13 November 2014

The Republic of Cyprus aims to ensure the security of its energy supply, protect the environment and encourage the development of renewable energy technologies and production. The Government also aims to positively contribute to the European energy security of supply.

The energy policy of Cyprus is fully harmonized with EU's energy policy. The main axes of the energy policy include:

  • The liberalization of the electricity market and oil sector;
  • The establishment and operation of a strategic oil stock terminal;
  • The implementation of development programs related to the use of energy conservation, technologies, the utilization of ingenious RES and the protection of the environment from industrial pollution;
  • The RES target is to supply at least 13% of the country's energy by 2020;
  • The promotion of oil products and other sources of environmentally-friendly energy, such as natural gas.

In the future, the Republic of Cyprus wants to establish a strong export base that will have a significant input in the national economy. To specify, in time Cyprus has the golden opportunity to become an Energy exporter, an Energy hub and ideally an Energy Center providing and offering the complete package of energy goods and services.

Oil & Gas Sector

Cyprus, in an effort to diversity its energy sources, to enhance the security of its energy supply, to reduce CO2 emissions in the power sector and to end its energy isolation, has decided to introduce natural gas into Cypriot energy mix.

The big discoveries of offshore gas deposits in the Mediterranean Region together with the existing oil and gas deposits in the Middle East, present a huge energy potential and certainly a new source for Europe.

Cyprus follows its own hydrocarbon exploration programme within its Exclusive Economic Zone (EEZ). Already as a result of the 1st Round of Licensing in 2007 - 2008, a license was granted to Noble Energy International which proceeded with drilling with positive results. In 2012, Republic of Cyprus proceeded with the 2nd Round of Licensing. Presently, exploration licenses have been granted for 6 offshore blocks within Cyprus' Exclusive Economic Zone to internationally renowned oil and gas companies and their partners. It is worth mentioning that Energy Noble's drilling in Block 12 was a success and natural gas has been found. Meanwhile the operations in Block 9 have already been started. The Government of Cyprus is continuing its discussions and negotiations concerning the infrastructure requirements necessary for bringing the natural gas onshore for local consumption, as well as liquefaction for export into Europe and other markets.

With the aim of developing the internal gas market and network, DEFA was established by the Council of Ministers of the Republic of Cyprus as the sole importer and distributor of natural gas in Cyprus. DEFA's responsibilities include:

  • Buying, importing, holding, using, distributing, selling and supplying natural gas in any form.
  • The operation of the natural gas transmission and distribution network.
  • Signing treaties with the Republic of Cyprus or any other country (or company or organisation)
  • Negotiating, buying, selling, managing, storing, importing, exporting and re-exporting any goods, tangible or intangible, including natural gas.

Undoubtedly, there have been important discoveries in the eastern Mediterranean Levant Basin. To specify, the exploration result shown that it has been discovered almost one trillion cubic meters of recoverable natural gas. All recent studies of the EC and of the International Energy Agency show clearly that gas will be critical for the transformation of the energy system.

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Gas networks face additional flexibility requirements in the system, the need for bi-directional pipelines, enhanced storage capacities and flexible supply, including liquefied (LNG). At the same time, markets are still fragmented and monopolistic, with various barriers to open and fair competition. A diversified portfolio of physical gas sources and routes and fully interconnected and bidirectional gas network, where appropriate, within the EU are needed already by 2020.

The economic advantages of gas today provide reasonable certainly of returns to investors, as well as low risks and therefore incentives to invest in gas-fired power stations. Gas-fired power stations have lower upfront investment costs, are rather quickly built and relatively flexible in use. Investors can also hedge against risks of price developments, with gas fired generation often setting the wholesale market price for electricity.

Discoveries of hydrocarbons in the area of the East Mediterranean come at a time of increased demand for fossil fuels by the EU. Based on the above, Cyprus and its neighbours will be in a position to contribute to the energy security of Europe through the provision of additional sources of energy and through possible participation in new energy infrastructure linking Europe to sources of energy, as such infrastructure is envisaged in the relevant proposed EU Regulation.

The key challenge for the future is to ensure that gas producing countries become ready to open towards exporting gas directly to Europe which for them may often imply accepting high political risk linked to the geopolitical situation.

The existence of world-class deepwater natural gas reserves in Cyprus Exclusive Economic Zone has attracted a lot of attention from potential international investors, while bringing new and exciting opportunities to the energy sector itself.

Legal Framework

The legal framework for Oil and Gas in Cyprus is a mixture of EU law (as a Member State) and International Law (since the signatory of the United Nations Convention on the Law of the Sea (UNCLOS)).

According to the regulations in UNCLOS regarding the delimitation of maritime boundaries, the Republic of Cyprus in 2004 passed a law defining and regulating its Exclusive Economic Zone (EEZ), with The Contiguous Zone Law (2004) and The Declaration of the EEZ Law 2004.

The Contiguous Zone Law proclaims that "the inner limit of which is identical with the outer limit of the territorial sea and the outer limit of which shall not extend beyond the 24 nautical miles from the baselines from which the breath of the territorial sea is measured."

The Declaration EEZ Law defines the EEZ as "an area beyond and adjacent to the territorial sea, subject to the specific legal regime established, under which the rights and jurisdiction of the coastal State and the rights and freedoms of other States are governed by the relevant provisions of this Convention. The EEZ shall not extend beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured."

Delimitation agreements have been signed by the Republic of Cyprus with its neighbouring countries, in order to define its EEZ.

In February 2003, a delimitation agreement was signed with Egypt in accordance with the International principle of median line, as specified in 'UNCLOS', along with a Frame work Agreement concerning development of cross median line hydrocarbon resources and a Confidentiality Agreement in May 2006.

In January 2003 the Republic of Cyprus entered into an agreement with Lebanon although this has not been ratified.

In December 2010, a delimitation agreement was concluded with Israel which was ratified and entered into force in February 2011.

National Law

The most significant domestic laws governing the area of hydrocarbon activities are the Hydrocarbons (Prospecting, Exploration and Exploitation) Law of 2007 (Law No. 4(I)/2007) (Hydrocarbons Law) and the Hydrocarbons (Prospecting, Exploration and Exploitation) Regulations of 2007 and 2009 (No. 51/2007 and No. 113/2009) (Hydrocarbons Regulations), which transpose Directive 94/22/EC into domestic law.

Licenses

The Republic maintains (through different provisions) the sovereign rights over its resources while it can grant authorizations to Oil Companies for Prospection, Exploration and Exploitation.

A prospection license is granted for a period not exceeding one year and it involves all activities related to locating hydrocarbons other than drilling. An exploration license involves any appropriate method for exploration including drilling and may be renewed for up to two terms, each term not exceeding two years, following an application submitted to the Cyprus Council of Ministers, Upon each renewal of an authorization for exploration, the holder relinquishes at least 25% of the initial surface of the area that was included in the authorization. When a hydrocarbons discovery is made, an exploitation license is granted for a period of 25 years which may be renewed for an additional period of ten years, after another application to the Council of Ministers.

Environmental plan

In 2008 the Energy Service has carried out the Strategic Environmental Assessment (SEA) to estimate the significant effects on the environmental effect of implementing hydrocarbon exploration and exploitation activities in the EEZ of Cyprus. The licensees are bound to follow and comply with the results and recommendations of this assessment, which seeks to "identify, describe and evaluate the likely significant environmental effects of implementing hydrocarbon exploration and exploitation activities".

Petroleum Storage and Distribution Terminal

The construction of a private €300m storage and distribution terminal in Cyprus with a total capacity of 858,000 cubic meters is underway. It will connect the vibrant trading areas of South East Europe, Asia and North Africa. Preliminary designs for the energy centre (at Vassilikos) are now nearing completion, while the government is currently looking for strategic investors to undertake its construction.

Renewable Energy

According to Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001, a "renewable energy sources" shall mean renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases)."

Cyprus promotes sustainable sources of energy, through implementation of development programs related to the use of energy conservation, technologies, utilization of ingenious RES and subsidization of related projects from the private sector. Cyprus ranks first in the world in solar energy use for water heating in households. It is worth mentioning that Cyprus has achieved significant progress in the production of energy from Renewable Energy Sources (RES). The most important projects relating to power generation from RES concern wind parks and photovoltaic parks.

Total electricity capacity from RES in Cyprus reached 181 MW in May 2013. The objective, as per the National Action Plan (NAP) issued by the Ministry of Energy, Industry, Commerce & Tourism, is to reach a minimum capacity of 584MW by 2020, which will be equal to 16% of the total electricity production in Cyprus and 3% higher than the target set by the EU.

In this respect, the production of energy from RES is expected to experience considerable growth in the years to come since significant investment is required in order for Cyprus to achieve the targeted capacity as per the NAP.

Conclusion

The major challenges that Cyprus faces are mainly associated with the security of the island's energy supply and the containment of growth in greenhouse gas emissions. As everywhere in the world, ensuring a sustainable energy future requires serious commitment from policy makers with a visionary approach, who are willing to make well-informed decisions and to educate the public accordingly. This may be particularly difficult in Cyprus, where energy and environmental issues have never been high in the policy agenda.

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