Energy is the new boom industry in Cyprus, attracting worldwide attention and serious international investment in both hydrocarbons and renewables – cementing the island’s status as a key player in the Eastern Mediterranean
Energy is the new boom industry in Cyprus, attracting worldwide attention and serious international investment in both hydrocarbons and renewables – cementing the island’s status as key player in the Eastern Mediterranean.
Cyprus’ energy profile has evolved significantly following the discovery of vast natural gas reserves in both its Exclusive Economic Zone (EEZ) and in its immediate neighbourhood. These developments have established the country’s budding oil and gas sector as one of the biggest opportunities for foreign investment. Another area gaining momentum in the energy sphere is renewable energy, with international companies flocking to the island’s shores to harness its wind and 340 days of sunshine.
In 2011, US firm Noble Energy, who is developing Israel’s giant Tamar and Leviathan gas fields in the Eastern Mediterranean Sea, announced a world-class discovery of natural gas in Cyprus’ offshore EEZ block 12 – known as Aphrodite. Two years later, Noble carried out appraisal drillings in block 12 and the results confirmed natural gas reserves of 4.54 trillion cubic feet (tcf) – enough to meet Cyprus’ domestic gas demand for over 100 years. Noble Energy’s success story in block 12 rapidly caught the attention of energy companies worldwide and created a surge of interest, with more players entering the market hoping to make further significant discoveries.
Cyprus’ licensing rounds have garnered strong interest from foreign investors, especially following Egypt’s colossal find – branded ‘Zohr’ – located just 6.5km from its territorial waters. The Egyptian find, operated by Italian company Eni, holds an estimated 30 trillion cubic feet (tcf), equivalent to 5.5 billion barrels of oil, and closely resembles Cyprus’ block 10, according to industry experts. Cyprus recently completed its third licensing round, awarding blocks to consortia including Eni, Total, ExxonMobil and Qatar Petroleum – and has signed contracts that are expected to yield faster drilling in a bid to explore the potential of exporting its gas to European and East-Asian markets.
Global energy giants such as French Total, a consortium of Eni and South Korean Kogas, and the UK-Dutch company Royal Dutch Shell, have already secured exploration rights in Cypriot waters and 2017 will be a pivotal year in a new wave of exploration activities. In preparation for the upcoming increase in offshore drilling, a new support base is also being set up in Limassol, in addition to support services based in Larnaca.
Cyprus has high hopes that the oil and gas sector could become a key driver of growth due to revenues from its natural gas – and the already-established involvement of major oil and gas companies has strengthened the country’s efforts of becoming a key regional energy hub. Cyprus has plans to also set up a national investment fund to manage its potential hydrocarbons wealth. It is hoped that the country could receive an annual cash injection of several hundred million euros from gas revenues just from the exploitation of the Aphrodite field, should production start in 2023.
In 2016, Cyprus signed a deal in a bid to potentially transfer natural gas via subsea pipeline to Egypt once extraction from Aphrodite begins – a move welcomed by Noble Energy who said it would help boost projects in the region. The country is also in discussions with Greece, Italy and Israel about the potential of transporting gas from the Eastern Mediterranean to Europe, via Greece and Italy. This €5.5 billion project, if taken up and given the green light, would constitute the largest underwater pipeline in the world – stretching over 1,300 km. However, most industry professionals do not see the costly and challenging project as a viable way forward.
Another key connection is the EuroAsia Interconnector, which will link the power grids of Cyprus with Greece and Israel via an undersea cable. The 2,000 Megawatt interconnector, is one of the seven selected electricity projects that have received funding, and the only North-South electricity interconnection in the Central Eastern and South Eastern Europe Priority Corridor.
The EU has agreed to finance the final detailed studies ahead of the implementation of the project with €14.5 million, as it will contribute to achieving the Energy Union’s goals of connecting European energy networks, increasing security of energy supply, and contributing to the sustainable development by integrating renewable energy sources across the EU. If it goes ahead, pre-construction works could commence as early as 2017.
An Expanding Fuel Hub
A strong momentum has also been seen in developing Cyprus into a significant regional fuel hub for Europe, Asia and Africa, thanks mainly to the successful operation of the sophisticated oil storage terminal in Cyprus by Netherlands-based global oil terminal company VTTI. In 2015, the company’s Cyprus subsidiary VTTV announced expansion plans to also take advantage of the regional natural gas opportunities.
The €300 million project in Vasilikos was the biggest infrastructure project constructed in Cyprus in recent years, and has put the island on the global energy map, as well as considerably strengthened Cyprus’ efforts to return to economic growth. Around €9 million go to state coffers from port fees and operating permits every year, and it has also resulted in around €2 million savings for Cyprus from lower storage costs for its strategic reserves. The Vasilikos area is also set to get another boost with the Cyprus Ports Authority, in cooperation with the EU, set to invest up to €50 million to develop the port area for the benefit of oil and gas companies.
The VTTV terminal has also given birth to a new export product for Cyprus in mineral fuels and oils, which jumped from zero in 2014 to €98 million in 2015. The company uses Cyprus as a terminal, blending its raw material and then exporting it to the rest of the world, but mainly to Lebanon (€28.8 million) and Israel (€16.6 million).
Cyprus’ strategic location makes it the first terminal of its kind in the Eastern Mediterranean, connecting Europe and the Black Sea with markets in the Middle East and Asia. As a percentage of Cyprus GDP, petroleum is only worth 1%, but the industry has tremendous growth prospects with the country’s determination to establish itself as a key energy hub and a stronghold of stability in the region.
The oil retail sector saw another coup after Greek company Motor Oil struck a €10 million deal to buy out all 31 Lukoil gas stations – constituting 10.8% of all gas stations in Cyprus – which will soon be branded with the Shell logo. These developments are expected to intensify competition and create a more competitive market in fuel retail.
Fossil Fuel Dependency
A key challenge for Cyprus is its high dependency on fossil fuels for energy – the biggest share within the EU in fact, which makes it crucial for the country to develop both its hydrocarbon and renewable energy sources. Cyprus is reliant on fossil fuel imports for its electricity needs, and spends over 8% of its GDP to cover the costs.
The island also saw the biggest increase in energy demand among the EU28, growing 41% since 1990 from 1.6 million tonnes of oil equivalent (Mtoe) to 2.3 Mtoe in 2015. These figures may be low when compared with its larger EU partners, but a more accurate comparison would be Malta where consumption was only 0.8 Mtoe in 2015. However, Cyprus is determined to find a cleaner solution until it can exploit its own reserves.
As Cyprus looks forward to a day when its power plants can be run on more cost-efficient natural gas, rather than expensive imported liquid fuels, it is undertaking other initiatives to achieve its national energy and climate targets. Due to its isolation from the trans-European electricity networks, Cyprus is targeting to have only 13% of its energy consumption coming from renewables (EU Target 20%) by 2020. This is set to be generated by wind farms, photovoltaic (PV) systems, solar thermal plants and biomass and biogas utilisation plants.
Latest data show that Renewable Energy Sources (RES) accounted for 9.8% of electricity production in 2015. RES power production rose 3.4% in 2016, compared to 2015, mainly on increased output generated by private photovoltaic systems. Wind farms generated almost two thirds of electricity from RES in 2016, increasing 2.2%, and the output of private-owned photovoltaic systems rose by 8.8%. However, the output of biomass power generators and photovoltaic units installed on public building, schools and at army barracks dropped 2.1% and 1.7% in 2016.
Cyprus’ energy policy has created financial support for RES projects, and a special fund was created aiming to support RES and energy saving investments in Cyprus, with revenue derived from consumers paying a ‘green tax’ levied on electricity bills (currently at €1 per kWh).
The island also has three projects that have won significant funding from ‘NER300’ – a financing instrument managed jointly by the European Commission, European Investment Bank and Member States. The Helios Power Project, EOS Green Energy Project and the Green+ Smart-Grid Project have garnered a combined €117.8 million to develop innovative renewable ventures in Cyprus.
However, the country’s national grid system has certain intrinsic and technical limitations affecting RES penetration and reliability of the energy system – such as the lack of interconnections to the trans-European electricity networks, a limitation to the amount of intermittent renewable energy that can be connected to the electricity system, and a lack of RES installations with storage capability.
To tackle these problems the country is exploring ways to introduce smart grids in the national network and is on the look-out for projects that could facilitate energy storage, and ventures that have production on a 24-hour basis. Also the EuroAsia Interconnector could bring more solutions in its wake.
The island is already one of the highest users per capita in the world of solar water heaters in households, with over 90% of households equipped with solar water heaters and over 50% of hotels using large systems of this kind. With almost year-round sunshine, Cyprus certainly has plenty of energy to harness, but competitive energy storing capabilities are crucial in order to fully tap into its solar potential and facilitate better RES penetration.
There continues to be much ground to cover in terms of renewable energy production, but international interest in developing the sector in Cyprus has been on the rise. In this respect, the production of renewable energy is expected to experience considerable growth in coming years, and significant investment is required in order for Cyprus to achieve its targets – opening the field for companies with expertise in renewables.
Liberalising the Market
The Cyprus Energy Regulatory Authority (CERA) has worked towards the full opening up of the energy market and granting consumers the right to choose their own supplier – with expectations of a full liberalisation by May 2019. CERA’s proposition is a ‘net pool’ model, where the operations of the state power company, EAC, are unbundled and the production and supply operations separated. EAC production would then enter into bilateral agreements with suppliers for the sale of energy at regulated prices. However, these plans have experienced some resistance from unions, as they are seen as moves which could put pressure to privatise the state power company.
Exciting Future Prospects
Cyprus’ energy developments have certainly placed the country centre stage with the unfolding discoveries in the Eastern Mediterranean. Offering a stable and secure base in an increasingly turbulent region, Cyprus is also a convenient location to set up operations for various auxiliary services to the energy industry and for company headquarters to support activities in the EMEA region.
Utilising its own resources, Cyprus could also have a unique opportunity to develop a specialised industry in petrochemicals, according to industry professionals, who have been calling for the national framework to include the formation of a comprehensive operational strategy for the sector.
Furthermore, the country’s excellent infrastructure and business environment, coupled with an advantageous tax and legal framework, establishes it as a competitive and efficient location for multinationals. The developing oil and gas sector and the still relatively untapped potential in renewable energy offer expanding opportunities, and Cyprus will need investors and partners to fulfil its ambition to become a regional energy hub.
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Updated: May 2017