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Cyprus Looks to Rebuild Economy with Ambitious Energy Sector Investments

October 15, 2014

FacebooktwitterFacebooktwitter Editor’s note: with all eyes presently on the disintegrating Middle East and the rampage of Islamic fundamentalists across Syria and Iraq, few have been focusing on developments happening in the relative tranquility of a country just offshore from the chaos- the Republic Cyprus. This comprehensive article details the country’s plans to rebuild its damaged economy by the help of multi-billion-dollar energy investments.

By Ioannis Michaletos and Chris Deliso

Apart from the well-known natural gas offshore exploration by the US Noble Energy in the Levantine Basin (revealed two years ago, and covered in depth by here), further explorations are currently being conducted by the Italian-Korean consortium ENI/KOGAS. In addition, the French Total is about to launch in the coming year its own research project in Cypriot waters.

Cyprus is estimated to have approximately enough gas deposits to secure its own domestic needs for the coming decades, while projections are that it could be able to export amounts either with a joint venture with Israel, or towards Western Europe via Greece.

Nevertheless, there are also some other key developments concerning Cyprus’s energy potential that have passed largely unnoticed, although they do play a major role for the economic prospects of the country. Cyprus’ economy was severely battered in 2012-2013 by a financial and banking crisis that caused a recession, resulting in a loan rescue package to be dispensed by the EU-ECB-IMF troika. Cyprus plans to rely for growth on energy-related investments in the future.

Specific Energy Sector Developments Ahead

The first significant energy investment in Cyprus, which will commence operations by the end of this year, is the VTT Vasiliko oil and fuel terminal station. This is a $450 million project that aims to supply vessels in the East Mediterranean Sea routes- both those coming from Suez to Gibraltar and those coming from the Black Sea and continuing either to the Atlantic or the Indian Ocean (via Gibraltar and Suez, respectively). The Cypriot government in 2013 issued a Master Plan (.PDF) for developing Vasiliko.

Due to its favorable geo-economic position, Cyprus was selected by the Dutch company VTTI, an affiliate of the energy giant Vitol, and the Malaysia International Shipping Corporation, Berhad.

The first preparations for this investment – one that constitutes around 2% of Cyprus’ GDP – started back in 2010, and were not put on hold, despite the ongoing economic crisis. In fact, Cyprus actually benefited in the aftermath of the so-called ‘Arab Spring’ that has destroyed Libya and Syria, while causing political shifts in Egypt and unrest in Lebanon, with no one knowing what further ramifications will occur in the region, with the continuing rampage of Islamic State militants right on Turkey’s southern flank.

All of this upheaval has boosted Cyprus’s chances of being the ideal ground for such an important oil station. Being a non-Muslim EU member, in the Eurozone, and having a stable political outlook, it is largely immune to the tremors shaking the Muslim world just ashore from it.

Moreover Cyprus has, in the Vasiliko region where the terminal is located, deep-water facilities that can accommodate large tankers, available human resources to fill the necessary work placements and very flexible and non -bureaucratic taxation and state regulation policies.

The Cypriot state estimates that from 2015 onwards it will reap $25 million in tax money, just from ships handling oil loads. Additionally, the country’s biggest consortium company, J&P, was awarded a $350 million construction contract that secured 500 job placements. The total number of oil tanker vessels to approach the facilities per year would be around 600 ships that will also make occasional orders for food and water supplies, as well as necessary equipment. This will thus create secondary sectors of economic activity.

The investment will total 40 oil tanks with 860,000 cm of capacity. Ships of up to 160,000 tons could be served. The grand plan of Nicosia is to develop the Vasiliko area, which already hosts the country’s largest electricity plant, as the main energy hub in the East Mediterranean.

The Cypriot government seeks to do this by also creating a $2 billion LNG terminal that will exploit the country’s newly found gas offshore gas deposits.

Concurrently another Dutch energy giant, tank storage provider VOPAK, has been eyeing the local market since 2012. In the Vasiliko area, it seeks to construct its own oil storage terminal. This $700 million investment could create 1,500 construction jobs and more than 500 permanent ones in both operation and secondary activities.

The ‘Grand Plan’: an Israel-Cyprus-Greece Undersea Energy Cable and Gas Pipeline

Furthermore, Cyprus, along with Greece and Israel, have since 2013 been pursuing a grand plan named “EuroAsia electricity interconnector”; this proposed 1,100km cable will link these three countries via Cyprus, becoming the world’s longest undersea power cable. The total investment would be around $2 billion, of which $750 million would go to the Israel-Cyprus link and installations, capable of a power rating of 2,000 MW.

Another project in the preparation stage is the Israel-Cyprus-Greece (East Med) gas pipeline. When completed, this will have a 1,700km length and aims to transfer 8 billion cm of gas per annum. Its cost, as assessed by the Greek gas company DEPA, would be $7 billion.

Here, a 150km-long underwater section connecting the gas deposits to Vasiliko on Cyprus, and a 650km-long underwater section from Vasiliko to the shore of eastern Crete, will absorb some 40% of the total construction costs.

As mentioned previously, Cyprus is also eying an alternative investment: the establishment of an LNG terminal in Vasiliko, preferably in cooperation with Israeli companies that already manage that country’s neighboring offshore reserves.

Some Concerns: Israel’s Needs, Turkey’s Threats, EU Capability and Market Issues

Although all plans mentioned above have been already selected by the EU Commission as “Projects of Common Interest “(PCI) meaning they are entitled to Brussels-sourced funding and backing, there are a number of other important variables to be assed in this regard.

First, it is to be seen what is the real interest from Tel Aviv. It seeks to find how and where to exports its own gas, which is going to be critical in order to satisfy economies of scale for such massive investments that are both long-term and costly for all countries involved.

Secondly Turkey seems to be increasing its pressure via naval forces positioned against Cyprus, while diplomatically condemning any Cypriot export without Ankara’s involvement or permission. Since the beginning of the sensational discovery, the Turkish government has been furious that the Greek Cypriots will benefit from these energy developments, and has no leverage other than the threat of its continued illegal military occupation of the northern third of the island. The Sept. 24 shadowing of an ENI-KOGAS drillship by a Turkish Navy vessel indicates the kind of behavior that has elicited public condemnation from Nicosia. Nevertheless, the companies say that drilling will continue regardless of the Turkish intimidation.

Also, the EU itself has not come up with a stable and coherent plan on how and if to exploit the newly found riches in the East Mediterranean, having multiple energy security plans in mind but without any specific timetable. As we have seen recently, EU energy policy is complex, with different states’ interests muddying the waters and potential for regional crises (as with Russia and Ukraine) having the capability to radically and suddenly transform policy. It should be remembered that like any huge bureaucracy, the EU works slowly and is incapable of making its long-organized projects always keep up with the pace of local realities.

Moreover, it will take at least a couple of years until the exact amounts of gas to be found offshore Cyprus are known definitively. This will of course require additional services from a host of related industry officials, from surveyors to equipment manufacturers to other experts.

So for any major multinational to be able to commit long-term investments, during a period of rather depressed natural gas prices worldwide, will remain uncertain until the full data is in and, perhaps, until the market becomes more amenable to investment.

Other Energy Supply Plans: Air and Ship Oil Refueling

Nevertheless, it has to be noted that Cyprus is an ideal location for significant air fuel supply between the booming East Asian air market and that of Western Europe, as well as the CIS countries. Jet fuel is a valued commodity and demand for it in the long-term, and on the spot market, is always high. In such a manner and bearing in mind the advantage so far the country enjoys, it can be estimated that further such investment are expected for Cyprus’ airports. And there are also investment plans for substantial yachting fuel supply services, which will in a few years turn the island antion into one big oil station for yachts crossing the entire Mediterranean.

Cyprus’ Economic Future May be in Energy, not Banking

After the 1974 Turkish invasion, Cyprus suffered a 50% drop in GDP almost instantly. Yet it quickly recovered, due in large part to the massive transfer of wealth that occurred in the Middle East because of the 1975 Lebanon War, and the destruction of Beirut’s position as the supreme financial center in the MENA region. The newly reconstituted Cyprus thus began its new, modern incarnation as a financial hub.

Then, the Iran-Iraq War in 1980 further accelerated capital flights towards Cyprus, helping establishing the country’s robust banking system. And this in turn was further boosted after the collapse of the Soviet Union and its Eastern Bloc, from 1989 and through the ‘transition’ period of the 1990s, as well as the disintegration of Yugoslavia in 1991.

Although much remains unresolved, most crucially, the future success of the Islamic State and Turkey’s own host of problems, that might affect its ability to maneuver on Cyprus, it appears that the ongoing collapse of state order in the Middle East, will once again save the Cypriot economy. But this time, considering the recent financial crisis and strict conditionally from the Troika, the rebirth of the Cypriot economy may have to be facilitated by energy-sector projects.

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