ENERGY: OIL AND NATURAL GAS

Transcription

1 ENERGY: OIL AND NATURAL GAS i n f o r m a t i o n b r o c h u r e

2 Cyprus: Natural Gas Overview The Republic of Cyprus, an EU Member State, is a small isolated energy system with no interconnection links to other countries. Cyprus operates on a system that is largely dependent on heavy fuel for most of its energy consumption. In 2011, Cyprus confirmed significant offshore reserves of approximately seven trillion cubic feet of natural gas. These reserves found in Cyprus s Exclusive Economic Zone (EEZ) gave rise to an ambitious energy strategy but also brought to a halt the plans for importation of liquefied natural gas (LNG) in Cyprus via a re-gasification unit set in the Vassiliko area. A dominant outlook at present is for Cyprus to export natural gas to Europe via an offshore subsea pipeline passing from Crete to the rest of Greece, connecting Cyprus natural gas to the rest of the existing pipelines. Interestingly, the prevailing options for storage of natural gas in Cyprus are: the installation of a Floating Storage and Re-gasification Unit (FSRU); natural gas pipeline installation for transporting Israel s natural gas; importation of natural gas in the form of Compressed Natural Gas (CNG) and the construction of a small scale re-gasification unit. It remains to be seen which of the above, if any, will materialize with respect to Cyprus. At the moment none of Cyprus s energy requirements are met using natural gas. Current energy requirements of the country regarding electricity generation and final energy consumption are met primarily by using heavy fuel. It is expected that the introduction of the Cypriot natural gas in the local market will minimize or eliminate heavy fuel imports for energy consumption. The proposed export plans of natural gas from Cyprus primarily relate to LNG. Due to the unsustainable morphology surrounding the Eastern Mediterranean the feasibility of a project involving the development of an offshore natural gas pipeline is an aspect that must be taken into full account, particularly in light of the complexities involved. The proposed plan for exporting LNG is the onshore transport of gas via a small pipeline based on the Vassilikos LNG facilities, which upon liquidation shall be exported via LNG tankers. Cyprus: The Oil Sector Cyprus is fully dependent on imported oil for its energy consumption and electricity generation. There are very low levels of diversity with regards to energy supply as oil imports dominate the market. The limited oil storage capacity of the country sets barriers to security of supply. The dependence of Cyprus on oil is expected to be reduced through the import of natural gas, up until the reserves offshore Cyprus are ready for exploitation, which is further expected to catalytically reduce dependence on oil.

3 The Regulatory Framework What are the main features of the energy regulatory framework? Beginning with the regulatory regime for hydrocarbons exploration and exploitation, we note that Cyprus is a contracting party to a number of international instruments such as the United Nations Convention of the Law of the Sea ( UNCLOS ) and has transposed into its domestic legal order EU legislative instruments such as Directive 94/22/EC on the Conditions for Granting and using Authorisations for the Exploration and Production of Hydrocarbons. The primary national legislation is the Hydrocarbons (Prospecting, Exploration and Exploitation) Law 4(I) of 2007 ( the Law ), supplemented by subsidiary legislation enforced pursuant to the provisions of the said Law, namely the Hydrocarbons (Prospecting, Exploration and Exploitation) Regulations of 2007 and 2009 ( the Regulations ). The aforesaid statute and Regulations provide for, inter alia, the criteria applicable with respect to licensing applications for prospection, exploration and exploitation of hydrocarbons in Cyprus. Concerning the development of the internal gas market and network, it must be stressed that Cyprus is an isolated energy system. The Cyprus Energy Regulating Authority was established as the competent regulating body by virtue of the Law Regulating the Natural Gas Market 183(I) of Following a 2007 amendment to the 2004 Law and a relevant decree of the Council of Ministers, the Government has established the Natural Gas Company ( DEFA ), and has been appointed as the entity exclusively responsible for the import, storage, distribution, transmission, supply and trading of natural gas, and the management of the distribution and supply system of natural gas in Cyprus. The State currently holds one hundred per cent (100%) of the total share capital of DEFA. At present the Electricity Authority of Cyprus (EAC) holds an option to acquire forty four per cent (44%) of that share capital and the GOC anticipates making up to five per cent (5%) of the share capital available to other investors in the future. The scope of competence of DEFA encompasses the following activities: Buying, Importing, Holding, Using, Distributing, Selling, Supplying Natural Gas, in any Form; Operation of the Natural Gas Transmission and Distribution Network; Concluding international legal instruments between Cyprus and other states and contracts between Cyprus and any legal person; Negotiating, Buying, Selling, Managing, Storing, Importing, Exporting, Re-exporting etc. any goods, tangible or intangible, including Natural Gas. It is therefore clear that all matters pertaining to natural gas fall under the State-established monopoly of DEFA. What are the license types for hydrocarbons exploration? Pursuant to the provisions of the Regulations, three types of licenses are prescribed: the prospecting license which is valid for up to a year and allows the holders of this license to conduct 2D or 3D seismic surveys and gravity and magnetic surveys; the exploration license which is valid for three years and offers the prospect of additional two renewals of the license. Simultaneously the exploration license offers the licensee with the right to carry out the same surveys as allowed under the prospecting license and additional exploratory

4 drilling, whereas upon each renewal 25% of the initial area is relinquished, and 100% of the initial area is relinquished upon expiration of the license. the exploitation license which is granted primarily for 25 years which can be later renewed for up to 10 years upon the fulfilment of the licensee s obligations. At present, Noble Energy holds the license for offshore block 12, while the Republic has further awarded another four blocks in November 2012 as follows: Consortium made of Eni and Kogas (blocks 2 and 3) Consortium led by Total with Novatek and GPB Global Resources (block 9) Total (block 11). How is the State participating in hydrocarbons exploration? Pursuant to Article 3(1) of Law 4(I)/2007 and in conformity with Public International Law, ownership of hydrocarbons, as part of the State s natural resources, vests with the State at all times. Furthermore, the rights over resources situated offshore Cyprus are to be exercised in conjunction with the continental shelf rights under UNCLOS. The fiscal regime under which the State aims to derive value from oil and natural gas development is based on the R factor formula. The R factor is a mechanism calculating the profit hydrocarbon sharing percentage and it conjoins the governmental profit share of oil and natural gas to the beneficial project and is calculated on a quarterly basis as R=X/Y, where R is the R factor, X is the contractor s cumulative net revenues (gross revenues less operating expenditures) and Y is the cumulative capital expenditure earned by the contractor. With regards to taxation, trading profits generated in Cyprus are taxed at the flat corporate income tax rate of 12.5% after deduction of all relevant direct and indirect expenses. No taxation is expected to arise on profits of successful hydrocarbon exploration applicants as the Model PSC published for the first round of hydrocarbon exploration applications contains provisions stating that any taxes are included in the Republic of Cyprus share of profits from exploration.

5 The Legislative Framework In accordance to the Law Regulating the Natural Gas Market 183(I) of 2004, as amended, access to gas storage facilities will be obtained on a transparent, objective and nondiscriminatory regulatory basis and defined by the Cyprus Energy Regulatory Authority. The licensee will be subject to a number of technical specifications, and an efficient and economical use of the system must apply. Of course, as noted supra the current state of affairs is that DEFA has been established as the sole operator to handle the above matters in Cyprus, by deviation under the applicable legislation. Pursuant to the provisions of the Law Regulating the Natural Gas Market 183(I) of 2004, the Council of Ministers or the undertakings owning transport and storage facilities are required to appoint, for a time to be determined by the Council of Ministers, one or more administrators for the transport network or the storage facilities, which administrators shall be responsible for ensuring maintenance, operation and development of these facilities. Third party access to natural gas transportation networks is ensured by virtue of the Law Regulating the Natural Gas Market 183(I) of 2004, as amended ( Law 183(I)/2004 ). Such access is ensured via publication of tariffs that are applicable to all eligible consumers in a non-discriminatory manner. The operators of high pressure gas transportation system and low pressure gas transportation system have a duty to provide all the necessary information and ensure efficient and non-discriminatory access to the infrastructure. The Cyprus Energy Regulation Authority ( CERA ), is the competent authority for approving the tariffs and terms and conditions for the provision of non-discriminatory services. Law 183(I)/2004 further stipulates the grounds upon which an operator may refuse access to the system which include, inter alia, lack of capacity or due to conflict of Public Service Obligations pursuant to Article 37 of Law 183(I)/2004. Upon such refusal of access right CERA is responsible to take measures in ensuring that operators take effective measures for further development of the system where this is financially plausible. How is transmission and distribution of natural gas governed? Currently there is no natural gas transmission/distribution network established in Cyprus. Law 183(I)/2004 outlines that the transmission and distribution of gas without a license is a criminal offence. The regulatory framework however for gas transmission/distribution is pursuant to Directive 2009/93/EC concerning the common rules for the internal gas market of the EU. The domestic distribution development of natural gas in Cyprus involves initially its transportation onshore to the Energy Centre facilities, from where it will be distributed directly to the three operating power plants, and then upon the construction of a distribution network it will be transmitted to the major industrial and tourist areas at an initial phase, and in the future it will be distributed to the commercial and residential networks.

6 What is the regulatory framework pertaining to Liquefied Natural Gas facilities? There are currently no LNG terminals or facilities constructed in Cyprus. There were plans to import LNG from Israel to Cyprus hence the necessity to construct onshore LNG terminal for the importation, storage and re-gasification of LNG emerged at an initial stage but operations were suspended with the discovery of natural gas reserves offshore Cyprus. However the Council of Ministers requires from undertakings that own LNG facilities to designate for a specified period transmission system operators and/or storage and/or LNG being responsible for the operation, maintenance and development of the transmission, storage and LNG. Pursuant to s. 28 of access of third parties to the LNG facilities is ensured by the publication of prices applicable to all selected clients and applied without discrimination amongst the users of the facilities. Energy Sector Developments: A Timeframe Beyond the ongoing licensing of blocks with hydrocarbons reserves offshore the island to leading conglomerates of the oil and gas industry, Cyprus approved the creation of a new company to handle sales of recently discovered natural-gas reserves. The government also commissioned the Massachusetts Institute of Technology to prepare a report on integrating Cypriot hydrocarbon reserves into the national energy system. The study, in addition, will focus on the commercialization and distribution of hydrocarbons to European and international markets, infrastructure issues and possible cooperation with other countries in the southeastern Mediterranean. Revenue from the hydrocarbons company will be directed to a special fund for hydrocarbon infrastructure investment as well as to the state budget and a savings plan for future generations. A few years ago, Cyprus took the strategic decision to engage in hydrocarbon activities within its EEZ. In this context, the 1st Licensing Round was held in 2007, which resulted in the granting of one Hydrocarbon Exploration License to Noble Energy International Ltd for the exploration of Block 12. In February 2012, a 2nd Licensing Round was announced for the remaining twelve blocks. As a result, five agreements have been signed with ENI/KOGAS for exploration Blocks of 2, 3 and 9 and with Total for the exploration Blocks of 10, 11. In September 2011, Noble began exploratory drilling in Block 12 and a few months later a natural gas discovery was announced at the Aphrodite field, which has been initially estimated to a gross mean of 7 trillion cubic feet. An appraisal well is planned to be drilled in the Aphrodite field in June The whole appraisal process (e.g. evaluation, design, financing etc.) is anticipated to be completed by Additionally, ENI/KOGAS and Total, are planning to carry out extensive 2D and 3D seismic surveys by the end of this year-beginning of Based on the results of the seismic surveys and the geological/ geophysical studies, it is expected that within the next 3 years, they will proceed with the drilling of exploration wells for natural gas and/ or oil.

7 In the context of the development of indigenous natural gas deposits, the Government has initiated all necessary actions for the establishment of a Natural Gas Liquefaction Plant at Vasilikos. This Plant will include facilities for the liquefaction of natural gas and the storage and export of LNG by tankers for transportation to the international markets. The discovery of substantial quantities of natural gas within the EEZ of Cyprus, in conjunction with the potential utilization of other gas deposits and future gas findings in the area, opens up new perspectives and creates a new impetus for Cyprus to become an energy market player. Especially, in these difficult financial times, where tough austerity measures have greatly affected our lives, the people of Cyprus have placed a lot of hope for a prosperous future, on the recent natural gas discoveries in our Exclusive Economic Zone. Therefore, all of us who are involved in this sector cannot fail. We must make every effort to succeed. Clearly, the challenge that lies ahead of us is to build a sustainable market in the oil and gas area. According to a study by the Human Resources Development Authority, it is anticipated that more than 5000 jobs will be created in the hydrocarbon sector by Obviously, all of these jobs will have to be filled by the right professionals, with the right skills and education. Therefore, all the players: the Government, academia and the industry must come together to establish the supply chain of well trained professionals that this new industry demands to function efficiently, thereby maximizing benefits and meeting the high expectations of our society. In this context, we have started a dialog with a number of Universities in Cyprus. At first, we are investigating the possibility of offering a number of scholarships to Cypriot graduate students on related subjects. We are also looking into the possibility of placing a number students or recent graduates in companies. Cyprus plans to engage in a structured dialog with our industry partners and universities in Cyprus and in our region, to build strong academic programs and create a strong research basis in the area. It is only through investing in human capital that Cyprus will be able to successfully exploit its natural resources in the years to come. This way, Cyprus builds the most fundamental block for sustainable growth and innovation. Memorandum of Understanding for the Production Sharing Contract for Block 12 of the Exclusive Economic Zone of Cyprus, with Noble Energy International Ltd, Delek Drilling Limited Partnership and Avner Oil Exploration Limited Partnership The signing of the Memorandum between the Republic of Cyprus and the three companies essentially represents the next milestone on the road map for the exploitation of indigenous gas reserves in Cyprus Exclusive Economic Zone. It is an agreement that defines the framework in which the negotiations will be conducted for the conclusion of a comprehensive agreement regarding the project s construction and operation.

8 The LNG Plant at Vasilikos composes the fundamental and necessary infrastructure that will allow for the export of Cypriot natural gas to the European and global markets. It is an ambitious project of strategic importance that will also be the largest investment in the history of the Republic of Cyprus. It marks for Cyprus and its citizens a very positive outlook for economic growth, especially given the fact that it will be expandable to serve not only the Cypriot natural gas deposits, but potentially the deposits of our neighboring countries. The completion of this project is an important step towards the realization of our energy strategy, with the ultimate objective being the establishment of Cyprus as a regional energy hub. For this purpose, Cyprus is actively seeking the cooperation of neighboring countries, with the aim of establishing the Eastern Mediterranean as an area of shared interests for all, offering prospects for peace, prosperity and progress in the wider region. In its capacity as a full member of the EU, coupled with its strategic geographical location, our country can constitute a stable and reliable bridge of cooperation between the countries of the Eastern Mediterranean with Europe, Asia and the Middle East. Cyprus, Israel and Greece sign MoU on cooperation in the fields of energy and water resources. A Memorandum of Understanding (MoU) on cooperation in the fields of energy and water resources was signed today by the Minister of Energy, Commerce, Industry and Tourism of the Republic of Cyprus Mr. Yiorgos Lakkotrypis, the Minister of Energy and Water Resources of the State of Israel Mr. Silvan Shalom and the Minister of Environment, Energy and Climate Change of the Hellenic Republic Mr. Yannis Maniatis. At the trilateral meeting, held at the Filoxenia Conference Center in Nicosia, the three Energy Ministers also agreed to issue a Joint Communiqué regarding the MoU, in which specific reference is made to the project for the electricity interconnection of Israel, Cyprus and Greece via a subsea cable, known as EuroAsia Interconnector.

9 How our law firm can help We at Prountzos & Prountzos LLC have a team of professionals dedicated to providing exclusive services in relation to the sectors of energy, oil, natural gas and electricity. Our energy specialists have extensive knowledge, understanding and experience of the energy sector in Cyprus and will provide a wide range of services to ensure our clients achieve their goals. Prountzos & Prountzos LLC provides clients with the following services: Legal Advice and Consultation on Energy Issues Help in Implementation, Design, Financing and Structuring of Energy Investments and Projects. Legal Representation at the pre-tendering, awarding and litigation stages of public contracts.

10 Main Contacts Charalambos G. Prountzos Advocate - Managing Partner Energy Department T: F: E: cprountzos@pplegal.com.cy Constantinos Michael Advocate - Associate Energy Department T: F: E: cmichael@pplegal.com.cy

11 ENERGY: OIL AND NATURAL GAS i n f o r m a t i o n b r o c h u r e 2013 Prountzos & Prountzos LLC, a Cyprus lawyers limited liability company regulated by the Cyprus Bar Association, with registration number HE , 15 Themistokli Dervi Street, 5th Floor, Office 502, 1066 Nicosia, Cyprus. Credits to Ministry of Commerce, Industry, Energy and Tourism and the Cyprus Law Digest for information appearing on this newsletter. All rights reserved