CYPRUS TO AUCTION OFF EXPLORATION RIGHTS FOR POSSIBLE

UNCLAS NICOSIA 001361

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EPET ETRD EINV ECON CY
SUBJECT: CYPRUS TO AUCTION OFF EXPLORATION RIGHTS FOR POSSIBLE
OFF-SHORE OIL AND GAS DEPOSITS


1. Summary: The Government of Cyprus intends to auction off
drilling rights for possible off-shore deposits of oil and gas at
the end of 2006 or beginning of 2007. The Norwegian company
Petroleum Geo-Services (PGS) is preparing both a "2-D" and "3-D"
analysis of 60,000 square kilometers of seabed located south and
southwest of Cyprus. Interested U.S. companies can purchase this
data by contacting the Cypriot Ministry of Commerce or PGS directly.
Beicip Franlab, a subsidiary of the French Petroleum Institute
(IPF) has been retained by the GoC as a consultant on this project.
In 2003, the GoC and Egypt signed a treaty delimiting their
exclusive economic zones. In 2006, they signed a second agreement
detailing how the profits from any deposits straddling the
demarcation line would be shared. In advance of the auctions, the
GoC is preparing new legislation and draft production sharing
agreements (PSA). According to the press, the depth of the Cypriot
seabed is between 700 and 3,500 meters. Drillings in the nearby
Egyptian seabed have found some oil and gas deposits, which have yet
to be exploited. The GoC has been careful not to estimate the
extent of the possible reserves. The press, however, has cited
earlier unsubstantiated estimates that as much as six to eight
billion barrels of oil and/or significant gas deposits may be
available. End summary.

Auction planned for late 2006, early 2007
--------------

2. The Government of Cyprus (GoC) plans to auction off drilling
rights for possible oil and gas deposits by the end of 2006 or the
beginning of 2007, according to Commerce Ministry Energy Department
Director Solon Kassinis. An area of 60,000 square meters will be
divided into blocks and auctioned once the GoC has completed all the
relevant legislation. Preliminary indications suggest that the
blocks may measure 50x50 kilometers each. The GoC is also
considering requiring companies to complete research drilling within
the block within two years of signing an agreement.


3. From March to May, the Norwegian company Petroleum Geo-Services
(PGS) conducted a seismic survey of the region from which it is
preparing both a "2-D" and "3-D" analysis of the area. Interested
companies can purchase this data by contacting Kassinis and/or PGS
directly. PGS, however, can only sell the data to companies
approved by the Commerce Ministry. The Ministry has retained Beicip
Franlab, a subsidiary of the French Petroleum Institute (IFP),as
its outside consultant on this project.

GoC Chooses to Use PSAs, Amend Existing Law
--------------

4. Before Cyprus begins the auctions, it plans to amend the
"Hydrocarbon (Search, Research, and Exploitation) Law 99 (I) of
2004," which harmonized Cypriot legislation to EU norms. The new
amendments will frame the legal, technical, commercial,
environmental, and political terms on which the GoC will distribute
licenses for the exploration and exploitation of oil and natural gas
deposits. In May, the GoC Council of Ministers decided that all
licenses would be granted on the basis of Production Sharing
Agreements (PSA),reportedly believing that this would be the best
way to ensure maximum profits for the GoC while still retaining
ownership rights. The GoC may choose to receive part of its profits
in kind (oil or gas) as a way to reduce its dependence on imported
energy products. Beicip Franlab is assisting the Commerce Ministry
to prepare a draft PSA.

Agreement with Egypt to Share Joint Deposits
--------------

5. In preparation for the auctions, Cyprus has signed several
agreements with Egypt designed to eliminate any potential problems
between the two countries resulting from the exploration and
exploitation of the suspected deposits. In March 2003, Cyprus and
Egypt signed a treaty delimiting each other's exclusive economic
zone. In May 2006, Cyprus and Egypt signed an agreement detailing
how they would share the proceeds from any deposits that were found
to straddle their exclusive economic zones. Cyprus is preparing
similar agreements with Lebanon, Syria, and Israel.


6. The GoC has been very cautious not to estimate the extent of the
possible deposits, noting only that preliminary signs have been
promising. The press, however, has cited comments from a former
Commerce Minister claiming that as much as six to eight billion
barrels of oil may be available, apparently based on preliminary
results of surveys from the adjoining Egyptian seabed. Deposits,
should they exist, are expected to be very deep. According to the
press, the Cypriot seabed ranges from 700 to 3,500 meters in depth.


SCHLICHER