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Cyprus Makes A Major Bet On LNG

The discovery of Cyprus’ first gas field, offshore in the Eastern Mediterranean, was reason for celebration in December 2011. Rising tensions with Turkey and the Covid-19 pandemic, however, have slowed the exploitation of discoveries that include the 4.5 tn ft3 (370 bn m3) Aphrodite field, the 3-5 tn ft3 Calypso field, and 5-8 tn ft3 Glaucus field. The delay has led to the Cypriot authorities’ commissioning of an import facility to meet its domestic demand if production doesn’t commence any time soon.

The assignment has been given to a multinational consortium led by China Petroleum Pipeline Engineering Corporation (CPPEC). The floating storage regasification unit (FSRU) includes onshore pipelines and additional facilities will be built at Vassiliko Port. The FSRU will have 125,000 m3 of storage capacity while being capable of unloading LNG carriers ranging from 120,000 m3 to 217,000 m3. The project’s value is €500 million and is co-financed by a 40 percent grant from the European Union’s Connecting Europe Facility (CEF), which is scheduled for completion in 2021.

Currently, the majority of Cyprus’ electricity is produced by burning fossil fuels of which oil is the most important component. Importing natural gas will reduce the island’s CO2 emissions by 30 percent while reducing the inhabitants’ energy bills by a comparable margin. 

Besides the obvious environmental and financial benefits of substituting imported oil for imported natural gas, flexibility is an important motivation for choosing the FSRU. Nicosia was careful in the commissioning of a facility that can easily be upgraded for bunkering and LNG export purposes. Although the development of the offshore gas fields is taking more time than expected, the Cypriots are adamant about reaping the rewards of their energy wealth.  

Related: Why No One Is Buying Up Shale Assets

Besides LNG exports from the island itself, Egyptian facilities are also an option to liquefy natural gas. Israel already preceded the Cypriots with a massive gas export deal worth $19.5 billion over 15 years that will be exported through the Idku LNG plant in Egypt. Furthermore, the East Med project is also still on the table to facilitate the export of natural gas to Europe. 

One of the bidders for the import of natural gas into Cyprus, UK-based Energean, offered the construction of a pipeline from Israel. Flexibility, however, was an important aspect leading to an easy choice for the FSRU. Also, future synergy has been included within the facility’s design to accommodate the island’s highly prized and important tourism sector. LNG is quickly becoming the cruise industry’s fuel of choice, which Cyprus will be able to provide when demand takes off.

Paradoxically, LNG imports will facilitate the growth of renewables. According to Panos Papanastasiou, an engineering professor at the University of Cyprus, “independent producers are investing in renewables projects, but you cannot base your business [model] completely on renewables.” The production of electricity from wind and solar requires balancing due to the intermittent nature of green energy sources. Natural gas is relatively clean as it emits approximately 50 percent less CO2 and provides the necessary flexibility to supplement the sun and wind. 

The current tensions with neighboring Turkey, however, are a major source of uncertainty especially when it comes to IOCs making investments. Turkish military ships have repeatedly harassed ships from energy companies exploring Cyprus’ exclusive economic zone for natural gas. Calls for de-escalation from the EU and NATO have had little effect on Turkish politicians who have ruled out making any concessions.

The military build-up is continuing with several countries bolstering their presence in the region in defiance of Ankara’s aggressive posturing. The UAE has sent several of its most advanced F-16s to Cyprus, while France has stationed Rafales of the French air force on Crete. Athens and Paris are close to reaching a deal for the sale of 10 new Rafale fighter jets and 8 used ones as a donation from the French air force. 

The rising tensions are bad news for the region’s business climate. Neither side is willing to back down meaning anything can happen. Therefore, don’t expect for Cyprus’ gas fields to be tapped any time soon. On the other side, low energy prices due to the Covid-19 pandemic ruled out investments in complex offshore projects anyway.  

By Vanand Meliksetian for Oilprice.com

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  • Mamdouh Salameh on September 03 2020 said:
    Turkey has three major energy objectives in the Eastern Mediterranean. The first is to become the energy hub of the European Union (EU). The second is to ensure a fair share of the gas riches in Cypriot exclusive economic zone (EEZ) for the Turkish Cypriots. The third objective is to prevent the construction of the proposed EastMed gas pipeline to transport Cypriot and Israeli gas supplies under the Mediterranean to the EU via the Greek mainland.

    Turkey opposes the EastMed because it could undermine its stated goal of becoming the energy hub of the EU by competing with the Turk Stream gas pipeline which will bring Russian gas supplies to Turkey and the EU under the Black Sea and also the Southern Gas Corridor (SGC) bringing Caspian gas from Azerbaijan to Turkey and then to the EU via the Trans Adriatic Pipeline (TAP).

    However, if energy is Turkey’s only strategic interest in the Eastern Mediterranean, then there is a solution which should satisfy all the parties involved based on the following provisions.

    The first is that the gas riches in Cypriot waters should be divided between the Greek and Turkish Cypriots on the basis of the size of the area each occupies in the Island. In return Turkey will cease exploring for energy resources in Cypriot EEZ.

    The second provision is that Greece, Israel and Cyprus should forgo the proposed EastMed gas pipeline in favour of an 80-mile long gas pipeline connecting the Turkish Cypriot enclave with the Turkish coast where it will connect with existing gas pipeline carrying gas to the EU. Israeli and Cypriot gas exports could be exported to the EU via Turkey using the proposed Turkish pipeline.

    The third provision is a settlement of the Turkish-Cypriot dispute over their overlapping EEZs in accordance of the UN Convention on the Law of the Sea (UNCLOS).

    Turkey announced yesterday that it is open to dialogue with its neighbour Greece to de-escalate tensions in the Eastern Mediterranean and look for a settlement to their disputes. If this is true, then Turkish President Recep Tayyip Erdogan facing mounting pressure internationally and domestic problems internally could use his country’s recent huge natural gas discovery off its Black Sea coast to announce in a goodwill gesture a freeze on exploratory activities in the disputed waters around Greece and Cyprus.

    Right now, the chances for such a shift are slim. Turkey’s more assertive diplomacy appears to be paying off, whether in Syria, Libya or in the Eastern Mediterranean. Last but not least, Turkish policymakers do not see a linkage between the two issues. But keeping all options on the table, including de-escalation and diversion, would be a prudent choice for Ankara.

    Until then, Cyprus plans for the utilization of its gas discoveries and LNG facilities remain on hold.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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