Cyprus to launch a third licensing round… Is the timing right?

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On February 16, the Council of Ministers approved a third licensing round for offshore oil and gas exploration, which paves the way for launching the preparatory process.

Despite difficult market conditions, Cyprus hopes to build on the positive momentum created by the discovery of Zohr in Egypt, just a few kilometers from the Cypriot Exclusive Economic Zone, and Block 11 in particular (licensed to Total, which is planning to drill a first well later this year).

Cyprus organized a first licensing round in 2007, following which it awarded one block (Block 12) to Noble Energy. The Texas-based company was later joined by Israeli company Delek, and more recently by BG (now officially merged with Shell). Noble Energy announced the discovery of Aphrodite in late 2011. First estimated to hold around 7 trillion cubic feet of natural gas, the appraisal drilling lowered it to around 4 tcf.

Encouraged by the discovery, Cyprus announced the opening of a second licensing round a few weeks later, in February 2012, and put 12 blocks on offer. Blocks 10 and 11 were awarded to Total, Blocks 2, 3 and 9 to ENI-KOGAS.

The two wells drilled by ENI in Block 9, Onasagoras and Amathusa, failed to reveal exploitable quantities of hydrocarbons. And, after failing to identify targets for drilling, it was hinted Total would quit exploration in Cyprus, but after negotiations with the authorities, it decided to relinquish Block 10 and continue exploration in Block 11. A decision that could prove to be wise. A few months later, on August 30, ENI announced the discovery of Zohr, a large field that could hold around 30 trillion cubic feet of gas in the Egyptian Shourok Block, a few Kms from Block 11.

Zohr is the first discovery in carbonate rocks in the Eastern Mediterranean. Previous discoveries off of Cyprus and Israel were made in porous sands. So, there might be a potential for more finds, something that has prompted Cypriot authorities to consider organizing a third licensing round, as we have anticipated in a note back in October 2015 (a smaller version of which was published here).

The discovery of Zohr revived interest for exploration in East Med. A combination of factors, including location, stability and regulatory certainty, put Cyprus at the forefront of East Med countries that could benefit from this renewed interest. Will this be enough to offset difficult market conditions? and will Cyprus be able to translate this renewed interest into actual bids? Choosing the right timing for the tender will be crucial for its success.