THE NEW OIL AND GAS FRONTIER REGION CYPRUS · Republic of Cyprus and we are currently at a stage...

FEBRUARY 2015

CYPRUS

CULTIVATING AN ENERGY HUB FOR THE EASTERN

MEDITERRANEAN: EXCLUSIVE INTERVIEW

WITH CYPRUS MINISTER OF ENERGY PAGE 14

PROJECT SPOTLIGHT: VTTV STORAGE TERMINAL PAGE 20

CYPRUS NEWFOUND HYDROCARBONS WEALTH -

STRATEGIC ANALYSIS FROM THE BIG 4: PWC, EY, KPMG,

DELOITTE PAGE 25-30

THE NEW OIL AND GAS FRONTIER REGIONLifting the lid on an offshore natural gas bonanza Page 10

2

CYPRUS INSIDE OIL & GAS FEBRUARY 2015

Foreword by the Minister of Energy, Commerce, Industry and Tourism

Cyprus very promising oil and gas prospects are clearly indicated by the recent sizable natural gas discover-ies in the Eastern Mediterranean. Already a mean of 5 tcf of natural gas has been discovered in the EEZ of the Republic of Cyprus and we are currently at a stage where the exploration activities of all our licensees have intensified.

Oil and gas majors Italian Eni, French Total, Korean KoGas, American Noble Energy and Israeli Delek and Avner, are at present operating in the six licensed Blocks offshore Cyprus. In addition, some of the worlds largest companies servicing the hydrocarbons industry, such as Halliburton and Schlumberger, are opting to base their operations on the island.

To efficiently monetize our hydrocarbon resources, the Cyprus Government is implementing a dynamic exploitation strategy, designed to take stock of all options available for exports to European and international markets. Such an exercise includes closely monitoring all pertinent regional and worldwide developments, while, at the same time, promoting an Eastern Mediterranean where bilateral differences have been resolved and neighboring countries are working together to create the alternative hydrocarbon supply routes which are now urgently sought after by Europe and elsewhere. Cyprus strategic location, its excellent longstanding relations with its East Med neighbors and its status as a member state in the eastern-most part of the EU, position our country as the ideal candidate for spearheading these cooperation efforts.

Apart from the large-scale infrastructure investments required to exploit the Cypriot natural gas reserves, our strategy also entails reaping the short-term benefits of the emerging oil and gas industry, by attracting and facilitating investments in its entire value-chain. Moreover, we aim at creating a knowledge-based econ-omy centred on this industry and capable of exporting services in South Europe and beyond. Over the longer term, we envision for this to include the services of the top oil and gas experts in the legal, financial, commer-cial, technical and other competencies.

Yiorgos LakkotrypisMinister of Energy, Commerce, Industry and Tourism

Ministry of Energy, Commerce, Industry and

Tourism

3


Foreword by the Chairman of the Cyprus Investment Promotion Agency (CIPA)

Cyprus is a well established investment destination chosen by many international companies to set-up their businesses due to the numerous advantages which the country offers. With more than 30 years of experience as an international Business & Investment Centre, Cyprus is widely recognized for offering a wide range of high-quality services, which has played a vital role in shaping the countrys economy.

Cyprus is handling its present challenges by introducing new structural reforms and change in its quest to redefine its existing structure into a new economic model, which is focused on sustainability and growth. Sig-nificant progress has been achieved and the first signs of an imminent recovery are being recognized by inter-national rating agencies and other global entities. As Cyprus is turning the page, confidence and trust are gradually coming back and so is the interest by foreign investors.

While Cyprus is exploring the unique opportunity to develop into an international energy hub of the East-ern Mediterranean region, the country is also looking towards capitalizing on investment prospects in other co-related sectors, like Shipping or Renewable Energy Sources. Most notably the Shipping Sector, an exist-ing renowned and global shipping power, is expected to play an even bigger role for the local economy due to the recent confirmed discovery of natural gas in Cyprus Exclusive Economic Zone. Cyprus geostrategic location at the crossroads of three continents with its untapped energy potential offers many competitive advantages in attracting global Energy players for setting-up a regional hub. Moreover, Cyprus is looking ahead to invest in new innovative technologies of clean and renewable energy, and is cooperating as such with local and foreign investors in a number of different projects.

Investment opportunities exist in a variety of focus sectors including Hospitality, Tourism, Health & Well-ness, Education, ICT, Energy, Research & Development, Banking & Financial Services, Investment Funds, as well as Large Scale Development Projects.

Cyprus is strengthening its position as an attractive and high-quality investment location while it continues to support the needs of foreign investors from all industry segments.

Christodoulos E. AngastiniotisChairman of the Cyprus Investment Promotion Agency (CIPA)

4


Acknowledgements

EnergyBoardroom would like to thank all the people, institutions and companies

involved in producing this special report.

Special thanks to.

Yiorgos Lakkotrypis, Minister of Energy, Commerce, Industry and Tourism, Christodoulos Angastiniotis and

Charis Papacharalambous from the Cyprus Investment Promotion Agency (CIPA) and

Solon Kassinis.

5


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This sponsored supplement was produced by Focus Reports

Publisher: Crystelle Coury; Research and Editorial: Louis Haynes

For exclusive interviews and more info, plus log onto www.energyboardroom.com or write to [email protected].

CopyrightAll rights reserved. No part of this publication maybe reproduced in any form or by any means, whether electronic, mechanical or otherwise including photocopying, recording or any information storage or retrieval system without prior written consent of Focus Reports.While every attempt is made to ensure the accuracy of the information contained in this report, neither Focus Reports nor the authors accept any liabilities for errors and omissions. Opinions expressed in this report are not necessarily those of the authors.

CONTENTS

Lifting the lid on an offshore natural gas bonanza 11

Dawning of an energy exporter 11

Mighty Aphrodite, untold riches 12

Crowning piece of the jigsaw? 12

The market knows best: decoding the Cypriot regulatory regime 12

Deciphering Cyprus gas monetization options 13

Boom time for professional services 14

Cultivating an Energy Hub for the Eastern Mediterranean 16

The CHC: Introducing the worlds youngest national oil company 18

Q&A with the President of The Cyprus Hydrocarbons Company (CHC) 18

Competing Visions? An Action plan for Getting Back on Track 19

The Turkish Question: Spanner in the Works? 21

Project spotlight: VTTV Vasiliko Storage Terminal 22

Downstream Opportunities for Foreign Players 23

Forecasting How The Cypriot Hydrocarbon Industry Is Likely To Unfold -

A Strategy Consulting Perspective 25

Strategies for a New Era of Energy Prosperity 26

Preparing to become an Energy Heavyweight 28

Investment Destination of Choice? 30

Significant Upturn for the Construction Sector 32

Solid Financials Key to Successful Hydrocarbon Development 34

7


Cyprus Facts

Location: 35 N and 33 E Total area: 9,251 km2 Population: 866,000 (2012) Time Zone: GMT+2 Currency: Euro Capital: Nicosia Languages: Greek, Turkish, English for business Political System: Presidential Democratic Republic

Despite recent banking tribulations, the island econ-omy continues to punch well above its weight and remains a strong candidate for inward bound invest-ment

Multilingual, highly skilled workforce with highest ratio of tertiary education per capita in EU

Ranked 5th best country to relocate to (by Knight Franks Global Lifestyle Review 2014)

Classed 2nd largest ship management center glob-ally with 3rd largest merchant fleet in EU

Over 1,022 vessels with 21 million gross tonnage registered under the Cyprus flag

Resilient economic outlook (Fitch Ratings Agency upgrade from Stable to Positive in fall 2014)

Internationally renowned tax-planning centre with strong professional services industry

Business friendly environment characterised by a low corporate income tax rate 12.5 percent, exten-sive double tax treaties network with 50 countries, no withholding tax on payments to non-residents and IP Box regime

Economic Snapshot of Cyprus

8


Track Record FDI

Source: Central Bank of Cyprus Statistics

965

2499

578

1715

979

402

0

500

1000

1500

2000

2500

3000

2008 2009 2010 2011 2012 2013

Cyprus Inward Direct Investment Flows (Euro Millions)

Source: Ministry of Finance

5.1

3.6

-1.9

1.3 0.4

-2.4

-5.4

-2.8*

0.4*

1.6*

-6

-4

-2

0

2

4

6

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP Growth (% change)

* 2014-2016 projected forecast

Cyprus ranks 5th best country to relocate

Source: www.knightfrank.com

Cyprus ranks as 5th best country to relocate to

9


Cyprus ranks as 5th best country to relocate to

Potential in East Mediterranean (Courtesy Kassinis Consulting)

Hydrocarbons LNG Plant

Oil Storage Terminals Upstream

Downstream Oil & Gas Auxiliary Services

Opportunities for investment in the Hydrocarbons field

10


Cypriot Oil and Gas TimelineThe evolution and decisive junctures in Cypruss infant hydrocarbon industry:

Republic of Cyprus signs Delimitation Agreement of its EEZ with the Arab Republic of Egypt in 2003

Cyprus officially inaugurates its offshore exploration activities in 2006 with the acquisition of 2D and 3D seismic data covering areas of 51,000km2 and 659km2 respectively

1st Exploration Licensing Round launched in February 2007

Delimitation Agreement of EEZ signed with Lebanon in fall 2007 (parliamentary ratification still pending)

First and biggest seismic survey to be carried out using PGS advanced Geostreamer technology

Award of exploration licence to Noble Energy International Ltd for Block 12 in October 2008

Delimitation Agreement of EEZ signed with Israel in 2010

Noble announces breakthrough discovery of 3.6 tcf estimated natural gas reserves in Block 12 in December 2011 subsequent to the drilling of 1st exploration well. The deposit is christened

Aphrodite

2nd Exploration Licensing Round launched in February 2012

Award of exploration licences to Eni/Kogas partnership for Blocks 2, 3 & 9 in January 2013

Delek and Avner partner with Noble Energy hitherto participating in Block 12 in February 2013

Award of hydrocarbon exploration licences to Total for Blocks 10 & 11 in February 2013

Establishment of the worlds youngest NOC, the Cypriot Hydrocarbons Company (CHC)

An appraisal well of Aphrodite drilled in 2013 results in a revised estimate of approximately 4.54 tcf mean gross natural gas resource

Announcement that Noble is to drill a least another exploration well in 2015

Aggressive exploration timetable unveiled that will see drilling in blocks 2,3,9,10 and 11 during the period 2015-16

February 2015 Oil & Gas Financial JOurnal | www.OGFJ.cOm | enerGybOardrOOm.cOm 1

Dawning of an EnErgy ExportEr There can be absolutely no doubt that the discoveries will have a

transformative impact on the local economy. A country that formerly

relied on imported oil to cover 94 percent of its energy consumption

requirements and nation once subjected to the EUs highest electricity

prices can now contemplate a future of energy autonomy and ex-

ports. In the words of Yiorgos Lakkotrypis, Cyprus energetic Minister

of Energy, Commerce, Industry and Tourism, natural gas discoveries

deliver an entirely new dimension to the Cypriot economy affording a

range of great opportunities over the short, medium and long term.

Initially we are witnessing significant investment from interna-

tional E&P outfits, from independents such as Noble Energy to su-

per-majors like Total, and equally from the types of firms that service

the upstream segment of the gas value chain such as Schlumberger

and Halliburton, he explains. Then, in the mid-term, the country

will enjoy the revenues accrued from the sale of hydrocarbons on

European and global markets. Finally, we should be able to develop

a knowledge-based community specializing in oil and gas related

services, which can continue to nourish the economy even after our

reserves have been exhausted, he asserts.

This is, however, unchartered territory for a nation formerly unfa-

miliar with the industry, and thus needs careful management. We

must not become sheikhs, exclaims George

Shammas, chairman of the Cyprus Energy Regula-

tory Authority, while unveiling his proposal for a

sovereign wealth fund to recycle gas revenues

into sustainable, equitable human-centered de-

velopment. What we are doing today in the hy-

drocarbons sphere should be for future genera-

tions and provide the foundation for the next

cycle of the islands economic growth, rather than

regarded as shortcut to solve problems of the

past, counsels Evgenios Evgeniou, CEO of PwC

in Cyprus.

To think of it as a silver bullet to solve all of

todays problems would be fundamentally the

wrong approach, agrees Nicos Papakyriacou,

partner and Cyprus oil & gas leader at Deloitte.

The real benefits will come in the mid- to long-

term. In the meantime, we must not lose focus by

putting all our eggs in one basket and overly rely-

ing on hydrocarbon revenues. We must resist the

temptation to place all our expectations in this

one industry, he warns.

advertisement

CyPruSLifting the Lid on an offshore naturaL gas bonanza

When Texan independent E&P player Noble Energy unexpectedly uncovered substantial quantities of offshore natural gas deposits within Cyprus exclusive economic zone (EEZ) in late 2011, it set the scene for wild cel-ebrations and marked a turning point in the history of a nation hitherto known more for its tourism, shipping and financial services. Three years later, the heady optimism shows little sign of relenting with many believing that the countrys hydrocarbons endowments will provide a speedy route back to economic prosperity following Cyprus bank-ing meltdown and near bankruptcy last spring. To a great extent, I would expect our rapidly emerging hydrocarbons industry to assist in rebalancing the economy while simultaneously furthering the stabilization of our banking sector, confidently predicts Angelos Gregoriades, chairman and head of tax at KPMG.

ThiS SPonSored SuPPlemenT WaS ProduCed by FoCuS rePorTS. Publisher: Crystelle Coury; Research and Editorial: Louis Haynes For exclusive interviews and more info, plus log onto energyboardroom.com or write to [email protected]

September 2013 - Appraisal well in the Aphrodite field, of Block

12 in the Cyprus EEZ, by the off-shore drilling unit ENSCO 5006 of Noble Energy International,

operator in Block 12

Yiorgos Lakkotrypis, Minister of Energy, Commerce, Industry and Tourism

Evgenios Evgeniou, CEO, PwC

11

CYPRUS INSIDE OIL & GAS FEBRUARY 2015February 2015 Oil & Gas Financial JOurnal | www.OGFJ.cOm | enerGybOardrOOm.cOm 1

Dawning of an EnErgy ExportEr There can be absolutely no doubt that the discoveries will have a

transformative impact on the local economy. A country that formerly

relied on imported oil to cover 94 percent of its energy consumption

requirements and nation once subjected to the EUs highest electricity

prices can now contemplate a future of energy autonomy and ex-

ports. In the words of Yiorgos Lakkotrypis, Cyprus energetic Minister

of Energy, Commerce, Industry and Tourism, natural gas discoveries

deliver an entirely new dimension to the Cypriot economy affording a

range of great opportunities over the short, medium and long term.

Initially we are witnessing significant investment from interna-

tional E&P outfits, from independents such as Noble Energy to su-

per-majors like Total, and equally from the types of firms that service

the upstream segment of the gas value chain such as Schlumberger

and Halliburton, he explains. Then, in the mid-term, the country

will enjoy the revenues accrued from the sale of hydrocarbons on

European and global markets. Finally, we should be able to develop

a knowledge-based community specializing in oil and gas related

services, which can continue to nourish the economy even after our

reserves have been exhausted, he asserts.

This is, however, unchartered territory for a nation formerly unfa-

miliar with the industry, and thus needs careful management. We

must not become sheikhs, exclaims George

Shammas, chairman of the Cyprus Energy Regula-

tory Authority, while unveiling his proposal for a

sovereign wealth fund to recycle gas revenues

into sustainable, equitable human-centered de-

velopment. What we are doing today in the hy-

drocarbons sphere should be for future genera-

tions and provide the foundation for the next

cycle of the islands economic growth, rather than

regarded as shortcut to solve problems of the

past, counsels Evgenios Evgeniou, CEO of PwC

in Cyprus.

To think of it as a silver bullet to solve all of

todays problems would be fundamentally the

wrong approach, agrees Nicos Papakyriacou,

partner and Cyprus oil & gas leader at Deloitte.

The real benefits will come in the mid- to long-

term. In the meantime, we must not lose focus by

putting all our eggs in one basket and overly rely-

ing on hydrocarbon revenues. We must resist the

temptation to place all our expectations in this

one industry, he warns.

advertisement

CyPruSLifting the Lid on an offshore naturaL gas bonanza

When Texan independent E&P player Noble Energy unexpectedly uncovered substantial quantities of offshore natural gas deposits within Cyprus exclusive economic zone (EEZ) in late 2011, it set the scene for wild cel-ebrations and marked a turning point in the history of a nation hitherto known more for its tourism, shipping and financial services. Three years later, the heady optimism shows little sign of relenting with many believing that the countrys hydrocarbons endowments will provide a speedy route back to economic prosperity following Cyprus bank-ing meltdown and near bankruptcy last spring. To a great extent, I would expect our rapidly emerging hydrocarbons industry to assist in rebalancing the economy while simultaneously furthering the stabilization of our banking sector, confidently predicts Angelos Gregoriades, chairman and head of tax at KPMG.

ThiS SPonSored SuPPlemenT WaS ProduCed by FoCuS rePorTS. Publisher: Crystelle Coury; Research and Editorial: Louis Haynes For exclusive interviews and more info, plus log onto energyboardroom.com or write to [email protected]

September 2013 - Appraisal well in the Aphrodite field, of Block

12 in the Cyprus EEZ, by the off-shore drilling unit ENSCO 5006 of Noble Energy International,

operator in Block 12

Yiorgos Lakkotrypis, Minister of Energy, Commerce, Industry and Tourism

Evgenios Evgeniou, CEO, PwC

12

CYPRUS INSIDE OIL & GAS FEBRUARY 20152 enerGybOardrOOm.cOm | www.OGFJ.cOm | Oil & Gas Financial JOurnal February 2015

The markeT knoWS beST: deCoding The CyPrioT regulaTory regime

Cyprus has so far avoided the dash to tax hydrocarbons that plagues many resource-rich states and this laissez faire stance on taxation seems more than likely to continue. Cypriot governments are renowned for adopting poli-cies that foster stable and business-friendly regulatory regimes recognizing the economic reality that true wealth for the nation arises from employment and prolific business activity, rather than by heavily taxing specific sectors, explains PwCs Evgenios Evgeniou. We are an economy based on free enter-prise where the private sector forms the backbone of economic activity, adds EYs country assurance and oil & gas leader Stavros Pantzaris.

Indeed, there is no specific regime within Cypriot income tax legislation re-lating to oil and gas with profits from trading operations instead taxable at the standard corporate income tax level, which in turn ranks the lowest within the EU. Furthermore, many analysts see little need to start tinkering with the exist-ing framework. Instead of overhauling its tax structures, Cyprus has opted for a profit-sharing contract context. If we follow this trend, there may well be no need to have a specific oil and gas tax system as such. Regarding high-wealth individuals working in this sector however, there could, of course, be

new provisions introduced, muse KPMGs Angelos Gregoriades and board member Iacovos Ghalanos.

Meanwhile the government certainly appears well attuned to the need to cultivate the right enabling environment for the fledgling natural gas industry to thrive. In the words of Energy Minister Lakkotrypis, Cyprus is at a critical juncture in its development path. We are overtly seeking investment and I urge the community to investigate Cyprus as an epicenter of new frontier ven-tures. So as to incentivize them, we are hard at work creating a local busi-ness climate that these companies will find very much to their liking, he adds, pointing to a raft of new policy measures aimed at fast tracking the permitting process for energy projects and allocating land to energy infrastructure devel-opers at favorable terms.

Over and above an extensive double tax treaties network, Cyprus ranks 39 out of 189 countries in ease of doing business, has no foreign exchange controls and market entrants enjoy low set up and maintenance costs along with a wide range of supporting services provided by local professionals so the island is truly attractive from a business standpoint, concludes Pantzaris.

for the Eastern Mediterranean, the threshold would have to be

well north of 5.5 tcfpreferably between 6 and 7 tcf.

This sobering news, however, has to be considered alongside

US geo-seismic survey data that estimates possible total gas re-

serves in the Levantine and Nile Delta basins at 122 tcf and 223

tcf respectively, not to mention oil deposits equivalent to some

3.4 billion bbl. Also to be considered is the Cypriot governments

distinctive exploration and production sharing contracts (EPSCs)

that commit the licensee holders of each of the awarded blocks to

executing aggressive exploration work programs to short dead-

lines. In other words, further discoveries, probably of a significant

stature, can be expected.

Outlining his exploration roadmap, Minister Lakkotrypis ex-

plains that the Cypriot state has signed three EPSCs with a con-

sortium comprising ENI and Kogas, two with the super-major To-

tal, and one with the Noble / Delek / Avner partnership. Looking

ahead, ENI / Kogas are well underway with a very extensive ex-

ploration program, lasting 12 to 18 months depending on find-

ings, while Noble will be drilling at least another exploration well

in 2015 and conducting subsequent appraisals of Aphrodite. Con-

currently Total is in the process of interpreting the thousands of

kilometers of seismic data they have acquired for a completely

new zone in the Nile Delta Basin, he explains. We believe that

the next six months will be critical in determining the future direc-

tion of the Cypriot gas with additional information on new discov-

eries imminent, agrees Toula Onoufriou, president of the nation-

al oil champion, the Cyprus Hydrocarbons Company (CHC).

Others are even more bullish on discovery prospects. The

Eastern Mediterranean is nothing short of a North Sea Mark II,

says Solon Kassinis, managing director of his own energy consul-

tancy and erstwhile director of energy at the ministry. The Israe-

lis claim to have discovered 37 tcf, while Cyprus anticipates an

estimated 60 tcf in blocks that only represent a fraction of our

EEZ. Then there is the reserves potential of Greece, Lebanon, Pal-

estine and Egypt to add to the mixwe are all Norwegians now..

Crowning piECE of thE Jigsaw?Cyprus true potential in oil and gas, however, transcends up-

stream production of its hydrocarbon endowments. What would

attract real investment into Cyprus is not so much the reserves

maP oF The exCluSive eConomiC Zone oF Cyprus

Mighty aphroDitE, untolD riChEsJust how extensive, then, are Cyprus natural gas reserves? Cur-

rently 13 exploration blocks have been drawn up south of the is-

land, the rights to six of which have been awarded during the

course of two licensing rounds in 2007 and 2011 respectively.

Noble Energys original headline discovery in block 12, which was

subsequently christened Aphrodite prospect, was initially

thought to contain some 3.6 tcf (trillion cubic feet) of gas. This

figure was very recently raised to 4.54 tcf by Nobles Israeli part-

ners (Delek Drilling and Avner Oil Exploration which together

hold a 30 percent stake in the field). The figure for condensate, a

liquid byproduct of natural gas that can be sold separately, mean-

while was also raised to 9 million barrels from a previous calcula-

tion of 8.1 million.

To date, Aphrodite represents the sum total of proven Cypriot

reserves. On its own, this makes for quite a conundrum when it

comes to selecting monetization options. On the one hand, the

islands domestic energy consumption is too meagre to justify de-

velopment of the play and thus at least a portion of the gas pro-

duced must be exported. On the other hand, the revised num-

bers still do not come close to the minimum amount of gas which

the operator Noble Energy says is needed to make the govern-

ments preferred choice of an onshore LNG plant commercially

feasible. According to Keith Elliott, Nobles senior vice chairman

13

CYPRUS INSIDE OIL & GAS FEBRUARY 2015February 2015 Oil & Gas Financial JOurnal | www.OGFJ.cOm | enerGybOardrOOm.cOm 3

deCiPhering CyPruS gaS moneTiZaTion oPTionS

Cyprus, to this day, remains an isolated energy island with no intercon-nections with trans-European electricity and gas networks. The great unknown is therefore how Cyprus can best bring its newfound gas wealth to market. Reserve size will play a decisive role in determining the type and volume of investments made both upstream and downstream, so ultimately much will hinge upon the next round of discoveries. Nevertheless, the follow-ing represent the main options currently under consideration:

Liquefied NaturaL Gas (LNG)The Cypriot government has been vigorously promoting the concept of a USD 10 billion liquefied natural gas facility to be built by private groups in Vasiliko enabling the country to ship gas to Asian markets and adjust is customer base in line with spot market prices.

traNs-MediterraNeaN PiPeLiNe DEPA, the Greek natural gas operator, has been conducting feasibility studies into connecting Cyprus with the Greek Peloponnese via an underwater gas pipeline. Depths exceeding 2,000m combined with an active seismic environ-ment pose substantial technical challenges.

CyPriot-eGyPtiaN PiPeLiNe/fsPo CoMbiNatioNBritish entity BG Group has approached the operators of Aphrodite play with

a view to securing gas for their Idku LNG plant in Egypt. The proposition comprises a 600km pipeline coupled with a floating production, storage and offloading (FPSO) unit over the gas well.

Gas-to-wire (Gtw)The idea of a great 2,000-Mw Eurasia interconnector has been mooted by a consortium led by DEH Quantum Energy in which natural gas would be converted to electricity within Cyprus then transmitted by submarine cable to European markets routed via Crete and mainland Greece.

CoMPressed NaturaL Gas (CNG)Pipeline-quality natural gas would be compressed to 20 MPa and transported in small quantities by vessel to relatively near markets such as Lebanon and the Greek Islands. This more interim solution would deploy techniques hitherto never commercially tested in the Mediterranean.

fLoatiNG Liquefied NaturaL Gas (fLNG)Woodside Petroleum, an Australian outfit with LNG expertise, is still ponder-ing an ambitious proposal to construct a floating LNG platform. Again this would be highly capital intensive.

themselves, but rather the regional function that the country can

fulfill as the primary market outlet for LNG for the entire Eastern

Mediterranean region, surmises Kassinis. PwCs Evgenios Evge-

niou concurs. From my perspective, its very clear: the added-

value to be accrued from being part of an energy hub is poten-

tially an even better prospect than the natural gas discoveries

themselves. The Eastern Mediterranean and the Levant region

are developing as a new frontier in terms of natural gas and oil,

and Cyprus has the prospect of establishing itself right at the

heart of this cluster, he observes.

With its geo-strategic location at the gateways to Europe, Af-

rica and Asia, the island would certainly seem appropriately situ-

14

CYPRUS INSIDE OIL & GAS FEBRUARY 20154 enerGybOardrOOm.cOm | www.OGFJ.cOm | Oil & Gas Financial JOurnal February 2015

boom Time For ProFeSSional ServiCeS

Traditionally Cyprus enjoys a strong competitive advantage in the profes-sional services sector especially in ancillary support segments such as au-dit, tax management and legal consultancy. The sector, whose ascendency actually predated the banking surge of the past decade when the country decisively leapfrogged conflict-torn Lebanon as a preferred business services hub, is now set for another growth spurt as it extends out into the hydro-carbon domain. The islands foremost consultancies are already jockeying for position to attain a slice of the new markets opening up.

The blossoming of Cyprus as an offshore financial center jurisdiction gen-erated not only substantial short-term income, but also considerable savoir-faire in specialist fields such as accountancy much of which remains to this day. That legacy will prove highly useful when applied to the nascent oil and gas industry, opines KPMGs Angelos Gregoriades. All the ingredients are already in place towards building a sound industry capability so as to cover the whole range of services for oil companies, from risk management and compli-ance to business optimization, human capital sourcing and corporate finance capabilities, agrees PwCs Evgenios Evgeniou.

Many of these market offerings will be targeted towards incoming energy firms with a view to mentoring them in their alignment with local tax provi-sions, the indigenous business context and regulatory sphere. Our oil and gas tax professionals already work with many of the leading players to help our clients render tax a more controllable and predictable cost in what is, after

all, a highly dynamic and ever-changing market, reveals EYs Stavros Pantzaris.

There will also, simultaneously, be much scope for advising the Cypriot state in how to manage and con-figure what is, in effect, an entirely new industry for the country. We will be on hand to promote best practice and assist the government in correcting bottlenecks that pose problems for the operators and in formulat-ing the sorts of legal frameworks in order to be able to attract new players to the region, promises Deloittes Nicos Papakyriacou.

Meanwhile the governments agenda is yet more ambitious: aiming to render the island the go-to focal point for hydrocarbon support services for the entire re-gion. It makes sense that we develop a specialization in oil and gas services that can then be exported through-out the Eastern Mediterranean. Neighboring states will be commencing their own exploration activities in the near future and the demand for technical, commercial and legal support will be vast. Our aspiration is to position the Cy-priot economy so that it provides this scientific expertise, due diligence, busi-ness know-how and manpower, declares an ebullient Minister Lakkotrypis.

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International), a Sw

iss entity. All rights reserved.

ated for performing the role of energy hub to the region. Cyprus

enjoys a number of unique attributes that make it ideally suited:

its central geographical placement, its renown for professional

services, its fully transparent legislative framework and its reputa-

tion for a rule of law that is predictable and stable, points out

Minister Lakkotrypis. If you look at the map, there is only one

country that has the political and economic stability to act as the

hub and its us when you consider the volatility and instabilities

afflicting the region, its little wonder more and more energy com-

panies are looking to Cyprus as a safe and stable base for their

regional operations, adds Evgeniou.

Were the island to actually achieve hub status, the economic

benefits could be expected to cascade across auxiliary industries

such as the engineering and construction sectors. Some interna-

tional EPC contractors are already contemplating such a scenario.

We see Cyprus oil and gas outlook as highly promising, expect

there to be many related infrastructural projects over the coming

years and seek to position ourselves right at the forefront of any

such developments, elaborates J&P Energy & Industrial Projects

CEO, Marios Patsalides.

Nor should the significance of Cyprus EU membership be

overlooked. We are actually the only EU member state in the

Eastern Mediterranean making us the obvious candidate as a con-

duit for channeling Eastern Mediterranean natural gas to Euro-

pean markets, observes Toula Onoufriou of the CHC. In fact,

Cyprus actually straddles the crossroads of major energy ex-

changes, according to VTT Vasiliko general manager George Pap-

anastasiou. You get greater quantities of diesel consumed in

mature Europe and higher gasoline demand in the developing

eastern Mediterranean region. Therefore you see middle distil-

latesdiesel, gas oil, jet fuelmaking their way over to Europe

from the Arab Gulf and trade in gasoline flowing in the opposite

direction. This often entails vessels needing to make and break

bulk. Cyprus enjoys the double dividend of lying along these criti-

cal pathways while simultaneously possessing the sort of deepwa-

ter environment where these activities can take place, he

analyses.

Whether such grandiose schemes can ever reach fruition re-

mains a moot point. The main brake is a lack of political will for

regional co-operation rather than a shortage of hydrocarbons,

laments one industry insider. Only time will tell.

Angelos Grego-riades, Chairman and Head of Tax, KPMG

15


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16


Cultivating an Energy Hub for the Eastern Mediterranean

Yiorgos Lakkotrypis, MINISTER OF ENERGY, COMMERCE, INDUSTRY AND TOURISM

Energyboardroom: The Cypriot economy has recently been through a banking cri-sis and remains disproportionately dependent on a triumvirate of sectors namely tourism, professional services and shipping. To what extent can Cyprus nascent hydrocarbons industry play a lead role in guiding the country back to economic prosperity?Yiorgos Lakkotrypis: Oil and gas brings a completely new dimension to the Cypriot economy and delivers potential in three core areas. In the short-term, we are wit-nessing significant investment from interna-tional E&P companies. In the medium-term, the country will enjoy the revenues accrued from the sale of hydrocarbons and, in the long-term, we aim to grow a knowledge-based community specializing in oil and gas services. Traditionally Cyprus holds a com-petitive advantage in the service sector and it makes sense that we also develop a spe-cialization that could then be exported throughout the Eastern Mediterranean. A number of countries in the region will be commencing their own exploration activities in the near future and demand for technical, commercial and legal support will be increasing. Our aspiration is to position Cyprus so that it provides that expertise and manpower.

EBR: You mentioned that the licensing rounds are now attracting top-tier E&P players. What steps is the Ministry actively taking to maintain momentum and secure the requisite inward investment from oil service companies for the industry to flourish?Yiorgos Lakkotrypis: We are being very proactive in the sense that we are actively seeking investment in that auxiliary part of

the oil and gas industry. We have estab-lished the capability to allocate land at very favourable terms and have also been fast tracking the permitting process by setting up a cross-cutting team involving personnel from each of the relevant government min-istries. This ensures that we can deal with incoming investment in a swift and coordi-nated manner and that appropriate incen-tive structures are in place.

EBR: What options are you considering for the monetization Cypriot natural gas?Yiorgos Lakkotrypis: Our priority is to try and make the proposal for an LNG terminal at Vasiliko commercially viable and compet-itive worldwide. Under the EU initiative of Projects of Common Interest (PCI), we are simultaneously reviewing a concept for an Eastern Mediterranean pipeline that would potentially connect Israeli and Cypriot gas supplies to European consumer markets via Greece. I could also mention ideas for FLNG, CNG and regional pipeline sales. The other day we signed a memorandum of understanding with Jordan which resolved to jointly explore the feasibility of Cyprus selling natural gas to the country. We have held very similar conversations with Egypt. At the moment, all of these various options are receiving serious consideration.

Interview

Traditionally Cyprus holds competitive advantage in the service sector and it makes complete sense that we develop a specialization in oil and gas services that could then be exported throughout the region.

Ministry of Energy, Commerce, Industry

and Tourism

17


Yiorgos Lakkotrypis, MINISTER OF ENERGY, COMMERCE, INDUSTRY AND TOURISM

EBR: Discussion of the countrys potential as the EUs sole natural gas exporter dom-inates Cyprus hydrocarbons agenda, but what about the outlook for oil? Total, for example, has expressed its interest in drill-ing for oil in blocks 10 and 11. Is there not a time dividend to be reaped from focus-ing resources towards oil because of the shorter timeframe needed to bring oil on-stream?Yiorgos Lakkotrypis: So far there has been no significant discovery of oil in the Levantine basin. The US geological survey predicted in 2010 the presence of both natural gas and oil. Meanwhile the presence of natural gas is steadily being borne out. So we can reason-ably assume that the presence of oil will also be confirmed in due course. You are abso-lutely correct that there is a commercial advan-tage from oil in the sense that you can mon-etize much quicker without the need for putting in place a lot of expensive upfront infrastructure. Some operators are indeed looking into that option and I am confident that more news on that will be forthcoming in the next couple of years.

EBR: How is the country going about build-ing up the requisite know-how considering the long lead times associated with devel-oping technically skilled oil and gas profes-sionals?Yiorgos Lakkotrypis: Within the Production Sharing Contracts that we have signed we have incorporated an agreement with each operator whereby they undertake to allocate a specific amount of their resources to educa-tion on a yearly basis. We have safeguarded that from the beginning of the process and are using part of that funding towards training up the civil servants that are going to be required to manage and oversee the domes-tic industry.

At the same time, we are looking at develop-ing technical skills such as high pressure welding and other blue-collar capabilities, and have been collaborating closely with the national educa-tional apparatus to build local capacity in white-collar jobs. We also recognize that the training

that happens in the classroom is only a small part of the overall education process so are doing everything we can to promote on-the-job apprenticeships. We are encouraging the for-eign operators to make use of local labour and foreign exchanges where Cypriots can receive practical training in centres of excellence such as Aberdeen and Stavanger.

EBR: To what extent does Cyprus geo-graphical positioning and reputation for fis-cal leniency and political stability make the country an attractive base for region-wide oil and gas operations?Yiorgos Lakkotrypis: Cyprus enjoys a number of unique attributes that make it ideally suited to the role of being the hub for the region: its central geographical placement, EU member-ship, a fully transparent legislative framework, and reputation for a rule of law that is predict-able and stable. This is what underpins our pursuit of agreements with neighbouring countries. There are many potential synergies that have yet to be leveraged in terms of joint development, transit and export of natural gas. We have allocated a large amount of land to host facilities for routing and storage of liq-uid fuel, propane and other variants. It is not, after all, as if there are many other alternatives in the region. We are currently trying to figure out which is the optimum mix of options to proceed with, but the will from the countries of the Eastern Mediterranean is unquestion-ably there.

Seismic surveys on Block 12

18


The CHC: Introducing the worlds youngest national oil company Since its inception back in January 2013, the countrys state oil champion, the Cyprus Hydrocarbons Company (CHC), has already undergone its fair share of drama, having been subjected to multiple managerial shake-ups and even a wholesale re-branding. Finally, however, the dust appears to have settled and its function and future outlook are becoming clearer. Structural changes were necessary because this is a company that could have swiftly developed into one of the most influential entities in the entire country, explains Cypruss Energy Minister Lakkotrypis. It was therefore critical to ensure the appropriate auditing and control mechanisms were in place and unfortunately, under the old setup, there was a feeling that these structures were lacking.

The firm is today managed by a seven-member non-executive board of directors nominated directly via the council of ministers, which constitutes the executive arm of the Republic of Cyprus. Its mandate has also been revised. The CHC serves as the commercial arm for the

state, marketing the islands share of any future hydrocar-bons production and holding the governments portion in infrastructure projects, proclaims the entitys president, Toula Onoufriou. At some point in the future, we even aspire to develop into an operator in our own right with the capabilities to perform exploration and extraction. For the time being, however, we will have participation in the upstream arena solely through the management commit-tees and we will not be shouldering the burden of funding direct investment in E&P activities, she clarifies.

This leaves some opinion leaders rather unimpressed. For the CHC to assume its rightful place as state repre-sentative of the nations reserves, the current management must set about hiring engineers and skilled personnel capable of handling technical issues related to E&P, ven-tures Solon Kassinis, who himself enjoyed a brief stint run-ning the company. The CHC has been reduced to little more than a marketing mechanism.

Energyboardroom: There have been numerous past debates over whether the CHC should assume regulatory functions and merge with the public natural gas entity, DEFA. What is your position on this?Toula Onoufriou: There was certainly an important period of deliberation as to how the different bodies in the energy sector should best interact, but this has now been finalised and our roles are clearly demar-cated. Our primary role is to act as the com-mercial arm of the Republic of Cyprus in the market-ing and sales of hydrocarbons.

EBR: What are your other functions?Toula Onoufriou: We also participate in the manage-

ment committees for the production shar-ing contracts that have been signed by the operators. This ensures we maintain a very active role in the production process.

EBR: What are your immediate priori-ties looking forwards? Toula Onoufriou: We are focused on supporting the E&P process and devel-oping the optimum conditions for the sale of Cypriot gas. Cyprus needs to establish a solid basis for the industry to

grow in a way that will build up additional strength within a national economy that has historically been overly reliant on only a handful of sectors. We need to harness newfound energy wealth to foster cluster growth in domains such as education and innovation.

Q&A with the President of The Cyprus Hydrocarbons Company (CHC)

Toula Onoufriou, President, Cyprus Hydrocarbons Company (CHC)

19


Competing Visions? An Action plan for Getting Back on TrackEnergyboardroom: You have a track record of 32 years as a high level civil ser-vant, part of that time as the Director of Energy within the Ministry of Energy. You were also appointed to lead the worlds youngest National Oil Company, then known as KRETYK, but resigned after a brief stint. Why was that?Solon Kassinis: KRETYK started out as Cyprus National Oil Company (NOC), but nowadays can no longer be considered as an oil company in the traditional sense. When the government placed the imple-mentation of the proposed LNG facility at Vasiliko on hold and started diluting the functions of the company, I immediately ten-dered my resignation. For KRETYK to assume its rightful place as a state entity for the nations reserves, it needs to possess E&P knowledge and capabilities. Sadly the company has been reduced to little more than a marketing vehicle. Any functions related to exploration and exploitation remain firmly rooted within the ministry and, even there, there is a distinct lack of political will to proceed with the LNG terminal which should form the centerpiece of any coherent national hydrocarbons strategy.

EBR: In your expert opinion, then, the LNG terminal is absolutely critical to being able to properly monetize Cyprus hydro-carbons wealth?Solon Kassinis: Absolutely! It is the only credible option on the table for harnessing Cyprus full energy potential. There is, of

course, a plethora of other exciting propos-als that would also greatly benefit the national interest, but these must be regarded as complements to the LNG terminal, not substitutes or alternatives. Its a peculiar situation. When I was leading KRETYK, stakeholders like Deutschbank were keen to go ahead with the financing, but our government fell asleep. Our politicians hide behind the poor excuse that we dont yet have sufficient quantities of hydrocarbon reserves for the project to be economically viable. I contest this vigorously. The original estimation of the US geological survey was that there are a likely 1.76 billion barrels of oil between Cyprus and Egypt and 1.68 billion barrels of oil between Cyprus and Israel, Leb-anon and Syria. This figure has now been revised upwards with Noble Energy declaring 3 billion barrels of unrisked oil potential in Cyprus and Israel. Noble are listed on the NYSE and cannot claim such vast quantities without having genuine grounds for doing so and without possessing technical studies to support their claims. In short, there are already ample reserves to justify going ahead with the first train of the LNG terminal.

EBR: Tell us about some of those other exciting proposals on the table.Solon Kassinis: A number of excellent ideas have been floated. One proposal was for a long-haul electricity interconnector linking Cyprus with Italy. The electricity transmitted across that connector would be generated not only from natural gas, but also from

Solon Kassinis, MANAGING DIRECTOR - KASSINIS INTERNATIONAL CONSULTING

Turkish Cypriots need to believe in themselves and their own country, Cyprusmoreover, they must be wary of the dangers of gifting everything on a plate to Turkey.

20


renewable energy sources. The beauty here is it circumvents the storage problems traditionally associated with renewables. Being a small island, there is only so much electricity that the Cypriot network can tolerate at a single point in time, but the connector would instead channel any spare capacity towards meeting demand in mainland Europe.

Another idea is to bring in natural gas from Israel and Lebanon to liquefy it and then channel it onwards to European markets. They would still have the ownership of the gas and only pay a toll-ing fee for the liquefaction services depending on the throughput of gas processed, stored and exported. There is even the prospect of supplying Egypt and other Middle Eastern markets with gas. Both Jordan and Oman have recently voiced an interest. In the interim period we could serve them using Compressed Natural Gas (CNG). This is a technique that has never been commercially tried in the region, but which theoretically should work. The Mediterranean Sea is after all not so rough, with maximum wave heights of 8 metres. The same method could also be used to serve Lebanon and the Greek Islands until the point where they can develop and extract their own reserves.

EBR: Since leaving KRETYK youve launched your own oil and gas consultancy firm. Could you please introduce Kassinis International Consulting outlining the scope of its activities today and client base?Solon Kassinis: One of my top clients is actually the prime minister of Greece. Having divided the areas from Crete to the Ionian Sea into twenty blocks, the Greek government will soon be commencing the tendering process and we

will be advising on the formulation of the rele-vant lease agreements. Secondly, I am acting as consultant to a range of private sector compa-nies involved in both upstream and downstream hydrocarbons activities. There is an Israeli com-pany that is progressing with the establishment of a methanol plant in Cyprus. We are also advis-ing companies from Norway and the US that are positioning themselves to provide pipeline and port / offshore services facilities.

EBR: You have also advocated leveraging energy policy to promote regional stability. Tell us about that.Solon Kassinis: I am a firm believer that this regional energy concept can be utilized to improve peoples lives and calm a region that has been beset by instabilities for many years. The same can be said for Cyprus own impasse with Turkey. I am myself a refugee from the occupied area of Cyprus and strongly believe that our hydrocarbon wealth can be a force for change in helping to unite the island. At the moment there is zero activity in the Western, Northern and Northeastern parts of the EEZ and we dont even know the hydrocarbon potential.

Turkish Cypriots need to believe in themselves and their own country, Cyprus. They need to understand the value of such resources and how they can be harnessed as an instrument to enhance livelihoods. Moreover, they must be wary of the dangers of gifting everything on a plate to Turkey. All Cypriots alike could potentially sell gas to an energy hungry Turkey at market prices. This would represent a win-win situation for everyone, includ-ing Turkey.

Our government fell asleep. Our politicians hide behind the poor excuse that we dont yet have sufficient quantities of hydrocarbon reserves for an LNG Terminal to be economically viable. I contest this vigorously.

Interview

For the CHC to assume its rightful place as a state entity for the nations reserves, it needs to possess E&P knowledge and capabilities. Sadly the company has been reduced to little more than a marketing vehicle.

21


Cyprus newfound gas discoveries have, in some respects, served to raise the political temperature across the region. Turkey, with which Cyprus has been at loggerheads ever since the 1979 formation of a breakaway an internationally illegitimate Turkish Cypriot state in the northern part of the island, dis-putes the countrys right to explore for gas with Ankara arguing that all exploration activities should be suspended until the Turkish Cypriot minority can assume a share of any proceeds generated. The Republic of Cyprus, for its part, has responded by firming up relations with its other neighbors, espe-cially Israel, and by abruptly ending its historic neu-trality to apply for NATOs Partnership for Peace sta-tus. Despite this, many commentators still believe that the islands gas finds could ultimately help to tie the region together and act as firm incentive to uni-fication.

Our natural gas endowments can be a catalyst

for promoting a solution because it is in the interests of all parties involved to find a win-win solution that allows all Cypriots to partake in the islands resource wealth. Let us not forget that Turkey represents the foremost energy consumer in the region so from a purely economic perspective should rank as our tar-get customer, points out Deloitte Cypruss Nicos Papakyriacou. Conversely, if we dont find a solution, it will limit our options and our potential to utilize what we find. The Cypriot problem would continue to create a geopolitical risk in the eyes of investors, he warns.

For its part, the Cypriot government strongly pro-motes the idea that the discovery of hydrocarbons can be the source of conflict resolution and stability despite the ongoing political differences that are acknowledged, affirms Minister Lakkotrypis. If we can create the right economic environment then polit-ical stability and growth should naturally follow, he reasons.

The Turkish Question: Spanner in the Works?

The ENI/KOGAS consortiums SAIPEM 10000 drillship, operating in the Cyprus EEZ since September 2014

22


One investment of much relevance is the establishment of a major stor-age terminal in the industrial zone of Vasiliko, which stands to make Cyprus a transit center of energy products trading, through the import, export and trans-shipment of oil products to and from interna-tional markets. When the project was initially conceived, it was actu-ally the brainchild of one of the com-panys shareholders, Vitol, who identified that there were no real oil storage facilities in the area and that there was insufficient capacity to support the product flows between east and west, explains VTT Vasi-likos general manager, George Pap-anastasiou. The second reason for locating this project in Cyprus is the accessibility to deep-sea water, which is a huge advantage for attracting the big oil vessels. Thus Cyprus is ideally located both geo-graphically and geologically, he adds.

The terminal which constitutes Cyprus single biggest energy infra-structure investment to date has a capacity of 357,000m of oil prod-ucts (comprising gasoline, diesel, jet fuel, gasoil, MTBE, FAME and heavy fuel oil) which will reach 650,000m with the eventual completion of a second phase. Within the framework of the project, a marine jetty com-prising four berths has been created which extends some 1200m off-shore and includes fourteen marine loading arms, capable of loading and discharging 1250 m/hour per product. Phase two will concern the construction of 13 fuel oil and crude oil tanks, with a capacity of 305,000 cubic feet and is expected to be fully operational by the end of 2016 - the long time frame primarily

owing to the fact that the new stor-age tanks will be placed on reclaimed land which needs to be constructed and allowed to settle prior to tank placement.

Through the terminal activities, it is estimated that Cyprus will gain revenues of EUR 18 million (USD 21.31 million) per year from port fees, while the state will have addi-tional proceeds from taxes paid by companies which will trade their products via the terminal. One pos-itive by-product is the role VTT Vasi-liko has played in preparing the groundwork for future energy infra-structure projects. We faced many challenges and not just in human resources and sourcing skilled labor and expertise. In order to develop knowledge in the country and dif-ferent departments of government, and in order to be quicker in under-standing projects like this, we had to first change the mentality of the

bureaucracy, which was not easy. Cyprus has been a place that is mostly tourist-oriented and there was a general belief that the busi-ness of tourism cannot be combined with heavy industry, recollects Pap-anastasiou. Future developers will find it much easier now, he reflects.

Whats more, the project has been useful in allowing other firms to familiarize themselves with the islands hydrocarbons framework in advance of forthcoming major infra-struc tural inter ventions. J&P Energy & Industrial Projects has gained over the years the necessary experience to undertake and suc-cessfully complete any project in Cyprus related to the oil and gas sector, including the production of gas, construction of an LNG termi-nal, pipeline network and/or any major infrastructure project, confi-dently declares the EPC contractors CEO, Marios Patsalides.

Spotlight

Project spotlight: VTTV Vasiliko Storage Terminal

23


Downstream Opportunities for Foreign Players

First ship arrives at VTT Vasiliko (VTTV) oil terminal for testing purposes

Energyboardroom: The Vtt Vasiliko stor-age terminal represents a first-of-a-kind project for the Eastern Mediterranean with the potential to connect Europe and the Black Sea with markets in the Middle East and Asia. What is the projects role as a connector linking-up product flows?

George Papanastasiou: Europe is long in gasoline and the eastern Mediterranean is short, and because of different develop-ments of these two areas, you find greater quantities of diesel consumed in mature Europe and more demand for gasoline in the developing eastern Mediterranean region. It thus makes sense to construct a terminal in Cyprus to facilitate distribution. Also additional product flows can be identi-fied emanating from the Black Sea, where there remains an abundance of old style refineries. These former generation facilities tend to produce a lot of black products, which inhibit the operating effectiveness of the refineries when held for long periods of time in storage. It is therefore in the interests of the refineries to move these products along as soon as possible to markets where consumption of fuel oil remains prevalent.

Its important to remember that, these

days, burning of fuel oil tends to be limited to emerging economies in the east such as India and China because of the pollutant by-products and harmful emissions which are simply deemed unacceptable within Europe. Meanwhile, Europe has transitioned to using natural gas. In order to transport fuel oil eastwards, one needs to make bulk and the only logical way and place to achieve this is through Cyprus. The Bosporus straights, for example, though equally stra-tegically positioned would be much too shallow for vessels the size of Suez Max. Because of the absence of flexible marine facilities in this part of the world, trading is still operating in a primitive context, but our terminal will change all of that and greatly improve the supply chain.

EBR: The VTTV Terminal also allows for the repatriation of the Cypriot Republics strategic oil stocks. How important is such repatriation in economic and political terms?

George Papanastasiou: Compulsory stocks are currently located both domesti-cally and in Greece. Cyprus own obligation meanwhile is to maintain 450,000 cubic feet

George Papanastasiou, GENERAL MANAGER, VTT VASILIKO

24


Interview

which is based on local market consumption from the previous year while the rest is kept in paper stocks elsewhere, mostly in the Netherlands. Repatriating the stocks to our terminal will be both politically and econom-ically beneficial as it means they can be prac-ticably drawn upon in an emergency.

EBR: What challenges has VTTV been encountering in implementing an infra-structural project of this magnitude?

George Papanastasiou: Cyprus is not used to undertaking large-scale energy infrastructure projects so we were obliged to prepare the groundwork through educa-tion and demonstration exercises abroad. For example, we took customs officials to witness oil terminals operating next to tour-ism facilities and residential zones; we shut-

tled environmental committees abroad to discover how other countries maintain envi-ronmentally friendly terminals; we accom-panied the Port Authority to Fujairah in order to show them the possibilities of operating a small fleet and having commer-cial vessels making port calls; and we even exposed the local fire brigade to the latest practices in oil fire containment and fire-fighting. It all takes time, but through edu-cation we have really started to change the mentality of the system here. We feel we have already been of immense service to the island because future large-scale infra-structural activities of this ilk, such as the proposed LNG terminal, will find most of the foundations have already been put in place. A precedent for work-around solu-tions will already have been established.

We feel we have already been of immense service to the island because future large-scale infrastructural activities of this ilk, such as the proposed LNG terminal, will find most of the foundations have already been put in place.

25


How might the discovery of significant hydrocarbon reserves change the com-plexion of the national economy?The prospect of cheaper energy may cre-ate significant opportunities for the devel-opment of some high energy consumption industries. There has actually already been some interest from the Middle Eastern investors in this domain, because Cyprus newfound hydrocarbons assets all of a sud-den provide the potential for establishing a manufacturing base within the European Union while still retaining geographical proximity to their own region. - Evgenios Evgeniou, CEO of PwC Cyprus.

What additional strategies should the country be adopting to ensure the con-version of these hydrocarbon endow-ments into tangible economic prosperity?Rigorous safety standards and protection against environmental hazard are areas that will need close attention. Its about building a sustainable cluster growth, not just managing the discovery and produc-tion of hydrocarbons. Fortunately, Cyprus has the benefit of being able to learn from other countries that have achieved this. We can see what works and what doesnt work and we know exactly what we need to implement so as to demonstrate to pro-spective international companies that we are the sort of robust and safe destination where they can confidently set up busi-ness. - Angelos Gregoriades, chairman and head of tax, and Iacovos Ghalanos, board member at KPMG Cyprus.

All the fundamentals are in place for Cyprus to assume the mantle of regional oil and gas hub, but the country can do more to consolidate this advantage. Legislators

could, for example, expand the double tax treaty network to include Middle Eastern countries which would have the effect of rendering it easier for their (often highly active) oil and gas sector companies to relo-cate here. - Nicos Papakyriacou, partner and oil and gas leader at Deloitte Cyprus.

What steps are you undertaking to pre-pare for serving Cyprus nascent oil and gas industry?In terms of readiness, weve developed a specific oil and gas group on the ground in Cyprus composed of specialists skilled in assisting energy sector clients in what we forecast to be the three priority areas: audit, tax, and advisory. - Angelos Gre-goriades, chairman and head of tax, and Iacovos Ghalanos, board member at KPMG Cyprus.

We have supported international clients dur-ing the first and second licensing rounds by providing assistance in the preparation of applications to the Cyprus government. Simul-taneously, we have been growing the in-coun-try oil and gas knowledge pool by leveraging global synergies and raising awareness

through conferences, webinars, seminars and newsletters to advance thinking across local businesses so they can position themselves to succeed in this industry. - Stavros Pantzaris, country assurance leader, oil & gas leader at EY Cyprus

PwC has been focusing on building up Cypriot hydrocarbon expertise by blending our local knowledge with quality insights and tried and tested practices from across our

global network. - Evgenios Evgeniou, CEO of PwC Cyprus.

Forecasting How The Cypriot Hydrocarbon Industry Is Likely To Unfold - A Strategy Consulting Perspective

Evgenios Evgeniou - PwC

Angelos Gregoriades - KPMG

Stavros Pantzaris - EY

Nicos Papakyriacou - Deloitte

26


Strategies for a New Era of Energy Prosperity

Evgenios Evgeniou, CEO - PWC CYPRUS

Energyboardroom: We have been hearing about many different proposals for monetiz-ing Cypriot hydrocarbon reserves. From your perspective, what represents the most viable options to date?Evgenios Evgeniou: Should there be further discoveries of natural gas, then new commer-cialization options may yet arise. Prospective investors take into account factors such as cost, technical feasibility, and the time it takes to get the gas to market. The choice of the most appropriate monetization solution is usu-ally market driven since for investors to pro-ceed, the terms presented to them need to make commercial sense especially given the risks involved in such projects and the large investments needed. As a country, we should retain flexibility regarding our options - pro-gressing in decisive steps, without rushing or making hasty decisions. What is important is to have solid and credible business plans for investors to be willing to put their money into the development of Cyprus as an energy cen-ter.

EBR: Some stakeholders would say that there is a race against time in terms of exporting LNG due to the global energy outlook. How do you respond to this?Evgenios Evgeniou: Im not saying we should be laid back about it, not at all. We must move decisively to very clear timelines. When I say we shouldnt rush, what I mean is that we need to have the fundamentals in place first before embarking on large-scale infrastructural proj-ects. There is a certain sequencing that needs to be applied. Currently progress is taking

place in exploration, and I agree with you that there is a window of opportunity with the inter-national energy gas market rapidly changing, both from a geopolitical perspective and the development of shale. We therefore need to be aware that there is a timing issue, but, on the other hand, we should be realists in the sense that, for international players to invest, they need to have something that is sufficiently concrete, tangible and credible.

EBR: How do you assess Cyprus current regulatory framework for hydrocarbons?Evgenios Evgeniou: The government needs to recruit, to train, and to buy tools in terms of software. There is still work that needs to be done to be able to properly supervise this sec-tor and to be able to negotiate with the incom-ing multinationals that possess all the exper-tise. We should be open to utilizing expertise from elsewhere both in terms of government-to-government partnership, and also via pub-lic sector collaboration with private enterprise.

EBR: Cyprus is globally renowned for its advanced professional services sector. How can this benefit the emergent oil and gas industry? Evgenios Evgeniou: In terms of attracting multinationals, one of the reasons that Cyprus has been successful so far as an international and regional business center is down to its infrastructure. The core ingredients are already in place and the energy sector has its own specific needs when it comes to the infrastruc-ture on the ground, which the government is quite rightly setting about developing.

There is a window of opportunity with the international energy gas market rapidly changing, both from a geopolitical perspective and the development of shalewe need to be aware of this timing issue, but, on the other hand, still remain realists.

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Preparing to become an Energy Heavyweight

Angelos Gregoriades, CHAIRMAN -KPMG

Energyboardroom: How ready is Cyprus to assume the role of acting as hub for the regions oil and gas operations?Angelos Gregoriades: This is certainly the strategy of the Government, depending on the capacity and volume of hydrocarbon find-ings. Currently, our proven discoveries and bilateral agreements with neighboring States are not enough to constitute Cyprus as a hub, or even to justify the development of further infrastructure. Hopefully, there will be further discoveries and agreements round the cor-ner, which will make infrastructure projects viable that will serve not just Cyprus, but ulti-mately the entire region as well. There have been preliminary discussions with Egypt in terms of combining forces and sharing an LNG facility, but if you look at the geograph-ical and political landscape, the only country that is acceptable as a hub is Cyprus. We, of course, have our own political situation here as well, but compared to the problems of the other countries across the region, it is incon-sequential.

EBR: Given the long lead times associated with developing oil and gas professionals especially for technical categories such as engineering, how prepared is the Cypriot workforce? Angelos Gregoriades: Actually there are quite a number of educated Cypriots working abroad who are now coming back to Cyprus, which will help boost what has the potential to be an excellent and prosperous industry. One of the objectives of the government should therefore be to foster and accelerate this trend. We need to introduce some tax benefits and other incentives in order to attract them home as quickly as possible.

Some of the Cypriot universities have started to introduce a number of programs specifically aimed at providing skilled labor to the hydrocarbons sector. Bright minds left because there was a lack of high-level employment for them, so the greater job availability that we are expecting this industry to bring will obviously help. On top of that, lets not forget that according to a recent study, Cyprus is also considered the fifth best place to live in this part of the world!

EBR: How would KPMG counsel the Cypriot state to go about sustainably developing the newfound hydrocarbon wealth? What would represent an optimum set-up that would benefit operators, ser-vice providers, and the national economy alike?Angelos Gregoriades: The most important factor would be having a robust regulatory framework and investment regime in order to attract the IOCs to Cyprus in the first place. This needs to be coupled with the Govern-ments own strategic incentives, which would be the promotion of employment, the gen-eration of growth and the establishment of Cyprus as an energy epicentre. This needs to be accomplished not just for Cyprus, but for the region in general as well. This is because, having a regime like that in place would actu-ally attract additional work from the region, and not just from the findings within Cyprus EEZ. The infrastructure is in place, with the possibility of further developments, to service both the local communities as well as the international markets in Europe and Asia, depending on political and economic factors.

If you cast your eyes across the geographical and political landscape, the only country remotely acceptable as an energy hub is Cyprus.

Interview

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Angelos Gregoriades, CHAIRMAN -KPMG

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Investment Destination of Choice?

Stavros Pantzaris, COUNTRY ASSURANCE LEADER, OIL & GAS LEADER - EY CYPRUS

Energyboardroom: Given the excep-tional challenges that Cyprus has had to face in recent years to restore the viabil-ity of its financial sector and public finances, to what extent does the coun-try remain attractive to investors?Stavros Pantzaris: Following the disrup-tion of its banking sector in 2012 and 2013 mainly due to the exposure to the Greek economy, Cyprus applied to Eurogroup for financial assistance to cover its budgetary needs, restructure its banking system and refinance its public debt. The latest reports from the so-called Troika (composed of the European Commission, European Cen-tral Bank and IMF) are positive, with fore-casts for the macroeconomic outlook for Cyprus revised upwards. Standard & Poors and Fitch upgraded the Cyprus economy in April 2014 after years of continuing downgrades and recently we have seen deposits in Cypriot banks increase for the first time since December 2012. The local economy is now expected to grow over 2015.

Notwithstanding the aforementioned, the environment is still attractive to serve the local market and the region. Various business and tax factors such as the ease of doing business in Cyprus, its strategic geographical position on the crossroads of Europe, Africa and Asia, English speak-ing environment, EU membership, no FX controls, low set up and maintenance costs for local entities and a wide range of sup-porting services provided by local profes-sionals, together make the island an exceedingly attractive business centre.

EBR: In a nutshell, how would you describe the countrys tax regime, then?Stavros Pantzaris: Cyprus provides a friendly tax environment with a low corporate income tax rate, access to the EU directives and the extensive double tax treaties network, no withholding tax on payments to non-resi-dents (apart from royalties paid for intellec-tual property economically utilised in Cyprus), low transaction taxes, a tonnage tax regime and tax incentives for expatriate employees. All in all, a highly favourable and appealing regime.

EBR: The Cypriot Government has made it a priority to develop a sustainable oil & gas sector in the country. How is EY ensuring international standards are adhered to and transparency promoted at all levels? Stavros Pantzaris: As professionals, we have an important duty to the public trust and the capital markets. EY has established a detailed system of policies and controls, along with independence standards that are among the strictest in the profession.

With regards to reporting, there is a broad view that greater transparency in the natural resource extractive industries will support proper development. Three major efforts have emerged to require disclosure of gov-ernment payments, including the Extractive Industries Transparency Initiative (EITI), US legislation under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the European Unions recently approved rule. EY supports its clients to understand and comply with these reporting requirements.

Cyprus provides a friendly business environment with a low corporate income tax rate, access to the EU directives and the extensive double tax treaties network All in all, a highly favourable and appealing regime.

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EYCyprusVisit:ey.com/cy

EY_JA_Eng_A4_12_14_Oil&Gas_Final.indd 1 11/12/2014 16:11

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Significant Upturn for the Construction Sector

Marios Patsalides, CEO - J&P ENERGY & INDUSTRIAL PROJECTS

Energyboardroom: What is J&Ps track record in providing engineering, procure-ment and construction (EPC) services to the energy and industrial sectors?Marios Patsalides: Joannou & Paraskev-aides, most commonly known as J&P, is a Cyprus based international building, civil and electromechanical engineering contrac-tor established almost 70 years ago, with an impressive portfolio of successfully com-pleted projects in the oil and gas sector, as well as industrial and infrastructure projects. With an annual turnover of US$ 735m and a current multi-task, multinational manpower in excess of 14,000 people, as well as a fleet of continuously renewed construction equip-ment, J&P is constantly featuring among the leading companies in its category world-wide.

In the oil and gas sector, J&P can proudly claim that it can undertake and execute any project, irrespective of the size, location and complexity, ranging from few million dollars up to and over several hundred million dol-lars. Furthermore, J&P maintains a strong presence across several countries in the Mid-dle East, Gulf Area and North Africa, as well as in Cyprus and in Greece. Indeed it is by virtue of this international footprint that J&P was swiftly able to overcome the impact of the banking crisis afflicting the local market in Cyprus.

EBR: How is J&P readying itself for the day when Cyprus infant oil and gas indus-try transcends to the next level and starts undertaking major energy infrastructure projects? Marios Patsalides: J&P has gained over the

years the necessary experience to undertake and successfully complete any project in Cyprus related to the oil and gas sector, including the production of gas, construc-tion of an LNG terminal, pipeline network and/or any major infrastructure project. We are well positioned to take advantage of what we are expecting to be an upswing in business.

EBR: Tell us about your contribution to the Vasiliko oil storage project? Marios Patsalides: The client is VTT Vasiliko, an affiliate of Vitol International, and the con-tract value constitutes some 260 million US dollars. Our contribution involves undertak-ing the engineering, procurement and con-struction for an oil tank farm of a net capac-ity of 630,000 cubic meters including 34 oil storage tanks and 1 oily water tank.

The new VTTV terminal is built in the industrial zone of Vasiliko, to world class standards, with the highest safety and envi-ronmental standards in place and will be able to store a range of oil products encom-passing Gasoil, Jet A1, Gasoline, MTBE, FAME and Heavy Fuel Oil and possess a Ship Loading capacity by 1.250 meters cubed. Other notable features include a steel struc-ture jetty, with 1500 m long main trestle and two lateral trestles, four berths and fourteen marine loading arms.

EBR: How is J&P going about sourcing skilled labor at a time when the hydrocar-bons industry is still new to Cyprus and expertise in energy engineering in rela-tively short supply? Marios Patsalides: J&P is today employing

The future for oil and gas infrastructure projects in Cyprus looks very bright. J&P seeks to be at the forefront of developments in this sector.

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Marios Patsalides, CEO - J&P ENERGY & INDUSTRIAL PROJECTS

a high volume of multi-task, multinational manpower, comprising project managers, experienced professionals and specialized engineers. We currently possess a highly trained and experienced technical staff and tradesmen of approximately 14,000 people located in various branches worldwide.

One of J&Ps major assets is actually its ability to move manpower from one country to another to meet the requirements for any new contracts awarded. This means that we are not impacted by the fact that it will take time for Cyprus to grow its own oil and gas expertise. J&P in Cyprus has the luxury of liaising with its other branches elsewhere if additional resources whether manpower or equipment are deemed necessary to the successful completion of a project.

EBR: Looking to the future, how do you assess the outlook of the construction industry in Cyprus with regard to energy

infrastructure projects? Marios Patsalides: The future for oil and gas infrastructure projects in Cyprus looks very bright. J&P seeks to be at the forefront of developments in this sector and firmly believes that there will be many develop-ments over the coming years that will prove beneficial simultaneously to our company and the broader Cypriot economy as a whole. Our vision is to position ourselves as the leading international building, civil, electrical and mechanical engineering enterprise, with a strong involvement in the energy and indus-trial sectors.

We are well positioned to take advantage of what we are expecting to be an upswing in business.

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The discovery of natural gas in Cyprus will undoubtedly effect the countrys econ-omy as development takes place and the countrys financial institutions want to make sure this development and eco-nomic transformation happens in a sus-tainable, low-risk manner. Block 12 con-tains enough resources to sustain Cypruss energy needs for the next 120 -150 years, explains John Patrick Hourican, CEO of Bank of Cyprus. Currently, energy imports and energy generation costs account to more than 10 percent of the Islands GDP. The discovery of gas prom-ises to change this. We are very optimis-tic that the development of the energy sector will have an overall significantly positive contribution to the whole econ-omy, says Hourican.

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