The hydrocarbons exploration and exploitation activities in the Republic of Cyprus are governed by the Hydrocarbon (Prospection, Exploration and Exploitation) Law of 2007 (No. 4(I)/2007) (the “Hydrocarbons Law”) and the Hydrocarbons (Prospection, Exploration and Exploitation) Regulations of 2007 and 2009 (No. 51/2007 and No. 113/2009) (the “Hydrocarbons Regulations”).
The Hydrocarbons Law and Hydrocarbons Regulations have implemented in Cyprus the European Union legislation (Cyprus is a EU member state since 2004) and in particular Directive 94/22/EC on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons.
Moreover, Cyprus is a signatory of the United Nations Convention on the Law of the Sea of 1982 (UNCLOS). It has also signed a number of agreements with its neighbouring countries (namely, Egypt, Israel and Lebanon) in accordance with the provisions of the UNCLOS. For example, agreements for the delimitation of the respective Exclusive Economic Zones have been signed with Egypt in 2003, Lebanon in 2007 and Israel in 2010. As a result, the Exclusive Economic Zone of Cyprus is divided into 13 exploration blocks covering an area of approximately 51,000 square km.
Pursuant to the Hydrocarbons Law, the ownership of hydrocarbons wherever they are found in Cyprus, including the Territorial Waters, the Continental Shelf and the Exclusive Economic Zone of the Republic (according to the definition that these terms have in the UNCLOS), shall be deemed to be and always to have been vested in the Republic.
The Hydrocarbons Law and Regulations envisage the granting of authorizations for prospection, exploration and exploitation activities. Such authorizations have the following features:
- Authorizations for prospection. They are valid for up to one year. They do not permit drilling but allow evaluation of hydrocarbon potential.
- Authorizations for exploration. They are initially valid for three years and allow the holder to undertake gravity, magnetic and seismic surveys and exploratory drilling. They are renewable for two further periods of two years. On each renewal, 25% of the initial surface of the area included in the authorization has to be relinquished. In the event of a discovery, the holder of the authorization has the right to be granted an exploitation authorization for the discovery.
- Authorizations for exploitation. They are granted for an initial period of up to 25 years with the option of one renewal of up to 10 years.
Applicants who have been granted with an authorization must enter into an exploration and production sharing contract, in the form published by the Ministry of Commerce, Industry and Tourism (a first version of the model contract was issued in 2007, substituted by a revised version in 2012).
According to a model now globally accepted, the Republic of Cyprus will therefore remain the owner of the resources and the relationship between the holder of the authorization and the state under the exploration and production sharing contract will be that of a contractor or service provider.
The first exploration authorization was granted to Noble Energy International Ltd (a subsidiary of Noble Energy Inc.) for Block 12 in October 2008. In December 2011 Noble Energy announced the discovery of a natural gas field with an estimated resource range of 5 to 8 trillion cubic feet (Tcf), revised to a range of 3.6 to 6 Tcf in October 2013.
Further to a second bidding round started in May 2012, a consortium between Italian Eni and South Korean KOGAS obtained authorizations for Blocks 2, 3 and 9 in January 2013. Total E&P was also granted authorizations for blocks 10 and 11 in February 2013. Eni-KOGAS is expected to begin exploratory drilling in 2014 whereas Total E&P in 2015.
The fast-developing energy industry of the Republic of Cyprus is likely to attract worldwide interest in the forthcoming future. New laws and guidance will be necessary due to the increased activity in the sector. For example, tax authorities are expected to issue some guidance with reference to the income tax lax concerning the oil & gas sector. To date, taxable profits from trading operations are taxable at the normal corporate income tax rate of 12.5% (one of the lowest in Europe).