Charles Ellinas Block 12 – Agreement not to drill

Block 12 – Agreement not to drill

On 28 January Delek Group announced at the Tel Aviv Stock Exchange that the additional exploration drilling planned to be carried out in Block 12 by 23 May will not now take place. It should be pointed out that this is a contractual requirement and was originally planned to be completed by 22 October 2015, but was subsequently postponed with the agreement of the government of Cyprus.

Since then the BG Group joined the Block 12 partnership. The new partnership carried out an assessment of Block 12, together with the government of Cyprus, and considered changes to the binding Work Plan under the Production Sharing Contract (PSC). As a result of this, the government notified the Block 12 partners that, on completion of the transfer of 50% of the rights of Noble in Block 12 to BG, it would formally waive the requirement to carry out additional drilling. This as we know took place on 27 January.

Press articles published since then, based on leaked information, suggest that the partners do not see a purpose to this additional drilling requirement given that Noble has not identified a target to drill. However, as recently as 2014 indications were that there are other small gas field prospects in Block 12. So, it is strange to claim now that no target to drill has been identified. The main reason may be costs. It could cost over $100million to drill one well, at a time when the oil&gas industry is facing severe financial problems due to low global oil prices. A substantial part of this cost would eventually pass to the government, as a recoverable cost under the PSC, once Aphrodite is developed. As a result, it may suit both the Block 12 partners and the government to wave this additional drilling.

However, this raises a number of other questions, also raised in an earlier Sigmalive blog on 27 October 2015. 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. The first extension was granted on 22 October 2011 and another on 22 October 2013. 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. A further extension of the exploration period may not be contractually possible.

It is very likely that Noble and its partners may have to relinquish the remainder of Block 12 after 23 May 2016 and retain only the Aphrodite gas field. This would negate the need to drill an additional exploration well. Noble and its partners will not need to carry out any further exploration and will now be concentrating on the development of Aphrodite.

The Development Plan for Aphrodite has been in discussion with the government since June 2015. In fact the declaration of commerciality was made in early June 2015 and the Development Plan was submitted later that month. Now that BG joined the partnership it may have to be reviewed again. Lets hope that the development plan will be approved before 23 May so that Noble and its partners can proceed from exploration to exploitation, with the development and export of Aphrodite gas. The problem though is that no gas sales have yet been identified and are unlikely to be identified by 23 May, so the PSC may have to be extended yet again to enable development of Aphrodite.

The key issue now is to have a credible plan, secure gas sales and develop Aphrodite. Given the low gas and LNG prices globally, which are expected to persist into the early 2020s, this will take time. Solution of Cyprob may open up other options.

Dr Charles Ellinas

Nonresident Senior Fellow – Eurasian Energy Futures Initiative - Atlantic Council