Cyprus and East Med hydrocarbon potential
Cyprus has attracted increasing prominence as an international financial centre since its 2004 full accession into the EU. An increasing number of large multinational corporations (MNC's), including leading Oil & Gas Groups, have been structured through the island taking advantage of its OECD fully compliant taxation system, higly educated workforce and open economy.
The island not only lies at the crossroads of important international trade and energy routes but in all probability is surrounded by substantial oil and gas resources, a significant part of which falls within the Cyprus Exclusive Economic Zone (EEZ). Assessments by USGS bring the level of undiscovered oil and gas resources in the Eastern Mediterranean to a total of 3.4 bbl for oil and circa 345 tcf for natural gas.
In terms of major findings to date in the Eastern Mediterranean, Israel has already announced significant findings at Leviathan and Tamar totaling 32tcf of natural gas and still unproven quantities of oil whereas Egypt’s supergiant discovery, Zohr, discovered in August 2015, in the order of 30 tcf has come to confirm and further boost the resource potential in the region. Cyprus to date has announced a 4.5 tcf natural gas discovery (Aphrodite), which is very significant if one takes into account the island’s needs in natural gas which do not exceed 0.035 tcf/year (1bcm/year).
To date, 13 exploration blocks have been deliminated by the Republic of Cyprus at the south of the island following international bilateral agreements with Egypt, Lebanon and Israel on the basis of the UN Convention of the Law of the Sea (UNCLOS) 82. Substantial geological and geophysical data has been gathered the last few years for a number of these blocks and are available in the form of Multi Client Seismic Surveys and Interpretation Reports.
Oil and gas regulatory framework
The Government of Cyprus through the Energy Service of the Ministry of Commerce, Industry and Tourism and other government agencies has put together a number of Laws and Regulations since 2004, governing hydrocarbon exploration and exploitation in Cyprus.
Based on UNCLOS 82 Cyprus has enacted a law in order to define and regulate its EEZ. In 2004 Cyprus passed the Exclusive Economic Zone Law, 2004 (L.64(I) of 2004) – ‘EEZ Law’. Based on the provisions of the ‘EEZ Law’, Cyprus has signed the delimitation agreements with its neighbors (Israel, Lebanon and Egypt) in order to define its EEZ.
The main EU legal instrument by which oil and gas activities in Cyprus are governed by is the Directive 94/22/EC of May 1994 according to which EU member states have sovereign rights over the hydrocarbon resources within their territories.
The above directive is transposed into domestic law by:
The Hydrocarbons (Prospecting, Exploration and Exploitation) Law of No.4(I)/2007 which in 2015 has been amended by Law 186 (I)/2015 (Hydrocarbons Law) .
The Hydrocarbons (Prospecting, Exploration and Exploitation) Regulations of 2007 and 2009 (No.51/2007 and No.113/2009) which in 2014 have been amended by Hydrocarbons (Prospection, Exploration, and Exploitation) Regulations of 2007 to 2014
Offshore Licensing Rounds and key developments in the Cyprus Oil & Gas Industry
- 2006-2008: Seismic surveys within Cyprus’s EEZ.
2007: 1st Oil & Gas Licensing Round Offshore Cyprus (For more information click here)
2008: Exploration License awarded for Block 12 to Noble Energy International Limited.
2011: Noble Energy drilled its first exploratory well and at the end of the year the first natural gas discovery was announced.
2012: 2nd Oil & Gas Licensing Round Offshore Cyprus (For more information click here)
2013: 30% of Noble’s Energy exploration rights in Block 12 are transferred to the Israeli companies Delek Drilling and Avner Oil Exploration.
The Republic of Cyprus awards exploration licenses for Blocks 2,3 and 9 to the consortium ENI-KOGAS and for Blocks 10 and 11 to French supermajor TOTAL.
Appraisal drilling work in Block 12 by Noble Energy indicated estimated gross resources in the range of 3.6 Tcf to 6 Tcf (with a mean of approximately 4.5 Tcf).
2014: ENI began its drilling operations at the Onasagoras gas field of block 9 of the Cyprus EEZ. At the end of the year ENI announced non-exploitable discoveries.
2015: ENI commenced a second exploratory drilling in the Amathousa reservoir also in block 9; ENI announced that they had not identified exploitable concentrations of hydrocarbons.
British multinational BG Group acquires a 35% holding in Block 12. Noble Energy remains the license operator, but with its stake now reduced to 35%, while Delek Drilling and Avner Oil Exploration each hold 15% working interest, as previously.
2016: 3rd Oil & Gas Licensing Round Offshore Cyprus (For more information click here)
Royal Dutch Shell completed the acquisition of BG Group.
Israel launches a first official offshore oil & gas licensing round for 24 blocks.(For more information click here)
2017: Lebanon relaunches its first oil & gas exploration licensing round for five offshore blocks. (For more information click here)
The Republic of Cyprus awards exploration licenses to ENI/Total (Block 6), ENI (Block 8) and Exxon Mobil/Qatar Petroleum (Block 10).
ENI acquires a 50% holding in Block 11.
Offshore Exploration Licenses - Republic of Cyprus
* Source: Official Twitter account of Energy Minister Mr. G. Lakkotrypis
The ENI/Total consortium officially announced plans to start drilling in Block 6 by the end of 2017 whereas Exxon Mobil targets to start its drilling operations in Block 10 in the second half of 2018.
Oil & Gas Tax Regime
When a successful applicant is granted a license they are required to enter a Production Sharing Contract (PSC) – prepared and published by the Cypriot Energy Ministry – with the Republic of Cyprus being at all times the legal owner of the hydrocarbons (refer to Article 3(1) of Law 4(I)/2007).
There is no specific regime within the Cypriot income tax law concerning the taxation of contractors and subcontractors.
A tax clause is included in the model PSC which requires all contractors and subcontractors to comply with the applicable Cyprus tax laws and regulations, including any EU tax rules applicable from time to time in the Republic of Cyprus. The corporate tax applicable to the Contractor shall be included in the Republic’s share of Profit Hydrocarbons and shall be paid by the Republic on behalf of the Contractor.

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