How Cyprus Oil and Gas Development Could Fail

Frixos Thalassetis MBA Oil & Gas Management M.A. Management Email:frixosthalassetis@hotmail.co.uk Tel: 99488165 April 2014

This study was elaborated to identify the risks that lurk in every country which is blessed by nature to have natural resources such as hydrocarbons. The study is structured into three parts. The first part analyzes the risks posed to the state's economy and citizens not to benefit from the exploitation of hydrocarbons if development is implemented without considering a series of preventive measures. The second part analyzes the risks of failure of the infrastructure required for processing, utilization and marketing of hydrocarbons. The third part highlights the critical choices and risks to successful exploitation of Cyprus hydrocarbons and upgrading Cyprus into an energy hub.

Part One
Discovery of hydrocarbon deposits in a country creates great expectations of economic benefit for the country and prosperity of its inhabitants. There are however many cases internationally where the natural wealth of the country instead of contributing to national development, the improvement of the countrys economy and its inhabitants, is leading to economic stagnation, ceasing other economic sectors such as exports of traditional agricultural and industrial products and generate conflicts on the distribution of revenues from hydrocarbons. This phenomenon i s designated as 'Resource Curse. Another risk is the phenomenon known as 'Dutch Disease' when the huge influx of money causes inflation in the country, increased government and private spending, increasing commodity prices, consumer reluctance to purchase local goods and services resulting to non-industrialization and in case of fall in hydrocarbon international prices, weakness to service of the state debt. The above phenomena occurred in several countries rich in natural resources and resulted in their slower economic development and growth than other countries that lacked natural resources. Such examples to avoid are Nigeria, Mozambique, Papua New Guinea and several other countries which for years while receiving billions of dollars each year from exports of hydrocarbons and

rents from international oil companies operating in the country, the majority of residents live in poverty and infrastructure of the country is mildly atrocious.

70% of Nigerians live under the poverty limit of GBP1.29 daily.(Burleigh. M. Daily Mail 8/8/2013) Main causes of the above phenomena focus on: The failure of the state to develop its economy so that it can respond to the new data The failure of the state to take over the management of hydrocarbons and not let individuals to manage those resources. In deficit exercise of democracy The lack of state budgetary discipline In political conflicts and political instability Interventions of foreign countries and interests In leakage problems and political corruption due absence of strong institutions of governance and control The risk of fortifications behind the power or neglect of power The likelihood of endangering the public safety, health and environment In the anticipation of excessive profits, which lead governments in over-spending and make incorrect financial options.

The above risks impose on a country which recently enters oil and gas industry and hydrocarbons exports, to form right at the beginning, an integrated strategic plan for the management of hydrocarbons. This planning should cover all related areas such as defining and securing by means of interstate agreements of the exclusive economic zone (EEZ), the performance, identification and assessment of seismic exploration studies, the correct separation of the EEZ in reasonably sized plots, creating conditions to make attractive to international oil companies the demand for licensing, elaborate binding agreements with the companies concerned and these agreements need to promote the general management of hydrocarbons in the country and include strict terms and clauses. Strategic

planning should also include solutions for how to edit and export hydrocarbons abroad and planning to create the necessary infrastructure. Strategic planning must take into account the geo-strategic interests of the country, while also exploiting the comparative advantages of the country.

High Share of Natural Resources Exports or Natural Resources Reserves much Higer than GDP

Poor Governance + Deficient Democracy + Lack of Control Institutions

Real Rise of Currency Value

Ineffective Allocation of Natural Resources Income

Influence in public & private Spending

Influence on Natural Resources

move Smaller Productivity Reduction of Other Goods Trading.

Trade Changes

Smaller Economic Growth

The three main objectives, which should be safeguarded by any responsible country in such cases are: 1. To ensure that the state revenue is fair with respect to oil companies and through transparent and published information to the people ensure that these revenues are used correctly for the benefit of the country. 2. The effects of mining, processing and exports of oil and gas are performed in a way ensuring the good natural environment of the country and society. 3. To create for the country new economic opportunities such as new jobs and new business activities.

Part Two
The infrastructure required for mining, production, processing and export of hydrocarbons, include drilling on land or sea of appropriate number of extraction wells, intubation and transport of hydrocarbons to processing terminals, the various processing and exporting facilities etc. Characteristics of those projects are: Very demanding in capital Complex and technologically demanding Usually performed by different partners with different interests and objectives Require prior approval and acceptance of the government in the country where executed Like all other mega-projects, those projects are considered successful only when: 1. The projects were constructed in accordance to their design and their performance is efficient, functional and fully serve the purposes for which constructed , with the greatest possible respect for the preservation of the environment 2. Were completed within the timelines set 3. Ensure resources and professional skills for the construction and operation of facilities 5

4. Were within the budgeted financial frameworks for their construction 5. Been undertaken by the best experienced contractors such projects which are conventionally responsible and accountable for any problems occur. A recent study by Cisco IBSG company, showed that projects of hydrocarbon development are affected by three success factors: a) Financial results of the projects as continuous cost overruns are observed. b) Exceeding timeframes for completion of the projects c) Finding skilled manpower to carry out the operation of projects, since according to the survey results there is difficulty attracting younger skilled workers by oil companies.

Root Causes of Project Failure

People & Organization Technical Challenges Governance External Stakeholders Contracting & Procurement Project Management Processes Project Management Processes 9% Contracting & Procurement 12% External Stakeholders 14% Governance 18% People & Organization 26%

Technical Challenges 21%

Part Three

One of the most immediate risks to successful exploitation of Cyprus hydrocarbons and upgrading of Cyprus into a regional energy hub will be a protracted filibuster to finalize decisions on:
1. Creating conditions for effective launch of explorations and drilling in

Cyprus EEZ licensed sea plots, since when surveys and drilling show positive results, interest and mobility of the already licensed oil companies will increase sharply resulting to faster recovery of Cyprus

hydrocarbons. Interest of oil companies in licensing sea plots during the next (third) licensing round will rise, attracting big oil companies with huge capital and international activity. It is worth mentioning the importance of exploration results for planning the infrastructure for hydrocarbon development, eg. the liquefaction terminal where the capacity and technology will be directly connected with the Cyprus reserves and cooperating neighbors reserves if Cyprus is upgraded into a regional energy hub. The surveys and drilling will demonstrate possible existence of crude oil, leading to a further increase in interest in Cypriot EEZ and will

contribute to quick profits from direct sales of oil compared to natural gas which requires treatment facilities (pipeline or liquefaction terminal). 2. Crucial choice for the Republic of Cyprus is the creation of liquefaction terminal or natural gas pipeline to Europe. While correctly Cyprus government decided to create liquefaction terminal, however there are still pressures from different stakeholders to install subsea pipeline either through Turkey or Greece for the purpose of natural gas supply of European market. It is important to mention that installing a pipeline for the export of Cypriot natural gas to Europe would have the following negative consequences: A) Failure to upgrade Cyprus into a regional energy hub since Greece or Turkey would be upgraded into hubs instead of Cyprus. B) Increased risks of sabotage, tapping of natural gas, price manipulation, indirect control by third parties are some of the most significant issues of pipeline option. The pipeline installation from Cyprus to Europe requires the consent and cooperation with other countries with the risk of Cyprus Republic dependency on them. C) Entrapment of Cyprus to the European market resulting into low selling prices and billions in profits that would be achieved from the sale of liquefied natural gas to more profitable markets. Extensive analysis is performed the study: Pipeline or Liquefaction: The Next Steps' (Frixos Thalassetis 05/07/2013) 3. Infrastructure for natural gas Utilization (LNG terminal)

Vital factor in the successful exploitation of Cyprus natural gas are the specifications of the liquefaction terminal, such as functional technology, production capacity (MTPA), the efficiency of production - operating costs, since almost all the gas of the Republic will benefit from the premises recovery affecting directly the profitability in MTPA (million tonnes per year), the selling price competitiveness and the profit for the Republic of Cyprus.

In addition towards upgrading Cyprus into a regional energy center the creation of facilities must take into account the liquefaction needs of neighboring partner countries willing to cooperate. It is worth mentioning that the successful selection standards of Cyprus liquefaction terminal will create conditions to make Cyprus a regional energy center that would provide incentives for participation of neighboring countries. Otherwise neighbors can turn to other utilization options. Extensive analysis is found in the study 'The Cyprus Liquefaction Terminal, Security Installations and additional options ' (Frixos Thalassetis - July 2013 ) 4. The Republic of Cyprus should build a plan of oil companies contribution programs (local content) to be applied by licensed oil companies. Such programs include involvement of local people and local companies in the construction and operation of energy facilities through educational and training programs, target employment of locals in a rate of around 85% of the company's workforce in the country. Such programs also include purchasing products and services from local market and construction of social interest projects, such as streets, parks, power stations, bridges, etc. in the opposite case there will be no employment of many Cypriots, no engagement of leading Cypriot companies, import of foreign workers, export of currency by foreign workers, high unemployment, loss of revenue for the economy of Cyprus and the Republic of Cyprus. Extensive analysis is performed in study 'Social Contribution of Hydrocarbons Companies in Cyprus' (Frixos Thalassetis - October 2013). 5. Presale of confirmed or non confirmed Cyprus natural gas deposits at this stage would constitute: A) Delay or even cancellation of liquefaction terminal construction as there were no confirmed quantities to justify the creation of liquefaction terminal (only 5 trillion cubic feet has been confirmed in the Cyprus EEZ so far and unconfirmed deposits presale would be a sellout since there is no formula for calculating undefined data) B) Cyprus would create the impression that there is no desire to exploit

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the countrys oil and gas deposits or does not have the means to create the necessary utilization infrastructure C) That Cyprus is not a reliable partner for companies licensed in Cyprus EEZ since there is already a preliminary agreement to construct a liquefaction terminal with some of the licensed companies. D) Cyprus would difficulty find oil companies to license the remaining seven sea plots in the EEZ. E) Dramatic decline of profits by Cypriot hydrocarbons and their derivatives. Preselling confirmed deposits can be made in the future and only after taking too many factors into consideration and having considered that those do not adversely affect the prospects of Cyprus.

Comments and Suggestions

Construction of the right hydrocarbon management plan by the Republic of Cyprus which takes into account the interests of Cyprus, should include planning for the steps to address the various factors, issues and influences that will distract the Republic of the objectives for their own interest. The compilation of the plan must be made by persons skilled in the management of hydrocarbons as well as other similar disciplines. References Appiah M., Zhang T. (2013) Escaping the Resource Curse in Sub -Saharan Africa The Hague Institute for Global Justice. Policy Brief 4 Burleigh M. (2013) [online] http://www.dailymail.co.uk/debate/article-2387359/Nigeria-country-corrupt-betterburn-aid-money.html#ixzz2roLjunXo Court T., Hughes P.,(2013) Oil and Gas Megaprojects Using Technology and Collaboration To Drive a Step Change in Value Cisco Internet Business Solutions
Group

[online] http://www.cisco.com/web/about/ac79/docs/mfg/Capital-Projects.pdf

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Damiebi Denni-Fiberesima and Nazatul Shima Abdul Rani (2010 ) An evaluation of critical success factors in oil and gas project portfolio in Nigeria African Journal of Business Management Vol.5 (6), pp. 2378-2395, 18 March, 2011 Available online at http://www.academicjournals.org/AJBM Ernst & Young (2012) Capital project life cycle management for oil and gas [online] http://www.ey.com/Publication/vwLUAssets/Capital_projects_life_cycle_manage mant_oil_and_gas/$FILE/Capital_projects_life_cycle_managemant_Oil_and_Ga s.pdf Pantin D. (2013) A Sustainable Development Planning Framework for Mega-Projects in Small Places Thalassetis F. (2013a) Pipeline or LNG; The Next Steps. Published in Politis newspaper on 7/7/2013. Thalassetis F. (2013b) Cyprus LNG Plant, Safety of Installations and Suggestions for Further Profitability. Publi shed in Politis newspaper on 4/8/2013 Thalassetis F. (2013c) Local Content of oil companies in Cyprus. Publication pending. Thalassetis F. (2013d) 'Future natural gas prices and why presales of Cyprus natural gas deposits are not recommended at presen t Publication pending.

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