooms is a common practice for companies and are used in many different types of transactions where the
vendor wishes to disclose a large amount of confidential data to proposed bidders typically during the due
diligence process. The traditional data room will literally be a physically secure continually monitored room, normally in
the vendors offices, which the bidders and their advisers will visit in order to inspect and report on the various documents
and other data made available.
xviii
Spot Prices provided by IEA on the 4/4/14.
42


However, Minister Giorgos Lakkotrypis has advised a wait and see approach, since any revenues will depend
on the amount of oil that is actually recoverable and stressed that it would be possible to talk of proven oil
reserves in Block 12 only once drilling has taken place. In the summer of 2013, Noble Energy carried out 3D
seismic surveys of the entire Block 12 and is expected to release their final assessment of 3D seismic surveys
mid-2014. The estimates will only be confirmed when drilling is conducted and Noble Energy is slated to
carry out additional exploration drilling for natural gas at other location in Block 12 in the 4Q of 2014.
Not surprisingly, TOTAL is also after the jackpot according to economic consultant Mullen [114] and is focusing
towards oil exploration within their blocks and will start exploration as planned in 2015.

Figure 33 Structural traps. Source: Devold and University of Maryland [115, 116]
11. Legalities
11.1. Exclusive Economic Zone
xix

An exclusive economic zone is a sea zone prescribed by the United Nations Convention on the Law of the
Sea at the Third United Nations Conference on the Law of the Sea (1982), over which state has special rights
over the exploration and use of marine resources, including energy production from water and wind. It
stretches from the baseline out to 200NM from its coast. In colloquial usage, the term may include
the continental shelf. The term does not include either the territorial sea or the continental shelf beyond the
200NM limit. The difference between the territorial sea and the exclusive economic zone is that the first
confers full sovereignty over the waters, whereas the second is merely a "sovereign right" which refers to the
coastal state's rights below the surface of the sea [77].
All limits are measured from baselines in which the normal baseline corresponds with the low water line along
the coast. Under the Convention, normal baseline can be drawn around low tide elevations which are defined
as naturally formed areas of land surrounded by and above water at low tide but submerged at high tide,
provided they are wholly or partly within 12NM of the coast.
The Territorial Sea is a belt of water not exceeding 12NM in width measured from the territorial sea baseline
Cyprus' sovereignty extends to the territorial sea, its seabed and subsoil, and to the air space above it. This
sovereignty is exercised in accordance with international law as reflected in the Convention. The major
xix
For a full explanation regarding EEZ please follow this link:
http://www.un.org/Depts/los/convention_agreements/texts/unclos/closindx.htm
43


limitation on Cyprus' exercise of sovereignty in the territorial sea is the right of innocent passage for foreign
ships [117].
The Contiguous Zone is a belt of water contiguous to the territorial sea, the outer limit of which does not
exceed 24NM from the territorial sea baseline. In this zone, Cyprus may exercise control necessary to prevent
and punish infringement of its customs, fiscal, immigration or sanitary laws and regulations within its territory
or territorial sea. Both the EEZ and the continental shelf are intermediate areas, in the sense that they are
not subject to the states sovereignty but are zones in which the state enjoys certain exclusive sovereign rights.
In order to establish an EEZ, a state needs to make a proclamation. Within its proclaimed EEZ, a coastal state
has sovereign rights to explore and exploit, conserve and manage all natural resources (living and non-living)
of the waters above the seabed and of the seabed and subsoil (Article 56) [117].
The Exclusive Economic Zone (EEZ) is an area beyond and adjacent to the territorial sea. The outer limit of the
exclusive economic zone cannot exceed 200NM from the baseline from which the breadth of the territorial
sea is measured. In the EEZ, Cyprus has sovereign rights for the purpose of exploring and exploiting, conserving
and managing all natural resources of the waters super adjacent to the seabed and of the seabed and its
subsoil together with other activities such as the production of energy from water, currents and wind.
Jurisdiction also extends to the establishment and use of artificial islands, installations and structures, marine
scientific research, the protection and preservation of the marine environment, and other rights and duties
[117].
Based on Article 58, other states still enjoy freedoms that they have in high seas in the EEZ of a given state.
Set out in Article 87, these are freedoms of navigation and overflight and of the laying of submarine cables
and pipelines, and other internationally lawful uses of the sea related to these freedoms [78].Thus based on
Article 58 while no country can prohibit an international pipeline from being laid across its continental shelf,
any county can impose conditions on its construction
xx
.
The Continental Shelf is the area of the seabed and subsoil which extends beyond the territorial sea to a
distance of 200M from the territorial sea baseline and beyond that distance to the outer edge of the
continental margin as defined in Articles 76-85 (Part VI) of the Convention. The continental shelf is largely
coextensive with the exclusive economic zone within 200M from the territorial sea baselines [117].
Cyprus has sovereign rights over the continental shelf for the purposes of exploring and exploiting the mineral
and other non-living resources of the seabed and subsoil, together with sedentary organisms (Article 77). In
this area, Cyprus also has jurisdiction with regards to marine scientific research as well as other rights and
responsibilities [117].
xx
This is of great importance to Cyprus since UNCLOS is ambiguous on whether Nicosia could prevent construction of the
IsraelTurkey pipeline along its continental shelf. On the other hand, the RoC may be able to argue its case with sufficient
skill to secure political support among its EU allies, which in turn could raise the financing costs of such a project.
44


Figure 34 EEZ Boundaries Schematic. Source: Australian Government [117]
11.2. Model Exploration and Production Sharing Contract
Production sharing agreement is a common type of contract signed between a government and a resource
extraction company (or group of companies) concerning how much of the resource extracted each party will
receive. In production sharing agreements the country's government awards the execution of exploration and
production activities to an oil/gas company.
If the contractor declares a discovery to be commercial, it then has a contractual obligation to submit to the
Cypriot authorities a development and production plan within a 4-month period. Upon approval of its
development and production plan, the contractor applies for upgrade its Hydrocarbon Exploration to a
Hydrocarbon Exploitation License in the exploitation area.
Since the oil/gas company bears the mineral and financial risk of the exploration and production phase, when
successful, the company is permitted to use the money from produced oil/gas to recover capital and
operational expenditures, known as "cost oil or cost gas". The existing Production Sharing Contract with Noble
Energy from the first licensing round reportedly splits the ownership of Profit Hydrocarbons 65/35 under
normal conditions in favour of the Cypriot government. The remaining money is known as "profit oil or profit
gas" and is split between the government and the company, at a rate of about 65 per cent for the government,
35 per cent for the company [118].
An important aspect of the SPC regarding the Tax Revenue is that there is no taxation of hydrocarbons
production revenues beyond profit sharing. Under the EPSC the applicable corporate tax is deemed to be
included in the Republics share of profit oil, and the portion of available oil which the contractor is entitled to
is net of corporate tax. This was mostly added into the ESPC to make it attractive and increase the interest of
45


major IOCs. On the other hand, the workers (both locals and foreigners) will be entitled to income tax which
compared to other countries such as UK
xxi
is low for the high earners.
12. Gas Pricing Mechanisms
The gas pricing mechanisms are parameters of great importance for the final decision of the monetization
option. As seen in section 14.1.5.3, gas pricing can turn a promising monetization option into a curse. This
section of the report will not place the reader into great depth of gas pricing mechanisms but only highlight
the importance of gas pricing mechanism from the sellers point of view.
The International Gas Union has identified three major market based pricing mechanisms, covering OECD and
non-OECD markets [17]. These mechanisms are:
Oil Price Escalation (OPE), the price is usually linked through a base price (Figure 35) and an escalation
clause, to competing fuels, typically crude oil, gas oil and/or fuel oil (Figure 36);

Figure 35 LNG-Oil correlation typical formula. Source: Melling [119]

Figure 36 Notional LNG contract slopes. Source: EY [120]
Gas-on-Gas Competition (GoG), gas to gas competition indicating an indexation to spot prices that
reflect supply and demand for natural gas in a market. Trading takes place at physical hubs (e.g. Henry
xxi
The UKs income tax rates for 2014-2015 were: 20% on annual earnings up to 31,865, 40% on annual earnings from
31,866 to 150,000 and 45% on annual earnings above 150,000 [223]. On the other hand, Cyprus tax rates for 2014
were: 0% on annual earnings up to 19.500, 20% on annual earnings from 19,501 to 28,000, 25% on annual earnings
from 28,001 to 36,300, 30% on annual earnings from 36,301 to 60,000 and 35% on annual earnings above 60,000
[224].
46


Hub) or notional hubs (e.g. NBP in the UK). There are likely to be developed futures markets (NYMEX
or ICE). Spot LNG is also included in this category;
Bilateral Monopoly (BIM), The price is determined by bilateral discussions and agreements between a
large seller and a large buyer, with the price being fixed for a period of time and
Netback from Final Product (NET), the price received by the gas supplier is a function of the price
received by the buyer for the final product the buyer produces. This may occur where the gas is used
as a feedstock in chemical plants, such as ammonia or methanol.
As shown in (Figure 37) internationally traded LNG is largely dominated by OPE
into Europe, Asia and Asia Pacific. GoG is mainly North America (Henry Hub
based) with some spot LNG cargoes into Europe and Asia Pacific
It is important to explore the various types of piped NG pricing mechanisms in
Europe since it is the only market (due to geographical restrictions) available for
RoC. As shown in Table 3, oil-indexed pipeline supplies were down dramatically as
a result of reduced nominations from the incumbent wholesalers, who faced
reduced demand from their end-customers due to recession and/or sourcing of
cheaper spot alternative.
Table 3 Gas supply in EU. Source: Melling [119]

It is also important to analyse the supply by county of origin since those countries will be the main competitors.
As shown in Table 4, Russia is the main competitor supplying gas using oil-indexed price.
Table 4 Gas supply by Source and price mechanism. Source: Melling [119]
Indigenous Pipeline Supply
2008 Bcm 2009 Bcm
Oil-indexed Spot Oil-indexed Spot
Netherlands 49.0 24.2 42.0 27.0
UK 18.0 51.9 11.0 50.0
Germany 10.0 3.8 10.0 3.0
Romania 10.7 0.0 10.0 0.0
Denmark 9.0 1.1 7.6 1.0
Italy 9.0 0.1 8.0 0.5
Other 9.2 0.4 8.8 0.3
External Pipeline Supply

Russia 150.0 6.6 130.0 3.0
Norway 70.0 29.2 70.0 30.0
Algeria 35.8 0 32.5 0
Libya 9.9 0 7.0 0
2008 Bcm 2009 Bcm
Consumption 561.9 522.1
Pipeline Supplies
Oil-indexed 390.4 346.9
Market-priced 117.3 114.8
Total Supply 563.0 529.9
Figure 37 World Price formation
2010-LNG imports. Source: IGU
[346]
47


Iran 5.8 0 6.0 0
Azerbaijan 4.0 0 4.0 0
Total
390.4 117.3 346.9 114.8

12.1. LNG Gas Price projection
The projected increase (Figure 38) of USs supply is particularly
important for the market as a whole, as most of it is based on a model
(Henry Hub) that does not involve direct indexation of gas to oil prices.
To put this in context, the key driver for utilizing LNG as an export
option being the highly priced-due to oil-gas indexation will be
replaced by the Henry Hub as it is preferred by the Asian markets
resulting in a decrease of the price unit [18].
In the recent EIA Outlook, the U.S.A. is seen as being a net gas exporter
by 2020. Even though actual US net export volumes by 2025
xxii
are
expected to be relatively low (around 40bcm), Henry Hub pricing is
influencing other gas markets and, especially the Asian market, is
contributing to the pressure on gas pricing to move away from oil price
indexation. It is vital to understand the importance of cost-
competitiveness since the World Bank expects gas prices in Europe
and the Far East to drop by 2020, in comparison to netback prices shown in Figure 39. According to Ellinas, the
predictions for netback prices in 2020 are: USD$13.7/mmBtu for Japan, USD$10.5 for the EU, and USD$5.7 for
Henry Hub [121].

Figure 39 World LNG netback prices November 2013. Source: Oil and Gas 360 [122]
xxii
In November 2013, an LNG supply contract between BG and CNOOC (starting production in 2015 for 20 years) is
based on a blending of oil-linkage and gas-on-gas market pricing [221]
Figure 38 U.S.A. natural gas net export.
Source: BP [124]
48


Another factor that must be considered is the ever-increasing number of countries/projects targeting the LNG
market, seeking long-term sales contracts post-2020. At an overall level, the re-gasification (buyers) to
liquefaction (sellers) units is about 2:1. By 2020 the total production of LNG will outstrip the demand which
will loosen the market. As a result LNG regional flows will change and LNG will be sold in other residual markets
such as Europe. In commercial terms, this will mean that suppliers will have to compete for the fewer buyers
which will reduce prices. On the other hand, reduced prices and penalties on CO2
xxiii
emissions (Figure 40) have
already stimulated demand (as shown in Figure 41) in the power sector, as Gas-fired plants tend to operate at
the high-cost end of the mid-merit power order [18].

Figure 40 LNG/Oils environmental impact. Source: Sweden Gas [123]

Figure 41 Share of oil and gas in electricity generated in Japan. Source: EIA [124]
As a result of the shift from Oil index to HH, those LNG projects which are delayed, or are unable to find buyers
soon, may face decreasing pricing risks (Figure 42), thus RoC will need to decrease its selling price in order to
be competitive which can put the project at stake. The statement of gas expert Ellinas is of great importance
xxiii
Natural gas emits 60 per cent less carbon dioxide than coal and 20 per cent than oil in electricity generation thus the
operators are less susceptible to pay any penalties for exceeding the allowable CO2 limit.
49


and highlights the approaching danger, as he states many of the currently planned LNG projects would find
it difficult to achieve FID if they are forced to sell at hub pricing [121].

Figure 42 LNG price per annum for various pricing mechanisms. Source: BP [125]
Similarly, as a result of the shift from excess buyers, to excess sellers, those LNG projects which are delayed,
may face increasing pricing risks. As shown in Figure 43 LNG projects in West Africa and Middle East having
low liquefaction costs will be able to drop their price thus having an impact on the overall market. Going
forward, the truth is RoC will eventually have to face pricing reality to remain competitive.

Figure 43 LNG costs to Europe. Source: Bonhomme [126]
50


13. LNG Contracts
Before moving into the various contract types it is important to explain to the reader the preliminary
agreements currently used in the oil and gas industry. There are two types of preliminary agreements, the
letter of intent and the memorandum of understanding. A letter of intent outlines the intent of one party
towards another with regard to an agreement, and may only be signed by the party expressing that intent
where as a MoU must be signed by all parties to be a valid outline of an agreement. None of these agreements
guarantee that that the two parties will proceed as stated on the MoU. There are many examples where the
parties did not reach an agreement such as Woodside
xxiv
with Noble Energy-led consortium and Israel with
Gazprom for the supply of LNG. Thus the deal of Israel with Union Fenosa cannot be taken for granted since it
is a non-binding letter of intent, which simply expresses the intentions. However, there is no doubt it is a step
forward towards completion of the agreement [127].
In contrast to the two above, a contract is a legal document governed by contract law. There are two types of
contracts, short-term and long-term. The LNG supply system can shift away from the current norm of long-
term contracts, by increasing flexibility and removing barriers to markets. Prices would be more responsive,
and determined via swap and spot transactions, hence allowing the market to determine the most efficient
supply routes. In order to facilitate more competitive natural gas markets, especially in Asia, transaction costs
have to be reduced in short-term contracts, while long-term contracts have to revised, to allow for more
sensitivity to market changes [19].

Figure 44 Short vs Long-term LNG Contract (2000-2011). Source: IGU [17]
13.1. Short-term supply contracts
In order to achieve a competitive natural gas market, especially in Asia, a move away from its stiff,
monopolistic structure, with government intervention and vertically integrated energy companies, to a more
xxiv
Woodside could potentially elevate any liquefaction project due to its experience in that sector, notably, with its ability
for quick E&P- they managed to explore and produce liquid gas from Pluto field (Australia) in just 7 years and its strong
market establishment (delivered more than 3,200 LNG cargos) [273].
51


flexible supply system is essential, in order to attract an increased number of suppliers to the market (IEA,
2013). As both the competitiveness of the market and the number of suppliers increases, the security of
supply provided by the spot market also increases. More efficient and shorter distance supply routes are
chosen, while transaction costs are reduced. As a result the demand for long-term contract weakens.
Currently the majority of short-term LNG supply contracts are a result of direct negotiations, between the
supplier and consumer, and do not have the advantage of lower transaction costs, the main reason being, the
inability to separate the supply of LNG from flexibility requirements, such as the availability of LNG carriers.
As Figure 45 shows, most ships that are able to transport LNG are tied to long-term contracts.

Figure 45 LNG Carrier Fleet and Order book. Source: Timera Energy [128]
Without the existence of an LNG trading hub, to regulate capacity and availability of LNG supplies, an LNG
market with short-term transactions, which is similar to the oil market, with a standardised product for
companies to trade, is near impossible to happen. An additional obstacle to the creation of a standardised
LNG product, are the technical requirements of LNG delivery (e.g. quality of LNG etc.) [124].
Four main types of short-term contracts exist in the current market, after IEA [124]:
1. Short-term contracts: These contracts are similar to long-term contracts, but have a smaller duration.
They usually last from one to four years, and there is no provision, to allow for price changes.
2. Portfolio optimisation: A supplier will usually enter into a long-term agreement to supply LNG, but
optimise its netback by holding control of the destination of supply. In practice, several long-term
contracts will regularly get broken up into short-term contracts to optimise profits, while at the same
time conform to supply commitments.
3. Spot trading: Spot trading is made up of short-term contracts of less than one year [129]. It usually
takes place, when there is unused capacity in the infrastructure (e.g. LNG carrier ships, gasification
facilities etc.), and the deals are facilitated through competitive tenders.
4. LNG arbitration: LNG arbitration involves an adjustment to an existing contract, that will benefit, both
the supplier and the consumer, and a shipment is delivered to a third party
The main constituents of any LNG contract are the cargo specific terms, such as prices, specification and
quantity delivered. In the Asian market a well-defined reference, benchmark price assessment does not exist.
Hence prices are determined, by the willingness of each individual buyer and seller, to achieve a deal and an
experts estimate of the value of a cargo in the Asian Pacific market. If a reference benchmark price was
52


introduced, this would accelerate negotiation procedures and increase liquidity in the market. A step towards
this direction is the intensified use of the Japan Korea Marker gas price assessment [130].
Analysing these kinds of transactions, LNG spot and arbitration deals in particular can be complex and time-
consuming. In order to enable trade and increase legal security for both supplier and consumer, master sale
and purchase agreements have been developed (MPSA). As a result of the simplification of these transactions,
costs have decreased. MPSA agreements cover general provisions such as governing law and dispute
resolution, but also provisions dealing with specific scenarios that could arise (e.g. failure to take a cargo). The
master agreement most commonly used in Europe is the European Federation of Energy Traders LNG Master
Agreement (2010), and is occasionally also utilized in some transactions in Asia. Other such Master agreements
that are commonly used include the International Group of LNG Importers MPSA (revised in 2011) and the
Association of International Petroleum Negotiators MPSA (revised in 2012).
13.2. Long-term contracts
The majority of LNG contracts in the international market are long-term, even though the proportion of long-
term contracts has fallen since 2000 [131]. The main reason being, that in order to facilitate LNG trade, unlike
other bulk products such as oil, it is necessary to invest in capital-intensive infrastructure such as liquefaction
and re-gasification. Hence buyers and sellers, need certain assurances of quantities supplied and delivered,
before embarking on such investments. This has led to the LNG market working in a similar way to pipelines,
where demand and supply are connected via fixed infrastructure. Long-term contracts oblige the buyer to buy
an agreed volume of LNG at an agreed price, over an agreed time period. This leaves the supplier susceptible
to price changes, and the buyer to changes in his demand of LNG.
LNG supplies from long-term contracts are either transported free on board or delivered ex ship (DES).
FOB practically means that the buyer is responsible for the transportation of the commodity. The title to the
commodity is transferred to the buyer at the shipping point. The buyer bears the advantage of choosing the
destination of the cargo. However they also have to bear an increased cost for transportation, insurance and
re-gasification.
The title to LNG that is DES is only transferred to the buyer after the shipment has reached the agreed port.
Hence transportation and insurance up to the point of arrival at the port is borne by the seller. All subsequent
costs, such as unloading and taxes are paid by the buyer.
13.2.1. Destination Clauses
A destination clause in an LNG contract, removes the buyers right to resell the purchased LNG in another area,
other than what is agreed. This clause is set by sellers to prevent competition in other areas. These clauses
have played a part, in keeping prices high in some regions of the world, especially in the Asia Pacific region.
Producers from the Middle East are making the most of these destination clauses, as their geographic position
allows them to arbitrage between the European and Asian markets.
Destination clauses ensure that LNG sellers to the Asian market make a return on their initial infrastructure
investment in excess of several billion pounds [132]. In Europe, however, the EU has taken strong measures
to eradicate destination clauses. Directive 2003/55/EC, which was the second European gas directive,
prohibited the use of destination clauses for LNG, in order to increase competition and create an EU gas market
[133]. In the U.S.A., destination clauses are not prohibited and new contracts have a higher degree of flexibility
compared to before.
53


The decline in destination clauses in Europe and the US has increased destination flexibility for producers
mainly from Africa, such as Nigeria and Equatorial Guinea. As a result, an increased amount of LNG is diverted
towards the Asian market, where prices are higher. However, the Asian LNG market has not kept in line with
recent developments. Destination clauses are viewed regularly to secure the supply of LNG. Security of supply
is higher up the agenda compared to economic considerations for many Asian buyers [134]. In addition,
current contractual obligations in Europe and the US mean that large amounts of LNG supplies cannot be
currently diverted towards Asia. As the amount of LNG that can be made available increases, so does the
pressure on long-term LNG contracts in Asia.
14. Downstream Options
Monetisation is the process of converting an asset or establishing something into legal tender [135]. Natural
gas can only generate revenue if it can be transferred from the extraction stage to the consumer. Monetisation
in the natural gas market refers to the process of making the gas available to the market and receiving revenue.
To determine the most beneficial monetisation option and make a prudent investment decision, monetisation
options are evaluated over the entire lifetime of the project. Some of the factors that influence the investment
decision are:
Investment capital cost;
Distance to desired market;
Demand trends in chosen markets;
Competitive suppliers in chosen markets;
Reliance on infrastructure and
The option of diversifying exports [136].
The monetisation option that provides the best returns for the oil and gas companies investing in Cyprus will
be chosen. Any political influence that alters this decision will result in project delay, and in extreme cases,
cancellation [8].
Currently there are eight main monetisation options for Cypriot natural gas. These are:
1. Constructing a liquefaction facility to liquefy and export Cypriot natural gas;
2. Constructing a submarine pipeline to Europe via Greece;
3. Constructing a submarine pipeline to Turkey;
4. Developing a compressed natural gas (CNG) marine transport system (for Egypt/Greece);
5. Constructing a liquefaction facility to liquefy and export Cypriot and Israeli natural gas;
6. Developing a floating liquefaction plant (FLNG), alone or with Israel;
7. Developing the EuroAsia electricity transmission line to Israel and Greece;
8. Developing a conversion of gas to liquids (GtL) industry and
9. Constructing a pipeline to Egypt (this is a short-term solution and it is described in section 20).
On 14
th
of October 2013, the European Commission published a list of projects of common interest (PCI). The
list consists of 248 key energy infrastructure projects, which will benefit from faster and more efficient permit
granting procedures and improved regulatory treatment. The Member States may also have access to financial
support from the Connecting Europe Facility, under which a 5.85 billion budget has been allocated to trans-
European energy infrastructure for the period 2014-20. For a project to be included in the list, it has to have
54


significant benefits for at least two Member States; contribute to market integration and further competition;
enhance security of supply, and reduce CO2 emissions. Cyprus being a Member State since 2004 was entitled
to the fast track scheme having the monetization options 7, 2, 1 listed as projects of common interest. The
list of PCIs is published every two years with 2015 being very important for the future of the above three
projects [137].
Of more interest is Noble Energys published strategy for the development of Block 12. It is of great interest
since the company will subsidize the infrastructure and go for the highest possible net profit without any acts
of political expediency. Noble Energys monetization options coincide with points 1, 6 and 9 above.

Figure 46 Noble Energy's proposed monetization options. Source: Noble Energy [113]
Figure 47 can be used as a rule of thumb for the selection of export option based on field production rate and
distance from market. It shows that pipelines and CNG give higher RoI than LNG in short distances (regional
markets) whereas the LNG is more suitable for markets more than 2000km away from the gas field. This graph
does not take into consideration CAPEX costs and possible difficulties such as geography, geomorphology and
politics.

Figure 47 Production Volume Versus distance to market framework for gas technologies. Source: Mokhatab [138]
14.1. Liquefied natural gas
Liquefied natural gas is a form of gas that is cooled and liquefied at below -162
o
C and stored at less than
125kPa. Liquid natural gas takes up 1/600 of the volume it takes as a gas at room temperature reducing the
55


storage and transportation costs. LNG can be transported in specially designed ships and after transportation
it has to be re-gasified to be transported by pipeline [116].
14.1.1. General Overview of LNG Value Chain
To make LNG available for use, energy companies must invest in a number of procedures that are greatly
linked and reliant upon one another. The major stages of the LNG value chain (excluding pipeline operations
between the stages) consist of the following [139]:
a. Offshore/onshore exploration to find natural gas;
b. Liquefaction to convert natural gas into a liquid state. Usually the Liquefaction process takes place
onshore (Figure 48), however, due to technological improvements and innovation, the first Floating
Liquefaction vessel, named Prelude, was built by Shell as shown in Figure 49.

Figure 48 Typical illustration of LNG production plant; sequence and requirements. Source: Mokhatab [140]

Figure 49 FLNG "Prelude". Source: Shell [141]
c. Shipping the LNG. LNG tankers are double-hulled ships particularly designed and exceptionally
insulated to prevent leakage or rupture in an accident. The LNG is stored in a special containment
56


system within the inner hull where it is kept at atmospheric pressure and cryogenic (~162
o
C)
temperature. Three types of cargo containment systems have evolved as modern standards such as:
The spherical (Moss) design;
The semi prismatic type B design
xxv
(SPB) and
The single/double membrane design.
These cargo types can be compared in terms of the main concerns on partial filling, sloshing, topside
support, and maintenance as given in Figure 50.

Figure 50 Cargo Containment System for LNG carriers. Source: Janseens [142]
The global LNG fleet consists of around 380 vessels. The standard size for an LNG carrier has
traditionally been 155,000 mcm. However over the last 3 to 4 years the size of many delivered carriers
has increased to 170,000 mcm as infrastructure has evolved to deal with larger vessels. The typical
carrier has similar proportions to that of an aircraft carrier but significantly smaller than that of a very
large crude carrier used to transport crude oil. LNG tankers are generally less polluting than other
vessels because they burn natural gas (boil off) in addition to fuel oil.
xxv
Details on LNG tank design, construction and materials can be found in CEEs report, LNG Safety and Security, at
www.beg.utexas.edu/energyecon/lng
57


d. LNG is stored in specially made tanks and re-gasified at a re-gasification Terminal to convert the LNG
from the liquid phase to the gaseous phase. This will then be ready to be moved to the final destination
through the natural gas pipeline system.
14.1.2. Market
Since the first base load LNG plant started up in Algeria in 1964, more than 90 LNG liquefaction plants
xxvi
have
been built in twenty-five countries (as shown in Figure 51) [17]. Todays worldwide capacity has reached 281
MTPA with 28 plants
xxvii
under construction (to be completed by 2030 - as shown in Figure 52) with a total
capacity of 110.1MTPA. LNG is the most dynamic major energy market with an average growth rate expected
to advance 10 per cent per annum until 2020.

Figure 51 Liquefaction Trains. Source: Sakmar [143]
xxvi
Including both Greenfield and Brownfield.
xxvii
Ibid.
58


Figure 52 Number of trains commissioned vs. average train Capacity 1964-2017. Source: IGU [17]
Total global natural gas demand is estimated to have grown by about 2.7 per cent per annum since 2000;
however, global LNG demand has risen by an estimated 7.6per cent per annum over the same period, almost
three times faster. LNG demand growth is expected to be even stronger particularly through 2020-2030 as
shown in Figure 53. After 2020, demand growth is expected to continue, albeit at a slightly slower pace as
markets mature.

Figure 53 Global LNG demand. Source: EY [144]
59


New Eastern Mediterranean gas has been
discovered and has happened in a period when
global demand for gas is increasing. BPs energy
outlook (released in 2013) predicts that due to the
industrialisation and electrification
xxviii
of non-OECD
economies, global energy demand will grow by 41
per cent with significant efficiency gains. As shown
in Figure 54, global gas demand is expected to grow
at more than twice the rate of oil. As indicated in
Figure 55, as oils share continues to decline, its
position as the leading fuel is closely challenged by
coal. Gas gains share increase steadily and by 2035
all the fossil fuel shares will cluster around 27per
cent. For the first time since the Industrial
Revolution, there will be no single dominant fuel.
LNG demand growth between now and 2035 is
expected to have an increase of 5 per cent. LNG
annual growth is expected to be 5 per cent,
decreasing to about 2 per cent per annum after
that. Demand will shift to the more price-sensitive markets in Asia who have other energy sources
xxix
.

Global demand for natural gas will grow by 1.9per cent
per annum over the outlook period, reaching 497Bcf/d by
2035. In the OECD, gas will overtake oil as the dominant
fuel by 2031, reaching a share of 31 per cent in primary
energy by 2035. But in the non-OECD, gas remains behind
coal and oil, with a 24 per cent share of primary energy by
2035. The fastest growing sector in volume terms comes
from the industry and power. The pattern of growth by
sector differs between the OECD and non- OECD. OECD
volume growth comes primarily from the power sector
followed by industry, while industry remains the largest
source of non-OECD growth [125].
In 2005, world demand for LNG amounted to 190 billion
cubic meters, which translates to 6.8 per cent of
worldwide gas consumption. Consumption in Asia the worlds largest market and Cyprus main target market
is projected to increase to 49mmtpa by 2020 and 279mmpta by 2030.
xxviii
In 2012, 42 per cent of primary energy was converted into electricity in the power sector, up from 30 per cent in
1965. By 2035 that share will rise to 46 per cent. Fuels for power generation account for 57 per cent of the growth in
primary energy consumption 2012-35.
xxix
China is the most promising country for shale growth outside North America, accounting for 13 per cent of world
shale gas growth.
Figure 54 Demand by fuel type. Source: BP [124]
Figure 55 Shares of primary energy. Source: BP [124]
60


Reasons for the LNG boom are the geographic imbalance of supply and demand. Production areas are
concentrated in Russia, Central Asia and the Middle East, while consuming markets are mainly in Asia (Japan
and South Korea), Europe (France and Spain), and North America as shown in Figure 56. The second decisive
factor comes from the ability of LNG to reach markets in other continents. By liquefying the gas, the IOCs can
transport very large quantities of LNG in countries, which are physically impossible to reach with conventional
gas pipelines and can provide an extra market to the seller.

Figure 56 Re-gasification Terminals. Source: Sakmar [143]
For the next 10 to 20 years, due to decrease in the indigenous production of gas in Europe (as shown in Figure
57), Europe will require substantial growth in both oil and gas imports. Shale gas in Europe (notably in Poland)
is in its very early stages of resource appraisal. Its development is not expected to be as significant as in the
US, due to the different geological, regulatory, social and environmental issues. France and Bulgaria have
banned hydraulic fracturing activities and other countries have expressed concerns with Germany currently
assessing the impacts of hydraulic fracturing. Poland and Ukraine (which are reported to hold significant
unconventional resources) are pushing hard to stimulate the shale gas industry. Consequently, no significant
production is expected in Europe before 2020 and by 2025 the EU will require an increase of almost 75bcm in
gas imports per annum (Figure 58) [126].
61


Figure 57 European Natural Gas Domestic Production. Source: CERA [145]

Figure 58 European LNG demand outlook to 2025. Source: Bonhomme [126]
14.1.3. Quality
LNG contains mainly methane, but also other heavier hydrocarbons such as ethane, propane, hydrogen
sulphide and other inert components. The quality of LNG is normally measured in terms of the amounts of
these components and the heating value of the mixture. This is of paramount importance to buyers, and they
specify allowable ranges for the quality of the LNG [146]. Quality specifications vary in different markets;
however if the LNG does not conform with the required specification agreed, then is regarded as off-
specification or off-quality gas and the buyer may refuse to accept delivery of all or part of any off-specification
LNG, while the seller has to pay liquidated damages for the off-specification volumes. LNG quality
specifications serve three main purposes [147]:
62


a) They ensure that the gas distributed is non-corrosive and non-toxic, by setting upper limits for H2S,
total sulphur, CO2 and Hg content;
b) Serve as a guard against the formation of liquids or hydrates in the networks, by setting maximum
values for water and hydrocarbon dew points;
c) They allow the interchangeability of the gases distributed (i.e. the ability of one gas to be substituted
by another, without affecting the operation of the gas burning equipment), by introducing constraints
on the range of values for parameters that affect combustion, such as the content of inert gases,
calorific value, Wobbe index, Soot Index, Incomplete Combustion Factor and Yellow Tip Index.
The quality of the LNG is measured at the delivery point and methods, such as gas chromatography are used
to determine the composition of the mixture [148].
All LNG produced complies with the specifications set for categories 1 and 2, as the gas entering the
liquefaction process has to be purified beforehand. As a result the concentration of components, such as
sulphur and mercury is kept very low [147].
14.1.3.1. Heating Value
The main quality concern for buyers is the calorific value of the gas. The global natural gas market can be
divided into three main markets (in terms of calorific value requirements). As Figure 59 shows, these are the
Asian, US and European markets.

Figure 59 Existing gas network specifications. Source: Bramoulle [147]
Gas quality can be adjusted to the desired level before being transported downstream. If the calorific value
needs to be increased then liquefied petroleum gases (mainly propane and butane) can be injected. This is a
widely used technique in Japan. If the calorific value needs to be decreased, inert gases such as nitrogen can
be added to the LNG or butane and propane can be extracted. Another solution is to blend the off-spec LNG
with LNG or gas from other sources, in order to achieve the required specifications. For the purpose of
adjusting gas quality, blending is the least costly method, and is preferred whenever possible. All other
solutions are technically feasible, although they can be costly and difficult to implement at a large scale [147].
63


14.1.3.2. Composition
LNG is rich in methane (as shown in Figure 60) and also contains heavier hydrocarbons, such as ethane,
propane and butane. All these components have a high calorific value. As stated earlier most impurities are
removed in the liquefaction process. As a result LNG has negligible amounts of inert components such as
nitrogen, no carbon dioxide, and a higher percentage of hydrocarbons compared to pipeline gas. On average
pipeline gas, contains ten times the quantity of inert gas compared to LNG. Inerts have no calorific value, and
hence lower the total energy content of the fuel. Consequently, LNG has a higher calorific value than pipeline
gas and is considered to be a superior fuel. This is neglected by many, who view LNG as a different storage
and transportation method, rather than a superior fuel [149].

Figure 60 Typical LNG Composition. Source: Blazek et al [150]
The difference in composition, between LNG and pipeline gas is evident in Figure 61. The graph shows the
composition of various sources of natural gas that supply the EU market. The composition is determined in
terms of methane, non-methane hydrocarbons and inert gases. The majority of pipeline gas sources (orange
spots) are further to the left of the graph, compared to LNG sources (green spots); this testifies the lower
percentage of inert gases and subsequently the higher calorific value of LNG. A notable exception to this rule
is Russian pipeline gas, which is of relatively high quality.
Methane 94.7%
Ethane 4.8%
Propane 0.4%
Butane 0.06%
Pentane 0.01%
Hexane 0.01%
Nitrogen 0.02%
64


Figure 61 Gas quality by country. Source: Brown et al [151]
14.1.4. Safety
The LNG tanker industry can take pride in its safety record, with no recorded severe accidents since the
beginning of its operation in 1959. However, the safety record of LNG terminals has been marred with some
accidents. The most severe accident recorded was in Cleveland, Ohio in 1944, which resulted in the death of
130 people [152]. This accident led to public fear about the safety of LNG facilities and subsequently
technology has since improved the safety of LNG facilities. Infrequent accidents, such as the incident that
occurred in Skikda, Algeria in 2004 which claimed the lives of 27 people, keep safety concerns a high priority.
The hazardous nature of LNG is debated, with the US being the most cautious in its assessment, and classifying
LNG as a hazardous material. The greatest hazards that can arise in an LNG facility are the following:
Freezing Liquid: LNG is a cryogenic liquid, stored at -162
o
C. As a result, direct human contact with the
liquid will freeze the point of contact, resulting in cold burns and frost-bite. The main safety measures
which are taken for this hazard are containment systems that separate storage tanks from other
equipment and personal protective equipment (PPE) worn by staff in hazardous areas in close
proximity to LNG [153].
Asphyxiation: When LNG is vaporised in a confined and unventilated area, the oxygen concentration
is reduced, which can result in asphyxiation.

65


Explosion: Vapours released from LNG are flammable
and can be explosive under certain conditions. For LNG
vapour (mainly methane) to ignite and burn, the
proportion of methane and oxygen must be within a
certain range. As shown in Figure 62, this range is
defined by the lower and upper flammability limit of
methane in air at room temperature. If the
concentration of methane in air is less than 5 per cent
(by volume), there is not enough methane to burn.
Therefore confined spaces, where LNG leakage is a
possibility are always well ventilated so as to keep
the concentration below the lower flammability limit. If the concentration of methane in air exceeds
15 per cent, then not enough oxygen is present to burn. Hence storage tanks, where the vapour
concentration of methane is close to 100 per cent do not form an explosive atmosphere [153].
Pool fire: In the event of an LNG spill, the vaporised gas can create
a flammable environment above the LNG pool. If the LNG spill is
located next to an ignition source, and a flammable environment is
created, the gas will burn above the pool, resulting in a pool fire.
The pool fire will spread as the LNG pool expands. A pool fire will
continue to burn, until all the fuel is used. Therefore, the priority
when fighting pool fires is to stop the flow of LNG to the pool [153].
Vapour clouds: Vaporised LNG from LNG spills is initially colder and
denser than air. As it warms up it starts dispersing into the surrounding air. If the vapour cloud
encounters an ignition source, and its concentration is within its flammability range, then the vapour
cloud will ignite. The vapour cloud fire, will then gradually burn its way back to the LNG spill and burn
as a pool fire [154].
Rapid Phase Transition: LNG occupies 1/600 of the volume it occupies as a gas at room temperature.
When LNG comes into contact with liquid, water in most cases, heat is transferred from the water to
the LNG, causing it to vaporise and expand. If large volumes of LNG are mixed with water, the LNG can
vaporise too quickly, creating a rapid phase transition [155]. Sizeable rapid phase transformations can
release large enough energy to damage lightweight structures.
Earthquakes and Terrorism: The seismic activity in a region and the likelihood of a terrorist attack must
be taken into account when designing safety measures.
14.1.5. Liquefaction terminals
14.1.5.1. Onshore
The construction of a liquefaction facility is the option publicly favoured and actively sought by the
government and companies in the area. This is mainly because it has been linked to high profit returns which
will remove the country from the economic recession and is an endless source of jobs.
The favoured option involves the construction of an onshore multi train LNG facility [156]. Working towards
this direction, the government of Cyprus signed a memorandum of understanding in June 2013 with
companies that had an interest in block 12 [157]. This included Noble Energy, Avner Oil Exploration and Delek
Drilling. The memorandum was a statement of intent to develop a liquefaction plant in the Vassiliko area
(Figure 64) of Cyprus.
Figure 62 LNG Flammability limits. Source: CEE [347]
Figure 63 Pool fire. Source: DOE [334]
66


According to Cyprus Hydrocarbons Company and Noble Energy, Vassiliko has adequate space for a three-train
development (Figure 66), with a maximum expansion of up to eight liquefaction trains increasing the capacity
from 35bcm to 50bcm if Vassiliko becomes an LNG Hub for the region. This would allow Cyprus to emerge as
an important regional supply hub for LNG, one of the countrys key strategic ambitions [158].

Figure 64 Vassiliko Energy Park - area and current stakeholders. Source: Kassianides [159]

Figure 65 Vassiliko Energy Park Proposed master plan. Source: Varoshiotis [160]
67


Figure 66 Plan view of proposed LNG Liquefaction terminal, Vassiliko. Source: Noble Energy [38]
The main elements of an LNG supply chain, from the gas field to the buyer are shown in Figure 67.

Figure 67 Key elements of a traditional LNG supply chain. Source: Mokhatab et al [93]
68


Apart from the onshore LNG being one of the most profitable export options and also a job provider, other
advantages are:
Demand for LNG has increased to three times the rate of the increase in demand for natural gas as a
whole. An expanding market is always attractive for investors with most of the interest in LNG demand
from the Asia Pacific region.
LNG production offers the ability to expand into new markets. One potential such market is the
replacement of marine fuel with LNG. Cyprus could then use its LNG production and geographical
position to offer bunker services. Another potential market is the increase in demand to replace
gasoline with LNG for road transportation vehicles [8].
LNG can be exported to markets further away, which compared to pipelines are restricted by pipeline
length and direction. The markets with the highest profit margins are the Asian and Latin American
markets, which cannot be reached via pipeline. In these markets it is more feasible to sign long-term
oil-indexed contracts. In contrast, European buyers are trying to escape oil-indexation. In addition, if
this flexibility is embedded in sales contracts, there is also room for potentially profitable arbitrage
opportunities between the Atlantic and Asia-Pacific Basins [161].
14.1.5.2. Offshore
Currently all liquefaction plants are based on onshore, compared to many re-gasification plants which have
both onshore and offshore facilities. The floating LNG is a new and emerging technology that liquefies gas
offshore. FLNG is considered to be an alternative liquefaction process, that will be most suitable for cases
where the gas reserves are far away from the shore, or there is a lack of available land to build a liquefaction
plant.
The main elements of an offshore-based LNG supply chain from the gas field to the buyer are shown in Figure
68.
FLNG technology started as a concept idea in the 1970s and still to date the technology is not fully operational.
This is expected to change in the near future, with facilities expected to be developed before the end of the
decade. The first such facility is under development by Royal Dutch Shell and is expected to be completed by
2017. The development is titled Prelude FLNG project and is estimated to cost USD$10-12 billion. It will have
a capacity of 3.6mmtpa and will be based in Australias Browse Basin. Various super major IOCs are also
requesting FEED for FLNG instead of onshore LNG in locations were they face opposition from
environmentalists or inadequate reserves. However, they even do preliminary analysis for gas rich countries
such as Tanzania, Mozambique (ENI in particular), Brazil, Nigeria, Iraq, Indonesia and Malaysia. Shell and
ExxonMobil are also working towards development of FLNG versions better suited to other non-wet natural
gas wells and higher production rates [8].
Israel on the other hand is considering FLNG as a serious monetisation option for some of its fields. However,
with Woodside outside of the consortium and with no super majors with the relevant experience involved, it
is doubtful that the technical difficulties of such a demanding project could be overcome.
Figure 68 FLNG Supply chain. Source: Mokhatab et al [93]
69


14.1.5.3. Financial Analysis
An onshore liquefaction terminal is an expensive project and experts find that financiers will not normally put
up the capital for such project unless there is a secure contract of at least 20 years with a buyer. Even though
Minister Lakkotrypis said in April 2014 that there is definite interest
xxx
from two international financial
institutes (European Investment Bank and German Deutsche Bank), and although Standard and Poors and
Fitch upgraded their outlook for Cyprus on 25
th
of April 2014, RoC still being poorly rated by all 3 international
rating agencies and the lack of enough proved reserves makes financing difficult [162].
Financial reasons could potentially put the onshore LNG facility on stake produced suspicion amongst the
Cypriot community. Minister Lakkotrypis denied press reports that the German bank is interested in the
management of the terminal; the terms and conditions for the investment will be of great importance,
especially from the German Deutsche Bank since they are involved in a management role in the Israelis
Leviathan offshore gasfield (which is located very close to Block 12). Although the discussions are at a
preliminary stage, any involvement of Deutsche Bank might influence Israelis decision towards pooling its
natural resources to make the LNG terminal economically feasible.
The profitability of LNG projects tends to significantly improve as they expand (2
nd
and 3
rd
trains), capturing
cross-train synergies and ensuing cost efficiencies. For example, after the first train, additional trains will cost
10-50 per cent of the cost of the first train (Figure 69). Synergies can be achieved through joint use of some of
the facilities developed for the first train. These savings are able to reduce the integrated unit cost of the plant
by around 23 per cent; this is assuming an initial single-train development can be expanded by an additional
2 trains at 65 per cent of the initial unit costs.

Figure 69 Plant cost versus train capacity (indicative). Source: Technip [163]
xxx
The investors are considering the following typical items: reservoir size and asset quality, expandability, stability of
reservoir owner, predictability of tax regime/regulations in host country, level of proven technology, participating
company track record, by-product economics, transportation advantages, access to open and proven markets, long term
contracts for the entire LNG chain, customers and markets, pricing formula, strength of marketing entity, pricing stability
and location [312].
100
200
300
400
0 1 2 3 4 5 6
U
S
D
/
p
t
y
Train capacity in MMT
70


A critical point in the LNG production is the time the terminal is online and produces liquefied gas. According
to many professionals it takes 6-10 years to build a plant. A longer wait for revenue results in a negative impact
on net present value. Another issue is that shipping LNG is an energy-intensive business, each day of shipping
uses around 0.1 per cent to 0.25 per cent of the product, according to estimates. This results in a reduction in
profits when shipping LNG further afield to the faster growing Asian markets as demonstrated in Table 5.
Tables 5 and 6 summarise the financial analysis for an onshore and offshore terminal. Although it is accepted
that the costs will change by the time RoC will have its FID, the reader can get a rough estimate of the
economies involved. Since the original timeframe for an onshore LNG terminal to be online was for 2019, the
author has deliberately estimated net profits for 2019 and 2022 to demonstrate the importance/impact of
future LNG prices.
If Noble Energys appraisal drilling had shown more gas or Israel had pooled its reserves, that would allow the
construction of the onshore LNG terminal, it would had brought to the economy USD$1.28billion per annum
if it was shipped to EU. Since the date has been postponed to 2022, the net profits will be reduced to
USD$0.85billion per annum depending on the impact from emerging suppliers notably USA.

71


Table 5 Financial breakdown for onshore liquefaction facility (online by 2022)
C
o
n
s
t
a
n
t
s

Gas available for export (assuming 5.2tcf) 173 bcm
Gas available 6,228,000,000 mmbtu
Fuel surcharge USD$0.6 mmbtu
Liquefaction cost USD$1.5 mmbtu
Cost of exploration (block 12) USD$200 million
Cost of submarine pipeline from Block 12
to Vassiliko USD$2,000 million
Cost of the development of Vassiliko (with
one LNG train)
xxxi
USD$8,000 million
Total investment USD$10,200 million
V
a
r
i
a
b
l
e
s

Est. Spot Price in Japan (for 2022) [164]
xxxii
USD$10.8 mmbtu
Shipping cost (2018-2019) USD$3.0 mmbtu
Net landed price in Japan USD$7.8 mmbtu
Est. Spot Price in Europe (for 2022) [165] USD$8.0 mmbtu
Net landed price in Europe USD$6.8 mmbtu
Est. Spot Price using HH price (for 2022)
[166] USD$5.7 mmbtu
Net landed price in Japan using HH pricing USD$2.7 mmbtu

Net Revenue per
annum (excluding
maintenance cost,
interest rate)
Shipping to Japan
USD$1,026 million
Shipping to EU
USD$846 million
Net landed price in Japan using HH pricing
USD$108(theoretical) million
Total Net Revenue
(until Blocks 12
depletion)(excluding
maintenance cost,
interest rate)
Shipping to Japan
USD$25,300 million
Shipping to EU
USD$22,808 million
Net landed price in Japan using HH pricing
USD$ Negative million
If we had enough proved gas (5.2tcf) and the timeframe was proceeding as proposed(online 2019), then
the profits would be as follow:
Net Revenue per
annum (excluding
maintenance cost,
interest rate)
Shipping to Japan USD$1,350 million
Shipping to EU USD$1,278 million
Net landed price in Japan using HH pricing USD$ Negative million
Total Net Revenue
(until Blocks 12
maintenance cost,
interest rate)

xxxi
LNG onshore terminal cost estimates by Technip and Bechtel USD$6bn for 1 train and USD$9bn for 2 trains.
xxxii
The Spot Prices are based on conservative values and therefore are not similar to what Dr. Ellinass estimates.
72


As the construction price suggests, the onshore liquefaction terminals are massive projects which require
specialised planning and skilled workers for their completion. Any delays during construction can transform
this dream into a nightmare with unwanted economic consequences for the domestic market. For such
projects to proceed, apart from finding adequate reserves, securing financing, gaining a firm market
commitment, and clearing all necessary regulatory issues, the infrastructure at Vassiliko must be developed
for the construction to proceed. This means that prior the FID, RoC will have to upgrade the existing bridges,
roads and electric generation facilities to support the needs of the construction project and the follow-on
operations. This is probably what Ellinas meant when he said in an interview to Pavlos Mylonas (
) that we are not convincing enough as far as our commitment for the construction of the onshore LNG
terminal is concerned when very little has been done since or the MoU was singed with Noble Energy-led
consortium in 2013.
A gas expert rightfully highlighted the indirect effect of increase in Greenfield facilities around the globe. The
increase will limit the available specialised contractors and trying to find the most appropriate contractor with
the necessary experience can increase the overall cost. Unavailability of skilled local workers who will deliver
the project in time and with top quality puts more pressure on the construction phase of the project. The RoC,
apart from upgrading the current infrastructure, will have to construct basic living quarters for construction
and operations foreign personnel [167].
Since the LNG costs are expressed as a metric cost of USD$/tpa, the exchange rate of EURO is of significant
importance. In Australia the LNG facilities, which are under construction find it difficult to proceed due to
increase of construction costs (up to 1.3x the cost of LNG at U.S.A. Golf Coast) cause by the strengthening of
Australian dollar against the US dollar. With EURO losing against the US dollar (Figure 70), the exchange rate
should not negatively impact the total cost of the facility. With reference to the above points, the cost
estimated at USD$8 billion is more likely to increase [168].

Figure 70 Euro-Dollar exchange rates since January 2000. Source:OANDA [169]
The RoC might prefer to exploit its natural gas by an offshore liquefaction vessel rather than an onshore
liquefaction plant to reduce the time its gas reserves will be available for the market and keep the investment
to a minimum without any rise in costs thus increasing the possibility of securing funding. The drawback of
73


this export option is the decline of the local employment but will give the advantage of securing contracts
before the expected decrease in LNG prices. As shown in Table 6, the FLNG option, although being USD$2.2
billion more expensive than the onshore LNG terminal (if the terminal was under construction in 2018 and
finish by 2022 the minimum), it counterbalances its high CAPEX by the high profits thus increasing the RoI of
the project. From the numbers in the two tables, the reader can understand that in the time being and in the
light of price drop, the best financial export option is with a FLNG. The onshore LNG does actually give higher
revenue in the precondition that it would export LNG by 2018. This is very unlikely to happen due to the
construction time the LNG onshore facilities usually need, estimated around 5 years and 7 years for developed
and undeveloped sites respectively. By 2020 prices will drop; this in conjunction with rising shipping rates
means that the total selling price will be close to the production costs, thus leaving small marginal profits.
Table 6 Financial breakdown for offshore liquefaction facility (online by 2019)
C
o
n
s
t
a
n
t
s

Gas available for export (assuming 5.2tcf) 173 bcm
Gas available 6,228,000,000 mmbtu
Fuel surcharge USD$0.6 mmbtu
Liquefaction cost USD$1.7 mmbtu
Cost of exploration (block 12) USD$200 million
Cost of submarine pipeline from Block 12 to
Vassiliko USD$0 million
Cost of the FLNG Unit (e.g. Prelude having a
max capacity of 5bcm per annum and design
life of 24 years) USD$10,000 million
Total investment USD$10,200 million
V
a
r
i
a
b
l
e
s

Est. Spot Price in Japan (for 2019) USD$12.0 mmbtu
Net landed price in Japan USD$9.0 mmbtu
Est. Spot Price in Europe (for 2019) USD$9.8 mmbtu
Net landed price in Europe USD$9.3 mmbtu
Est. Spot Price using HH price (for 2019) USD$5.0 mmbtu
Net landed price in Japan using HH pricing USD$2.7 mmbtu

Net Revenue per
annum (excluding
maintenance cost,
interest rate)
Shipping to Japan
USD$1,206 million
Total Net Revenue
(until Blocks 12
maintenance cost,
interest rate)

14.1.5.3.1. Egypt as an example
Giamouridis in his report titled The offshore Discovery in the Republic of Cyprus brings to the surface an
example of a country which did not manage wisely Gods gift of natural gas and run into serious economic
74


problems. Egypt being the regions latest significant LNG producer has managed through its domestic
turbulence to become a gas importer. Due to supply shortages, Egypt has idle LNG facilities which worsen its
economy and it is now in need of IMFs loans to keep its economy from hitting the buffers making it a great
example of the cost having the expensive LNG trains idle and the long-term effects of selling under-priced
natural gas.
Even though the evaluation of Egypt as an
LNG exporter in 2014 cannot be compared to
that of 2011, by taking into account its
exports from 2008 (496bcf), 2009 (452bcf),
2010 (343bcf), 2011 (303bcf), the location of
Cyprus suggests that it is possible to access
a wide range of LNG markets at a reasonable
cost. As shown in Figure 71 Egypt delivered
cargoes to 16 countries across Europe, Asia,
Middle East and the Americas in 2011 [8].
If estimates based on Egypt are used, in March
of 2011 the LNG transportation costs for Cyprus would have been USD$3.2/mmbtu for South Korea and Japan
USD$1.5/mmbtu for India. Due to lower costs to some European destinations (USD$1.2/mmbtu for costs to
France and the UK) it would have been possible for Cyprus to have realised a much better netback of
approximately USD$12.2/mmbtu in the spot market for sales to Asia compared to USD$8/mmbtu. The
substantial regional prices inhibited this [8].
At the time, potential sales of LNG cargoes from Cyprus to other markets in Europe would have still failed to
match or come close to the Asian premium as French and Spanish netback were at USD$9.2/mmbtu and
USD$9.6/mmbtu respectively. Furthermore, Cyprus would have had the potential to realise a favourable
netback of USD$11.3/mmbtu with transportation costs at approximately USD$2.8/mmbtu for deliveries to
Bahia Bianca in Argentina, which is a re-gasification terminal in a region that has a promising demand growth
[8].
The prices and costs above indicate favourable netback differences, which are between 1.7/mmbtu (Argentina
vs Spain) and USD$4.5/mmbtu (South Korea vs UK). Overall, the differences in spot prices between
Korea/Japan and Spain in the same month were USD$5.25/mmbtu and between Japan/Korea and NBP were
USD$6.4/mmbtu. These substantial figures are only possible with the LNG option. Furthermore, Cyprus could
also benefit from the inroads as a consequence of the fuel and also in the global bunker market as an LNG
producer.
14.1.5.4. Possible European Buyers
Denmarks long-term energy strategy does not include the construction of major LNG re-gasification terminal.
However, due to the future increase in annual consumption (exceeding 0.5bcm), the possibility of construction
of a small-scale LNG plants cannot be excluded [170].
The Finnish and Estonian governments, Gasum and Estonian companies AS EG Vrguteenus and AS Alexela
Energia signed two documents on the 28
th
of February 2014. The first document was a LoI for the construction
of the Baltic connector, a USD$130million natural gas pipeline that will connect the two states. The second
document was a MoU on continuing the feasibility study for the LNG terminals, which the EU will fund up to
Figure 71 Egypt's LNG Exports
75


50 per cent since they are listed as PCIs. The study will focus on building two Greenfield LNG terminals at a
cost of USD$1381.16million on either side of the Gulf of Finland and a pipeline connecting the two countries.
There were concerns that Gazprom would slow down the project since Gazprom owns a quarter of Gasum and
could influence the decision-making of Gasums main owner (Fortum) through its gas supplies to the
companys electricity generation units in the Urals. Of great importance is Gasums (Gazprom) expansion
strategy in the Nordic region. On March 2014, Gasum bought a 51per cent share of the LNG distribution
business of the Norwegian company Skangass making it a significant investment towards Gasums strategic
goal of improving the availability of LNG in Finland. The acquisition gives Gasum the power to monopolize and
control the distribution infrastructure for LNG in both Finland and other Nordic countries [171, 172, 173].
Germany may prefer building additional pipes from Russia as opposed to constructing LNG re-gasification
terminals. Even when the re-gasification terminal in Rostock comes online in 2016, this will not have a major
impact on the gas diversification of the country, because the terminal would meet less than 2-3 per cent of
Germanys total gas consumption [174].
Lithuania has progressed the most among the Baltic States, with its planned 2-3bcm capacity floating LNG re-
gasification terminal named Independence (symbolising Lithuanias new era of independence from Russian
piped gas
xxxiii
) due to the necessity to have an alternative energy source. The country has already started talks
with Norway and Qatar for the supply of LNG and stated the terminal will accept LNG cargos by December
2014 making it the first LNG terminal in the Baltics [175, 176, 177].
Sweden opened in May 2011 its first LNG re-gasification terminal. Since then, Sweden has proceeded with a
feasibility study for another LNG re-gasification terminal in Lysekil
xxxiv
. The EPCI contract was signed in 2012
with the first phase, worth 44million expected to be completed in 2015, when a number of smaller storage
tanks will be in place. The storage tanks will be pressurised, vacuum-insulated tanks with a total capacity of
up to 9,600m
3
. In the second phase, a tank will be built that can store 20,000 25,000m
3
with the scope to
expand in line with market developments and will be fully operational by the beginning of 2017. There are
also plans to build at least five small scale LNG terminals in addition to the major LNG receiving terminals to
satisfy the future domestic energy needs [123, 178].
14.1.5.5. Possible Asian Buyers
14.1.5.5.1. Primary Buyers
The LNG primary buyers according to PCF [179] are Japan, South Korea, China whereas the secondary buyers
are Singapore, Thailand, India, Vietnam, Malaysia and Indonesia.
Japan is the largest LNG market having imports of nearly 87.49mmtpa in 2013. After 2020, when existing
contracts expire, long-term LNG imports are expected to fall. This will create a projected supply-demand gap
of 47mmtpa by 2025, and 63mmtpa by 2030. The gas demand will be affected by whether or not the Japanese
government decides to bring back online or permanently leave offline its nuclear power plants. Gas demand
growth will be suppressed by the greater use of nuclear power and renewable energy in electricity generation.
xxxiii
Lithuania has accused Moscow of manipulating gas prices for political gains and the European Commission has been
investigating Gazprom's pricing policies in Eastern Europe based on complaints from a number of countries in the region.
xxxiv
The driver of utilising LNG as a prevention measure to penalties for Greenhouse gas emissions can be demonstrated
in Swedens strategy to construct the 2
nd
LNG terminal in Lysekil. The city is located 100km away of Sweden's key
industrial areas and northern Europe's largest port of export. It is located in a so-called "Emission Control Area" (ECA),
where stricter sulphur emission limits will become applicable in January 2015.
76


There is a large upside for gas in that the government prefers a lower share of nuclear power in the fuel mix.
It is assumed by PFC Energy that Japan will still have nuclear power plants online in 2030 [180].
South Korea is also a large and growing importer of LNG. It is projected that the countrys gas demand will rise
by 2.3 per cent per annum until 2030. This growth will be driven by incremental introduction of gas in the
energy mix of industrial, distribution and power sectors. The long-term demand for LNG depends on how
quickly South Korea will install nuclear and renewable generation capacity. Even with growth in nuclear
capacity, PFC Energy forecasts that the power sector will continue to consume more gas. Due to lack of
domestic production, South Korea will continue to rely on LNG for its gas supply. The country has enough
contracted LNG to meet nearly all of its demand for the next 5-8 years. PFC Energy predicts a supply-demand
gap of 7mmtpa by 2020, rising to 18mmtpa by 2025. Between 2030 and 2045, growth of energy and gas
demand will be limited by energy efficiency policies [181].
China is forecasted to have strong growth in gas demand across all sectors, bolstered by policies to increase
gas share in the fuel mix. China aims to boost LNG imports, as well as pipeline imports and production, and
has proposed a large number of LNG import terminals. Despite increasing production of shale gas, it is
predicted that China will face a supply-demand gap of 17mmtpa, which will increase to 47mmtpa by 2025 due
to fast-paced demand growth. China is actively securing long-term gas supplies, both by pipeline from Russia
(USD$400bn contract) and LNG imports. However, shale gas is expected to change Chinas energy landscape
significantly after 2020. After this point, the gas supply-demand gap widens due to declining production and
lower contracted gas volumes [182].
14.1.5.5.2. Secondary Buyers
The following 6 Asia-Pacific LNG regions face distinct strategies and challenges to supply their increasing
domestic gas markets. To meet their demand growth, Singapore and Thailand will need LNG imports. The
extent of these imports will also demand pipeline flows into these countries. India and Vietnam have the
potential to be well supplied. With regards to Malaysia and Indonesia, two LNG exporters who are expected
to also become importers, there is greater uncertainty in projected supply-demand gap because of each
markets regional imbalances, level of future exports, and their ability to bring gas supply to demand centres.
The above countries markets will be discussed further below.
Singapore, the smallest region in the group, has completed its first re-gasification terminal on 15
th
of February
2014 allowing the city-state to import up to 6mmtpa of LNG. There is one existing contract with BG for
3mmtpa. The region currently relies on pipeline gas from Malaysia and Indonesia, but is diversifying its gas
supply in case piped gas declines in the future. It is projected by PFC Energy that Singapore will have a minor
supply-demand gap by 2020 (the assumption is that pipeline imports continue), but will require additional LNG
imports by 2025 [183].
Thailands growing gas demand is met by three sources: domestic production, pipeline imports from Myanmar
and recently, LNG imports. The country bought ~5mmtpa of re-gasification capacity online, which if used, will
remove any potential supply demand from 2020 2050. On 12
th
of December 2012 Qatargas Operating
Company Limited announced the signing of a 20 years long-term LNG Sales and Purchase Agreement (SPA)
between Qatar Liquefied Gas Company Limited and PTT Public Company Limited of Thailand with the first
delivery set for January 2015 [184].
Indias domestic production makes up the majority of its gas supply but has fallen short of levels needed to
meet the rising gas demand, which has caused India to turn to LNG imports. India's annual LNG capacity is
77


estimated to reach 50 million tons by 2017 from about 13.5 million tons as premature declines from the D-6
field along with uncertainty around gas pricing and industry regulation have impacted on production levels.
India is largely unexplored in this respect, and efforts need to be taken to develop additional domestic supplies
of natural gas. The country is located near major resources of gas in Iran and Turkmenistan, and pipeline
interconnections remain a distant prospect. The country is seeing huge potential in LNG, and is constructing
new re-gasification terminals for increasing the existing capacity by half.
Qatar has historically been Indias primary supplier in terms of LNG imports, supplemented by spot purchases.
However, GAIL (Gas Authority of India Ltd) will begin importing 3.5mtpa from Sabine Pass LNG in U.S.A.. Along
with Petronets 6mtpa Gorgon LNG off take, this provides 20mtpa of contracted LNG volumes to India, from
2018 to 2028. Furthermore, Gazprom and BG, recently have signed deals with the state-owned gas company
GAIL (India) Ltd, Gujarat State Petroleum Corporation (GSPC), Petronet LNG, Indian Oil Corporation Limited
(IOCL) and other Indian companies for supplying a total of over 15mtpa of LNG per annum from their portfolio.
In particular, BG Group signed on 20
th
March 2013 an agreement with GSPC for the supply of 2.5mtpa of LNG
to GSPC for 20 years(worth about USD$20bn) and the supply will start by 2014 [185]. There are two existing
re-gasification terminals in India, there are another two under construction and multiple additional proposals.
The country will be fairly supplied through 2025, taking into account these LNG contracts, but that is only if
India can boost its gas production. If these production volumes are not achieved, then India will need to
increasingly turn to LNG to meet demand.
Vietnam has a strong projected growth in gas demand; this will quickly lead to a widening supply-demand gap
unless Vietnam can boost domestic production at a quicker pace or rely more heavily on LNG imports. There
are two proposed LNG import terminals that the country aims to bring online by 2015. These would together
provide 3mtpa of re-gasification capacity, although there is expected to be some development delay on both
these projects as they are not yet under construction. Furthermore, Vietnam plans to get two Floating
Regasification Storage Units (FRSU), the Thi Vai FSRU with capacity of 1mtpa to supply gas to industrial
customers and independent power plants, which is planned to be operational in 2014/15. The second FSRU
will be located in Binh Thuan with initial capacity of 3mtpa to supply gas to independent power plants in Son
My area. It is planned to be operational by 2018. Its capacity is planned to increase to 6 to 10mtpa in the
period after 2020 in order to supply gas to customers in central and southern region of Vietnam [186].
Malaysia and Indonesia face similar challenges in meeting rising gas demand: they both have regional supply-
demand imbalances and they both are LNG exporters getting FRSU. Malaysia will be a LNG import-free country
by 2016 once the FSRU comes online off the Sungai Udang port. The FSRU at Sungai Udang will have a
maximum capacity of 3.8mtpa and there will be two floating storage units (FSUs) to receive and store LNG
with a capacity of 3.6mtpa. The terminal is critical because of depleting domestic gas resources and increasing
domestic demand [187]. Indonesias Re-gasification terminal, The PGN FSRU Lampung project reached a
significant milestone on 17
th
May 2014, when the installation and connection of the FSRU and the Tower Yoke
Mooring System were finalized on site, 6 km offshore Lampung. The project will commence commercial
operation under a 20 year time charter with PGN by the middle of June 2014 [188] having a capacity of 2mtpa
[189].
14.2. Pipelines
As discussed in the previous sections, Europes slowly increasing need of natural gas (CAGR 0.6 per cent
between 2008 and 2030), combined with a decline in indigenous production (-1 per cent per annum), will
create a supply gap of more than 100bcm by 2030. Except from the Liquid Natural Gas, there is another way
78


to fill this gap which is by supplying gas through pipelines; this will resulting in a tough race between countries
exporting LNG and piped natural gas [126].
14.2.1. Market
In 2011, the existing pipeline import capacity into Europe was roughly about 350bcm per annum of which 60
per cent originated from Russia, Caspian and North Africa. As shown in Table 7, several European pipeline
supply projects emanating from Russia, Azerbaijan and Turkmenistan (through the Caspian Sea) are
envisioned, but only a few projects are likely to be implemented. Even the prestigious South Stream is at stake
because it breaches EUs energy market rules which state that an energy producer cannot own transmission
network
xxxv
[190]. More emphasis is given to the TANAP pipeline and Eastern Mediterranean (Israel and
Cyprus) as new entry points.
Table 7 Future Pipeline Projects. Source: Bonhomme [126]
Gas pipeline Origin Nominal Capacity (bcm) On-stream
Blue Stream-2 (extension) Russia 16 2015
GALSI Algeria 8 2014
ITGI (Interconnector Turkey-Greece-
Italy)
Azerbaijan (Shah-Deniz-2) 10 Probably
cancelled
Nabucco West Caspian and/or Iraq 16 and more 2018/1
Next (Nord Stream-3 & 4) Russia 55 2016
South Stream Russia (West Siberia) 2 x 15,5bcm (or 4 x
15,5bcm)
2016-2018
(maybe delayed)
SCP extension (South Caucasus
Pipeline)
Azerbaijan (Shah Deniz-2) 12 2017
TANAP (Trans-Anatolian Pipeline) Azerbaijan (Shah Deniz -2) 16 (then 24bcm) among
which 10bcm for TAP, or
Nabucco West
2018
TAP (Trans-Adriatic Pipeline) Azerbaijan 10 (or 20bcm) 2018
TCGP Trans-Caspian Pipeline) Turkmenistan 30 TBA
Persian Pipeline Iran 37-40 2014
IGB (Interconnector Greece-Bulgaria) Greece TBA TBA

With regards to the Eastern Mediterranean Region, the active gas pipelines are key factors for its energy
outlook. As shown in Table 8 the most important pipelines in the region are inactive, which caused the gas
crisis for Jordan and Lebanon.
Table 8 Regions Pipelines. Source: Bonhomme [126]
Pipelines Capacity bbl/d MMcf/d Notes
A
c
t
i
v
e

Egypt-Jordan-Syria-Lebanon (Arab Gas
Pipeline)
- 966
Egypt Jordan flows intermittent and at
volumes less than contracted; flows to
Syria, Lebanon offline
Iraq-Syria (Ain Zalah Sufayah-
Suweidiya)
- - Small pipeline not significant volumes
I
n
a
c
t
i
v
e
Egypt-Israel (el-Arish-Ashkelon) - 677 No flows since 2011
Iraq-Syria (SCOTLINE)two pipelines 1,400,000 - Iraq sections inoperable
Saudi Arabia-Jordan(Trans-Arabian
Pipeline)
315,000 -
500,000
-
Section from Saudi Arabia to Jordan
closed since 1990
xxxv
The real reason as to why South Stream is on stake has to do with the participation of Russian firm Stroytransgaz whose
main stakeholder, Gennady Timchenko, was placed on the US's sanctions list against Russia in April [341, 342].
79


Syria- Lebanon (Gasyle 1) - 300 Non operational

An overview of the pipelines currently installed in Europe can be seen in Figure 72.

Figure 72 Existing and Planned pipelines in Europe for 2013. Source:Eurogas [191]
Various events, with the latest being the Russia-Ukraine crisis, have forced Europe to redefine its long-term
energy policy. The crisis led to a reduction in the risk of investing in energy infrastructure in Cyprus with the
EU looking to ensure its energy security and decrease its energy dependence on Russia by exploring more
costly actions. Notably, Pasquale De Micco, a national expert from the European Parliament`s policy
department said in an interview with Reuters that "the energy security scenario is completely changed and
none can exclude that more expensive investments will be done in the light of energy security, more than on
return of investments," [192].
80


Although an entry point from Cyprus would be ideal for Europe, in contrast to LNG market flexibility, the
transfer of natural gas through pipelines keeps the supplier hostile to the same buyer and that might result in
unwanted economic consequences for a small country like Cyprus. Thus it is vital that all possible monetization
options are examined in depth. As a long-term solution the RoC has been investigating two options for export
through pipelines:
Pipeline to Greece and
Pipeline to Turkey.
14.2.1.1. Cyprus-Greece
The relation between Cyprus and Greece dates back many centuries. Actually, the vast majority of Cypriots
are of Greek origin and speak the Greek language whereas Greece has been Cypruss most entrusted supporter
and ally in its history.
This monetization option suffers from the high initial cost of the LNG terminal, which must be subsidized by
RoC (currently under IMF loans) and the companies involved. According to preliminary studies the proposed
pipeline would first travel 200km from Block 12 to Vassiliko, and then to Greeces mainland as shown in Figure
73 having an overall distance of almost 1150km.

Figure 73 Proposed Pipeline Cyprus-Greece. Source: World Bulletin [193]
The region characterised by its ultra-deep waters, non-uniform terrain with many canyons and heavy
earthquake activity (Figure 74) makes this project technically difficult even though Greek Minister George
Papaconstantinou has said the project is entirely feasible
xxxvi
. It has been stated by the Public Power
Corporation of Greece (DEPA) that the pipeline would have a capacity of 8bcm per annum but RoC plans to
xxxvi
On 10
th
March 2014 Greece launched an international tender for a study on the feasibility of a proposed pipeline to
carry gas from Israel and Cyprus in an effort to reduce dependence on Russian supplies.
81


export 35-50bcm per annum. Such capacity means that 5 to 7 pipelines might be needed to export such
volumes of gas increasing the overall initial cost and risk [194].

Figure 74 Earthquake activity in the Mediterranean Sea for 1-15
th
June 2014. Source: EU-MED Seismological data [195]
From the financial analysis (Table 9) it is obvious that this pipeline is feasible under economies of scale which
envisage gas input from Israel. Hence its viability, just like the LNG option, may depend on either further
significant gas finds in Cyprus or Israels final export method. Investment cost is another obstacle to the
Cyprus-Greece pipeline. Gas sold via pipeline to Greece would be worth USD$61.3 billion at current prices (this
is before investment but after an estimated 5 per cent loss in transit). However, a large amount of capital
expenditure is needed to build a pipeline at such depth and at such long distances, which is capital that is
almost 1.5 times greater than that for LNG and neither Greeces nor Cyprus current economies can support
that.
14.2.1.1.1. Financial Analysis
According to a rough cost analysis, the investment cost for a pipeline from Vassiliko to Greece and then on
land within Greece would be around USD$37.1 billion. This would result in a reduction of revenue that could
be generated to USD$24 billion. This is not very different in value to the USD$22.8 billion gained from
exporting gas to the European market from an onshore LNG. Because investment costs are so high, this also
raises the same issues as an LNG plant i.e. whether financing can be secured particular in the current absence
of larger volumes [78].

82


Table 9 Cyprus-Greece pipeline net revenue
Gas available for export 173 bcm
Gas lost in pipeline 9 bcm
Number of pipelines (8bcm per annum) 2
Gas available for sale through pipeline 155 bcm
Price of Russian natural gas for Greece
xxxvii
USD$396 /bcm
Value of Block 12 pipeline gas after transit but before investment cost USD$61,380 million

Cost of exploration USD$600 million
Cost of submarine pipeline from Block 12 to Vassiliko USD$2,000 million
Distance from Cyprus to Crete and Peloponnese 1050 km
Estimated cost per 100km USD$1,489 million
Cost of submarine pipeline from Vassiliko to Greece USD$31,370 million

Estimated distance on land to link to pipeline network 480 km
Estimated cost per 100km of an onshore pipeline USD$670 million
Cost of onshore pipeline in Greece USD$3,216 million

Total investment cost
xxxviii
USD$37,187 million

Net Revenue per annum (excluding maintenance cost, interest rate) USD$3,168 million
Total Net Revenue (until Blocks 12 depletion)(excluding maintenance
cost, interest rate) USD$24,000 million
14.2.1.2. Cyprus-Turkey
The relations between Greece and Cyprus, Turkeys military invasion in Cyprus in 1974 and their long-term
strategy of not recognising the (the government of the Republic of Cyprus) as the only
legitimate government of Cyprus (a recognition which comes from the rest of the world), make this option
unrealisable.
On the other hand, it is of no doubt that a pipeline to Turkeys vast network of domestic and international
pipelines would be a serious option if relations between RoC and Turkey were normal. Investment costs for
this export option are considerably lower than construction of the LNG terminal and the export option to
Greece (as shown in Table 9) thus maximizing the profits for both Cyprus and companies involved. In the
scenario that finds the countries in good relations (envisages the solution of the Cyprus problem), there are
still other drawbacks that can stop this monetization option from going to fruition and are elaborated further
in section 17.2.
14.2.1.2.1. Financial Analysis
According to the estimates in Table 10, the net revenue by exporting gas through a subsea pipeline to Turkey
totals USD$29.4 billion, compared with USD$24 billion via pipeline to Greece and USD$22.8 billion for the
onshore LNG plant. Gross value of gas via pipeline after domestic consumption and losses in transit is USD$33
xxxvii
On 5
th
June 2014 Georgios Chelikidis, the General Manager of Prometheus Gas, announced that Greece will buy
Russian gas at a price of USD$396 per bcm. He said Greece had recently signed a contract with Russias gas giant Gazprom
within the framework of the current intergovernmental agreement on gas supplies up to 2016, with an option of
extending it for ten years more [250].
xxxviii
The total investment cost does not count the cost of buying the land required/license fees/Category 2-3 checks.
83


billion. This is USD$10.2 billion higher than the revenue available from an onshore LNG plant. Investments
costs, at around USD$3.6 billion, are much lower compared to USD$37.1 billion for a pipeline to Greece and
USD$10.2 billion for the LNG plant.
If a similar to Greece price per mmbtu is taken, the gross value of gas via pipeline after domestic consumption
and losses in transit totals to USD$61.38 billion and the net profit rises from USD$29.4 to USD$57.78 billion.
The price difference between the pipeline to Greece and LNG in terms of profit becomes USD$33.78 billion
and USD$34.98 billion respectively.
It should be noted that with the gas price Gazprom sells to Europe, the difference between LNG and a pipeline
to Turkey is more than the level of public debt held by the RoC Government in 2011; could bailout the country
from the European Financial Stability Facility.
Table 10 Cyprus-Turkey pipeline net revenue
Gas available for export 173 bcm
Gas lost in pipeline 9 bcm
Number of pipelines 1
Gas available for sale through pipeline 164 bcm
Converted to 5,904,000,000 mmbtu
Price
xxxix
USD$5.6 /mmbtu
Value of Block 12 pipeline gas after transit but before investment cost USD$33,062 million

Cost of exploration USD$600 million
Cost of submarine pipeline from Block 12 to Vassiliko USD$2,000 million
Distance from Cyprus to Crete and Peloponnese 100 km
Estimated cost per 100km USD$1,000 million

Total investment cost USD$3,604 million

Net Revenue (excluding maintenance cost, interest rate) USD$29,459 million
14.3. Other monetization options
14.3.1. Combination of LNG and pipelines
Some executives of DEPA suggested the best option is having both a pipeline and an onshore LNG facility. It is
widely agreed that this is the optimum option since it gives the flexibility and combines the positives of both
export options, however, this will not be examined further in this publication especially when the size of the
estimated reserves is not sufficient for an onshore LNG plant and Israels export decision is still unknown.
Adopting a multiple export strategy at this stage would unnecessarily sacrifice economies of scale and might
even undermine project viability altogether [158].
14.3.2. Compressed Natural Gas
CNG is made by compressing natural gas (which is mainly composed of methane, CH
4), to less than 1 per cent
of the volume it occupies at standard atmospheric pressure. It is stored and distributed in hard containers at
xxxix
Price given by Turcgas in the Turkish Stock Exchange for buying gas from Israel.
84


a pressure of 2025MPa (2,9003,600 psi), usually in cylindrical or spherical shapes. The main elements of a
CNG supply chain from the gas field to the buyer are shown in Figure 75.

Figure 75 Compressed Natural Gas Delivery System. Source: Paltsev et al [196]
CNG as a monetisation options offers two main advantages:
Lower Infrastructure costs, as the initial investment is restricted to an onshore or offshore
compression facility, and a shorter development period (usually one to two years) [196].
The geographical position of Cyprus is in theory suited to CNG. CNG has low investment costs, but
higher transportation costs. As neighbouring countries in demand of natural gas are in close proximity,
monetisation, using CNG can make the most of this technology.
However, CNG has never been tried on a large scale and thus the government and investors are reluctant to
invest in such a technology. Also, by using CNG this would limit the markets to which Cypriot gas can be sold,
as long distances render it inefficient.
14.3.3. Electricity Transmission
In the scenario that finds RoC with neither export option (LNG/CNG/Pipeline), monetizing natural gas through
a different form can provide the solution. With strict limits to greenhouse emissions, expensive gas-fired
power plants become more appealing. Those two points can become the drivers for exporting electricity via
sub-sea cable to both Israel and Greece which will be ultimately linked to the pan-European electricity grid.
This concept is behind the EuroAsia Interconnector project, which is the 3
rd
PCI listed by EU Commission.
The project led by RoC will consist of a 600 kV DC and allow for reverse transmission of electricity enabling
delivery to any country of the three involved (i.e. Israel, Cyprus and Greece) to satisfy its peak demand. The
project will have a capacity of 2000 MW and its total length is estimated approximately 1518 km (329 km
between Cyprus and Israel, 879 km between Cyprus and Crete and 310 km between Crete and Athens) and
will allow for reverse transmission of electricity. The dumping depth of the cable will exceed the 2000m and
2500m for Israel Cyprus and Cyprus Greece respectively and will pass through a region of non-uniform
terrain with many canyons and heavy earthquake activity [197].
85


Figure 76 Electricity Transmission Proposal. Source: EuroAsia Interconnector [198]
Similar to the pipeline, depth and distance can become a threat which could potentially stop the project from
reaching fruition. The cables distance between Greece and Cyprus is only 16km longer than the NorNed
transmission system
xl
but will cross deeper water compared to the SAPEI
xli
transmission system linking Sardinia
to mainland Italy. According to Quantum Energy, projects main stakeholder, the cable should cost 1.5 billion
to build but having SAPEI at a third of the distance and shallower water at a cost of 0.730 billion the EuroAsia
is certainly underestimated. Regardless of that, its low initial low cost should translate to high profits but the
energy losses and low netback price make this option the least favoured with an estimate net revenue of 17.5
billion [78, 199].
14.3.4. Conversion of Gas to Liquids
The GtL industry relies on taking methane (which would be transported by pipeline to Cyprus), converting it
into syngas, and using it to produce higher-value products. The various pathways to producing higher-value
products, is shown in Figure 77.
GtL would allow for diversification of Cypriot exports, as GtL prices are usually linked to the oil, rather than
the gas markets. Also the GtL industry is more labour-intensive than other monetisation options, hence
boosting the local economy.
The main reason such an option seems unfeasible at the moment, is that the development of such an industry
will require a large capital investment, and the Cypriot economy due to its small size and current recession,
will find it difficult to fund such an undertaking. A second but less important limiting parameter is the fact that
xl
The NorNed transmission system was inaugurated on 12 January 2011. The cable links Norway and the Netherlands,
has a total length of 580km making it the longest cable in the world and a construction cost of 600 million. [313]
xli
The SAPEI transmission system was inaugurated on 17 March 2011. It has a total length of 435km and runs at 1600m
below sea level making it the deepest HVDC in the world.
86


many countries in the region, namely in the Middle East, have increased their capacity of GtL. This would
suggest strong competition in the Industry.

15. Indirect Revenues (by Petros Isidorou)
Cyprus is expecting to maximize its profit by monetizing its hydrocarbons through pipelines, CNG or LNG. In
the meantime, prior and during the exploration phase, the RoC will be able to have substantial profits from
various hidden sources. Such profits can give relief to the economy but also to the society.
Through the exploration phase, the government received fees for the licences. For example, in February 2013,
the government received 150 million from the ENI/KOGAS consortium as well as 100 million from TOTAL as
signature bonuses for Blocks 2, 3, 9 and 10, 11 respectively. TOTAL paid 100 million euros for its licenses in
two southernmost blocks in February [200] [201]. Furthermore, Table 11 shows the pricelist with regards to
the cost of the seismic data the companies had to buy for the interpretation of the results, which formed the
basis of their bid [202]. Table 12 shows the tariff for the annual surface fees each company has to pay for the
usage of its block(s) as agreed in the ESPC (the RoC takes only 40 per cent of the profits).

Figure 77 Gas to Liquids Conversion Pathways. Source: Paltsev et al [159]
87


Table 11 Fees of data packages
MC2D CYP2006
Quantity Price
2,000-4,000 Line-km USD$350 per Line-km
The whole survey USD$280 per Line-km
Uplift Licence fee USD$500 per Line-km on seismic data within the awarded licence

MC3D CYP2007
Quantity Price
659km
2
USD$2,500 per km
2

Uplift Licence fee USD$5,000 per km
2
on seismic data within the awarded licence

MC2D CYP2008
Quantity Price
The whole survey USD$300 per Line-km
Uplift Licence fee USD$500 per Line-km on seismic data within the awarded licence

2D Interpretation Report 2007 35,000

3D Interpretation Report 2008 40,000

2D Interpretation Report 2009 55,000 (35,000 for companies that purchased the 2007 2D report)

Table 12 Annual surface fees. Source: Kyriakides et al [203]
During the exploration period 25 per square kilometre
During the first renewal period 30 per square kilometre
During the second renewal period 35 per square kilometre
Exploitation period 500 per square kilometre

On 9
th
May 2014, Halliburton
xlii
concluded a deal with the government to use Cyprus as their base of operations
for the eastern Mediterranean region [204]. This vote of confidence is of critical importance since rival
companies of Halliburton see their presence in Cyprus as a sign of stability there. If one of them is happy
operating in Cyprus, word spreads and more companies will look to Cyprus as their destination to establish
their offices. Halliburton plans to collaborate with Cyprus-based universities and set up a local management
team. Furthermore, Ellinas noted that once the company secures contracts for its services, local companies
would have an opportunity to increase their activities and provide support services like storage space,
servicing of equipment, providing supplies and equipment [204].
Although there will be no taxation on the companys revenues, the Cypriot government will tax the income of
domestic and foreign workers employed by these companies at the countrys standard income tax rates. Tax
xlii
Halliburton business model is based on providing drilling services and specialised equipment to oil/gas companies.
Halliburtons activities in Cyprus would likely be of passive role mainly storing their drilling gear, opening up offices and
enhancing overall the physical presence to the East Mediterranean region.
88


revenues will flow both during the intensive infrastructure development phase and during long-term
operations.
Regarding the environmental benefits, Noble Energy adopted a stretch of 400 metres of the Faros beach in
Pervolia in Larnaca, aiming at protecting the environment and upgrading the area. Members of Noble Energy
cleaned the area and installed wooden bins, benches and signs urging people to keep the beach clean. They
have also committed themselves to keep the beach clean throughout the year with several clean-ups. Of great
importance and sign of commitment was shown by John Tomich, Noble Energy Country Manager in Cyprus
who announced that the company will continue to support environmental and marine conservation in Cyprus
[205].
16. Game of Thrones (by George Karagiorgis)
During the Christofias administration (2008 -2013) a reshuffle of the cabinet of Ministers took place in August
2011, allowing Praxoulla Antoniadou, a leftist to take over the Ministry of Commerce, Industry and Tourism.
The first priority for the new Minister was to clash with Solon Kassinis, the Director of the Ministrys Energy
Service, instigating a disciplinary hearing against him for speaking to media without prior permission. On top
of that, in October 2011 she revoked the authorisation of Kassinis and his team to oversee Noble Energys
operations as per the PSCs terms. This resulted in severe delays causing losses of tens of millions. At the end
of the day it was obvious that one of the major objectives of the ruling party AKEL, through the new Minister,
was to remove Kassinis and take the destiny of hydrocarbons in AKELs hands. In late February 2012 the Cypriot
parliament amended (with AKEL voting against) the Hydrocarbons Law of 2007 and repatriated operational
oversight of upstream licence holders to the Energy Service Director (and also to the Ministrys Director
General), this time assigning them responsibility on that level, rather than merely reinstating earlier Ministerial
authorisations to that end.
Moreover, the amendment put aside a previous Advisory Committee which consisted of the Director General
of the Ministry of Commerce Industry and Tourism, the Attorney General, the Director General of the Ministry
of Foreign Affairs, the Director General of the Ministry of Finance, the Director General of the Ministry of
Agriculture Natural Resources and Environment, the Director of the Geological Survey and the Director of the
Energy Service. According to the Law of 2007, the major objective of this committee was to evaluate upstream
bids and make relevant recommendations to the Minister of Commerce, Industry and Tourism. However, the
2012 amendment replaced the Technical Committee with the same composition plus the Accountant General
and the Auditor General who participates in meetings as an observer. The major difference compared to that
basic Law of 2007 (as now termed) is with reference to the committees actual responsibilities, which now
expand to include, besides the evaluation of upstream bids, also contract negotiation with the selected
bidders.
The Cypriot government in the form of its Council of Ministers still needs to approve bidders, both initially and
after the completion of negotiations (and may even ask for renegotiation). Furthermore, the government
retains the right to proceed with direct assignments of upstream licenses in cases of overriding national
security and / or of public interest considerations. However, under normal circumstances, neither the Council
collectively, nor individually the Minister of Energy Commerce Industry and Tourism can engage directly with
contract negotiations. These provisions have been very strongly criticised and opposed by the AKEL
administration, which has expressed fears that non-elected officials will control core strategic state affairs.
Against this backdrop, and following a failed referral of the amended Law back to Parliament by President
89


Christofias in March 2012, in April 2012 he referred the case to the countrys Supreme Court, asking for an
opinion on the constitutionality of these and other amendments [8].
During another minor reshuffle of the cabinet of Ministers by the Christofias administration (2008 -2013) in
March 2012, the Interior Minister Neoklis Sylikiotis replaced Minister Antoniadou. Former Minister
Antoniadou, accused her former government and AKEL party colleagues of deliberately undermining her work
as the Minister for Commerce Industry and Tourism in respect of her responsibilities in the energy sector. The
whole situation became more complicated during April 2012 due to the lodging of an appeal by former
Minister Antoniadou at the Supreme Court against President Demetris Christofias, on procedural flaws in her
dismissal as Minister in March.
The March 2012 decision of the parliament has caused extra complications on the legal framework of
hydrocarbons in general. The parliament vote, confirmed that the Cyprus Energy Regulatory Authority
(CERA/RAEK) would play a role, something completely new that is making the whole issue even more
complicated. Furthermore, this might allow CERA to claim the granting of third-party exemptions to Noble
Energy for the pipeline that will link Aphrodite with onshore Cyprus. The regulator is also invited and attends
meetings on relevant matters with Noble Energy. A serious analysis of the situation will have to take into
account another important stakeholder that is the Electricity Authority of Cyprus (EAC). EAC is the largest
potential domestic consumer and had expressed their interest in a direct stake in a potential liquefaction
infrastructure in Cyprus. However such issue might never come true for EAC mostly due to the high capital
requirements. It must be stated that EAC has an option for a 44 per cent stake in DEFA.
A Wise Men Committee comprising of members with substantial upstream and midstream experience with
the IOCs BP and Shell, with engineering companies Schlumberger and KBR, as well as with international
academia, was set up by the Christofias administration in November 2011, to offer advice on technical and
commercial matters pertaining to monetisation of Aphrodite and long-term strategic planning with regard to
hydrocarbons exploitation more generally [206].
In June 2012 the government appointed a small team consisting of the Deputy Accountant General Andreas
Zachariades, Energy Service Director Solon Kassinis, Wise Men Committee member Theo Kontou, and a
representative of the Law Office, with the aim of negotiating monetisation of the Aphrodite offshore gas
discovery with Noble Energy, including both the arrival of gas onshore Cyprus and the development of LNG
infrastructure, apparently with an emphasis on third-party access [8], [207].
Exactly how all relevant arrangements will be complemented and/or superseded by the planned
establishment of a dedicated new state-owned upstream operator and marketer of local hydrocarbons, based
on the Norwegian model of Petoro and Statoil, is still rather vague. According to Minister Sylikiotis, the
company was to be established and participate across the value chain, including in new PSCs and E&P
operations under the second licensing round; while it would also participate in any export infrastructure that
is to be developed with the aim of monetising local gas reserves; as well as in the marketing of profit
hydrocarbons [208] [8].
Slightly before the end of the Christofias Administration, Energy department Director Kassinis resigned (8
th

February 2013) from his duties to accept the position of the executive vice chairman of the company known
by its Greek name (CNHC). CNHC is the company that was enacted into law officially by the house of
the representatives on the 06/12/2012.
90


However, all the above changed in February2013 when Nicos Anastasiades president of DISY (Democratic
Rally) was elected as the seventh president of the republic of Cyprus. Apart from DISY, president Anastasiades
was supported by two other political parties, DHKO (Democratic Party) and Evroko (European Party), he
was elected with a percentage of 57.48 per cent. His opponent Stavros Malas that was supported by the left
wing party AKEL got 42.52 per cent.
The new cabinet of Ministers consisted of persons from all the three political parties that supported Nicos
Anastasiades during his campaign. The important Ministry of Commerce, Industry and Tourism (and Energy)
was given to DHKO and more specific to George Lakkotrypis in exchange to the support given during the
presidential campaign. George Lakkotrypis took over the Ministry from his predecessor Neoklis Sylikiotis on
the 01/03/2013.
Immediately after his election, president Anastasiades had to deal with an unprecedented financial crisis, on
the 16/3/2013 and 25/3/2013 the Eurogroup took unique decisions for Cyprus. From that moment Cyprus has
enter into a new era, the era of the so called bailout.
While all the above were happening, DHKO one of the political parties that supported Nicos Anastasiades
during his campaign, entered into a new turmoil period that ultimately led to an internal battle. Eventually on
the 01/12/2013 Nikolas Papadopoulos, son of the former President of the republic of Cyprus (2003-2008)
Tassos Papadopoulos, defeated the team of Marios Karogian and was therefore elected as the new president
of the Democratic Party DHKO.
The political decision of the Anastasiades administration to issue a joint statement with the Turkish-Cypriot
Leader Dervis Eroglou on the 11/02/2014, was one of the reasons that pushed the newly elected president of
DHKO Nicolas Papadopoulos to make the decision to withdraw its support to the newly elected president
Anastasiades, asking all its ministers (DHKO members) who were participating in the cabinet of Ministers to
resign. The decision of DHKO to withdraw its support to the government was ratified by the central committee
of DHKO on the 27/02/2014, stating clearly that DHKO disagrees with the content of the joint statement. To
this extent the Minister of Commerce, Industry and Tourism George Lakkotrypis resigned from DHKO declaring
that he is no longer member of DHKO and therefore having no obligation to obey the instructions given by
DHKO to its Ministers (to resign from their Ministerial positions), hence keeping his position as Minister of
Commerce, Industry, Tourism and Energy.
In the hydrocarbons area the turmoil period was further affected by the decision of Solon Kassinis, former
Director of the Ministrys Energy Service (until the 8
th
of February 2013), and vice chairman of CNHC to resign.
Kassinis stated that the issue of natural gas is of national importance and the political parties should respect
its nature thus avoiding political battles related to gains out of it. On his final meeting with President
Anastasiades on the afternoon of the 31/07/2013 he officially resigned explaining his views. Kassinis
expressed his opposition to the new role and structure of CNHC that was proposed from the new Minister
Lakkotrypis. He also clearly declared that the new structure of CNHC means in practice that the responsibility
for making decisions concerning hydrocarbons and in general the promotion of energy issues "passes" from
technocrats to politicians, and more specifically to the competent Minister.
Indeed the fears of Kassinis came true. On the assembly of the cabinet of Ministers on the 03/10/2013 Minister
Lakkotrypis presented his suggestion to change the structure of CNHC and to rename it to EYK (CHC Cyprus
Hydrocarbons Company). On the 16/10/2013 the cabinet of Ministers approved Lakkotrypis suggestion
allowing the appointment of seven (7) non-executive members into the board of directors, hence allowing him
91


to have direct control on the decisions of the new company CHC. Final act of CNHC was the resignation of its
chairman Ellinas. According to an official announcement of CNHC (February 2014) the contract between
Ellinas and CNHC was terminated on 31
st
December 2013 based on mutual consent, with the sole purpose of
facilitating CNHCs efforts for reorganization.
According to Transparency International Perception index 2013 Over the next 20 years, it is expected that 90
per cent of production will come from developing countries. Today, many countries rich in oil and gas are
home to some of the worlds poorest people simply because wealth stays in the hands of politicians and
industry insiders (more information is given in section 22). Revenues dont get published, payments made to
governments to exploit resources remain secret and bribery and embezzlement go unchecked [209].
According to the same report Cyprus ranks in 31st position out of 175 countries examined with a score of
63per cent. According to the World Economic Forums Global Competitiveness Index 2013 Cyprus ranks in
58th position out of 148 countries examined with a score of 4,3 out of 7,0. The above information makes it
clear that the management and administration of hydrocarbons in Cyprus must be dealt with great caution.
In its Strategic Plan for Energy, TTT recommended that the administration of hydrocarbons should be
autonomous and independent of politicians and made specific proposals as to how this can be achieved [210]
[211].
17. Scenarios for Pipelines
In the forefront, there are two main gas export pipeline options, which could supply the European market and
monetise RoCs upstream reserves. Those two options are either through Greece or Turkey and both of them
will be examined and presented.
On the drawback side of this scenario are the low prices (compared to LNG sold in Asia), Cyprus current
economic state, supply security issues and the cost of the pipelines due to the water depth in the eastern
Mediterranean Figure 78 (~3080m
xliii
) which limit the size of pipelines.
xliii
While onshore pipeline technologies are well established, offshore pipeline technologies continue to pose difficult
challenges in their deployment and maintenance. Consequently, due to high demand and increasing budget, the industry
is constantly involving by innovating and pushing the limits of the technology to date.
92


Figure 78 Submarine Bathymetry of Mediterranean Sea. Source: Universit degli Studi di Pavia [212]
17.1. Pipeline to Greece
One of the main keys for success of such a project with this depth is the manufacturability of the pipeline with
the requisite wall thickness. Several technology advances need to be applied to achieve feasibility and a
rigorous development program is ongoing for successful implementation which could allow for deeper pipes
to be installed rather than the 34.6mm used for the North stream (water depth ~200m,two pipelines,
maximum capacity 55bcm per annum, overall distance 1,222km, two years to build
xliv
) and Blue stream (depth
of 2200m, length 395km, diameter of 24inches, capacity of 16bcm per annum and a construction cost of
USD$3.4 billion) [213].
Greece appetite for the pipeline is more than obvious; it has been demonstrated by intensive public support
of the idea as the best monetization option for Cyprus and Europe. Why wouldnt they? An entry route
through Greece will bring multi-million dollars to the country. The money will be generated from gas transit
fees for using its national gas grid to transport gas to the Balkans and the EU. Furthermore, the prospect of
closer energy-related commercial ties between Greece and Israel will draw support from the US, a
development that in the mid-term could help Greece overcome its debilitating fiscal and economic crisis.
On 10
th
March 2014, Greece launched an international tender for the feasibility study of a proposed pipeline
to carry gas from Cyprus (and possibly Israel) in an effort to become Europes alternative gas entry point which
will reduce dependence on Russian supplies and Turkeys mood. The Eastern Mediterranean Pipeline is
designed to initially carry 8bcm per annum of Israeli and Cypriot gas. It would stretch from Cypruss Aphrodite
natural gas field to Greece and then to European markets through the IGI-Poseidon pipeline, led by Italian
utility Edison and state-controlled Greek utility DEPA [214].
This option can be realised by constructing a subsea pipeline:
xliv
For more information please read the report found https://www.nord-stream.com/press-info/library/
93


633km underwater section from Vassiliko to the shore of eastern Crete;
405km underwater section from Crete to the South-East coast of Peloponnese;
260km land section running across Peloponnese;
An underwater section crossing the Gulf of Patras and
A 220km land section from the shore of Aetolia-Acarnania to Thesprotia.
The commercial justification for having a pipeline to Greece is that Cypriot (and possibly Israeli) gas, could
access a relatively high gas import prices market, despite all the current economic difficulties. In addition, they
can capture peripheral synergies which have existing and planned natural gas infrastructure in Greece and the
wider region, including the:
Trans Adriatic Pipeline;
Interconnector TurkeyGreeceItaly;
Interconnector Greece-Bulgaria and
Various bilateral gas interconnectors in South Eastern Europe.
This concludes that East Mediterranean volumes reaching Greece could flow westwards to large European
markets (Italy) and northwards to South Eastern and even Central Europe. Furthermore, there are
expectations that markets, in particular those in South East Europe could offer opportunities for increased
natural gas imports from new sources in the future because of:
Their growing demand in energy;
Threats to gas supply security, crisis in Ukraine 2008 & 2014
xlv
;
Reduction of their gas production;
Framework for CO2 reductions, which can be achieved with non-oil supplies and
Desire to dilute the gas dependence on Russia.
Estimations from DEPA shown that pipeline tariffs will be very competitive (similarly to the LNG prices) in
respect of gas deliveries to Greece as well as across South Eastern Europe and even Italy
xlvi
. A statement which
is easily questionable since it depends on the future gas prices, future re-gasification units and possible gas
quantities coming from Greeces hydrocarbon exploration and production.
xlv
The crisis in Ukraine has alarmed Europe with most of the concerns coming from Russian-depended countries for
natural gas imports. The prospect of war, or chaos on its borders becomes a backseat since a row with Russia over
Ukraine's unpaid gas bill threatens energy security in the rest of the continent. Due to the mild winter temperatures,
Europe could survive a short interruption of a few weeks to the pipelines across Ukraine provided that other Russian gas
is kept flowing. The European Union has taken since the last Russian gas interaction in 2009 and has built in more
resilience by securing contracts with other suppliers. The EU has taken measures to reduce its reliance further such as
better storage, more interconnectors and diversification of supply but those options will become available in the long
term. For now, though, being 36 per cent depended on Russia for natural gas imports, Europe cannot do without Russian
gas. Quaintly, the Kremlin by signing on the 21
st
of May 2014 (after 10 years of talks) the historic USD$400bn contract to
supply 38bcm of natural gas to China for the next 30 years changed the geopolitics and Russian can do without its
European customers. With an alternative market in the East, Russia might be less inclined to belligerent tactics against
its European clientele but this might change depending on US/Europe/NATOs suctions towards Russia [218].
xlvi
Compared to the gas markets in Western Europe, the market in the South Eastern Europe allow for increased profit
margins for the producers of natural gas due to the contractual framework which remains fixed to long-term oil-indexed
(high) gas pricing mechanisms.
94


Professor Antonis Foskolos and Dr Elias Konofagos, hydrocarbons experts concluded thorough investigation,
based on indicators from the U.S.GS and French Beicip, that the sea region south and east of the Island of
Crete could potentially have up to 60tcf of natural gas [215]. Safe conclusions could not be made since there
is no evidence of how many of those are recoverable since the exploration procedure is in preliminary stages.
However, the completion of the proposed pipeline would influence and guide the exploration towards that
area and speed up the process.
Moreover, political reasons could support the construction of such a pipeline to Greece. Nicosia would like to
see its political leverage increase (with the long-term scope for resolution to the Cyprus problem) and become
Europes saviour by giving the opportunity to European countries to reduce their dependence on Russian
gas. This could indeed provide supply security to the EU. The fact that there was gas sabotage by Russia a
few years ago, which resulted in energy crisis due to the decrease in the amount of gas volumes piped to
Europe, can lift the diplomatic and political capital of the contributing parties in EU circles towards the Cyprus-
Greece pipeline.
Despite all the key benefits this pipeline will bring to Cyprus and Greece/Europe, there is still relatively little
general agreement on such projects commercial viability since (after Giamouridis, 2012):
There are many concerns about the proposed gas pipelines technical complexity because of its
significant length as well as sea depths in which it will need to be located. Furthermore, the final cost
will be higher than the proposed due to unforeseen issues rising during construction and geohazards
which can potentially increase the pipelines wall thickness thus increasing the cost;
Equipment availability such as the J-Lay vessels is another point of concern;
This project is strongly dependent on successfully finishing other downstream infrastructure projects
including both Greek natural gas systems upgrades and new regional interconnectors;
The project limits the RoC into a relatively small number of natural gas markets, even if these technical
and economic obstacles are successfully overcome, in comparison to the more flexible LNG option,
which could offer to RoC access to the Asian markets;
Due to the South East Region uncertainties regarding the economic recovery there are significant
uncertainties in relation to anticipated market opportunities, particularly around the realisation of
their demand potential and pricing and
Pipeline exports to South Eastern Europe (and even to Central Europe and Italy) will have to compete
with the new Azeri pipeline gas from Shah Deniz Phase 2
xlvii
.
Regarding the proposal from DEPA for the bilateral development of a pipeline and liquefaction terminal
theoretically will offer the best of both options which are
Enhance RoCs political position in EU and
Reach the desired Asian market.
Practically however, it does not take into consideration how important the brownfield economics and
economies of scale are in relation to the costly construction of liquefaction plants. As indicated in section
xlvii
The Shah Deniz field discovered in 1999 is one of the world's largest gas-condensate fields with its reserves being
estimated at 1.2tcm of gas. The gas which will be produced at the second stage of Shah Deniz field development will be
the main source of the Southern Gas Corridor, which envisages the transportation of the Caspian gas to European markets
[221].
95


14.1.5.3, LNG projects significantly improve their profitability as they expand beyond their first Greenfield
phase and capture cross-train synergies and the following cost efficiencies. Thus it would be more cost
effective to use the excess natural gas to finance the expansion of the LNG facility rather than piping it through
an extra export option such as the pipeline to Greece.
Many reports have not mentioned the fact that on 25
th
June 2011, a Memorandum of Understanding was
signed to construct a gas pipeline from the Iranian gas field of Assaluyeh through Iraq and Syria, which was
supposed to start operation in the period from 2014 to 2016 having a projected capacity 40bcm per annum.
The importance of this MoU was that the pipeline was proposed to extend to Greece through a submarine
line and from there on to the markets in Europe
xlviii
, named the Islamic Pipeline. It was to be supplemented
by the export of LNG from the Syrian ports to the Mediterranean (probably from Tartus at which Russia could
guarantee its security as Russia has leased Tartus and constructed a naval base). In more realistic terms, the
project is still alive however the political circumstances are totally unfavourable at present since, a) both Syria
and Iran are under sanctions eliminating the possibility of external funding and b) the volatility in the region
due to the civil war in Syria forbids considering that option for many years
xlix
[216].
17.2. Pipeline to Turkey
There is also a second scenario that could be followed and it involves the construction of a subsea pipeline of
roughly 100-km to the Vassiliko. Then, continuing for approximately 95 km
l
onshore and another 125 km
through deep waters to Ceyhan port [217].

Figure 79 Cyprus-Turkey proposed pipeline (edited by Author). Source: Natural Gas Hub [218]
This monetization option has a commercial logic but due to the Cyprus problem, a lot of political issues would
have to be overcome. Turkeys annual gas demand reaches about 50bcm which will be growing with a rate of
xlviii
The other option would be to link this pipeline to Turkey and then to Europe (reducing the costs of submarine pipeline)
but still it would need to pass through volatile regions.
xlix
No one within Europe would like to see Russia having under control another natural gas entry point.
l
For demonstration purposes only, the distance has been assumed as a straight line. In practice this is impossible and a
proper analysis should be conducted.
96


about 3 per cent every year. Theoretically, RoCs target market, Europe, can be achieved through a pipeline to
Turkey since, the country provides access to Europe by the construction of TANAP. As it was shown in section
14.2.1.2.1 a pipeline to Turkey is the one giving the highest yield than other proposed monetization options
(pipeline to Greece
li
or onshore LNG).
Gas from Cyprus could face increasing competition in Turkey from other gas suppliers, such as Iraq, Iran and
Azerbaijan [219]. The politics around the Cyprus problem, the existing pipeline capacity and the impact of
Azerbaijans aggressive export strategy are important drawbacks, which will be discussed in detail.
17.2.1. Cyprus problem
On 21st February 2014, according to Minister Lakkotrypis the President said that without a solution there is
no chance for a pipeline to Turkey but in the event of a solution, of course, the prospects would be wide open
and the matter would take on a commercial format [220] which opposes what the Turkish Energy Minister
Taner Yildiz stated in January 2012 [221] that potential energy cooperation between the Cypriot and Turkish
sides through Turkey, could lead to a successful negotiation for the solution of the Cyprus problem.
On various occasions President Anastasiades stated that a) there was no question of discussing natural gas as
part of the islands reunification talks and b) Turkey can be Cyprus customer after a solution but not a strategic
partner which translates that even if the Cyprus problems is solved, the pipeline cannot be constructed to
pass through Turkey [222]. On the other hand, to increase the pressure to the Turkish side for a better
negotiation regarding the Cyprus problem the President stated that the reunification of Cyprus will
undoubtedly have a decisive and positive influence in the turbulent region of the Eastern Mediterranean, by
improving the relationship not only of Turkey with Cyprus but also of Turkey with the EU [223].
Moreover, it is not unlikely to see the Greek Cypriot side agreeing to a long-term dependency on Turkey as a
transit to Europe or potential buyer, and this is mainly because of the active involvement of superpowers such
as U.S.A. who sent their Vice president, Joe Biden (the most senior US official to visit in more than 52 years
lii
)
to Cyprus on 22
nd
May. For the Obama administration, the three-day stopover also offered the opportunity to
help reunify Cyprus after 40 years of division, the western world's longest-running diplomatic dispute. The vice
president said "an important focus of conversations" would be the settlement process. The U.S.A. will do
anything they can (even establish a strategic partnership) to unlock the transit route and substantially reduce
Europe's reliance on Russia for energy supplies putting a hold to Russias geostrategic growth [15].
17.2.2. TANAP capacity and other uncertainties
The fact that many politicians announced that the natural gas will reach the European markets is heavily
questionable. Khoshbakht Yusifzade, the First Vice-President of Azerbaijan's state energy company SOCAR
liii

announced on 8
th
May 2014 that the TANAP's capacity will reach 23 billion cubic meters of gas in 2023 and
exceed 31bcm of gas by 2026 [224]. Assuming that the Cyprus problem will have been resolved by then, there
will be no spare capacity
liv
in the TANAP for Cypriot gas to reach the European Market since according to
li
Less expensive because of the relatively short distance between Cyprus and Turkey.
lii
The last time an American VP, Lyndon Johnson, came to Cyprus was in 1962.
liii
SOCAR is the Azerbaijan's state energy company which with collaboration with Turkish Botas and the energy company
TPAO developed TANAP.
liv
In case there would be spare transportation capacity in the TANAP system available to Cyprus/Israeli exporters, this
would be limited to less than 5bcm per annum.

97


Giamouridis (2012) any gas supply contract between Cyprus and Turkey would require a considerable amount
of time for investment in the necessary infrastructure, losing the 2023 timeframe.
In order to achieve EUs goal for diversification not from TANAP, but through Turkeys domestic pipelines, The
National Gas Transmission System (NGTS) of Turkey will have to be upgraded since its current pipelines are
running under full capacity. Therefore, the project will be dependent on the successful completion of upgrades
in the Turkish system by constructing other pipeline networks. This would inevitably increase transportation
costs, which decrease profit margins in each of its proposed end markets.
The Nabucco West and TAP projects were tailored to service 10-23bcm per annum and 10-20bcm per annum
respectively-which is the planned supply of natural gas from the second stage of the Shah Deniz gas field
development in the Azerbaijani section of Caspian Sea. Even if TANAP has available capacity and could
accommodate Cypriot gas to reach Turkeys border with Europe, there is no pipeline available to carry the
Cypriot gas to the European market. Thus, only if Turkey uses a significant portion of the proposed supply from
Azerbaijan, then there will be available capacity in those two pipelines for Cypriot gas.
Finally, even in the case that all the above concerns were overcome, a look into Turkeys history should act as
a warning when establishing such kind of long-term agreements. A pipeline having Turkey as the end user and
not EU should be preferred in the unlikely event the pipeline is constructed. In the opposite scenario, Turkey
would have the option of opening/closing the pipeline, keeping Cyprus economy under its control. Having
Turkey as the end user can be a much wiser option in terms of geopolitics and commerciality since Cyprus will
have the upper hand in case Turkey is not consistent with its payments. However, even this suggestion is highly
questionable. It is questionable mainly for one reason; Turkey, being surrounded by countries rich in gas, could
increase its gas from its suppliers and replace Cypriot gas! On the other hand, Cyprus will not be able to
immediately find suppliers and even if it does, it will take valuable time for the required infrastructure to be
constructed.
Ultimately, as Managing Director of TOTAL Exploration & Production Cyprus Jean-Luc Porcheron stated during
a presentation organized by the Cyprus-French Business Association entitled TOTAL in Cyprus: A Long-term
Perspective, a good and long-term relationship with the county where the pipeline`s end point will be is
critical [225]. Based on the above statement, none should be surprised by Greeces plan to increase its re-
gasification capacity.
It is not unexpected for Europe and most importantly Cyprus due to its relation with Turkey to trust its natural
resources with them. For Europe, it is a matter of not having another Russia-Ukraine problem, which could
happen if the main pipeline providing gas to Europe is only via Turkey. Also the principles governing Turkey
can be said to be different with that of Europe as for example Turkeys PM stopped its own citizens from
sharing their opinions/beliefs prior the elections and these differences can cause conflict within its region
and Europes idea of democracy. Also, as seen by Egypt, it is possible for Turkey to use the natural gas which
is for the EU, for domestic uses and it would be difficult to assess whether this will happen and whether it can
be monitored to ensure transparency.
18. Scenarios for LNG
LNG offers the advantage to the seller to choose the optimum market. This is mainly because like oil, LNG can
be shipped to all the premium markets e.g. Japan, China and South Korea. Thus the high selling price is the key
element that drives the LNG market. Its high demand is due to its ability to be stored (since the trading
98


material is in liquid form) and delivered in peak times for domestic use. Furthermore, the high calorific value
allows latest-generation power plants to achieve high-energy efficiency using cogeneration or combined cycle
configurations, limiting both energy consumption and atmospheric emissions.
According to Tsakiris [226] Cyprus domestic long-term demand is projected to be around 30bcm for a period
of 25-30 years depending on whether Cyprus converts its fleet of passenger cars, buses and light trucks to gas-
fired vehicles. Thus, it is clear that Cyprus is too small as a market to justify an investment for the production
and transportation of gas to Vassiliko, if no export option exists. The small domestic consumption favours the
LNG plant at Vassiliko, which is highly dependent on economies of scale.
As aforementioned, the U.S.A.-Israeli partnership, signed a statement of Intent with RoC on 26
th
June 2013 for
the LNG plant having a capacity of about 5 million tonnes per year. According to Noble Energys timeframe
shown in Figure 80, the Pre-FEED work proceeds as scheduled by Technip and the project is expected to start
by 2016 and be completed having one train by 2019 with plans to increase the train to three in the future
[157].

Figure 80 Timeframe for the exploitation of natural gas
Unfortunately, the results of the latest appraisal drilling failed to provide concrete estimate of the actual
reserve and significantly downgraded expectations as the estimated results dropped from 7tcf to 3.6-5tcf
(having a mean of 4tcf). In effect, the appraisal confirmed as an intermediate estimate 4.9tcf, which was the
worst-case scenario of exploratory drilling completed back in December 2011. Thus, although the timeframe
seems valid, the volume of the reserves, as estimated by the appraisal drilling, were not enough to give the
incentives for the onshore LNG facility and the timeframe is postponed until the discovery of more gas
volumes.
2013 2014 2015 2017 2018 2019
Domestic Project
Appraisal Program
Process and Facilities studies / FEED
Detailed Engineering
Procurement, fabrication, construction
commissioning
Export project
Government approval and alignment
Site evaluation and Pre-FEED Design work
FEED and EPC bidding
LNG marketing
Train 1 construction and commissioning
99


Cyprus, which plans to establish a facility having more than one LNG train, is convinced that more reserves
lv

will be discovered by energy majors TOTAL, ENI and KOGAS, thus making the project financially sustainable.
Although the Noble Energy led-consortium has announced the continuation of appraisal drillings, Delek group
is facing financial difficulties and the process will be most likely delayed prolonging the timeframe.
The advantages and market flexibility LNG offers will have to be assessed against a number of risk factors that
can erode its advantages. According to Giamouridis, the main risk factors are as follows:
The high unit costs of greenfield
lvi
liquefaction facilities, which for a single-train plant are estimated at
between USD$4.5 to 6 per mmbtu (that includes only midstream and downstream costs);
The emerging competition from Gazprom. By offering cheaper
lvii
gas, Gazprom is making the re-
gasification terminals less appealing which could potentially reduce the growth of LNG in Europe;
The emerging low production costs from future LNG export countries such as U.S.A., Mozambique and
Tanzania;
The current high shipping rates;
Asias demand for gas cannot be assumed to last forever;
Oversupply, the sellers-buyers will change as new LNG projects are set to come on-stream (Figure 81)
(especially from North America and East Africa, U.S.A. - becoming a LNG exporter by 2020 rather than
an importer today) which will have a downward impact on the price;
Crude oil price volatility, will influence future profits since most Asian LNG prices are under long-term
contracts linked to oil-index mechanisms and
Due to changes in pricing mechanism, the Asian buyers are constantly seeking to decrease the netback
by signing short-term contracts based on Henry Hub pricing
lviii
.
lv
The reader is exhort to read the articles from Vidal et al (2000) titled Internal configuration of the Levantine Basin
from seismic reflection data (eastern Mediterranean) [324],
Montadert et al (2010) Petroleum Systems Offshore Cyprus [325] and
Steven A. Bowman (2011) Regional seismic interpretation of the hydrocarbon prospectivity of offshore Syria [326]
lvi
For Brownfield (adding trains to existing LNG plant) the cost can be reduced to USD$3-5 per mmbtu.
lvii
The Prime Minister of Lithuania, Algirdas Butkevicius, announced that his country is in talks with Gazprom for a 20 per
cent reduction in the cost of natural gas [162].
lviii
For example Japan, the gas buyer with the largest share of worlds LNG, is already seeking to introduce some Henry-
Hub priced LNG volumes to its portfolio. After the multimillion cost of the triple Fukushima disaster of March 2011 is
trying to counterbalance its costs in generating electricity by using other price indexation mechanics. Furthermore,
another key candidate for natural gas exports, China in the long term could become less willing to pay high LNG prices as
its gas pipeline import options grow with the latest agreement being the supply of gas worth of USD$400 billion from
Russia.
100


Figure 81 Global LNG capacity and demand. Source:Masiulis [227]
It must be highlighted that compared to the proposed subsea pipeline of the scale and complexity required in
this scheme, even a pipeline to Turkey (shortest distance) could face difficulty competing with an expandable
liquefaction terminal having more than 4 trains. Of equal importance are the shipping rates. The high shipping
tariffs (in 2011 were approximately USD$140,000/day) suggest that LNG exports to remote destinations could
become economically viable to reach in the future since more LNG carriers are under construction, which
should push the stakeholders to reduce the shipping tariffs in order to secure the sustainable market. This can
be seen in effect as since March the shipping rates were dropped by as much as 50 per cent [228].
As stated in the above sections, the major profits of an LNG terminal are usually generated from the second
and third liquefaction trains that are significantly less expensive to construct than the original 1-train
installation. Thus, the results of the following appraisal drillings are of great importance because if the future
results are not sufficient, then the LNG export could become financially unfeasible (assuming Cyprus does not
pool its natural resources with Israel).
As a result Cyprus is faced with various options:
(a) In the likely scenario that the next appraisal and exploratory drilling Noble Energy plans for late 2014
in two other promising targets within Block 12 increases the combined reserves estimate to 7tcf, then
Nicosia can go ahead and take the FID for a single LNG train within 2015-2016;
(b) In the other likely scenario that the exploratory and appraisal drilling ENI/KOGAS and TOTAL plan for
late 2014 - 2015 in their blocks increases the combined reserves estimate to the desired amount, then
Nicosia can go ahead and take the final investment decision for an onshore LNG train within 2016-
2017;
(c) Consider a floating LNG option which will maximise the profits (assuming all planned international
LNG terminals come online) and
(d) Directly or indirectly (through U.S.A.) convince Israel to export 8-10bcm/y of Leviathans gas for
liquefaction at Vassiliko.
101


With reference r to point (a) above, Block 12 could by itself contain the minimum 168bcm necessary to build
a single LNG train; this is what led Noble Energy & Delek to sign the MoU for the Vassiliko LNG liquefaction
plant in June 2013. Only Noble Energy has announced a pre-drilling estimate for its second prospective target
at 28-56bcm. Noble Energy completed the detailed 3D seismic survey over the potential target in mid-2013
and is expected to drill this prospect in 2014. In effect by the end of 2014 Nicosia should know the
commercially exploitable gas of block 12.
As a country, it is vital to understand that it is very important not to make any early assumptions and
predictions relating to the gas volumes. For example, Israel started with low estimates and ended with high
proven reserves. In particular Israel started with (estimated) 3.7tcf and ended with 9.7tcf in Tamar. Leviathan,
their biggest reserve, started with 14tcf, went to 16tcf and ended with 18tcf [229].
Noble Energy is expected to extract and transfer natural gas from block 12 to Cyprus by late 2018 which means
that the onshore liquefaction will not be constructed before 2024-2026. As it we have argued earlier on in this
document, LNG prices are expected to drop. According to Mullen, financiers might use a lower price for gas in
their assumptions and will therefore demand higher volumes to make the onshore LNG facility viable, thus the
lower boundary will be increasing making the FID a challenge [99].
Regarding point (b) above, TOTAL and the consortium of ENI & KOGAS announced that they are currently in
the process of further analysing the seismic data in their possession and exploratory drilling will follow in 2014-
2015. Noble Energy has faced significant delays in its exploratory efforts in both Cyprus and Israel due to the
unavailability of drilling rigs in the area. This is something that the other three oil giants will not risk by bringing
their own drilling platforms from other gas/oil fields such the drillship SAIPEM 1000 from Mozambique in ENIs
case.
According to the latest news, the oil giants indicated their willingness to complete their exploration program
as soon as possible, which will give a more realistic/accurate view of the estimates not just in block 12 but in
blocks 9, 2, 3 and 4 as well. On the positive side is the announcement of the consortium of ENI/KOGAS starting
their appraisal drilling after their 2
nd
exploratory drilling. This will definitely reduce the time for a clearer
picture since the consortiums original plans were to finish with all four exploratory drillings and then continue
with appraisal drilling.
As stated in section 14.1.5.5.1 by 2020, South Korea will have a supply-demand gap of 7mmtpa, widening to
18mmtpa by 2025. The fact that RoC has rejected the consortium consisting of oil and gas giants TOTAL,
Novatek and Gazprom
lix
and allowed ENI/KOGAS to exploit the most profitable gas field
lx
shows that the
Government is determined to proceed with an onshore LNG terminal that would allow exports to the highly
priced South Korean market through KOGAS.
lix
A day after EUs plan to bail in Cypriot banks, Gazprombank (a subsidiary of Gazprom) delivered its own bail out proposal
to the office of the president of Cyprus! Although Gazprom refused to confirm it even made an offer, there were rumours
that they offered to take over the bail out (which sunk a whole country!!!) in exchange for exploration rights within
Cyprus EEZ! A proposal which literally shocked the US and EU who were behind the unprecedented and inhumane plan.
An article on The New Yorks times says it all it (meaning the proposal) illustrates how a sprawling, wealthy company so
deeply entwined with President Vladimir V. Putin of Russia that it is often called a state within a state is willing to seize
an opportunity and exploit weaknesses and divisions within Europe to cement its position and power [293].
lx
for the largest (based on available seismic (but no drilling) data, block 9 is considered to be the most prolific of all
offshore blocks in Cyprus, with potentially as much as twice the quantity of gas discovered in Aphrodite.
102


Assuming that the RoC fails to influence Israel to pool some of its resources and Noble Energy does not find
the required quantity to satisfy the financial aspects of an onshore LNG terminal, then there are two options;
either continue with an FLNG or wait until 2018 for ENI/KOGAS and TOTALs exploration results. Such a delay
would jeopardize the profits since the plant will be operational in 2020 the earliest, by which time the price
for LNG will have be dropped.
With regards to the logistics for an onshore LNG terminal, RoC may have to share the cost of transportation
of natural gas from the FPSO to the LNG liquefaction terminal at an estimated cost of about USD$2 billion and
the actual liquefaction plant at an estimated cost according to Minister Lakkotrypis of about USD$8.37-
USD$13.62 billion [230] whilst the consortium of Noble Energy will carry the entire financial burden for the
production of gas from the sea bed to the FPSO
lxi
vessel. Assuming that the current plans for the share
agreement of the LNG plant and pipeline remains as it was agreed by President Christofias government (RoC
will hold 51 per cent of the shares)), Roc will be asked to fund USD$4 billion. The last sentence shows the
indirect financial impact the bailout caused to Cyprus. Why would any bank finance RoC USD$4 billion when
RoC has no previous experience in the production of hydrocarbons and its financial system is under strict
supervision by the IMF?
According to Deutsche Bank, it has been estimated that the LNG projects currently in operation in Australia
were developed having an average cost of approximately USD$1,200 million/mtpa, whereas the average cost
of the recently sanctioned and proposed projects in Australia has risen to more than double the historic
average, to around USD$2,600 million/mtpa. As Santos CEO and Managing director David Knox pointed out,
the Australian LNG projects currently under construction are now 80 per cent more capital intensive than
those already in operation [27]. The reasons for the cost escalation were examined in a recent report by
Oxford Energy Studies which highlighted that the strengthening of Australian dollar towards the US dollar, the
high cost
lxii
and low productivity were the main drivers for the increase [168].
Grel et al [78], highlights a critical issue, that is, the security of supply. Based on the latest announcements,
for the gas quantity estimated up to now, the current plan is to build a single-train plant of 5mtpa which in the
eyes of the investors means that there is no back-up in the event of an interruption in supply. In case more
trains are constructed (meaning that additional gas is found in the EEZ) the position of RoC will be elevated
thus, making it easier to find investors.
The rise of the liquefaction CAPEX can potentially influence the FID. Figure 82 demonstrates the trend of metric
cost per year from 1972-2020. The curve shows a gradual decrease in the cost of the LNG terminal with a rapid
increase towards the end of 2010. In the period of 1970-1990 the cost was on average USD$600/tpa where as
in the period 2005-2015 the cost peaked to even USD$1400/tpa with an average of USD$1200/tpa. The period
lxi
Floating production, storage and offloading (FPSO) vessels are particularly used in remote or ultra-deep water locations
in contrast to seabed expensive long-distance pipelines to onshore terminal since the FPSO offer a cost effective solution.
The reduction in overall costs provide an economically attractive solution for gas fields which can be exhausted in a few
years and do not justify the expense of installing a pipeline thus enabling the development of small gas fields.
Furthermore, once the field is depleted, the FPSO can be moved to a new location thus increasing their lifecycle and life
expectancy of the field by providing a constant supply of natural gas from different plays enabling the companies involved
to maximize their profits through extended long-term supply contracts.
lxii
Australian oil/gas workers earn USD$163,600/year on average, compared to USD$106,340 in the USA and USD$93,400
in the UK.
103


which the RoC is seeking to start its onshore liquefaction plant, thus from 2015 and onwards the price will be
possibly higher than USD$1200/tpa.

Figure 82 Liquefaction CAPEX historic trend. Source: Songhurst [168]
According to Tsakiris and Songhurst [226, 168] there are seven ways to reduce the overall cost for RoC are
presented below,
1. Use barge mounted liquefaction plant built in a shipyard in a low production cost country (such as
China) and take advantage of the lower cost base and higher productivity (thus reduced time). The
barge can be moored/grounded at Vassiliko. This approach has been used for the two onshore LNG
plants in China at half the cost /tpa of a typical LNG onshore terminal [231];
2. Use of Black and Veatch PRICO process. The PRICO process is optimised for smaller production of
around 2mtpa but higher capacity could be provided as multiple units. One of its greatest advantages
is its short construction time currently set to 30 months. There are plants currently using this process
in China and there are pre-FEED studies to be used in Mozambique and Tanzania [232];
3. Drop its share in the control of the offshore pipeline connecting the Aphrodite field with Vassiliko thus
reducing the overall cost;
4. Drop its share in the control of the 1
st
liquefaction train
lxiii
;
5. Bring external super majors such as Chinas state owned CNOOC. The first company that supplied
China with LNG came to Cyprus on the 2
nd
of March 2012 to present their views on how to proceed
with an LNG terminal. Furthermore, on 19
th
February 2014, Minister Lakkotrypis announced the
interest of Chinese delegates (including China Shipbuilding Industry Corp.) in the development of a
floating LNG export terminal [233];
lxiii
If Noble/Delek were to limit their shares of the profits from the Production Sharing Agreement (PSA) and take the
entire upstream cost from Production to Liquefaction, Nicosia would still make major profits as a result of its dominant
share in the PSA, get gas from Aphrodite for its domestic consumption that would allow it to reduce the cost of electricity
by 50 per cent, limit its debt liabilities to a minimum and increase its bargaining position vis--vis ENI/KOGAS and Total
when the time comes to discuss the ownership of their liquefaction trains.
104


6. Bring current super majors in the LNG facility. The consortium of ENI/KOGAS to invest approximately
USD$3 billion for a production train in the LNG plant [234] and
7. Finance in exchange for Guaranteed LNG Contracts. One variation of this scenario is for Cyprus to get
loans from potential customers in exchange of future LNG sales. This is a form of pre-selling but with
the advantage that it would minimize the lending cost for at least the first liquefaction train that will
in any case be less profitable than the second or third train. This approach also offers demand security
for LNG exports, which can be used to secure loans from international banks and most importantly
secures the coveted 51 per cent control over the entire liquefaction terminal. Similar to the pre-
selling, the most important drawback is that Cyprus may have to offer a major discount relevant to
the current LNG export prices and sacrifice part of its price-setting flexibility over the life of the sales
contract.
Ellinas noted that by the time Cyprus is able to export LNG to Europe the pricing would not be viable. Thats
because the cost of building a pipeline and an LNG plant would be in the area of USD$8-9 per mmbtu, not
even including re-gasification expenses. But LNG in Europe by that time (after 2020) is expected to sell for
USD$9-10 per mmbtu not much of a profit margin for Cyprus and its partners. The only way exports to Europe
would be commercially viable is via ships transporting gas from floating LNG platforms. Based on the estimates
in Table 6 (section 0), it is financially better to progress with an FLNG, which could allow Cyprus to secure
contracts having higher netback prices, thus increasing RoI. [235]
The FLNG can accommodate a wide variety of gas specification (rich or lean) and, more importantly, it is a
movable midstream asset that can be used in several locations and does not require pipelines (it will be
positioned directly over the producing field) to shore reducing the overall cost by USD$2 billion. Due to FLNGs
nature, built in dry dock under controlled environment, FLNG is less susceptible to construction delays thus
allowing strict deadlines to be met thus allowing the RoC get on the market in time and as scheduled.
A FLNG vessel can be moved from one part of a field to another or to a new field reducing further the overall
cost of the gas development [236]. Due to its mobility, relatively small deposits can be tapped as local
processing makes them viable. And indeed, larger deposits that extend horizontally such as the ones in block
9 can have the vessel redeployed and relocated to ensure untapped resources are left to a minimum; whilst
minimizing the need for expensive pipelines.
Processing LNG on site delivers environmental benefits as it can be shipped directly to markets around the
world thus cutting time to market and reducing the energy burden needed to ship gas to a processing plant or
into storage first. Conditions at sea for processing LNG are excellent as well, with large amounts of cold water
available to support processing of gas and cooling, producing less polluting waste gases [237].
ENI being the only company currently exploring the FLNG option in one of its wealthiest gas fields in Africa will
provide the necessary knowledge for an FLNG (if decided) facility in Cyprus making the ENI-led consortium
being the first to launch a FLNG facility in Europe. ENI announced its request for FEED proposals for a FLNG in
the gas-rich Area 4 field in Mozambique's Rovuma Basin. In a strategy update in 2014 ENI announced plans to
build an onshore LNG terminal and two FLNG terminals with the FID expected before the end of 2015.
Furthermore, KOGAS might drive ENI towards that direction since a FLNG facility will produce the precious
LNG in less time than using an onshore LNG facility which translates to higher profits for the two companies
[238].
105


The drawback of the FLNG, which has a direct impact to Cyprus plans is its non-extendable capacity (ENI
overpassed it in Mozambique by constructing an onshore LNG facility). Once it is built with the agreed
specifications, it is over and currently FLNGs capacity ranges from 3.6
lxiv
to 6
lxv
mpta per annum. Furthermore,
if Cyprus proceeds with the FLNG, the minor domestic demand does not support the construction of the
pipeline to shore and a re-gasification terminal will be needed. According to the Cyprus Mail, Vitol and M&M
have proposed building a floating storage and re-gasification unit (FSRU), while Socar is said to have proposed
an onshore re-gasification plant
lxvi
[239].
Uncertainty is something that many investors frown at, the main initial hurdle logically comes from financing;
the hurdle for FLNG is the uncertainty that surrounds it. Despite some experts saying that the FLNGs to come
will have lower CAPEX (the operational expenses (OPEX) are assumed to be more), the fact that there are no
existing FLNGs in operation speaks for itself. Based on the companies currently involved in the gas exploration
offshore Cyprus, only ENI/KOGAS (and possibly TOTAL) have the potential to face the commercial risks due to
their extensive financial and technical resources to lead projects of this nature. The contractual and finance
structures are not fully tested [240].
An important parameter, which will be sacrificed, is the employability of people. Since one of the well-
advertised advantages of onshore LNG is the employment of many local Cypriots, this cannot be said for the
FLNG. As the FLNG will be constructed in a port far away from Cyprus, it will provide less economic benefit to
the country and fewer jobs.
18.1. Greeces re-gasification strategy
Cyprus aspiration to support EU gas supply security can be achieved through the LNG. Most importantly, LNG
can be directly shipped to Greece, ignoring commercial loss from not selling to downstream premium Asian
markets, which would serve the same political objectives as piped gas to Greece.
Greece has included its 80 per cent capacity increase of the Revithoussa LNG terminal, which will aim to boost
Greece's ability to supply and further diversify southeast Europe's gas systems. Furthermore, two additional
projects - floating LNG stations - were included as PCI's, with at least one to eventually go ahead in the coming
years. The goal is to upgrade incoming transit gas inflows within the country by at least 5bcm per annum giving
another entry point to natural gas to reach the European market [241].
DEPAs planned
lxvii
lxviii
FSRU (floating re-gasification) in northern Greece could provide gas security (from Russia
and from Turkey) in South East Europe which is one of the most vulnerable regions because of their security
of natural gas supply in Europe. Experts have suggested that the FRSU will guarantee Bulgaria's energy
security. This can be achieved by committing part or all of its output to European gas buyers under firm long-
term contracts, including through Balkan gateway re-gasification terminals such as the planned FSRU
lxiv
The first FLNG that is to be online (~2017) is the Shells Prelude which is expected to have a capacity of 3.6mtpa per
annum of LNG as well as process 0.4mtpa of LPG and 1.3mtpa of condensate.
lxv
ExxonMobil and partners BHP Billiton are looking to build an FLNG with a capacity of 6-7mtpa per annum and will
become operational in 2020-2021.
lxvi
It has to be noted that DEFA ended talks with ITERA in September 2013 and ITERAs bid involved procuring liquefied
natural gas (LNG) and re-gasifying it aboard Floating Storage and Re-gasification Units.
lxvii
DEPA at the final stages of finishing environmental impact and feasibility studies. The completion of the floating LNG
terminal project offshore Kavala will further enchase the chances of a meaningful transfer of gas from Greece to countries
such as Hungary and Croatia.
lxviii
Initial LNG storage capacity of 135,000m
3
and projected annual gas send-out of 2.6bcm.
106


offshore Kavalla (connected to Alexandroupolis Independent Natural Gas System) (Figure 83) and the
expansion of the existing re-gasification plant in Revithoussa
lxix
.
Golar is thought to have expressed keen interest in financing DEPAs project. With tensions rising in Ukraine,
the Greek government highlights and enforces the importance of the project to Greeces energy plans in
relation with the Interconnector Greece-Bulgaria
lxx
natural gas pipeline (ranked first among EU Project of
Common Interest) that will allow the flow of natural gas from northern Greece to the Balkans and will be
operational by late 2016 [242].
Furthermore, in order to achieve both political and the commercial objectives RoC can commit volumes to
flexible European IOCs which can deliver their offtake to the highest bidder irrespective of location, and share
some part of this commercial upside with Cyprus.

Figure 83 Kavalas Re-gasification terminal. Source: IENE [243]
19. Cooperation with Israel
The financial crisis into which the country was led from poor Government decisions does not allow the fruition
of most of the export options. The RoC considers the strategic partnership with Israel as the best possible
means to draw foreign investors to the island.
lxix
Upgrade of a liquefied natural gas (LNG) terminal to increase gas reception, storage and output capacity. The project
involves the construction of a third tank, upgrade of the marine facility, the installation of cryogenic equipment and an
upgrade of metering. Approximate total cost 166million.
lxx
Speaking after the EU summit on 27
th
May 2014, Commission President Jos Manuel Barroso made it plain that the EU
executive would impose infringements on Bulgaria regarding the Gazprom favoured South Stream pipeline, the
construction of which is about to begin in breach with EU laws. Therefore, Bulgaria will need to find other ways to get
supplied with NG (not only from the TANAP) [258].
107


In the light of LNG price drop in the near future, time becomes an increasing critical factor in the export. The
target date for gas export is 2020, and already it seems there will be delays of 18-24 months. To anticipate the
desired high LNG prices, benefit from quantities of scale and flooding the Cypriot community with jobs, Cyprus
onshore liquefaction initiative needs available gas, Leviathans gas. Even 8bcm per annum (150bcm in total
which is ~25 per cent of the gas in Leviathan) pipeline from Leviathan to Vassiliko for a period of 15-20 years
would suffice for the construction of 2 liquefaction trains.
Israels main difficulty for building the LNG liquefaction terminal in its own shore is finding a suitable coastal
site that is more than 1km away from the nearest residential area and with the approval of the
environmentalists. Furthermore, being in a region which is highly politically unstable (Syria, Egypt, Lebanon
and Palestine) and heavily influenced by groups such as Hamas and Hezbollah, having a source of highly
flammable liquid within target range is not a wise option.
Cyprus and Israel have signed a number of agreements for defence cooperation and protection, confidential-
information
lxxi
exchange and search-and-rescue training activities and others. The main purpose of those
agreements is to enhance the security of the upstream activities through joint operations as Cyprus cannot
defend its natural resources due to inadequate naval. A demonstration of the defence cooperation and
protection agreement was the joint military exercise called Onisilos-Gideon on 11
th
February 2014. The
exercise occurred inside the Nicosia flight information region (FIR) where Israeli fighter jets carried out flybys
over areas south of Limassol to Paphos featuring 32 F15 and F16 jets. The exercise included simulated firing
at targets on land and sea along the coast of the two cities [244].
Based on the latest information regarding the Tamar field, the latest hope for pooling reserves is from the
development of Leviathan field. According to the statement issued on 20
th
May 2014, Noble Energy announced
that significant progress has been made on the development of the Leviathan field. The consortium is
targeting to sanction the initial phase of development at Leviathan by the end of 2014, with first production
planned for late 2017. The initial development phase is planned to be 16.35bcm per annum from a FPSO
system, to provide natural gas into Israels indigenous and regional markets.
For Phase 2, Pre-FEED studies confirmed technical and commercial viability of the field development with a
FLNG production system. FEED studies are ongoing with BGS, a company which Shell selected to handle the
design, procurement and construction of the Turret Mooring Systems for their FLNG facility named Prelude
[245, 246]. Theoretically, from Noble Energys statement it is clear that the consortium is willing to take the
risk to liquefy their natural resources with a FLNG unit. In practise, however, Israel has not yet officially
lxxii

confirmed its export options and RoCs strategy has to be adapted to cope with Israelis possible export
options. As Mike Efthymiou, a non-executive director of CHC and special adviser to the President on energy
affairs, stated that the Leviathan partners are expected to reach a decision on the second phase of
development (FLNG) by autumn and thus discussions between the RoC and Noble over the next few weeks or
months will be critical [235].
lxxi
RoC and Israel signed on 28
th
April 2014 an agreement on the exchange and protection of confidential information on
hydrocarbons discovered in Block 12 and in the adjacent Ishai offshore licence with the purpose of assisting the two
governments assess extent of hydrocarbons discovered in their respective offshore blocks [60].
lxxii
The Leviathan partners are expected to reach a decision on the second phase of development (FLNG) by the 3
rd
quarter
of 2014. That in turn indicates that discussions between the government here and Noble over the next few weeks or
months will be critical.
108


19.1. Israeli plans
As aforementioned, Cyprus monetization option through an onshore LNG terminal depends on Israels export
plans and/or its total available recoverable natural gas. Currently, there are three phases which compromise
the development of Israels richest gas field, Leviathan.

Figure 84 Leviathan Exploitation phases
Based on the three phases shown above, it is fundamental to investigate Israels possible export options which
consist of:
Pipeline to Turkey;
Pipeline/LNG to Greece;
CNG to Greece/Turkey;
Use of existing pipeline to Egypt;
Onshore LNG terminal and
Offshore LNG terminal.
19.1.1. Pipeline to Turkey
In late March, Globes reported that Turkish multinationals had submitted more than ten bids to buy 7-10bcm
of gas a year from Leviathan, amounts that could generate USD$25-35 billion revenue, assuming a 15-year gas
supply contract at USD$6.50/mmbtu [247]. In April Turcas Petrol made a step further by notifying the Istanbul
Stock Exchange that its gas subsidiary Sabanci Holding has initiated negotiations together with Turkish
Enerjisa
lxxiii
lxxiv
and its German partner E.On to buy natural gas from Israel's Leviathan field for domestic
consumption, a known tactic which was tried with Noble Energy [248].
The problem with the Turkish deal relates to three main points:
the delicate political relationship between Israel and Turkey;
the handling of the negotiations on the parts of the corporate bodies in Turkey and
lxxiii
EnerjiSA is among the biggest natural gas consumers in Turkey.
lxxiv
A similar incident happened in Cyprus in March 2014 where Noble Energy issued a statement denying that the
company was in talks to plan a subsea pipeline to Turkey and subsequently to the European market [225].
Phase I
Exports to Israel and local markets such as Cyprus
(for Electricity production) estimated in 2017.
Phase II
Exports of liquefied natural gas (probably using
FLNG).
Phase III
Involve regional markets such as Turkey, Cyprus,
Egypt.
109


Russia will oppose anything they perceive as being in the interests of the US
lxxv
.
The concerns of the Government of Cyprus should be similar to those of the Israeli Government. What would
happen if Israel had another Mavi Marmara
lxxvi
incident during the lifetime of the offshore pipeline
connecting the two countries? Automatically, the Turkish-Israeli relations would return to a status of hostility
where Israel would be in hostile position since Turkey could cancel its own imports or stop the transit of Israeli
gas through its territory. As in the case of Cyprus, Turkey can find an alternative gas source to meet its demand,
but Israel will not have readily available alternative export destinations. Some might believe that having a
pipeline might bring the two countries to peace. According to Dr. Brenda Shaffer, an expert on Central Asia,
the gas pipelines between countries don't ensure peaceful relations between them. As an example, Shaffer
cites the blowing up of the Egyptian gas pipelines in Sinai, which led to energy crises in Israel and
Jordan. Furthermore, Turkmenistan and as the threat of sanctions against the Iranians and the Kurds of
northern Iraq dissipates, might also compete for the Israeli gas and increase tensions in the area (Figure 84)
[249] [250] [251].
This export option is particularly attractive to the two minor oil companies, Delek and Ratio who might struggle
to raise international bonds to finance their part in developing the Leviathan gas field which is estimated to
cost USD$4.5 billion excluding the export infrastructure needed. A solution which is provided by the money
brought on the table by the Israeli-Turkish pipeline option.
The prerequisite to such a solution remains the same: a solution to the Cyprus conflict given that such a
pipeline would have to cross Cyprus exclusive economic zone. Joe Bidens recent visit to the island created
new hopes that the talks would this time progress and potentially reach a settlement. The second necessity is
the reestablishment of trust between Israel and Turkey: despite Netanyahus apology to the Turks in March
2013 over the Mavi Marmara flotilla incident and the restoration of their diplomatic ties, to date, their
relationship remains fragile [252].
Israeli gas would be delivered to Turkey via an undersea pipeline from a FPSO ship at Leviathan. For an onshore
pipeline, it has to pass through Syria which is highly unlikable due to Turkeys military presence and
interaction
lxxvii
during the ongoing Syrian civil war. Thus, one can suggest that Turkey and Israel have one
theoretical option, offshore. Thus, if it is constructed offshore then the pipeline should pass either within the
Cypriot EEZ (Figure 85) or Lebanese EEZ which means that political breakthroughs must happen for one of the
solutions to become realistic.
lxxv
The US administration is an enthusiastic supporter of the Israeli-Turkish pipeline.
lxxvi
On 31
st
May 2010, 13 Israeli naval commandos using speedboats and helicopters boarded the ships in order to force
the ships to the Israeli port of Ashdod. During the military operation, the Israeli commandos faced resistance from about
40 passengers on the Turkish ship Mavi Marmara which forced them to use their firearms to protect the rest of the
passengers and themselves. During the struggle, nine activists were killed including eight Turkish nationals and one
Turkish American. Following the raid, tensions between the two countries mounted and Turkey expelled the Israels
Ambassador.
lxxvii
On 23
rd
March 2014, Syria accused the Turkish government of shooting down a Syrian jet fighter in their territory.
110


Figure 85 Israel-Turkey proposed pipeline. Source: Hurriet News [253]
The three theoretical scenarios are explained further in sections 19.1.1.1 - 19.1.1.3 below:
19.1.1.1. Onshore through Syria
The first theoretical route of such a pipeline to Turkey is via Syria. Apart from the evident problems of
stabilization, the Syrian president called the Turkish Prime Minister Recep Tayyip Erdogan bigoted and said
Ankara was allowing terrorists to cross into Syria to attack the army and Syrian civilians. Furthermore, the
Syrian Ambassador to the United Nations, Bashar Al-Jaafari, accused the governments of Turkey and Israel of
a "public alliance of supporting terrorism" in his country (trying to remove Assad-regime with the hope that
the new government-placed by them- would satisfy their needs and aspirations) [254] [255].
Furthermore, the Assad regime is likely to have higher priorities than to facilitate the transit of Israeli gas such
as reconstructing its country, which has collapsed during the civil war. Even if Assads regime had no other
priorities, with all the political and military games that took place by Israel and Turkey, Assads regime is closer
to Moscow (they provided the Syrian army with military equipment and training against the rebels) rather
than Ankara/Tel Aviv and Russia would not allow the transit pipeline to proceed and its gas reach EU.
19.1.1.2. Offshore through Cyprus
The second theoretical route of such a pipeline to Turkey is via Cypriot EEZ. This plan was suggested by former
U.S. ambassador Matthew Bryza, who currently sits in the Board of Directors of Turcas Enerji, as the most
commercially efficient
lxxviii
export option for Israeli gas. According to him, the pipeline would cross through
lxxviii
According to feasibility studies conducted by the Turkish energy company Turcas Enerji a CAPEX of USD$2.5bn would
be required to construct the subsea pipeline from Israel to Turkey having a total distance of 470km. Two pipelines will
111


Cyprus EEZ before it enters Turkish/Turkish-Cypriot territorial waters either via Syrias undetermined EEZ
or via the arbitrarily defined EEZ of the occupied northern parts of Cyprus which is solely recognized by Turkey
as the PTRNC and landing either onshore at either Ceyhan or Mersin on Turkeys eastern Mediterranean
coast [256].
However, an offshore pipeline through blocks 12, 9 and 2 envisages that the Cyprus problem will be solved. A
restart of the proximity talks is problematic for several reasons, not the least one, due to the persistence of
the Turkish government to not recognize the existence of the Republic of Cyprus.
The political significance of this incentive should not be underestimated though, especially now that the U.S.A.
has more reasons to push for a resolution and proceed with the Israeli-Turkish pipeline due to Europes need
for an alternative gas supplier to Russia and the unexpected/unplanned continuation of Assad regime in Syria.
19.1.1.3. Offshore through Lebanon
The second theoretical route of such a pipeline to Turkey is via Lebanese territorial waters or Lebanons EEZ
depending on the distance of the pipeline from the shore. The difference would be very significant in terms of
cost since it could increase the cost by a factor of two if it goes via deeper waters. Given the existing state of
war between Israel and Lebanon and their more recent friction over an area of 854km
2
that has frozen the
development of the Alon F & Alon D blocks, it is impossible for the Israelis to bypass both Cyprus and Lebanon
when considering an underwater pipeline connection to Turkey [226].
Even in the highly unlikable scenario that Turkey and Israel finally reach an accommodation with Lebanon they
would have to cross either Syrian territorial waters or Syrias EEZ which are still undefined with both Lebanon
and Turkey.
19.1.2. Pipeline/LNG to Greece
If an undersea pipeline from Leviathan to the Greek mainland with capacity of 20bcm per annum were to be
built, its costs can be inferred from the trans-Mediterranean pipeline recently commissioned between Libya
and Sicily (GreenStream), which also was a challenging engineering project. GreenStream is 520km long, has
a maximum depth of 1,100m, a pipeline diameter of 32 and a capacity of 11bcm per annum. It was built in
2004 at a cost of USD$7.2 billion, or for USD$14 million/km [257].
A pair of 32 pipelines from Leviathan to the Greek mainland would cost around USD$30 million/km (assuming
that formidable engineering challenges can be overcome- ultra deep waters). Adding to the cost of expanding
the capacity of the onshore Greek pipeline system by constructing more pipelines to handle 20bcm per annum,
the estimated capital cost for pipelines from Leviathan to the northern Greek border would exceed USD$37
billion. This capital cost leads to an ongoing cost of up to USD$5/mmbtu, assuming no large subsidies, to
deliver 15.7bcm per annum of Israeli gas from Leviathan to the European gas grid. At current market prices
for Russian gas at the German border, a transport cost of USD$5/mmbtu plus at least USD$1.00/mmbtu in
transit fees leaves a small amount of net income for the Israelis [258].
need to be constructed having a diameter of 24inches. The pipelines will have a capacity of 8bcm of gas per annum each
totalling to 16bcm per annum. An additional USD$83 million would be required to build a 40km pipeline on land to
connect the landfall at Ceyhan to the Turkish national gas grid. More ambitious plans to integrate Leviathan gas into the
EU-supported Southern Corridor project would require either: USD$647million for a 470km connection from Ceyhan to
the TANAP; or USD$1.93bn for a 1,215km pipeline from Ceyhan to the start of the Trans-Adriatic Pipeline (TAP) on the
TurkeyGreece border, for a total of USD$4.4bn to connect Leviathan gas directly with the EU [197].
112


A more cost-effective way for Israel is to secure arrangements with all Balkan states and export natural gas to
Europe via ship. Thus if the Israelis would wish to target the higher value Southeast European markets they
are more likely to export their gas through Greeces main LNG import terminal in Revithoussa or the planned
FRSU in Kavalla. After the expansion of Greeces re-gasification capacity Israelis will be able to provide and
fulfil the energy demand of Serbia, Romania, Bulgaria and Hungary. However, as will be discussed below,
instead of LNG, Israeli might proceed with shipping CNG [226].
19.1.3. CNG to Greece/Turkey
In February 2014, the Israeli Globes stated that based on its sources, the Tamar gas field partners are planning
USD$15 billion in natural gas sales to Turkey, Greece, and Cyprus without the need to build a pipeline. To be
more precise Noble Energy, Delek, Isramco and Alon were in talks with Edeltech Ltd s owner Uri Edelsberg,
who wanted to buy gas to supply it to customers in the Eastern Mediterranean Basin [259].
The talks have mentioned buying all 80bcm of gas that may be exported from Tamar and Tamar SW field.
However, based on the latest news, the sign of MoU with Union Fenosa could mean the end of any preliminary
agreements between the parties.
Although theoretically, there will be no available (unsold) gas in the Tamar field, there is plenty of gas in the
Leviathan and a scenario with monetization by CNG looks as an ideal theoretical solution but not a practical
yet, as its main disadvantage is that it has not been used before. However, in contrast to the piped gas, CNG
is the optimum export solution due to its several advantages such as:
Reduced investment in construction;
If an offshore compression vessel is used, there will be no onshore terminal no problem with the
environmentalists
Reduced price; Cyprus has the highest electricity rates in Europe, and recently published a ten-year
natural gas purchase tender
lxxix
. Although the tender targets LNG suppliers, Cyprus might end up with
CNG which costs much less than LNG;
No need for re-gasification unit, this is an important advantage especially in the Greek islands which
are not connected to pipelines and must operate power stations with diesel;
No need for permission from hostile or war-torn countries for a pipeline to pass through their exclusive
economic zones;
Suitable for transportation to longer distances, to Turkey, Crete, and mainland Greece;
CNG systems can meet delivery within three years from the order and
Greater operational flexibility without the dependence on long-term contracts with a limited number
of customers [259].
What the overall background of CNG suggests and was backed up by energy experts is that if Cyprus does not
solve its dispute with Turkey, Delek who pushes hard to export gas to Turkey, might move for an agreement
with Turkey using CNG instead of piped or LNG gas [260].
lxxix
Delek submitted its tender for the supply of natural gas to Cyprus electricity power plant. The raw value of gas from
Tamar is estimated at USD$7 per mmbtu and the transportation cost of gas from Israel to Cyprus is estimated at USD$2.50
per mmbtu. Thus giving a final price of around USD$10 per mmbtu, USD$8 less compared with the current price of
USD$18 per mmbtu for LNG.
113


19.1.4. Pipeline to Egypts LNG facilities
After the Mavri Marmara incident in 2010 Alon Liel, a former Israeli ambassador to Turkey warned of a new
Turkish-Egyptian alliance that could isolate Israel in the Mediterranean which would alter the powers in the
region and enhance the already unfriendly environment for Israel [261]. In September 2013, Henderson in his
report (Natural gas export options for Israel and Cyprus) stated that Israel was examining possible ways to
supply gas to Egypt with interest to reverse the flow of the Arish - Ashkelon pipeline (Figure 86).
Egypt since 2012 sees its domestic gas demand increasing day by day and cannot meet its contractual
commitments for export volumes
lxxx
. Thus the Egyptian Government is seeking to import natural gas. At
present, Egypt has no re-gasification terminal available which limits its gas import from either using an existing
or building a new pipeline from a neighbouring country such as Israel. Israel knew that by establishing itself as
a gas supplier to Jordan, the Palestinian Authority in the West Bank and to the Gaza Strip, it could overcome
the domestic political objections for such an agreement to proceed, which is exactly what they have done.
Although on 23
rd
October 2013, an Egyptian State
Executive stated to Reuters [262] that Egypt is not
interested in importing gas via pipeline from Israel and
instead is focusing on a plan to import LNG, the prices of
Egypt's LNG re-gasification terminal
lxxxi
and the higher prices
LNG fetches in the global spot market have driven Egypts
import strategy towards Israel.
On 5
th
May 2014, Noble Energy announced that it has signed
an initial agreement (non-binding Letter of Intent (LOI) to
sell natural gas from the TAMAR field to Union Fenosa
lxxxii

Gass (UFG) existing gas liquefaction facilities in Egypt for
the next 15 years (~5bcm per annum). The LOI
contemplates a total gross sales quantity of up to 2.5tcf of
natural gas [263].
Importantly, as local Israeli news agency stated that the
price for the natural gas sold will be similar to the contract
price in other natural gas sales and purchase agreements
and is based mainly on a linkage to Brent oil prices. This translates to a deal worth of USD$1.3 billion annually
over 15 years totalling to USD$19.5 billion. Furthermore, Egyptian news agencies state that BG Group is also
in talks with the rights holders in Leviathan for the purchase of 5tcf, for a total of up to USD$40 billion after
high financial losses ~USD$1.5 billion in 2013.
Another benefit for Israel is that if the agreement comes to fruition, it will also increase the capacity for
natural gas deliveries to Israels domestic market said Keith Elliott, senior vice president of Noble Energy in
the Eastern Mediterranean [263]. The reason is simply the capacity of the existing two pipelines. Israeli
explorers and their international partners know that without an export market it will be difficult to finance
lxxx
In order to overcome the penalties from its buyers, Egypt agreed with Qatar in September 2013 to make LNG cargoes
available to be delivered to Egypts export customers.
lxxxi
The re-gasification terminal would be more expensive than piping gas from Israel due to the cost of erecting the
terminal compared to fixing the existing pipeline network.
lxxxii
A joint venture of Italy's ENI and Spain's Gas Natural operating the LNG terminal at Damietta.
Figure 86 Arab Gas Pipeline. Source: Wikipedia [284]
114


fresh exploration, and near impossible to secure funds for Leviathans full field development (case which we
face now with Delek). In the long-term this will, paradoxically, also limit the volume of gas available to the
domestic market since the companies will have limited gas to satisfy both domestic market and exports. Thus,
if the LOI comes to fruition it will enable Noble Energy-led consortium to develop the 3
rd
pipeline ahead of
plan increasing the capacity from the wellhead to the production platform and get the USD$3bn needed for
the full development of the field until 2043 - total production 56.6bcm per annum.
19.1.5. LNG
Israel has the option to monetize its natural resources by liquefying its natural gas from the Tamar and
Leviathan fields. The LNG could be sold either in the European market or be shipped via the Suez Canal
lxxxiii
or,
if the LNG terminal is based at Eilat, be shipped directly from the Red Sea to Asian customers or to other
markets.
The small but beautiful coastline of Israel has become the priority of the residents and environmentalists to
protect. The Israelis have shown their opposition to the construction of any major infrastructure facility
through various ways including protests. Furthermore, Noble Energy representatives told local residents that
the company had no plans to build an onshore gas handling facility. The reason behind this statement was
mainly due to technical and economical but not environmental issues. The onshore facility would require the
use of compressors due to the time/production-depended pressure drop at the well heads. An upgrade to the
existing subsea production wellheads which would require the company to change the gas handling method
would cost a lot of extra millions of dollars [264].
The project that would allow Israeli government to maintain physical control over its export facility and avoid
politically contentious permits for a land based liquefaction terminal in Israel (or in Cyprus
lxxxiv
) drove the Noble
Energy-led consortium to examine the development and implementation of a floating LNG facility [8].
In November 2011 the Noble Energy-led consortium signed an agreement with Daewoo Shipbuilding and
Marine Engineering, NextDecade and D&H Solutions to initiate joint development and implementation of a
floating LNG facility. Shortly after, the midstream project company Levant LNG Marketing Corporation was
established to conduct discussions with potential LNG buyers. Surprisingly, on the 26th of February 2013, the
corporation signed a LOIC for a long-term (about 20-years
lxxxv
lxxxvi
) LNG supply with a subsidiary of Gazprom forcing
the Israeli crowds in the streets shouting against the contract claiming that the deal would harm interests
and the relationship of Israel with the U.S.A. [265]. The agreement, however, was frozen as the government's
lxxxiii
There were fears (from Israeli Government officials) that the Muslim Brotherhood-dominated government in Egypt
would slow down or even prevent Israeli LNG cargoes transiting the Suez Canal to Asian customers (although treaty
obligations guarantee free passage, politically motivated inspections of Israeli cargoes on spurious safety grounds could
render the route unviable.) With the new Egyptian Government, such fears are eliminated since they are more likely to
allow Israeli LNG cargoes transiting the Suez Canal.
lxxxiv
There was a great debate in Israel about whether sending gas to Cyprus would simply extend security vulnerabilities,
while putting a national strategic asset in the hands of a third-party country [220].
lxxxv
Gazprom is evidently repeating what is trying to do in Azerbaijan, that is, absorbing as much gas as it can from
potential competitors and preventing them from reaching the traditional markets of Gazprom. Economic considerations,
such as the prices, have nothing to do with this strategic purpose. When the Russians buy gas from Azerbaijan, they pay
a European price but deliver this gas to North Caucasian regions, which do not pay for it. The deal with Tamar can be
regarded from the same angle. Gazprom wants to control the gas flow from Eastern Mediterranean before it reaches
South European markets. With the same goal in mind, the Russian behemoth is making an attempt at establishing control
over DEPA.
lxxxvi
The basic interest of Russia in South Eastern Mediterranean is to ensure a broad influence in the area gaining
importance on account of either its gas/oil richness or strategic position, a position which frets USA.
115


gas exports decision rendered the project uneconomical. Russias Lukoil and Gazprom strategy to buy
European refineries (Italy, the Netherlands and Romania) has rung bells to the EU officials who prepared a
draft report for the region's leaders stating that Russia's strategy of buying up oil refineries in Europe could
compromise the bloc's energy security [266] and special mitigation measures had been taken to prevent that
from happening.
At the moment, Noble Energy is evaluating FLNG for the Leviathan field, envisioning a capacity of 3mtpa and
a target start-up in 2017-18 as it is anticipated to be the production system for the second stage of
development [245]. As aforementioned, the DSME/Technip, Samsung Heavy/Saipem/Chiyoda and Hyundai
Heavy/KBR groups received bid documents for FEED work on Noble Energy Leviathan projects FLNG scheme
off Israel. Bids are due for submission by mid of this month. The FLNG vessel required should be able to handle
3mmtpa of LNG. FEED work is expected to start in August and run until mid-2015. FID on the project is targeted
for late 2015 with first gas production in 2018/19 [267].
One of the greatest issues Israel will have to face is the security vulnerabilities of such a huge installation,
comparable in size to four aircraft carriers which would be vulnerable to attack by anti-ship missiles or even
rocket-propelled grenades. Over 100 projectiles fired by terrorists in the Gaza Strip, ruled by the Islamist
movement Hamas, have struck Israel since the start of 2014, with 3278 (maximum number of rockets) being
launched in 2008 [268]. Former navy chief, V.-Adm. Eliezer Marom, during a security conference in Rishon
Letzion described the region as a "pretty wild jungle, with many threats," including Gazan terror organizations,
Hezbollah in Lebanon, and armed groups in Syria [269]. Further to those issues above, Russia has sold to Syria
their most advanced anti-ship missiles (P-800 Yakhont) which at any time can end up in wrong hands [270]. It
would be nonsense to believe that having an FLNG would not become the primary and ultimate target of the
various groups fighting against Israel.
From a technical point of view, Woodside Petroleum, which signed on the 7
th
of February 2014 an MoU with
Noble Energy and its Israeli partners to take a strategic investment in the Leviathan field could be the first
company in the region which had hands on experience with the most ambitious FLNG vessel, Shells Joint
Prelude project
lxxxvii
which was selected on 20
th
August 2013 by Woodside to be used in the Browse gas fields
offshore Western Australia [271]. Following many months (started in March 2014) of disputes regarding the
taxation between Israel and Woodside, on 20
th
May 2014 Noble Energy announced that the MoU was
terminated. Based on Noble Energys statement following the termination of the MoU, the company stated
that the plans for development of the Leviathan discovery have significantly changed the emergence of
regional markets which are accessible through pipeline outlet has pushed the need for LNG into a later phase
of development. However, one can argue that Woodside being specialized in developing LNG installations,
was seeking the development of an onshore or offshore LNG terminal which seemed to clash with Noble
Energys short term development strategy is a more valid reason for the MoUs termination [272].
What really matters is that a key player who would have experience in the FLNG is not involved in the Leviathan
production activities and although the consortium states that this will not affect the development, still
USD$2.71 billion (Woodsides cost for the 25 per cent share) must be found from another source (raising
international bonds) to allow the initial phase to proceed as planned.
lxxxvii
Shell's Prelude FLNG vessel having a CAPEX of USD$5bn, is still under construction and will not be ready for
production until 2016-2017.
116


Based on the issue that has arisen with Woodside, Leviathan geologist Dr. Josep Langotsky (considered the
father of Israel's offshore deep water gas exploration), (supported by Knesset Members Shelly Yachimovich
(Labour) and Moshe Gafni (United Torah Judaism)) supported a statement filed by the Movement for Quality
Government objecting to the arrangements between Noble Energy and Delek, and the Antitrust Authority. Dr.
Langotsky proposed splitting up the Leviathan giant gas field into several licenses and producing natural gas
separately and independently from each of them. This would allow other key players like Woodside to proceed
with its needs (start developing the FLNG) without any blocks from other stakeholders [273].
20. Cooperation with Egypt
Due to the fact that there has never been a scenario where one country has used another countrys LNG
facilities to export its own natural gas, especially in the case of Cyprus which does not have a strong military
presence, it would be risky for Cyprus to follow this route. Therefore, it is not practical for Cyprus to pursue
this option as this would extend security vulnerabilities while putting a national strategic asset in the hands of
a third-party country having a politically unstable environment.
Although it is risky to use Egypts LNG terminal, having Egypt as the end user is not. On the second quarter of
2013 Egypt gave the green light for companies to import gas. Such a move was highly exploited by Israel that
took all the necessary actions to sign a LoI for gas supply (discussed further in section 19.1.4 above).
Regardless of the fact that a LOI has been signed by the consortium Union Fenosa in which ENI is involved,
there is a tight timeframe which allows Cyprus, if it moves fast and makes the necessary arrangements, to
secure its first natural gas export.
Due to Israels high domestic gas demand; the pipeline from the Tamar field (having capacity 10bcm per
annum) to the onshore terminal is already struggling to meet peak demand thus Israel will not be able to
export gas during some hours of the day. However, the pipeline will supply gas to Egypt which is still connected
to Israel via the pipeline built by Egypt's East Mediterranean Gas Company (EMG) during off-peak hours at
night [274].
The Noble Energy-led consortium plans to complete by 2016-2017 the extra (3
rd
) pipeline which will double
the delivery of natural gas from the Tamar field to 20-22bcm per annum thus allowing the export of both
domestic and export volumes. The third pipeline will be able to deliver 6bcm of gas a year to the Israeli market
and the same amount to Egypt's LNG plant in Damietta.
On the other hand, significant progress has been made on the development of the Leviathan field, following
approval of Israel's natural gas export policy. Noble Energy is targeting to sanction the initial phase of
development at Leviathan by the end of 2014, with first production from the field currently planned for late
2017 [245].
Therefore until 2017, Cyprus will have the opportunity to sign deals with the Egyptian government.
Although RoCs long-term goal is to become a key energy player in Europe by supplying LNG (from an onshore
Liquefaction terminal), Egypt can serve as the short-term solution. By having another export option any
associated problems with the operation of the LNG will not prevent Cyprus from continuing its exports, an
ability which can increase investors confidence and finance the onshore LNG terminal.
117


In the long-term and after the completion of the onshore liquefaction terminal, LNG can be supplied if
requested since the Egyptian Natural Gas Holding Company signed an LOI with the Norwegian LNG company
Hegh for a FSRU which will be used for five years as an LNG import terminal at the port of Ain Sokhna, in the
Gulf of Suez and scheduled to start operations in the third quarter of 2014 [275].
Although an FLNG can be used, a pipeline or CNG can provide the best financial solution. Interestingly, Foreign
Minister Kasoulidis speaking to public broadcaster CyBC stated that CNG can be an option that can be utilised
for short distance (targeting Egypt) shipments [276].
21. Cooperation with Lebanon
During a recent visit in Cyprus, Lebanese Minister Bassil confirmed to Minister Lakkotrypis that Lebanon is
considering using Cyprus facility to export some of its natural gas. Given the close proximity of the two
countries (265.3km away) it is a strategic plan that would allow Lebanon to increase its offshore exploration
and bring key companies in the bidding rounds. As shown in Figure 88, there are promising structures and
elements which are identified in the seismic data. Thus, it can be understood that if Lebanon speeds up its
exploration phase by leasing its offshore blocks, Cyprus will have another strategic ally that will favour the
construction/expansion of the proposed onshore LNG plant. This can only be a long-term strategy, since at
present, Lebanon is far from exploration. [277]

Figure 87 Seismic data offshore Cyprus and Lebanon. Source: Semb [278]
22. Curse of natural resources
The resource curse, also known as the paradox of plenty, refers to the paradox that countries and regions with
an abundance of natural resources like oil and gas. Studies have suggested that those rich in resources
countries tend to grow slower than those that have fewer resources. This resource curse is shown via the
Table 13 below where the resource-poor countries seem to grow exponentially.
118


Table 13 GDP growth. Source: The World Bank [279]
1970-1980 1981-1989 1990-2007 1981-2007
BOTSWANA 15.4 11.4 5.8 7.7
CHILE 3.0 4.0 5.5 5
INDONESIA 7.9 6.1 4.9 5.3
MEXICO 6.7 1.5 3.2 2.6
NIGERIA 6.7 0.6 4.4 3.1
SAUDI ARABIA 13.5 -1.4 3.4 1.8

Many studies have tried to explain this unusual phenomenon and there is a general consensus that the
problem is hypothesized to happen for many different reasons such as, after Sachs [280]and Coutinho [281]:
1. The Dutch disease
2. Deterioration of governance and conflict
3. Overinvestment in physical capital
4. Underinvestment in human capital
5. Increased macroeconomic volatility
22.1. Dutch Disease
This symptom was founded in the Netherlands as the name suggests. In the late 1950s there was a discovery
of natural gas off the North Sea coast, which resulted in the contraction of the trade sector such as
agriculture, manufacturing and tourism because of the increase in profits in the resource sector including
natural gas, coal, oil and minerals. This resource boom impacts the lagging sector of the economy in two ways.
Firstly, it switches labour away from the manufacturing sector towards exploiting the natural resources now
at its disposal. While this helps to increase the short-term revenue gained from these resources it lowers the
productivity of the trade sector of the economy. This has major impacts in the long-run when the resources
are all used up as now the tourism sector of the economy is extremely weak and unproductive and so the
economy has nothing to fall back on.
Secondly, the increase in spending in the economy as a result of the additional income provided by the
resource boom transfers yet more labour away from the manufacturing sector but this time to the non-
tradable goods sector. This shift thus increases the demand for non-tradable goods and thus drives prices for
these goods higher. However, as prices for the traded goods sector are set by demand over the world prices
for these goods would not change leading to an increase in the real exchange rate. In other words, Cyprus
being heavily dependent on the Tourist industry will a) not continue its development and b) face an apparent
decline in that sector if compensator measures are not taken [282].
22.2. Deterioration of Governance and Conflict
In more recent times, the resource curse has been linked with weak institutions. Economic groups tend to
have rent-seeking behaviour when natural resources windfalls occur as the government seizes large rents to
be re-distributed. Thus rent-seeking activities shift resources from productive areas and consequently give rise
to deadweight loss for the economy. Having a weak institution and pressure from different interest groups
leads to a misallocation of government revenues. The pressure from these interest groups gives rise to the
phenomenon voracity effect whereby the revenue windfall benefits are wasted.
119


22.3. Overinvestment in Physical Capital
Another observation made regarding resource-rich countries is that they tend to use revenue on low return
overambitious projects and thus ignore private investment, which are consequently down-sized or abandoned
altogether. This uncertainty in revenues causes a continuous cycle of booms and busts in the government
investment sector, which are associated with high investment costs for adjustments. These can include costs
of training workers when investments are high or dismissing workers when investments are low.
22.4. Underinvestment in Human Capital
The resource curse can also be attributed to low investment in human capital. It can be observed that as the
natural resource abundance increases, measures of education such as school enrolment are said to be
decreasing. This can be due to the opportunity cost of investing in education increasing as natural capital
overshadows the human capital.
22.5. Macroeconomic Instability
The business cycles of resource rich countries compared to resource poor countries is a determining factor
explaining the resource curse as the former have a significantly larger business cycle than the latter. The
determining reason can be attributed to pro-cyclical fiscal policies that translate the price volatility of the
natural resource into macroeconomic instability. This coupled by access to cheap credit in the capital markets
when there is a price boom further aggravates the situation. The resulting inflation from the cycles due to an
overheating economy causes the overvaluation of real local currency, which in turn damages the credibility of
the exchange rate and other monetary policies that are associated with it.
Also, when the natural resource prices are low, the high debts that have been accumulated lead to high
interest rates. Nigeria can be taken as an example; in the 1970s their oil was used as collateral to tackle their
debt when the prices were high; however, when the oil prices dropped a decade later, they were left with
little or no ability to tackle their debts
lxxxviii
.The debt stock increased with leaps and jumps, even when no new
loans were contracted. Nigerias external debt stock till 1977 was less than USD$0.8 billion. Beginning from
1978, the external debt stock began to grow astronomically, rising from USD$0.763 billion in 1977 to USD$5.09
billion in 1978 and USD$8.855 billion in 1980, an increase of over 73.96 percent between 1978 and 1980. By
December 2004, the total external debt stood at USD$35.94 billion indicating an increase of USD$3.03 billion
from December 2003. In 2006, the Paris Club creditors agreed to cancel a massive USD$18 billion of debt,
enabling Nigeria to use accrued savings to train 145,000 teachers; put over 3.5 million children into school;
build 166 new health centres and provide 79,000 doses of anti-retroviral drugs for HIV/AIDS patients [283].
The lack of proper management of the windfall revenues can also be attributed to the resource curse which
consequently leads to other determining factors of this phenomenon such as the appreciation of real interest
rates due to increased government borrowing and macroeconomic instability due to pro-cyclical fiscal policies.
Thus, it is recommended that the theories that determine the best use of abundant resource revenues be
reviewed.
lxxxviii
For more information please read Origin of Nigeria's Debt available at,
http://www.dmo.gov.ng/ardrnigeriaexternalanddomesticdebt.php
120


23. Optimal Use of Revenues: The Theory
Like almost all natural resources, oil and gas are exhaustible and have price trends thus measures of
permanent income have to take these characteristics into account. L. Coutinho describes seven points which
can be followed for optimal use of revenues however in this publication only the three will be presented;
emphasis will be given to the formation of National Revenue Fund (NRF) [281].
23.1. Consumption Smoothing
Present value of expected revenues should form the basis of spending, taking into account price uncertainty,
and uncertainty about the time of resource depletion. This means that revenues should be saved and invested
in good times, so that returns on investment constitute a permanent stream of income.
23.2. Binding Fiscal Rules
Binding fiscal rules can be used to limit the use of windfall revenues and guarantee an optimal level of savings.
There are different types of rules, which can be adopted. The key point is to insulate government expenditure
from fluctuations in natural resource prices. Decoupling fiscal policy from revenue fluctuations works to
minimize the Dutch disease (for more information read section above) through the containment of fiscal
spending. In addition, fiscal policy can also help to cushion part of the windfall by repaying public foreign debt,
taking away some of the pressure on the real exchange rate. This will also strengthen the fiscal position and
give the government room for movement during revenue downfalls.
23.3. Sovereign Wealth Fund
The above two points address the problems of price volatility and natural resource exhaustibility, but do not
guarantee that gas revenues are used to foster future financial growth and development. A medium which
takes into account the welfare of future generations and addresses both expenditure smoothing and inter-
generational transfer (savings funds or future generation funds) can be provided with the formation of SWF.
A SWF is a state-owned investment fund investing in real and financial assets such as stocks, bonds, real
estate, precious metals, or in alternative investments such as private equity fund or hedge funds. Sovereign
wealth funds invest globally. Most SWFs are funded by revenues from commodity exports or from foreign-
exchange reserves held by the central bank.
Some sovereign wealth funds may be held by a central bank, which accumulates the funds in the course of its
management of a nation's banking system; this type of fund is usually of major economic and fiscal
importance. Other sovereign wealth funds consist of simply the state savings that are invested by various
entities for the purposes of investment return, and that may not have a significant role in fiscal management.
Growth and development can be achieved through sensible and credible fiscal policy choices. The National
Revenue Funds date back to 1956 when was established by Kuwait and currently Norway is been ranked as
the country with the most assets in its sovereign wealth fund, USD$878 billion as shown in Table 14.

Table 14 Sovereign Wealth Fund Rankings for up to 2013. Source: Sovereign Welfare Fund Institute [284]
Country Sovereign Wealth Fund
Name
Assets
Billion
USD
Inception Origin Linaburg-Maduell
Transparency
Index
Norway Government Pension Fund
Global
878 1990 Oil 10
121


UAE Abu Dhabi Abu Dhabi Investment
Authority
773 1976 Oil 5
Saudi Arabia SAMA Foreign Holdings 737.6 Not Available Oil 4
China China Investment
Corporation
575.2 2007 Non-
Commodity
7
China SAFE Investment Company 567.9 1997 Non-
Commodity
4
Kuwait Kuwait Investment Authority 410 1953 Oil 6
China Hong Kong Hong Kong Monetary
Authority Investment
Portfolio
326.7 1993 Non-
Commodity
8
Singapore Government of Singapore
Investment Corporation
320 1981 Non-
Commodity
6
China National Social Security
Fund
181 2000 Non-
Commodity
5
Singapore Temasek Holdings 173.3 1974 Non-
Commodity
10
Qatar Qatar Investment Authority 170 2005 Oil and Gas 5
Australia Australian Future Fund 90.2 2006 Oil and Gas 10

23.3.1. Norwegian Pension Fund Global
A model, which accounts the welfare of future generations the Government officials should seek to follow, is
the successful Norwegian model, which is famous for its transparency. The resources on the Norwegian Shelf
belong to the greater community and provide a significant contribution towards financing our welfare system.
The petroleum activities provide higher return than a normal return. Figure 88 shows the Norwegian State
takes a substantial share of the revenues from the petroleum activity on the Norwegian Shelf through taxes,
fees and the State's Direct Financial Interest portfolio. The cash flow from the petroleum activities is
transferred in its entirety to the Government Pension Fund Global, previously known as the Norwegian
Government Petroleum Fund. The purpose of the Government Pension Fund is to support government savings
to finance the pension expenditure of the National Insurance scheme and long-term considerations in the
spending of government petroleum revenues [285].
Over time, the central Government structural non-oil budget deficit shall correspond to the expected real
return on the Government Pension Fund Global, estimated at 4 per cent. This fiscal policy guideline is not
exercised mechanically, however, considerable emphasis is placed on stabilising economic fluctuations. The
guideline
lxxxix
thus entails a gradual increase in the use of the petroleum revenues up to a level that can be
sustained over the longer term (Figure 89) and since the reserves are exhaustible, the fund takes that into
consideration by investing in financial assets outside Norway [286].
lxxxix
The guideline and the administration of the Norwegian Government Pension Fund Global is explained in more detail
in the annual national budgets and in the report to the Storting on the Government Pension fund.
122


Figure 88 Net Norwegian Government cash flow from petroleum activities 1976-2010. Source: MoPAE Norway [285]

Figure 89 Government Pension Fund Global. Source: MoPAE [285]
24. Human resources
With all the on-going uncertainty, there is nothing to be done apart from wait for more drilling to be
completed, which will allow for an FID to be taken. On the other hand, we as individuals must take this delay
as the opportunity to extend our knowledge and experience in the gas industry. Ellinas advised the young
Cypriots at Frederick University who would like to be employed in the islands natural gas industry, to leave
the country in order to have any employability chances later on [287].
123


Based on a presentation given by Ellinas, a large number of workers will be needed before, during and after
an LNG plant is built, which could peak at 7,500 people during the construction of the onshore plant at
Vassiliko, with about 700 jobs being created during the operation phase (Figure 90).

Figure 90 Number of employees needed during construction of onshore LNG facility. Source:Ellinas [73]
However from the 7,500 only 2,500 jobs will go to Cypriots and that is mainly due to a lack of experience
xc
in
the construction of LNG plants but with initial preparation many jobs can be provided outside the LNG plant
with construction consultancy firms convincing firms like Noble Energy, ENI/KOGAS and Total to maximise
Cypriot participation since according to Ellinas for every job created during construction, three or more other
jobs will be also created in the fields of external support, security and supplies
xci
raising the overall number
to 26,250 [73].
Following that, during the 3
rd
energy symposium, the current chairwoman of the CHC, Toula Onoufriou urged
the people to think along these lines. She talked of an energy hub not only for producing and exporting but
also a centre of training and education and technological development. As a plan to develop the human
capital potential three training objectives have been highlighted [288]:
Train a new generation of young professionals and entrepreneurs who will have the knowledge and
skills to work and thrive in this new environment;
Train the staff that will man the various government and other bodies that will support this industry
(National Oil Company, Regulatory Bodies, Ministries etc.) and
xc
The famous and highly used meson cannot be used for gaining jobs in companies such as (Noble /Delek /ENI /TOTAL
/ Schlumberger /Halliburton /Technip /VITTOL etc.) whose main priority is their in house performance and sustainable
growth.
xci
According to Dr Richard Burns there will be areas such as the local hotel industry that could be adapted to meet
employment opportunities. A construction camp for the workers on the LNG plant will need to provide very similar
services to what the hotel industry provides so there will be opportunities for medium sized companies to thrive again.
124


Train skilled workers to support the various operations offshore and onshore related to the
hydrocarbon industry (e.g. major oil companies, LNG plant, specialized and other support services)
With regards to the first bullet point, ENI has offered scholarships to two Cypriots for postgraduate studies in
energy, the environment and economics at the Scuola Enrico Mattei, part of the ENI Corporate University in
Italy [289] and Noble Energy/Total contribute 1.5m towards degrees related to the oil and gas industry.
Furthermore, the Minister Lakkotrypis announced the allocation of 30million through four new schemes for
youth, clusters, Business Innovation Centres and Promotion of Innovation activities, during the new
programming period, as compared to 4mn in the period 2007-2013. This move comes to support
Governments long-term vision, which is to create a knowledge-based economy around the oil and gas
industry one that will enable Cyprus to export services in the region and beyond [290].
24.1. Israel as an example to avoid
During his talk at Frederick University, Ellinas said that if preparations such as young people going abroad to
seek experience, were not done correctly, ahead of the beginning of construction, Cypriots could even lose
out on the jobs that could be available to locals. This has been demonstrated by our neighbouring Israel.
Israel has become a regional natural gas power, and according to Ministry of Economy and Natural Gas
Authority estimates, 3,000 employees will be needed in the gas sector in the coming five years. As in most
cases, estimates are one thing, and reality is another. In 2012, the Technion Israel Institute of Technology in
Haifa launched a new MSc Engineering program with a focus on oil and gas, together with the prestigious
University of Haifa. Only four of the programs twenty graduates have found work with the oil and gas
exploration companies in the local market and none has found work in government services, which do not
even have many of experts in the field. A statement from an Israeli graduate student explaining that they
dont have much hope of finding work in the local market and that anyone looking for work in the field needs
to relocate abroad confirms Ellinas words. Professor Ove Gudmestad, an expert in developing offshore gas
fields from Norway's University of Stavanger, takes it a step further by stating that it is important for key
people in the Government to understand what the foreign companies that are drilling are proposing [291].
24.2. Norway as an example to follow
At the end of the 1950s, few people imagined that the Norwegian continental shelf concealed wealth
consisting of vast volumes of oil and gas. However, the gas discovery in Groningen in the Netherlands in 1959
led to newfound optimism surrounding the North Seas petroleum potential. The Norwegian oil and gas
bonanza begun 10 years later with the discovery of Ekofisk in 1969, from which production started on the 15
th

of June 1971. Since then several large discoveries are made making Norway a significant gas exporter for the
EU [292]. In the beginning of the exploration phase, the authorities chose to start with a model where foreign
(mostly U.S.A. based) companies operated the activities. This meant that foreign companies initially
dominated the exploration activities and developed the first oil and gas fields. Eventually, the Norwegian
involvement increased with Norsk Hydro joining in, and in 1972, Statoil was established with the State as sole
owner. In 2007, Statoil merged with Norsk Hydro and became one of the world's largest suppliers of oil and
gas. Statoil has been one of the most important players in the Norwegian oil industry, and has heavily
contributed in Norways transformation to a modern industrial nation (the petroleum sector constitute about
25 per cent of the States total income). The domestic oil and gas industry has since being pioneering and
expanding by former Statoil employees who established dozens of companies specializing in technical services.
Today, Norway is one of the world's most productive petroleum provinces and a test lab for technology
development [293]
125


25. Conclusion
Cyprus geological position stands at the crossroads of three continents, Europe, Asia and Africa which makes
it the best strategic position for the superpowers enabling Cyprus to have a key role in history. Britains main
motive in acquiring Cyprus in 1878 was to combat Russian influence in the Mediterranean and to protect its
route to India. In our times, (un)fortunately Cyprus lies in the strategic position of Russia and U.S.A. where,
Russia being Europes major gas supplier secures its position by controlling other possible gas entry routes
(such as the Islamic Pipeline) and U.S.A. trying to prevent Russias expansion by politically influencing countries
such as Syria, Egypt, Qatar, Israel, Turkey and Ukraine.
The hydrocarbon exploration could offer a very positive incentive for the resolution of the Cypriot question
but also increase Cyprus political leverage in EU since it can provide another gas supply route to the Russian
depended European market. Since the beginning of the 20
th
century, various companies tried unsuccessfully
to discover gas with the BP (named as Iraq Petroleum back then) being the most notable name. Since then,
technological improvements such as the use of P-up PSTM stack method and dual-sensor streamer (has the
ability to record more of the low frequency events in the seamount) have enhanced the possibility of
successful hydrocarbon explorations.
The presence of hydrocarbons seems for the citizens of Cyprus the best solution in reviving the countrys
economy which resulted from the bailout in 2013 and thus there is an enormous interest in Cyprus and abroad
in the role of hydrocarbons can play. The RoC under the presidency of Demetris Christofias had opened two
bidding rounds. Upon extensive negotiations an Exploration License for Exploration Block No 12 was granted
to medium-sized U.S.A. Houston based Noble Energy International Ltd, Exploration Blocks No 2, 3 and 9 to the
consortium led by ENI (acting as an operator with an 80 per cent interest) and KOGAS and Exploration Blocks
10 and 11 to French TOTAL.
A sustainable strategy looking towards the medium and long-term revenues, should take into consideration
the domestic market. Various research works has shown that regardless of the extent of domestic gas use in
the coming years, Cyprus will have sufficient resources for developing export capabilities. Hence, Cyprus will
monetize its natural resources through exports.
In order to determine the most beneficial monetisation option and make a prudent investment decision, each
monetisation option is evaluated over its entire lifetime. The main factors that influence the investment
decision are:
Demand trends in regional international markets;
Competitive suppliers in regional international markets;
Distance/transport cost to regional international markets;
The option of diversifying exports;
Investment capital cost and
Reliance on infrastructure.
Eight long term monetisation options are examined based on those investment decisions. Given the
combination of Cyprus rating as junk, the low volume gas reserves, the possible decrease of LNG price and the
unsettled Cyprus problem, it seems that not all of the options can be feasible. However, the future is uncertain
and any change of the above factors can enhance the feasibility of options such as the FLNG and CNG. The
monetization options investigated in this publication are:
126


1. Constructing a liquefaction facility to liquefy and export Cypriot natural gas;
2. Constructing a submarine pipeline to Europe via Greece;
3. Constructing a submarine pipeline to Turkey;
4. Developing a compressed natural gas (CNG) marine transport system (for Egypt/Greece);
5. Constructing a liquefaction facility to liquefy and export Cypriot and Israeli natural gas;
6. Developing a floating liquefaction plant (FLNG), alone or with Israel;
7. Developing the EuroAsia electricity transmission line to Israel and Greece;
8. Developing a conversion of gas to liquids (GtL) industry and
9. Constructing a pipeline to Egypt (as a short-term monetization option).
Cyprus should re-align its export strategy and turn to regional markets if the Government does not secure the
necessary funds from either the EU through the projects of common interest scheme or private investors or
if the companies do not enhance their exploration programme. Regarding the future exploration, ENI/KOGAS
will commence geophysical surveys in 2014 with Noble Energy (despite the consortiums financial difficulties)
and TOTAL following in early 2014 and 2015 respectively. Noble Energys and TOTALs explorations are of great
importance since both will focus their activities in deep Mesozoic rock for oil. It is estimated that by the end
of 2015 Nicosia will have more realistic picture of its actual reserves in blocks under lease and thus continue
with their FID in 2016.
With the possibility of LNG price drop in the near future, time becomes an increasing critical factor in the
export option. Countries such as USA and Mozambique plan to start exports by 2020. Cyprus may lose out on
the Asian market if it is not in position to export natural gas within that period. The target date for gas exports
is 2020 and it already seems there will be delays of up to 3 years. It can be easily said that for high production
cost LNG projects which are delayed or are unable to secure contracts with oil-index pricing, may face
increasing pricing risks making their financing a challenge.
If RoC was to proceed with the onshore LNG, it should focus its efforts on the financing of the liquefaction plan
and in doing so reduce the requirement of its financial contribution by USD$1-USD$1.25 billion. One way to
decrease the construction costs is by changing the contract type to Cost Reimbursable with Fixed Price or EPC
Cost Reimbursable. The selection criteria between the two methods depend upon the factors on which RoC
places the greatest emphasis: reliance on a major design-construction firm and limited cost growth or owner
control and input.
Another way that could potentially reduce the overall cost for RoC is by using a barge mounted liquefaction
plant built in a shipyard in a low production cost country (such as China) and take advantage of their lower
cost base and higher productivity (thus reducing the delivery time). Similarly, RoC could utilise the Black and
Veatch PRICO process. The PRICO process is optimised for smaller production and one of its greatest
advantages is its short construction time currently set to less than 3 years (a typical onshore LNG terminal
needs approximately 6-7 years to build). In the light of the above statements, i.e. low prices and high
production costs, it might have more financial benefits to proceed with an FLNG, ready by 2019-2020,
sacrificing some of the indirect benefits but securing high netback prices rather than waiting for developing
an onshore LNG terminal, ready by 2023, and sacrifice high netback prices.
Regardless of the findings from future exploration, Cyprus could potentially continue with an onshore LNG if
Israel decides to pool its reserves. Thus Israels decision for export strategy is of great importance since it can
change RoCs export option. Israel is exploring various scenarios such as pipeline to Turkey either via Lebanon,
Cyprus or Syria, CNG to Greece, LNG from an FLNG and pipeline to Cyprus and then to Greece. With Noble
127


Energy stating that the second phase of the Leviathan gas field development consists of an FLNG and that their
top priority is the regional market (they have already signed supply agreements with Jordan and Palestine)
Cyprus must pre-work and commence a strategic plan to cope with Israels final decision.
Egypts domestic demand absorbs all the available Egyptian natural gas and Egypt cannot fulfil its export
volumes causing losses of billions of dollars to the companies involved. Israel took advantage of that
opportunity and Noble Energy signed a non-binding Letter of Intent for gas supply with Union Fenosa, Egypts
Damietta LNG terminal operator. However, with the Tamar gas field still under development, Noble Energy
cannot satisfy both, Israels domestic demand and export. Thus Egypt seems to be the ideal for Cyprus to sign
its first supply contract using CNG.
Studies suggest that countries rich in resources tend to have their economies grow slower than those that
have fewer resources. The Dutch disease, the deterioration of governance and conflict, the over-investment
in physical capital and under-investment in human capital are some of the issues that must be addressed in
the case of Cyprus.
This publication reflects and states actions taken up and until 1
st
of July 2014. The scenarios are subject to
change and every strategy has to be re-accessed and adapted based on the prevailing state of affairs.
Consequently, a competent, politically independent and empowered team should be in place to manage the
project in a transparent and professional manner. Political involvement should be restricted to supporting
technocrats and industry experts. The record of corruption in Cyprus, as depicted by international
organisations (ranked 31
st
- 2 and 9 places above Portugal and Spain respectively), combined with the
corruption prone nature of the oil and gas industry raise alarming concerns.

128


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