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Cyprus sets high standard for NOCs

November 06, 2012 12:45 AM By Roudi Baroudi

In this photo provided by the Cyprus Press and Information office,  the Noble Energy company's offshore oil and gas rig is seen some 115 miles (185 kilometers) off Cyprus' south coast, Monday, Nov. 21, 2011. (AP Photo/Press and Information Office, HO)
In this photo provided by the Cyprus Press and Information office, the Noble Energy company's offshore oil and gas rig is seen some 115 miles (185 kilometers) off Cyprus' south coast, Monday, Nov. 21, 2011. (AP Photo/Press and Information Office, HO)
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The Eastern Mediterranean’s mounting potential as a source of vast hydrocarbon riches has mapped out a new frontier for energy consumers, and the Levant Basin’s oil and gas deposits, coupled with the region’s general political position, have created a whole new environment that attracts major industry players.

The tiny island nation of Cyprus is punching way above its weight in the undeclared but very real struggle over the region’s massive gas wealth, but this is not a case of defeating opponents. Instead, the Cypriots have taken the lead by setting an example for their neighbors, one that will help all of the contestants in the long run.

While the Israeli, Lebanese and Palestinian efforts are being slowed down by domestic political infighting, bi- or multilateral bickering, and/or family feuds, the Cypriot process is well under way. Licensing rounds have already been held to parcel off blocks of the seabed off the country’s coast; a state-owned national gas company has been formed; and four additional drilling permits were issued in the last week of October.

None of this progress is coincidental. Ever since the evidence began to mount that Cyprus would share in the Eastern Med’s riches, the country’s political and economical leaderships have kept their eyes on the ball. For example, it pursued and achieved agreements with each of Egypt, Israel and Lebanon, removing what might have been major obstacles to making full use of its economic, physical and geostrategic positioning.

From the beginning, it has been clear that the long-term interests of all the players would be best served by making Cyprus a regional hub, with all producers sending their gas there for processing and/or shipment to markets on the European mainland.

Only Cypriot leadership, however, has allowed this best-case scenario to emerge as the most likely one: Its forward-looking diplomacy and openness to dialogue made this alternative viable, and its prioritizing of the sector is keeping it that way.

Even more important than what the Cypriots have done thus far, however, is the way in which they have done it.

First and foremost, they have not allowed themselves to be distracted by obstacles. A third of the island, readers will recall, has been outside the central government’s control since the Turkish invasion in 1974. Although reunification with the Turkish Republic of Northern Cyprus came very close to fruition a few years ago, the effort failed in the end.

Now both the TRNC and its backers in Ankara argue that the internationally recognized government headed by President Demetris Christophias has no right to exploit the country’s gas reserves until a settlement is reached. Undeterred, Christophias and his team have pressed on regardless – and vowed to use the proceeds constructively for the benefits of “all Cypriots.”

Another obstacle has been Cyprus’ precarious economic position. The global financial crisis that began in late 2008 has consistently undermined the country’s crucial tourism receipts, and now the government has been forced to seek a bailout from the European Union and the International Monetary Fund because the Cypriot banking sector has been badly hurt by exposure to the meltdown in Greece.

Instead of allowing these uncertainties to delay the gas venture, however, Cyprus has used them constructively as motivating factors to accelerate the unlocking of these vast hydrocarbon assets. The logic is simple: whether Nicosia agrees to a bailout or follows some new economic path, the sooner it starts making money from gas, the better.

Perhaps the most positive indicator has been the determination of the Cypriot leadership to get the process right by following the best practice. The experience of the global petroleum industry has been that a country’s ability to draw sustainable benefits from its hydrocarbon revenues, spread those benefits across its population, and prevent corruption and waste is directly linked to the manner in which it establishes and operates its national oil (or gas) company.

Such organizations, when carefully conceived, staffed and managed, mature into world-class drivers of economic growth and development. These days, well-founded and experienced NOCs compete with major international oil companies to explore, develop and produce oil and gas, both at home and abroad, often nurturing impressive entrepreneurship in energy-related sectors and otherwise spreading their wealth.

Like other countries in the Eastern Mediterranean, Cyprus began this process with little to none of either the geosciences or the legal expertise required to establish an effective NOC or license its acreage.

There are dozens of ways for an emerging energy producer to permanently damage itself at this stage, from scaring off investors to getting swindled by them, and from encouraging pilferage to inviting environmental disaster. The advice of qualified consultants and other experts is clearly called for in all such instances, and the Cypriots have had the good sense to seek it out.

Even here it is important to build the right kind of relationship, one that involves the knowledge transfer and training that allow the country and its own people to control more and more of their own destiny as time passes.

Thus far the government of Cyprus has demonstrated that it is indeed serious about avoiding many of the usual pitfalls, as indicated by its decision to base the structure of its own NOC, to be known by its Greek acronym KRETYK, on Norway’s Statoil. Originally formed in 1972 to make sure Norway obtained maximum benefit from the North Sea oil industry, Statoil has been instrumental in ensuring that Norwegians were able to avoid the so-called “resource curse.”

Domestic expertise was developed at every level of the oil and petrochemical industries, and thanks in large part to a trendsetting sovereign wealth fund, the revenues were used to help make the overall economy more diversified and sustainable.

In this the Norwegian model has been the envy of other countries around the world, for although it has not been perfect, it has sharply limited the disparities and dislocations occasioned by resource booms from Canada to Australia and virtually everywhere in between. Recent years have seen independent experts advocate the same model for Lebanon, but authorities there have yet to make significant progress.

Of course, not everyone is happy about KRETYK. The speed with which it was set up seems to have resulted in some inconsistencies. It is essential that bidders and other players in the energy sector are able to develop a clear picture about the overall oil and gas sector, to know precisely where authority over a given area resides, and to feel confident that a binding legal framework is in place.

Given Nicosia’s transparency and openness to outside expertise thus far, it has to be assumed that these questions will be laid to rest in relatively short order. And however individual concerns are addressed, following in the path of Statoil would seem to be the best option available if the goals include competent management, spreading the wealth and preventing corruption.

In fact the very manner in which criticisms are being made and answered is yet another example of how Cyprus is showing the way for emerging economies around the globe, but especially in the Eastern Mediterranean.

Instead of wallowing in the mud of domestic factionalism, the Cypriot leadership is trying to leave a legacy that will speak for itself in the future, irrespective of which party(ies) happen to be in charge. In their own way, both sides seem to recognize that the stakes are enormous, and vested interests of various stripes will always try to get their fingers into the pie, so having the opposition put government policies under a microscope is a healthy practice.

On the reunification front, it is expected that the government will strive ahead to honor its pledge to help “all Cypriots.” Whatever the particulars, strong revenue streams can only make it easier to contemplate, negotiate and operate a new Cyprus whose Greek and Turkish communities are finally reconciled. Both directly and indirectly, a thriving gas sector could help make all manner of new ventures more viable, from the smallest of small businesses to the reunification of an entire country.

Here too there are both lessons for Cyprus’ neighbors. Peel away all the rhetoric, move forward to open up vast energy resources, reap rewards in terms of economic development and self-sufficiency. People everywhere are very much alike: they want basic things like well-paying jobs, comfortable homes, affordable energy and water, and decent schools for their children.

If it is well managed, a rising tide can indeed lift all boats, expanding economies, reducing poverty, increasing opportunities and giving people the chance to do something other than fight one another. Far too often in this part of the world, however, the parties to a conflict are more than willing to sacrifice their own interests – and even those of their children – to deny the same to their rivals.

To be sure, Cyprus could not have accomplished all of this by itself. This is precisely why it has been so important to engage with experienced partners and embrace best practice. The European Commission also deserves recognition for having backed up the relatively new member-state in several ways, including political support.

The Cypriots have figured out that in this instance at least, it makes no sense to play a zero-sum game. And when the rest of the region arrives at the same realization, the Cypriots will be waiting – with modern production facilities, access to key export pipelines and marketing outlets.

Roudi Baroudi is an energy and environment economist based in Doha, Qatar.

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Source: The Daily Star


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