Decisions by DEFA & Larnaca spark exodus of energy companies (updated)

By Stelios Orphanides

Two decisions taken by authorities recently may at best delay Cyprus’s plans to emerge as a hydrocarbon producer in the medium term, while they have already triggered an exodus of energy companies, an oil and gas professional said.

The decision of the Larnaca municipality to reject a request to extend the operation of MedServ, a company providing oil and gas exploration support services, has angered those directly involved and caused widespread disappointment in the industry, the professional said, speaking on condition of anonymity because of the sensitivity of the matter.

Maltese company MedServ, which offered support services to energy companies — including Italy’s ENI and France’s Total — involved in hydrocarbon exploration in Cyprus’s exclusive economic zone, was looking to relocate to Egypt, the Cyprus Business Mail also has learned. Other logistics companies, including Schlumberger, Haliburton and Weatherford were likely to follow.

And the government’s decision to cancel the tender -the third in five years- for an interim natural gas supplier, which would have allowed the state-owned power company to switch to a cleaner fuel, added insult to injury, the professional said in an interview. A day later, state natural gas company DEFA, sealed the government’s decision, angering the winning company, Vitol, and sending shockwaves in the energy industry.

The professional, with long experience in the global oil and gas industry at top executive positions, said the two decisions neither took into account how the industry worked nor which players were involved.

Following the acquisition of a 35 per cent stake in Cyprus’ Aphrodite field by British Gas (BG), the island will soon discover that it will have to deal with energy giant Royal Dutch Shell, the professional said.

BG, the owner of Egypt’s natural gas liquefaction plant at Idku, that Cyprus eyes for its planned gas exports, was the target of a £40bn (€51bn) takeover by the Anglo-Dutch company, which is expected to absorb BG’s operations this year.

Shell was the company that won a competition for a €7bn contract to supply Cyprus with natural gas four years ago. The government cancelled the tender following the discovery of the Aphrodite gas reserve by US-based Noble Energy, thought then to hold up to 10 trillion cubic feet (tcf) of gas. The estimation was later revised down to 4.5 tcf.

Shell, which is considering how to complete the merger with BG, is now “suspicious” of Cypriot authorities as it was among bidders in the two new tenders for the interim supplier that followed, the professional said. “Shell has a very long memory”.

Itera which won the competition three years ago, declined to submit an improved offer after it was asked by DEFA to do so and pulled out of the competition.

As oil prices dropped to their lowest level since 2003, “Shell will take time to consolidate the takeover” and in this context, it will also have to consider BG’s €160m Aphrodite investment and the Idku liquefaction terminal, the professional said.

“So Shell will have to feel that it is worthwhile,” the professional added. “However Cyprus is not easy to invest in”.

“How are you going to guarantee the return when they don’t even know whom they should talk to? How can one explain that a municipality can kick out companies?” the professional asked. “If Shell decides not to work with Cyprus, who is going to develop Aphrodite?”

The professional added that hundreds of energy companies which set up offices in Cyprus in recent years were considering relocating to Egypt. “Companies are fed up with Cyprus; they got their fingers burnt.”

Even following the invitation to the companies affected by Larnaca’s decision from Limassol mayor Andreas Christou to continue operating from there, for oil companies “the choice is not between Larnaca and Limassol but between Cyprus and Egypt”.

Besides, oil companies left Limassol years ago, the professional said, after being overcharged for space they subletted from a Cypriot company which rented it from the Cyprus Port Authority at a much lower price, the professional added. “Noble also got its fingers burnt there and now there is additional uncertainty as a result of the port’s privatisation”.