Cyprus Drilling Success May Offer EU Gas Alternative to Russia

Cyprus said success drilling in deep waters off the eastern Mediterranean island this year may offer Europe a way to loosen Russia’s grip on its energy supplies.

Cyprus, which has proven reserves of as much as 6 trillion cubic feet of natural gas, is looking to find another 4 trillion to 5 trillion cubic feet, Energy Minister George Lakkotrypis said. Such a discovery, about a quarter the size of Israel’s giant Leviathan find, would allow the country to proceed with plans for a liquefied natural gas terminal.

An LNG plant on Cyprus could also process gas from elsewhere in the Levant Basin, an area that may hold 122 trillion cubic feet of gas, and ship it by sea to markets in western Europe, where supplies are now threatened by the crisis in Ukraine. Russia, which provides about 15 percent of the region’s needs through Soviet-era pipelines crisscrossing its western neighbor, has threatened to cut supplies from June.

Cyprus will have “a pretty good idea” of its gas and hydrocarbon reserves within about 12 to 15 months, as companies including Eni SpA (ENI), Korea Gas Corp., and Total SA start exploration, Lakkotrypis said in an interview May 14.

Eni and Kogas will start intensive exploration within weeks in their licenses in blocs 2, 3 and 9, a campaign to last 12 to 18 months, he said. France’s Total, with licenses for blocs 10 and 11, will start exploration in the second half of next year.

Noble Energy Inc., which found proven reserves of 3.6 trillion to 6 trillion cubic feet in the Aphrodite field, will drill another well in bloc 12, Lakkotrypis said.

Israeli Gas

Noble was also responsible for the 2010 Leviathan discovery, then the world’s biggest in a decade. Cyprus last year held talks with the Houston-based explorer on the potential for taking supplies from the Israeli field for export from a Cypriot LNG plant.

An LNG plant would require upfront capital expenditure of 6 billion euros ($8.2 billion) to 10 billion euros, and Cyprus is in talks with “large financial institutions which have expressed an interest in participating,” Lakkotrypis said.

“The most pressing priority is to make another discovery,” before looking at financing options, he said in his ministry office in Nicosia. “Ultra-deep waters contain a very high risk. The probability of success is pretty low.”

Cyprus is negotiating the terms and conditions for operating an LNG plant with Noble and will make a final investment decision by 2016-2017, he said.

Turkey Dispute

If sufficient gas reserves aren’t found, other options, including pipelines to existing plants in neighboring countries, are being explored. “We are not excluding anything, but the onshore plant is our No. 1 priority.”

A pipeline to Turkey isn’t an option unless the countries resolve their territorial dispute. Since 1974, when Turkey invaded the island, the country has been divided into the internationally recognized Republic of Cyprus in the south and the Turkish Republic of Northern Cyprus. A new round of reunifications talks has now entered a “substantive phase,” according to the United Nations.

Energy is one of the main potential growth sources for the island-nation’s economy, which is mired in deep recession, following a 10 billion-euro international bailout that came with strict austerity measures and included the imposition of losses to bank depositors.

To contact the reporters on this story: Nikos Chrysoloras in Nicosia at nchrysoloras@bloomberg.net; Georgios Georgiou in Nicosia at ggeorgiou5@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Alex Devine, Randall Hackley

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