Oil Regulation & Natural Gas

What is the overview of Cyprus’ natural gas sector?

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.

What is the overview of Cyprus’ 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.

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 2004. 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. As such, the discussion in this chapter with regard to the natural gas market will largely be subject to this fact and the existence of a statutory monopoly.

What are the license types for hydrocarbons’ exploration?

Pursuant to the provisions of the Regulations, three types of licenses are prescribed:

  • the prospecting licence which is valid for up to a year and allows the holders of this licence to conduct 2D or 3D seismic surveys and gravity and magnetic surveys;
  • the exploration licence which is valid for three years and offers the prospect of additional two renewals of the licence. Simultaneously the exploration licence offers the licensee with the right to carry out the same surveys as allowed under the prospecting licence and additional exploratory 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 licence 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 10% 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.

Are hydrocarbons licenses transferrable or assignable?

Pursuant to Reg. 12(1) of the 2007 Regulations, any holder of a licence for hydrocarbons exploration/exploitation that wishes to transfer its authorization or assign its rights arising from such licence to another entity, by virtue of s. 27 of the Law, shall submit a relevant written application to the Minister, who, after considering it, shall submit an opinion to the Council of Ministers for taking a relevant decision. In the case where the application for transfer of an licence or assignment of rights arising from a licence is approved by the Council of Ministers there shall be no signing of a new Contract, but the amendment in the existing licence will be effective from the moment the interested party is notified of the Council of Ministers decision, in writing.

What are the environmental or other additional considerations a hydrocarbons licensee must take into account?

The Assessments of the Effects on the Environment of Certain Plans and/or Programmes Law 140(I) of 2005 transposed into national legislation the provisions of Directive 2001/42/ EC of the European Parliament and of the Council of 27 June 2001 on the assessment of the effects of certain plans and programmes on the environment. Pursuant to the said legislation’s provisions, the Ministry of Commerce, Tourism and Industry has developed the Strategic Environmental Assessment (“SEA”) in relation to the licensing of hydrocarbons exploration and exploitation within the EEZ of Cyprus towards ensuring environmental protection and sustainable development. A licensee for the exploration and/or exploitation of hydrocarbons shall be bound to comply with the SEA’s recommendations and results as well as the Opinion issued by the Environmental Authority (of the Ministry of Agriculture, Environment and Natural Resources) on the exploitation and exploration operations. Furthermore, it shall also be necessary for the licensee to conduct a preliminary Environmental Impact Assessment study prior to the initiation of any exploration work and a full Environmental Impact Assessment study prior to the initiation of any exploitation work, both of which will comply with the provisions of the SEA, the said Environmental Authority’s Opinion and the applicable legislation. Furthermore, pursuant to Regulation 15 of the 2007 Regulations, the licensee is particularly required to take all necessary measures towards complying with the provisions of the International Convention on Civil Liability for Oil Pollution Damage which is in force as of 19/06/1975, the Protocol to the said Convention in force as of 08/04/1981 and the provisions of Law 63 of 1989 ratifying the said Convention on behalf of Cyprus. Lastly, pursuant to Regulation 19(2)(b) of the 2007 Regulations, the licensee shall, when carrying out offshore operations, ensure that the constructions and installations erected shall be fitted with navigational aids and be illuminated between sunset and sunrise in accordance with the provisions of the International Convention for the Prevention of Pollution from Ships of 1973, its Protocol of 1978 and the Resolutions MEPC 14(20) of 1984, MEPC 16(22) and MEPC 21(22) of 1985 which was ratified by the Republic with the International Convention for the Prevention of Pollution from Ships of 1973, its Protocol of 1978 and Law 57 of 1989 ratifying the said instruments.

What is the legislative framework for natural gas storage?

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 licence 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.

What is the regulatory framework pertaining to Liquified 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.

What are the latest developments in Cyprus’ oil and gas sector?

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.




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