OIL & GAS – THOUGHTS AND MEMORIES

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On the 10th December 1982, in Montego Bay, Jamaica, man succeeded to rule the seas and the oceans. The vast wealth which lies in the oceans and below the sea-bed was regulated by the historic Convention on the Law of the Sea:

It took more than 14 years of strenuous work to reach the Agreement; more than 150 countries and hundreds of diplomats participated. Cyprus was there as well. I was Minister of Foreign Affairs at the time and we were handling the issue. In charge of our delegation was our Ambassador in Washington Andreas Iacovides, a distinguished diplomat, who was well conversant with the subject.

On the first day the Convention was open for signature, 119 delegations were appended to the Convention, a world record at the time.Cyprus has signed and ratified the Convention. Turkey rejected it. The U.S signed the Convention but the Senate has not ratified it, so there is no commitment.Two and a half years before the Convention, on the 4th August 1980, I met in my office M.J. Ambrose, senior executive of U.S oil major Standard Oil of Indiana. Standard Oil, together with oil giant Amoco wanted to drill south of Cyprus, approximately where “Aphrodite” lies today. They were convinced that we had hydrocarbons down there.

However Turkey, which was apparently well informed, had threatened, in accordance with the minutes of the Ministry, that she “would take further military action in Cyprus”. President Kyprianou, who received Ambrose in his office on the following day, asked me to communicate with U.N. Secretary General Kurt Waldheim. Waldheim’s advice was that we should postpone the matter. So the “dream” was not implemented at that time. The Standard Oil of Indiana file, which included the “dream”, with copies of the minutes, I took with me to the Ministry of Commerce, Industry and Tourism, almost 20 years later. I remember that I put it on the right hand side of my desk, to remind me of the “oil project”.

A few months later I spoke to President Clerides about the subject, who gave me the green light, with some skepticism. So, the great march of the Cyprus oil and gas commenced, amidst derision and ironic comments from many quarters. I had in my team Ministry Director-General Michael Erotokritos (and later Soteris Soteriou), Director Olympia Stylianou and Energy Director Solon Kassinis. I negotiated with Egypt’s Petroleum Minister Samer Fahmy and we signed in Cairo on 17.2.2003 the Agreement about the Exclusive Economic Zones (EEZ) of the two countries. It was the first EEZ Agreement ever in the area. We negotiated and reached a preliminary Agreement with Lebanon, during my meetings in Beirut, in September 2002, with President Lahoud, Prime Minister Hariri and Energy Minister Baydoun. I met in Damascus Vice-President Khaddam, but we failed to reach an agreement. I started a dialogue with Israel. The march continued during the presidencies of Papadopoulos and Christofias and now the drill is below the seabed. 

On this occasion I would like to refer to some details, which I believe the average citizen should know in regard to the possible oil and gas wealth of our country.

1. Reserves: On the basis of existing information it appears that we have gas reserves and possibly oil reserves as well. The reserves, depending on the degree of certainty of their existence are rated in four categories: (a) probable, (b) possible, (c) proven and (d) recoverable. Cyprus today, according to foreign experts, friends of mine, is between “probable” and “possible”: If and when we reach the “proven” stage we must know that a percentage of the “proven” will not be recoverable.

On the basis of the announcements of Noble Energy thus far, if we assume that block “Aphrodite” has 8 trillion cubic feet of natural gas (possibility of success 60% according to Noble) this would be equivalent to a little more than one per thousand of the world reserves, which in 2009 were 6,3 quadrillion cubic feet (Oil and Gas Journal). We may have oil as well, whose percentage most probably is lower than that of natural gas. World reserves of oil: 1,3 trillion barrels (Oil and Gas Journal). Totally Cyprus, in the whole of her EEZ, in accordance with estimates made by the Egyptians may have 1/2 % (one half per cent) of natural gas and oil of the world reserves.It is a remarkable quantity, much smaller though than the fantasies and mythomania of some people who think that we shall replace Gazprom as gas providers of Europe!! Russia and Gazprom own one quadrillion and 680 trillion cubic feet of natural gas, (namely 27% of the world reserves) a figure by 210 times higher than the gas estimates of the “Aphrodite” block. 

2. Expression of interest: We often have official statements that “colossal oil companies” are interested to participate in Cyprus, because they have bought the data on off-shore oil potentials. There may be companies which are interested, however the purchase of the data has nothing to do with such an interest. All important oil companies have a budget to buy such data from all corners of the world, which they file in their data rooms. The purchase of data is completely unrelated to an interest to participate in Cyprus.

3. Agreements: I have studied many “Profit Sharing Agreements” between Governments and Oil Companies and I am in touch with persons knowledgeable about the subject. I do not know which are the contents of the Agreement between Cyprus and Noble Energy. In general terms however an Oil Agreement should be along the following lines: 
(A) A “signature bonus” is payable to the Government upon signature. The bonus may vary from id=”mce_marker”m to $80m depending on the size of the deal and the degree of certainty of the reserves.
(B) When the pumping of gas or oil starts, the Government receives “off-the-top” royalties on the daily production which vary between 10% (in the Middle East and Africa) and 38% (in Canada).
(C) After the payment of the royalties, the oil company covers its current expenses and the depreciation of its investments. A lot of care is needed in this regard, including expert knowledge of what is chargeable and what is not. In the absence of such expertise and a correct audit, the Government may be left with marginal or no profits.
(D) What is left is called “profit oil” and it is divided between the Government (80%) and the oil company (20%).
(E) In many Agreements there is also a so-called “production bonus”, which amounts to $5m-id=”mce_marker”0m each time, and is paid to the Government when the daily production exceeds certain pre-agreed thresholds. 

4. Threats and problems in the area: Despite the “Convention on the law of the sea”, conflicts and hostilities in connection with the immense off shore oil wealth take place quite often. Disputes or clashes have occurred at times, amongst other cases, between Senegal and Guinea-Bissau, Nigeria and Cameroon, Equatorial Guinea and Gabon, China and Malaysia/Indonesia, Myanmar and India, Russia and Japan, Greece and Turkey, Malta and Libya, Canada and France (French islands close to Canada) and recently Lebanon and Israel.

In our case Turkey claims the whole or part of our EEZ, based on the “rights of the Turkish Cypriots” and on the fact that she has declined to sign the Convention of 1982. The problem is not easy and the naïve repetition of our stand regarding our sovereignty and our rights does not resolve it. We have sovereignty over the north of Cyprus as well, but we have not been able to exert our rights during the past 37 years. Turkey is a very difficult, unpredictable and dangerous country. Personally I have made my proposal for an Agreement with the Turkish Cypriots, in such a way that our sovereignty and rights will not be affected. We should under no circumstances risk the nightmare-scenario of having Turkey pump our oil and gas (who is going to stop her?) or lead us into other adventures.

I believe that we have sufficient quantities of oil and gas, very large compared to the size of our country. We simply need a lesser degree of fantasy and mythomania and more prudence.

Minister of Foreign Affairs 1978-1983
Minister of Commerce, Industry & Tourism 1998-2003
Member of the House of Representatives 1991-1996
President of the Liberal Party 1986-1998
Vice-President of Liberal International 1994-1998

 

Nicos Rolandis