Cyprus Oil and Gas Update

Cyprus Oil and Gas

Cyprus Oil and Gas Update & Conclusions

Cyprus’ effort to develop its oil and gas reserves has met with significant headwinds thanks to technical issues, internal weaknesses and geopolitical risks.

On the technical side, the relatively slow rate of exploratory drilling by oil majors reflects uncertainty in natural gas development in the eastern Mediterranean and the global energy market. The rise of US shale gas and the impending commissioning of massive natural gas projects in Australia leads many observers to forecast declining natural gas prices. Given the risks in the eastern Mediterranean area, most majors have focussed drilling resources in other regions.

On the policy side, Cyprus has made a consistent, long-term effort to develop oil and gas resources, centred around attracting exploratory drilling, and positioning an onshore LNG plant as the focus of commercialisation strategy. The relatively low resource estimates from Block 12, together with the slow rate of drilling by other groups, means that decisions on this objective will be delayed for at least another 12 months. Cyprus’ domestic political scene has seen considerable turbulence in technocratic appointments and public sector coordination. Its bail-out programme and the destruction of the offshore banking sector have significantly increased country risks for future development.

On the geopolitical side, the main short-term risks will be the progress of economic and political relationships between the European Union and Russia following the Crimea/Ukraine conflict. The latest sanctions round by the EU will exacerbate tensions in the energy sector, and may lead to lasting damage in terms of Russia’s energy and financial engagement in Cyprus. This may also lead to renewed impetus in developing Cyprus’ oil and gas reserves as an alternative means of supply to Russia. This scenario, however, will require a considerable up-front investment, while the overall size of Cypriot resources is, to date, nowhere near the amount necessary to offset Russia as an energy supplier.

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Photo & Article (c) Philip Ammerman Navigator Consulting Partners LLP

15 September 2014