THE GOVERNMENT yesterday announced its decision to end talks with the French-Russian energy consortium over licencing rights for the preferred Block 9 in its exclusive economic zone (EEZ), choosing instead to start negotiations with the previously overlooked Italian-Korean consortium.

Speaking after a cabinet meeting, government spokesman Stefanos Stefanou announced the termination of negotiations with the consortium comprising French energy giant Total, Russian company Novatec and GPB Global Resources BV (a Gazprombank subsidiary) for an offshore gas exploration licence in Cyprus’ block 9, citing lack of progress in the talks.

Instead, the state will begin negotiations with the Italian-South Korean joint venture ENI-KOGAS for block 9, while negotiations will also be launched with Total for block 10. Until now, no negotiations had begun with any interested party for block 10, despite bids being made in the second licencing round for the remaining 12 blocks in Cyprus’ EEZ.

In late October, the government announced the decision to launch negotiations to award licences for blocks 2 and 3 with ENI-KOGAS, block 9 with Total-Novatek-GPB, and block 11 with Total alone.

The four offshore prospects are contiguous, lying north and north-east of block 12, where US firm Noble Energy has a concession to drill and has reported significant gas finds. Block 9 is considered to be the ‘prime cut’ of the four prospects, having received eight bids in total.

The government-appointed negotiating team met with the companies and consortia short-listed for blocks 2, 3, 9 and 11 in mid-November, asking them to return to the table in two weeks with improved proposals, regarding both the financial and technical aspects of their bids.

By the end of November, negotiations began in earnest with Commerce Minister Neoclis Sylikiotis saying he expected contracts to be signed in early 2013, for which the government would earn a ‘signature bonus’ from the companies awarded licences that would go some way to filling near-empty state coffers.

However, the government’s choice of companies and consortia raised a number of questions, particularly over block 9- considered the ‘prime cut’ of the four prospects, having received eight bids in total.

A number of press reports suggested the government had altered the order of ranking of the bids for block 9, eventually picking the Total-Novatec consortium despite its bid being graded fourth and fifth by the state’s own evaluation committee and French consultants Beicip Franlab.

The government has denied any wrongdoing, noting that the final decision rests with cabinet. It also highlighted there is no single ranking system for the bidders but rather, a number of different categories with different listings depending on the specific criteria evaluated.

Sylikiotis argued at the time that the final decision took into account additional parameters, not just financial.

In early November, daily Alithia claimed that the decision to award block 9 to the French and Russians was a political decision designed to sugar-coat an alleged request made by Cyprus for a €1 billion loan from Russia, which would allegedly come from the banks involved in the block 9 project.

On November 13, daily Phileleftheros published what it claimed were the full data on the respective scores awarded by Beicip and the Energy Service’s evaluation committee. The paper reported that Total-Novatec’s proposal for a signature bonus was 400 per cent lower than that of ENI-KOGAS.

There were even reports suggesting that some of the companies not picked are considering legally challenging the competition process though the government has denied being given any such warning from any of the bidders.

It also highlights that the most important aspect of any deal is the share the state will get in the production sharing agreement. The government argues it has negotiated one of the best share percentages in the world.

Speaking to reporters yesterday, Stefanou said negotiations for blocks 2, 3 and 11 have made progress, but that insufficient progress was made in negotiations for block 9, hence the decision to begin anew with ENI-KOGAS.

In addition, talks would begin with Total for block 10, meaning negotiations are now underway for five new blocks in Cyprus’ EEZ: with Total for blocks 10 and 11, and ENI-KOGAS for blocks 2, 3 and 9.

Speaking to the Cyprus Mail last night, Sylikiotis said negotiations on the three blocks 2, 3 and 11 were proceeding well. All bidders have improved their bids, taking negotiations to an advanced stage, he said.

“We expect negotiators to return to Cyprus for talks in the first ten days of January after which we can hopefully wrap up the process and reach agreement in that month,” said the minister.

Regarding block 9, Sylikiotis pointed out that negotiations would not start from scratch since the same model is used for all, with mainly the financial criteria being the variable for each contract.

“It is very important we proceed with the exploitation of our hydrocarbon deposits,” he said.

A government source yesterday defended the decision to begin negotiations with the Total-Novatec consortium on 9, despite it leading to a dead-end. The source said the two sides reached an amicable agreement to end negotiations after the consortium’s value of how much gas was in block 9 proved to be less than the government’s own estimates.

“The first criteria in the evaluation process is the size of the company, its technical and financial capacity. And Total is the biggest company in the group. They come second in deep water drilling in the world and second in their involvement in liquefied natural gas (LNG) terminals,” said the source.

“That’s why we want their strong presence in hydrocarbon explorations, because of their size and strength. They are more aggressive in their drilling timetables. That’s why we will start negotiations on block 10,” they added.

It is believed block 10 has decent prospects for finding oil.

The government also has one eye on attracting investors for the costly construction of an LNG terminal in Limassol. With big companies like Total and ENI involved, the idea is this will make it easier to raise the funds for the terminal.

Published by:  www.cyprus-mail.com