Charles Ellinas Block 12 Lease Renewal

Block 12 Lease Renewal

Noble and Delek announced on 22 October that they have postponed drilling of an additional exploration well on Block 12 from 23 October 2015 to 23 May 2016. This proposed date coincides with the license expiry. It is not known whether the government of Cyprus has agreed to this, but presumably they did.

According to the news release, the block 12 partners and the government are still examining options for amending and finalizing the development plan as required under the Production Sharing Contract (PSC), submitted to the government by Noble and Delek in the summer.

This raises a number of questions. As previously reported, the PSC was signed on 24 October 2008 for 3 years. It is usual for such contracts to have provisions for a number of extensions and, as reported, relinquishment of part of the Block each time an extension is granted. But the process cannot be indefinite. In May 2016 it will be 7 years and 7 months since signature of the PSC and 4 years and 7 months since expiration of the original 3-year term of the PSC.

The time between now and 23 May 2016 is less than seven months. This is tight to organize and complete drilling of an additional well. It requires submission of plans and approvals, including environmental and safety approvals, bidding and award of drilling contracts, securing a drilling ship, appointment of contractors and setting up a drilling base. Given the water depth and gas-bearing formation depth it would require about 3 months to drill a well.

In the meanwhile, it is hoped that the development plan will be approved before then and Noble and Delek will proceed from exploration to exploitation with the development and export of Aphrodite gas. However, they may have to relinquish the remainder of Block 12 after May 2016.

It will be interesting to see how these plans develop and whether Delek proceeds to buy another 19.9% share of the Block from Noble as has been recently announced.

The preferred option to export gas to Egypt is fraught with challenges, not the least being global and European gas prices. These have now settled within a $6-$7 per mmBTU range and may stay low during the rest of this decade. Such prices could make the Egyptian option commercially very difficult, whichever way the gas is transported from Aphrodite to Egypt and then to the markets.

So, where would this leave the May 2016 deadline, the future of Block 12 and Aphrodite gas exports?