Full transcript of the event featuring the Minister of Energy, Commerce, Industry, and Tourism of the Republic of Cyprus, Yiorgos Lakkotrypris.
Energy Developments in Cyprus and the Eastern Mediterranean
Minister of Energy, Commerce, Industry and Tourism,
Republic of Cyprus
Richard L. Morningstar,
Founding Director, Global Energy Center,
Director, Eurasian Energy Futures Initiative,
Location: Atlantic Council, Washington, D.C.
Date: Monday, March 9, 2015
Superior Transcriptions LLC
RICHARD L. MORNINGSTAR: First of all, good afternoon, everybody. And I assume you can all hear me OK. And welcome to the Atlantic Council.
It’s my pleasure to introduce our distinguished speaker for today’s event on “Energy Developments in the Eastern Mediterranean,” the minister of energy, commerce, industry and tourism for the Republic of Cyprus, Yiorgos Lakkotrypis. And I would like to thank Minister Lakkotrypis for joining us to share his insights on the energy outlook in the Republic of Cyprus and the broader Eastern Mediterranean region.
This meeting today is a joint effort between our new Global Energy Center, of which I am the founding director, and our Eurasia Center. And I’m happy to say very briefly that the Global Energy Center has gotten off to a fast start, as indicated by our recent programming on issues ranging from energy geopolitics to climate change. And we as a Center are firmly committed to collaborating with partners in government, industry and civil society to help forge innovative solutions to the most pressing policy issues in the energy sphere.
To that end, we’re particularly excited today to host Minister Lakkotrypis to speak on an issue that we’ve worked on closely in collaboration with the Eurasian Energy Future(s) Initiative here at the Atlantic Council. And today we find ourselves at an interesting moment with respect to Eastern Mediterranean energy development. Since the discovery of offshore energy reserves, Mediterranean nations have sought to take advantage of the opportunity presented by the exploration and development of such energy resources. There do, however, remain a number of challenges, whether political economic or technical, on the road to energy development in the Eastern Mediterranean, and I don’t believe there has ever been an opportunity that could benefit so many people and so many nations that has been faced with so many challenges. And I know the minister will speak to that.
And few people have a more thorough and complete understanding of the opportunities and challenges associated with energy development than the minister. Since taking office in March 2013, Minister Lakkotrypis has worked extensively on energy issues at the highest levels across the region. He’s responsible – in his role, he’s responsible for boosting the economy of the island, encouraging tourism and foreign direct investment, and enhancing the international standing of the Republic of Cyprus. In his remarks, the minister will focus on the challenges facing the Republic of Cyprus in its – in its efforts to develop its nascent oil and gas industry, and will help to place recent energy developments in the Eastern Mediterranean in a regional context.
So without any further – anything further, I want to extend a warm welcome to our speaker, Minister Yiorgos Lakkotrypis. And after his comments, David Koranyi, who’s the director of the Eurasia Energy Initiative, will moderate a discussion with the minister. So thank you. (Applause.)
MINISTER YIORGOS LAKKOTRYPIS: Thank you very much, Ambassador.
Distinguished guests, ladies and gentlemen, first of all allow me to extend our warm thanks to the Atlantic Council for putting together this wonderful event, giving us the opportunity to present not only – not only what Cyprus has been doing and the most recent developments, what’s coming next, but also what is it in for, the Eastern Mediterranean at large, especially with regards the recent geopolitical shifts that we have seen. I have been here in September 2013. Since then, a lot has happened – a lot of dramatic events have happened that are potentially shifting the priority on what needs to be solved and what needs to be done first.
So allow me to just very briefly take 10, 15 minutes to give you an executive summary of what – where have we started, where we are today. Back in 2010, the U.S. Geological Survey has actually predicted the presence of natural gas and oil in the Eastern Mediterranean. Over the past few years, we have seen sizeable discoveries in both Israel and Cyprus that are confirming the presence of natural gas. So one can reasonably assume that the presence of oil will also be proven correct soon. There are technical challenges, but potentially the presence of large reserves of oil could be proven in due course.
Cyprus, since we had the discovery by an American company, Noble, in a consortium with the Israeli Delek, has set itself a vision and a strategy on how to achieve that vision. As a country maintaining the relationships that we do with all of our neighbors – excellent relationships – we have set ourselves the goal to become an energy center in the Eastern Mediterranean, and we have put together a three-pillar strategy to be able to achieve that.
In the shorter term, what we want to be able to do is be able to attract services companies that would service the oil and gas industry in its entire value chain. To that end, we have managed to attract two U.S. majors, Halliburton and Schlumberger, to set up their bases in Cyprus, not only to service the Cyprus exploration and exploitation efforts but also potentially to help the other neighboring countries as well.
On the medium term, what we look forward to is, of course, the actual exploitation of the natural resources themselves: the natural gas and all of its byproducts being able to make the economy more competitive and even have access – an access to industries which have not been accessible so far, energy-intensive industries such as steel or petrochemicals, and of course cement and other kind of industries such as that.
And in the longer term, once the gas is extracted, once the gas is sold and it’s gone, what we want to leave behind is to play along with our traditional strengths, which is to create a knowledge-based economy centered around the oil and gas industry. So all of those professional services that today we have to important – technical, financial, commercial, legal – we would like to be in a position to export them ourselves. And to that – and we are leveraging on some annual funds that we are receiving from the companies to finance training, to finance on-the-job experience in order to achieve that.
As I mentioned, back in – you know, just before I go to the exploration activities, in – I have to mention that we already have delimitation agreements with the three neighboring states – Lebanon, Israel and Egypt. We also have a unitization agreement signed with Egypt in December 2013, ratified in June 2014. The unitization agreement basically determines the rules or the framework of how do we handle joint reservoirs that could extend across the median line.
In 2011, we had a discovery by Noble Energy and Delek of an estimated today – we had the appraisal in 2013, so today the estimated reserves are about an average of 4.5 trillion cubic feet. And to put that number into perspective, and it – it might sound small in terms of global scale, but to put that number into Cypriot perspective, we need for domestic use about half a TCF for about 25 years, which clearly shows the possibility for exporting.
After undergoing a number of monetization options, we are now streamlining our efforts towards regional sales. More specifically, we are focusing sales to Egypt – the underutilized LNG terminals, one operated by British Gas, the other operated by Union Fenosa – and/or Jordan. Of course, Jordan is a little bit more complicated because the routing of the pipeline is not that easy, but certainly we are having that discussion as we are having more advanced discussions with Egypt. And of course, as I mentioned before, number-one priority is to get the gas onshore Cyprus, something which has not been possible since 2011. Because the needs are so small, the arrival of the gas in Cyprus does not justify the large capital investment required to build the infrastructures, but if you amortize those expenses in different buyers then it makes a lot of financial sense.
We should be seeing a lot of developments in that front over the next few weeks. We are expecting declaration of commerciality of the field. It will be a key milestone for Cyprus because it will be the first time that we are moving from the exploration stage to the exploitation phase. We should be receiving from the Block 12 contractors a field development plan, and if that is approved it will lead to a 25-year exploitation license. And this is why I mentioned this is a key, critical milestone for us.
At the same time, we also have other companies, such as Eni-KOGAS and Total, who are undergoing exploration work. We have not been successful with the first well drilled by Eni. There is now under process another well. And with Total we recently agreed – despite a hiccup we had in their exploration program, we recently agreed that they will continue their exploration work until their – at least until their contract expires in February 2016.
Now, what we – what we feel – and this will be my concluding statement – what I have discussed with David and Damon in Cyprus a few – a few months ago is about the prospect with which arise in the – for the entire Eastern Mediterranean, a very terrible land, I have to say, region, and certainly not a walk in the park, with very difficult obstacles that need to be overcome. And we feel – we were in Rome last November in an EU conference on energy, and it was very interesting to see all of the countries – all of the countries sitting on the same table discussing the potential of the Mediterranean, and more particularly of the Eastern Mediterranean, to become a player to contributing EU energy security of supply, to potentially resolve the differences that have existed for decades.
And what we see as an opportunity here? An opportunity for elevating the conversation, not in what is happening today, not in what is happening in five years, but elevating the conversation in what will happen in the next 10, 15 years. And I’ll explain myself. We have today exploration work from Israel and Cyprus. We have production from Israel. Israel is producing. We will be producing very soon. We have Egypt, who is currently going some energy deficiencies, but – (inaudible) – and become a producer over the next few years. We have Lebanon, who we hope will advance with a licensing round and start their works as well.
Now, we are – we are in an advanced stage today, Cyprus and Israel, discussing infrastructure, subsea infrastructure, with Egypt, with Jordan. Now, there is a clear need for a grand master plan – a grand master plan that would involve all of the countries sitting together and looking how would it look like in the next 10, 15 years with – when potentially most of these differences would be resolved, because the conversation itself could be a catalyst for this resolution.
It’s by no means easy. We understand it. We acknowledge it. And as the prime minister of – sorry, the foreign minister of Israel, Mr. Lieberman, told his counterpart in this – his Swedish counterpart, you know, the Eastern Mediterranean is a bit more complicated than putting together an IKEA table, all right? So it is complex. But if we don’t start the conversation now, right – looking way, way ahead, we could avoid with this conversation duplicating infrastructures. We could enhance security of energy supply of every nation. I would be, as a minister of energy of Cyprus, very interested to see a reverse-flow infrastructure being created. I’m sure Israel would feel the same way. I’m sure Lebanon would feel the same way.
Certainly the timing of this needs to be very carefully planned. We have elections in Israel. We have a difficult situation at the Lebanese and Jordanian borders with the Islamic State on the gates. But having this discussion starting one way or another should be able to bring these nations a little bit closer together.
So with this – with this vision, I’d like to close it off here and look forward to the rest of the conversation. Thank you very much. (Applause.)
DAVID KORANYI: Mr. Minister, thank you for this very concise, eloquent, and very businesslike introduction. I have to say I’m very impressed. And again, welcome back to the Atlantic Council. Thank you for including us in your very busy schedule here in Washington and in the U.S., actually.
MIN. LAKKOTRYPIS: Oh, no, thank you for having us.
MR. KORANYI: You’re also having a business forum up in New York and also giving lectures at the Fletcher School and at Harvard, as far as I understand, in Boston. So I wish you all the success for this visit.
MIN. LAKKOTRYPIS: Thank you.
MR. KORANYI: As Ambassador Morningstar mentioned at the beginning, we have been working on Eastern Mediterranean issues as the Atlantic Council, along with other think tanks in town and also think tanks in Europe, for quite some time. We started because we were very hopeful that it could be used as a tool for, first of all, prosperity in a region that badly needs it, and then, second of all, potentially as a tool for reconciliation and peace. We were very hopeful. We still are very hopeful, maybe in a bit more somber and reserved way. But we still believe that there is – as you alluded to towards the end of your speech, there is a master plan that actually works to the advantage of all the key regional players.
But at the same time, the reality caught up with many of the dreams in the region, including I think on the island as well. And what we have seen lately is that the politics of energy in the region is probably a lot more complicated than many people, including ourselves, imagined before. And I’m going to ask you later on with regard to the Cyprus settlement that fits into that context, but let me first ask you about that master plan you mentioned towards the end because it’s quite a fascinating concept. And you mentioned the need for a regional dialogue that needs to start now, and I cannot but fully agree with you on that point. But what would be the right format for such a regional dialogue? Who would be the right participants? What would be – who would be the right convener? Is it the EU? Is it the U.S.? Is it the transatlantic allies? What role could the regional ministers, such as yourself, play? How would – focus to what kind of vision that entails.
MIN. LAKKOTRYPIS: Look, the framework that can be set up could be – could easily be something like the job that you are doing, right? We have seen a very active U.S. in the region, very active U.S. We have been calling for the EU to be even more active than what they are. And certainly now, with a new commission in place, I believe we have some room that we can work with. But we are clearly seeing – we are clearly seeing the desire. There is – I understand exactly what you’re saying about which country is able to talk to whom, which country will be able to sit on the same table with whom, considering what is happening. And this is why we raised this in our discussions today in Washington, that we need the leverage of the U.S. behind this.
How can Cyprus help? Certainly as the southernmost member of the European Union, in the region at its core, with its own problems but certainly with a vision and in excellent relationships with all of these neighbors that practically – most of them don’t talk to each other. With one exception, of course: with Turkey, which stems from the invasion and occupation, which is still going on.
So what we can – what we can say, if we have a carefully planned scheme on how to go about with this, at the right time considering election time and when will there be the different governments formed, et cetera, I believe having this discussion about the infrastructure without any exclusions – it’s important to note this, without any exclusions – actually could be able to attract most of the countries. And when most of the countries come on the table, then certainly those that don’t want to come on the table will be forced to come on the table.
MR. KORANYI: Thank you.
Before I start provoking you on the settlement, let me just talk a bit about or ask you a bit about the infrastructure piece you mentioned towards the end. And you talked about the Egyptian option, which is in my mind a fairly simple option. Of course, it’s complicated from a commercial perspective but it’s fairly simple from a political perspective. And even from a commercial perspective, it’s a fairly cheap option. Of course, the Israeli factor complicates that because you have the antitrust issue. It would have made a lot more commercial sense to do it together with the Israelis and exploit those LNG terminals.
So question number one: What’s your understanding and what’s your expectation in terms of the antitrust procedure in Israel and how that plays into decisions with regard to your export policy?
And then question number two, which also ties into – we briefly mentioned about European energy security and how the gas in the region could contribute to European energy security. Do you see alternative export options like the touted export option, maybe CNG, to Crete and then a pipeline to Greece, onwards, feeding into the TAP and the Southern Gas Corridor, or a pipeline all the way to Crete, or any other option that is feasible?
MIN. LAKKOTRYPIS: Yeah, this is an excellent question, and you and I, David, discussed it on many occasions about what monetization options Cyprus has.
Let me start off, of course, with what is going on internally in Israel. I’m not going to comment about the essence of the case because this is, of course, entirely up to Israel, the Israeli state to resolve. What I will say is that our desire is that these two projects developing the Leviathan, which is a giant field, and developing the Aphrodite – its Aphrodite sister, is something that we desire to do simultaneously because of economies of scale, because of synergies, because of many other aspects. But we have made it very clear to the companies, the contractors who actually own both fields, that the Cyprus exports must go on. And it will go on, irrespective of what developments happen in Israel. We hope that they will be resolved soon. There was a certain amount of optimism today at the GMF this morning that it could be resolved before the end of the summer, and we certainly pray for that. However, we are already in advanced conversations with our Egyptian counterparts. The conversation is politically. Is it commercially certainly more challenging? We have the options of sending it to Idku Terminal, an LNG terminal which is operated by British Gas; to Damietta, an LNG terminal operated by UFG, or potentially domestically because, at the end of the day, what counts is the price, the creditworthiness of the buyers, and a couple of other very important key terms such as what – when do you consider force majeure – we are not talking about the easiest of places that we will be selling the gas – or take-or-pay and other terms such as this.
Which brings me to your – to your question about the energy security in Europe. Being able to – and it’s important that we mention this so that everybody is on the same page in the room – why are these LNG terminals underutilized? Very simply, because the Egyptian government a few years ago diverted the gas from exporting to the domestic use – so everything they are producing they are using for domestic – for the domestic market, and still there are significant shortages there – leaving the contracts that need to be fulfilled by these LNG terminals not able to be fulfilled. If you recall, in February 2014 British Gas declares force majeure, paying significant amounts of – billions of dollars in penalties for not being able to fulfill these contracts.
So we have the option of being able to fulfill – to help British Gas or Union Fenosa fulfill these contracts, which primarily are being shipped to Europe. We also have the option just to use it as a tolling – so have our own customers, right, and then just pass them through for processing in the LNG terminals. However, the end customer will depend entirely on commercial terms. So what our role as government is is to make sure we facilitate and create a predictable environment that these companies can come to an agreement, but at the end of the day it’s the market that’s going to determine who the end customer is. And certainly if British Gas or Union Fenosa will be one of the customers, then some of those contracts will be for fulfilling European supply.
Talking about CNG – you also mentioned it, David – we examined the compressed natural gas. It was certainly a very appealing option, with technology risk because it has never been implemented in marine environments. It was – it’s a technology which takes the cost from the capital expenditure and transfers it into the transportation because you can liquefy three times with less vis-à-vis LNG. So with LNG, if you liquefy three times, with CNG you liquefy one, which means you require three times more ships to send it. But we did investigate and we looked at the possibility of sending it up to either Greece or Crete or then into the European network. It appears that the market right now is pretty soft in that respect, putting aside again the technology risk, because we also put on the table the possibility of buying on the wellhead, upstream, so somebody else takes the technology risk. We investigated that. It seems it’s not something which neither us nor the companies, more importantly, favor.
So we are looking at this, and we are looking at developing it as soon as possible, not only to be able to export. Because, again, you and I had a conversation in Malta about the timing, and how – the need to move quickly, but also because we need to bring the gas to Cyprus. We are 100 percent based on liquid fuel today. Maybe we got some breathing space because of the international oil prices, but that doesn’t mean that we gained any competitiveness because the price has dropped for everyone. Having our own indigenous resources feeding our electricity power plants will give us a competitive advantage and will have a horizontal effect on the economy.
MR. KORANYI: Could you tell us a bit more about the domestic usage in Cyprus, what exactly that really entails? Is it electricity generation, perhaps just heating?
MIN. LAKKOTRYPIS: As phase one, we – it’s going to be electricity generation. Phase two, we will create a network to take it to industry. We do not see – we do not foresee that it will be used for households. Because the market is so small, creating a network for natural gas will not make any financial sense. But we do see a third element which could play a big role, which is LNG in shipping. Quite a significant – quite a significant initiative by the European Union. Funding is available. We discussed it and we are now considering the possibility of storing LNG in Cyprus so that we can actually feed the shipping industry with that technology.
MR. KORANYI: So perhaps one day Russian warships will refuel –
MIN. LAKKOTRYPIS: (Laughs.)
MR. KORANYI: – on liquefied natural gas in Cypriot ports?
MIN. LAKKOTRYPIS: (Laughs.) We will talk about that. (Laughs, laughter.)
Mr. KORANYI: (Laughs.) Certainly will.
Let me ask you about the settlement negotiations that are now frozen. You find yourself a couple of weeks ago, months ago in a situation where you opted for seizing the settlement negotiations for the time being. At the same time, you have been already arguing at that stage whether including the energy dossier in the context of the settlement negotiations, the Cyprus settlement negotiations, is something that makes sense from your perspective. My understanding is that the Turkish Cypriot community took it as an element that could destroy the fragile trust between the two parties, and to some extent it contributed to an atmosphere in the past couple of months where we ended up where we are today. Looking forward and being, again, optimistic about this, as we were back in last February, and also keeping in mind that you emphasized the importance of talking about these issues, how do you see – I mean, first of all, there is a tricky political timeline ahead of us. Elections in the northern part of the island and the elections in Turkey, of course, this all plays into the settlement negotiations, political dynamics as well. But also, looking beyond that, how optimistic you are in a scale to one to 10 that the settlement negotiations could resume? And how helpful you think including energy at some point in some form, as your president at some point indicated that it would be helpful maybe towards the end – how do you imagine that? What’s the timeline for that? Again, it’s very hypothetical but what would be the ideal scenario in your mind?
MIN. LAKKOTRYPIS: Before I answer that question, David, it is important for me to explain in this audience why we left the negotiating table – very, very important – because what has happened is that we had seismic vessels coming and doing surveys in this part of the island, in the southern part of Cyprus, in blocks which we have licensed through international tendering process. We have had violations in the past in the North, but this was the first time that we had the blocks that were licensed to Eni, seismic vessel undergoing acquisitions, and accompanied by warships. So who would not have walked from that negotiating table? Who?
MR. : While drilling.
MIN. LAKKOTRYPIS: Yes, while Eni was drilling. But irrespective, we licensed this, we had international – we have international contracts, we have commitments, the companies have commitments, and this happened. Here – I’m showing again on the map – the northern part of Cyprus is occupied, and suddenly we have Turkish vessels going back and forth, shooting at the wrong angle at the beginning but, anyway, that’s irrelevant.
So the president was very clear: We cannot continue negotiating a settlement with having a sword over our heads, because we lost our ability to exercise sovereign right in the North 40 years ago. We will not lose it again in our southern part of the seas. That was very clear, and I just wanted to clarify that to this – to this audience.
Now, resuming negotiations, I believe there would be a window of opportunity coming up pretty soon to resume negotiations. We have Eni that is going to – going to take a technical break for their rig maintenance. It was scheduled for August, but the unsuccessful well, the first well, has forced them to bring this schedule forward because it seems that the geological model that they used to assess the eastern part of our EEZ, it is not what it should be, so it requires recalibration. So there could be a window of opportunity there, and we wait to see. It’s not going to be long. They will finish this current drilling program sometime in March, in the next few days, and then from there on the rig will move into maintenance. We’ll see how Turkey will react to that.
MR. KORANYI: Great. I’m going to have two more questions, then I’m going to open up the floor to the audience. So please, get yourself prepared for that.
Let me pivot away from the Eastern Mediterranean for a second. You were also, of course, sitting at the table when the EU energy ministers were meeting. The European Commission just published a proposal of communication on this new blueprint for a European Energy Union. So if you could just focus to your initial reactions from a European perspective and from a Cypriot perspective, what is there? What is new? What is missing? What is a priority for Cyprus to emphasize within this European Energy Union concept?
MIN. LAKKOTRYPIS: I think in general the plan is – the paper that was published is in the right direction. It addresses the primary need for the European Union to diversify not only its energy sources, but its – also its energy routes. So where does it get its gas in an effort – in an ongoing effort to limit its dependency on Russian supplies?
From a – from a Cyprus perspective, we see that in two dimensions. First of all, it was very critical for us that we had no limitations on our ability to negotiate contracts because there was the intention in the paper that no EU member state would be able to negotiate bilateral contracts without the consent of the European Commission. Of course, that was intended for the purchase of gas, so that you don’t have individual member states negotiating with Russia but basically negotiating as a – as a European Union. But it also covered the selling of gas, which is what we are aiming to do right now. We managed that pretty well. It’s limited to bilaterals, not to commercial agreements.
The second dimension that relates to Cyprus, and I daresay to the Eastern Mediterranean at large, is how the EU views and should be viewing the Eastern Mediterranean as a whole as a new energy supply source and route, and to assist us in the design, in the financing, in the implementation of the infrastructures in order to be able to transport the gas to the European Union. You’ve got today, in Leviathan, 20 TCF – 20 trillion cubic feet – out of which 50 percent is available for export and could be feeding easily seven to 10 BCM a year to the European Union. It just needs to find its way to the markets.
So that’s how we see it. We are in contact, communication especially with the vice president of the commission, Sefcovic. We are working closely. We are discussing about the possibility of funding projects of common interests or through the Juncker plan, as well, some of those infrastructures. And we are looking at them based on the resources that are available.
So, today we have in Cyprus the Aphrodite discovery. What makes financial sense, what makes economic sense is to send it to Egypt. It’s the most straightforward solution, again, subject to the right commercial terms. Should we have further discoveries, depending on the size, we will be seeking for other solutions for exporting that gas, too.
MR. KORANYI: Thank you.
A final question, really to pivot away from energy, because you are also minister for industry, commerce and tourism – it must be a respite for people to ask you about those subjects.
MIN. LAKKOTRYPIS: (Laughs.)
MR. KORANYI: Pretty sure it’s not very often these days. When it comes to the – so Cyprus has undergone a very serious economic and financial crisis, and as far as I understand the signs of recovery are much more encouraging than many people would have thought even a couple of months ago. So if – in terms of your portfolio and the areas you are responsible for, what are the main priorities you focus on, prompting a recovery and being able to put the Cypriot economy back on the right track?
MIN. LAKKOTRYPIS: OK. Before I answer that question, I’ll tell you a joke about my title, right? Last February, in 2014 as a matter of fact, we visited the pope together with the president. And the president was introducing his delegation, and he was telling my titles – energy, commerce, industry, tourism – and the pope moved to the next person. (Laughs, laughter.) So – (laughs).
What are the priorities? Look, we are not out of the woods yet. We have made significant progress. To what relates to energy, I have to say that we decided consciously that we will keep the two separate. We will need to do the structural reforms necessary to change the economy, to change all of those things that have brought us into the situation that we are in right now. And we have been doing that: very prudent fiscal policy; a very aggressive, outward-looking effort to bring in foreign direct investment to leverage our strengths, our competitive advantages such as tourism or professional services. And certainly we are now in a position to say that if we manage to keep the numbers together and achieve our targets in both tourism and professional services for 2015, we will create primary surplus – much sooner than anyone had anticipated, much sooner. And then we will be able to take the – our fate in our own hands.
You mentioned Russia earlier (ago ?) – a critical component. Russia, for Cyprus, is a key commercial partner. We have deep commercial ties in tourism, in professional services. Certainly Russia is undergoing a crisis right now because of the sanctions, because of the price of oil, which I believe hurt more than anything else. So if we manage to contain this year’s tourism arrivals, we will be able to create a primary surplus at the end of the year. That’s how critical it is for Cyprus.
As far as professional services is concerned, we have been seeing the numbers of registrations of new companies for FDI rising month by month steadily. We have not reached the 2012 numbers yet, but we are getting there. While at the same time we are going through tough but necessary structural reforms, there is no one in Cyprus that, despite the differences on the – on the actual substance on how you do this, no one in Cyprus that questions the need to do these changes – despite, as I mentioned, the differences of how these changes will be implemented. And that is helping us a lot to drive – to drive these changes through.
MR. KORANYI: I cannot resist not to end with a softball question, so let me ask you about the Russian sanctions. And going forward, there is a lot of discussions/talks in view of Russia’s continued aggression against Ukraine, a call for further sanctions. And understandably, the member states are very divided. There are some member states who are very much in favor of the sanctions and there are member states who are a lot more reserved about proceeding down that route. This is especially sensitive in the context of sectoral sanctions and energy-sector sanctions as such. So what’s your perspective on imposing further energy sanctions from a global market perspective, from a European perspective, and from a Cypriot perspective?
MIN. LAKKOTRYPIS: There is no doubt that the sanctions that have been imposed so far and those being considered to be – to be implemented are biting both Russia and especially the European Union. This is why you are starting to see member states being conservative, being reserved about implementing further measures. There is no doubt about that. I just mention a very small example for Cyprus and tourism, how it impacted Russia internally and how it’s impacting, of course, the ability of Russians to spend money overseas. You can multiply that and magnify that in some other member states as well.
During the recent visit that we had in Moscow, the president was very clear to the president of the Russian Federation that we are a strong supporter of Ukrainian sovereignty and we are also a strong supporter of the Franco-German effort, the Minsk Agreement that needs to be implemented and respected. He was (confident ?) in spite of the criticism that we have – we have seen, which incidentally we did not see when Matteo Renzi visited Moscow a week later. The president was very clear about that we are a European Union country. We have Western affiliation, right? We have strong cultural/economic ties with Russia, but we will stick with our partners. And he was conveying the messages. He had the telephone conversation with the chancellor of Germany, briefing her about that conversation. So let’s see.
We are not – we hope that this will be – the Minsk Agreement will be implemented and will be respected by everyone so that we can start de-escalating this situation.
MR. KORANYI: Thank you, Mr. Minister.
We have about 15 minutes left, so let me throw the floor open now. If you could just identify yourself and then ask the question/questions, ideally not more than two, for the minister, that would be great.
Q: Thank you. Thank you. It’s Dana Marshall with Transnational Strategy Group. And thank you, Minister, for that very comprehensive discussion.
As always, David asked all the right questions. Let me see if I can focus on one area, which is on the master plan. I appreciate when your – what you said about how the – your government is going to try to make the most reliable sort of climate for investment for international oil companies, and I’m sure that all that you can do you will do in that area. But most of the problem is things that you can’t control, none of us can: the huge geopolitics, all of that we see. So I guess one question in general is, how do you account for the need for flexibility when you’re dealing in an industry which is so capital-intensive? And maybe as a corollary to that question, have you considered some of these floating liquefaction and gasification options to give you the flexibility to move things around rather than putting iron into the ground?
MIN. LAKKOTRYPIS: That was, as – shall I answer that one?
MR. KORANYI: Yes, please, Minister.
MIN. LAKKOTRYPIS: That was actually – (laughs) – right to the point one of our deep concerns, flexibility, when we were looking at streamlining our options. We did look at FLNG. We evaluated that economically; didn’t make sense because the costs, as we are seeing on some of the projects which are going on right now, could have run out of control completely. Add to that the limited – the limited capacity that these vessels can offer. And then we had a very comparable solution to the one that we preferred – and we still, too – which is an onshore LNG.
So the costs were running at about the same level with much less efficiency because of the capacity of these floating vessels. So we – the size of the reserves for Cyprus were not justifying such a – such an investment, which, if I remember correctly, in the case of FLNG was running at about 9 billion when in the case of onshore LNG with much more capacity was about 10 (billion). Now, the situation that we are in with the oil and gas industry, of course, it doesn’t help. So the company says, well, we are very conservative, very concerned about undergoing such a huge financial burden.
So to answer the question, yes, we examined FLNG very, very carefully. We even examined the option of sharing the vessel with Israel. We even examined the option of having a vessel moving around in potentially smaller fields that might be discovered. And this is why we went back to discuss the – and we are suggesting a dialogue on infrastructure.
These are dilemmas that I’m sure other potential producers will encounter. So if we – if we sit down and look at a grand master plan, what infrastructure do we need? What consideration should we take? How do we enable reverse flows, right? At what stage of the development? Just to have something on paper that will guide everyone over the next –
Q: Is this a PCI for Brussels, this project?
MIN. LAKKOTRYPIS: No, a PCI is only stamped as PCI when you have two member states, and we are primarily dealing with nonmember states. OK.
MR. KORANYI: Ariel first.
Q: Ariel Cohen, International Market Analysis. Thank you for a very comprehensive presentation. I want to thank the Atlantic Council for focusing on this important issue.
I wanted you to sort of drill down on Turkish position. You mentioned the presence of the Turkish naval vessels. I’ve heard maybe even here, from Ambassador Matthew Bryza, that Turkey would have been an ideal route, actually, for a pipeline that would collect the gas from the offshore Eastern Med, bring it to Cyprus, and then go east and then link to the Turkish hub. How far do you think the Erdogan government is willing to go to prevent the development of your gas offshore and maybe even go further than that to try to prevent those developments in the region? And why? After all, if Turkey is a hub and brings gas from northern Iraq, eventually from Iran, from Azerbaijan, eventually from Turkmenistan, it would be in Turkey’s interest to have more supply, not less. Thank you.
MR. KORANYI: Let me collect one more question in the interest of time.
MIN. LAKKOTRYPIS: OK.
MR. KORANYI: Sir, please.
Q: Thank you very much. My name is Anthony Livanios and I am with U.S. Energy Stream, an international oil and gas advisory firm based in Frankfurt, Germany and Washington, D.C. Thank you, Mr. Minister, for an excellent presentation. And thank you to the Atlantic Council for bringing you here with such a great presentation you did.
My question relates with your master plan that you’ve mentioned. And I’m wondering, how do you incorporate the current plunge in oil prices? As oil prices have been declining in the last six months by 60 percent, this affects deep offshore drilling throughout the world from the oil majors. How do you plan to cope with this challenge? And especially you mentioned Total. Will Total drill until 2016 in the same block or in another block? And how do you plan to attract more oil companies in that oil price environment to drill in Cyprus? Thank you.
MR. KORANYI: Minister, back to you.
MIN. LAKKOTRYPIS: I’m going to start off with the question about Turkey. Let me say one thing I do agree with my friend Matthew, is that resolving Cyprus problem will unlock a whole new series of possibilities, unbelievable series of possibilities. He’s been very active in lobbying that the most attractive solution would be to transport the gas through – either through Turkey or to Turkey for its own domestic consumption. I don’t have an answer to that because we haven’t looked at that option, for very simple – for very simple reasons, and because Turkey has – is not even implementing the Ankara Protocol, right, the Ankara Protocol which calls for opening up its markets for Cypriot products or for Cypriot vessels or for ships or for even the airspace. So if I cannot sell olive oil, why should I be selling natural gas?
Again, let’s put it into perspective. I am a believer that if we have a solution to the Cyprus problem, that would open up and unlock a whole range of great possibilities. How far would the leadership of Turkey go? That’s a good question.
What we have been in Cyprus trying to do is we have been trying to align a number of interests, right? We are a tiny nation with no naval military facilities or presence. We needed to get everyone and all of the stars aligned. We feel that with the Egyptian option we have managed to do so, with one exception: Israel’s domestic disputes with the monopolistic authority, which we hope will be overcome very soon. But there you have potentially an alliance between Egypt, Israel, Cyprus, backed by the U.S. administration. That is the only way we can – we can prevent from Turkey taking extreme actions.
MR. KORANYI: And the second question.
MIN. LAKKOTRYPIS: Sorry, second question, regarding the – let me start with Total, to say that the renewed agreement that we hopefully will be signing next week will be talking about doing geophysical/geological surveys in a different area, but no drilling. They can drill if they identify a drillable prospect, which unfortunately have not done so far.
What is important – on the second part of your question, how do you attract large international oil companies, what oil – you know, the region is very tough by definition. So the best thing that we can do, all countries, is at least limit some of that uncertainty by creating the right investment environment. So the investors are telling us, if you like, you can be tough or you can be lenient on your regulation; just be predictable, right? And this is why we have put together a very good hydrocarbons framework, legal framework, which is being continuously enhanced in order that everyone knows what the rules of the game are.
We operate on production sharing contracts which are negotiated through international bidding rounds, and there is commitments from either side that everybody needs to meet. How does that play with neighboring countries? Even having as simple an agreement as a unitization agreement that we have with Egypt, which determines the framework in case there is a joint reservoir, how do we handle that? That goes a long way for companies to come and operate in that site. And we are negotiating one with Israel, we are negotiating one with Lebanon, even though there are different sorts of issues, not so much between Cyprus and Lebanon but mostly between Lebanon and Israel.
So this is what we are trying to do. It’s important for us to close the circle, if you like. We have gone through a licensing round, exploration phase, and now it’s important for us to go to exploitation because that will be a clear indication for international investors that, yes, it is possible in a turbulent region of the world that you can actually close the circle and make money.
MR. KORANYI: Just a follow-up question on that, and – (inaudible) – to commercial viability of all these finds. I mean, you alluded to that in your original presentation/statement, the presence of oil. Any indication that oil can come on stream at some point, or that hope is now gone? Because that would dramatically change the commercial –
MIN. LAKKOTRYPIS: I will answer that with one word only: Yes. (Laughter.)
MR. KORANYI: Encouraging.
We have time for one more question and then we’re going to have to wrap it up. Sir, please. In the back.
Q: I’m curious in listening about the scale of the natural gas finding. The natural gas – the big players like Qatar, and I don’t know if Saudi Arabia has natural gas as well, but what do they think about maybe being upstaged or their market being potentially, you know –
MIN. LAKKOTRYPIS: You said Saudi Arabia?
Q: Yeah, the Saudi Arabia, Qatar, the other – current Middle Eastern players in oil and gas.
MIN. LAKKOTRYPIS: Qatar, for example – let’s take Qatar, for example. They have the biggest reservoir in the world, with 800 TCF, if I remember correctly.
MR. : Nine hundred.
MIN. LAKKOTRYPIS: Yeah, total 900 TCF. So we have a discovery of 4.5 (TCF), OK? (Chuckles, laughter.) So you can judge the scale.
Mind you, however, what this – what I mentioned before about aligning the stars, it’s important to mention that now this drive by both Cyprus and Israel towards Egypt is attracting the attention of other major Arab countries, such as the UAE and Saudi Arabia, that want to support Egypt. And therefore now we see interest in the financing of the pipeline that would transport the gas by Emirati companies who have their financial muscle and also the political desire to assist in that direction. So we are seeing a lot of – again, a lot of new possibilities opening up – opening up here.
But I hope – I hope I answered your question. (Laughs.)
MR. KORANYI: One more.
Q: Thank you, Mr. Minister. And thank you to the Council for hosting this. My name is Mike McMahon. I’m an attorney with the law firm Herrick, Feinstein and I just have a quick question.
It seemed – it was great to hear towards the end in response to some questions where you said that if we could resolve the Cyprus issue, it would open up a host of possibilities. It would seem that – although I didn’t get from your presentation that there was as much focus on that as there should be, because it would seem – and I agree with what you said – to set in motion in the Eastern Mediterranean a collaboration amongst nations that don’t always collaborate, certainly it would be easier to begin by solving the issue on the island of Cyprus. And I know you mentioned about the Turkish ships off your waters. What will it take to bring both sides back to the table? When will the government of Cyprus be ready to go back to the table to negotiate, to move that process along? Because it didn’t sound like there was anything in the – in the near future where that would happen, and it would certainly seem to me that that would send the message to the world and to investors that the plan that you describe, as ambitious and yet optimistic and needed as it is, has a chance of happening because the Cyprus issue itself can be resolved.
MIN. LAKKOTRYPIS: Thank you.
MR. KORANYI: An easy one for the end.
MIN. LAKKOTRYPIS: Yeah. No, no, it’s actually a good opportunity to answer and make something absolutely clear.
While the energy prospects that the country has in front of it right now are important, the fundamental and primary priority for Cyprus is to resolve the Cyprus problem, because even though the energy prospect is largely economical/geopolitical, the Cyprus problem is existential for us. So let there be no doubt about the desire to resolve the Cyprus problem, as evident by the president, because I’d like to remind everyone that when he went to the negotiating table he lost his main partner in the government, right? He lost his main partner. He sacrificed his main partner in the government, which is now causing us a lot of problems in parliament because we don’t have parliamentary majority anymore to pass all of these legislations that we need in order to transform the country and the economy.
I mentioned earlier that there could be a window. The primary – the primary requirement for Cyprus to go back to the negotiating table is not to have anybody threatening even further its sovereignty. So the national navigational warning needs to be withdrawn and there should be commitments that there will not be any violations in the future. We go back to the negotiating table hoping for the best result, that will be the best, that will be accepted, that will be good for both Greek Cypriots and Turkish Cypriots. And I see that window of opportunity coming up in a month.
MR. KORANYI: OK. Mr. Minister, thank you very much. We ran out of time. Thank you for your very stellar performance and very frankly outlining all the challenges – politically, diplomatically, commercially – you are facing. But also I’ve been very encouraged by this very bold and clear-eyed vision you have for Cyprus and the region. So in whatever ways the Atlantic Council can be helpful in that endeavor, we would be very happy to be part of the journey. And I wish you all the best for your trip here in the U.S. and back home. Thank you.
Let’s give a round of applause for the minister.
MIN. LAKKOTRYPIS: Before you do, thank you, David. (Applause.)