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Investment opportunities in the Energy Sector in Cyprus

The Legal and Regulatory Framework

The oil and gas developments in Cyprus' offshore fields have given rise to significant interest in the   Cyprus energy sector.

Cyprus of course is a newcomer in this area but the significant reserves that are believed to exist offshore together with Cyprus geostrategic location and close ties to Europe and the Middle East provide a dynamic setting with significant opportunities for investment in Cyprus in the energy field but also potentially other sectors that are expected to be influenced and benefit by these developments. Currently our Government, with cooperation from Parliament, is putting in place the necessary infrastructure to enable the island to cope effectively with these developments. These developments create the need for potential investors to seek local sophisticated and prompt professional support in analyzing them and examining investment opportunities and offering appropriate advice as well as assisting with implementation issues. Our firm is committed to this end and we have a team of high level lawyers and tax experts fully conversant and current on Cyprus' energy legal and regulatory framework who stand by ready to provide prompt and high level legal and tax advice. In this respect, we highlight below certain aspects of the Cyprus legal and regulatory framework for the energy sector regarding upstream and downstream activities and renewable energy developments that we thought may be of interest to our clients and collaborators.

 

 

THE MAIN CYPRUS ENERGY AUTHORITIES

  • The Cyprus Energy Regulatory Authority (CERA) is an independent authority of Cyprus established under the Law Regulating the Electricity Market of 2003 whereby amongst others, it has responsibilities to grant, monitor, enforce, modify or revoke authorizations issued under the said Law and it safeguards effective competition in the electricity market. It also advises the Minister of Commerce, Industry and Tourism on all matters concerning electricity and regulate tariffs, charges and other terms and conditions applied by licensees for any services provided under the terms of their authorizations, including production, transmission and supply of electricity.
  • A Natural Gas Company (DEFA) has been founded and is responsible for the import,      storage, distribution, transmission, trading of natural gas and the management of the distribution and supply system of natural gas in Cyprus and has been appointed as the sole importer and distributor of natural gas in Cyprus.
  • The Electricity Authority of Cyprus (EAC) is an independent semi-governmental utility which was established in 1952 for the supply of electricity to the whole of Cyprus on an objective non-discriminatory basis. EAC owns the National Transmission System for electricity, which connects the power stations with the load centers. The distribution network links the EAC's transmission system to the final consumer.
  • The Cyprus Institute of Energy was founded in the year 2000 by the Minister of Commerce, Industry and Tourism. The scope of the Institute of Energy is the promotion of energy conservation and rational use of energy; the development and promotion of Renewable Energy Sources (wind, solar, biomass, hydro, geothermal or any other form of known renewable energy, or may prove worthy of consideration in the future) in Cyprus and any activities with the scope of promotion of both of the above issues with the scope of and further utilization of financially feasible energy technologies.
  • Minister of Commerce, Industry and Tourism / Council of Ministers whose role is explained below.

 

HYDROCARBON ACTIVITIES

  • Laws, Regulations and Agreements

As an overview it is essential to point out that the following laws and regulations apply to the industry of hydrocarbon activities in Cyprus:

  • The Hydrocarbons (Prospecting, Exploration and Exploitation) Law (2007)
  • The Hydrocarbons (Prospecting, Exploration and Exploitation) Regulations (2007 and 2009)
  • Harmonization with Directive 94/22/EC of the European Parliament and Council concerning the Hydrocarbon prospecting, exploration and production activities
  • The Contiguous Zone Law (2004)
  • The Declaration of the Exclusive Economic Zone Law (2004)
  • Strategic Environmental Assessment (SEA)

Cyprus has signed agreements with Egypt, Lebanon and Israel for the delimitation of the Exclusive Economic Zones of each country. The agreements signed with these countries are the following:

With Egypt:

  • Delimitation agreement of the Exclusive Economic Zone (EEZ) with Arab Republic of Egypt (February 2003)
  • Republic of Cyprus ratified the delimitation of the EEZ with Arab Republic of Egypt by Law (March 2006)
  • Framework Agreement concerning the development of cross-median line Hydrocarbon resources (May 2006)

With Lebanon:

  • Delimitation agreement of the EEZ with Lebanon (Jan 2007)
  • Republic of Cyprus ratifies the delimitation of the EEZ with Lebanon by Law (Nov 2007)

With Israel:

  • Delimitation agreement of the EEZ with Israel (Dec 2010)
  • Republic of Cyprus ratifies the delimitation of the EEZ with Isreal by Law (Feb 2011)

The above legal framework applies to the territorial waters, the continental shelf and the Exclusive Economic Zone of Cyprus. Hydrocarbon activities are also subject to general Cypriot laws and regulations on environmental protections, health and safety.

Prospection, exploration and exploitation of hydrocarbon activities

The industry of hydrocarbon activities is mainly governed in Cyprus by the Hydrocarbons (Prospection, Exploration and Exploitation) Law, the Hydrocarbons (Prospection, Exploration and Exploitation) Regulations of 2007 and 2009 and the Submission of Applications Guidance Note for the 2nd Licensing Round issued by the Ministry of Commerce, Industry and Tourism (hereinafter the "Ministry"). The said law, regulations and guidance note outline the conditions and requisites to be met in order for one to be authorized to use and exploit the authorizations and/or licences issued for the prospection, exploration and exploitation of hydrocarbon activities which will be performed in upstream business activities, conducted at the offshore exploration blocks indicated by Cyprus following bidding for the licences by interested parties. At present, Cyprus has signed only one Production Sharing Contract which relates to Block No. 12 granted to Noble Energy International Ltd. Cyprus announced with its notice published in the Official Journal of the European Union on the 11th of February 2012 an invitation to apply for hydrocarbon exploration authorizations (licences) and subsequent hydrocarbon exploitation licences for another 12 offshore blocks. The starting date of the so called 2nd Licensing Round was announced and closed. According to the relevant Ministry's records, 15 companies expressed interest in the 2nd Licensing Round offshore Cyprus concerning the authorization for hydrocarbons activities.

Types of Licences for hydrocarbon activities

A summary of the types of authorizations and/or licences for hydrocarbon activities are outlined below:

  • Prospection Licence: An authorization for prospection shall be granted for a period not exceeding one year. The prospection of hydrocarbon means the attempt to locate hydrocarbons by any appropriate method other than drilling.
  • Exploration Licence: An authorization for exploration shall be granted for an initial period not exceeding three years and may be renewed for up to two terms, each term not exceeding two years provided that the holder of such authorization has fulfilled all his obligations arising from the authorization and has submitted an application to the Council of Ministers two months prior to the expiry of the current term. Upon each renewal of the authorization for exploration, the holder of the authorization relinquishes at least 25% of the initial surface of the area that is included in the authorization granted. Also upon expiry of the renewal of the authorization for exploration, as possibly renewed and/or extended as mentioned herein above, the holder of the authorization relinquishes all the remaining part of that area that is included in the authorization granted, provided that the area to be relinquished shall not include the areas included in an authorization for exploitation. In case of a commercial discovery of hydrocarbons, a holder of an authorization for the exploration of hydrocarbons, will be granted an exploitation authorization related to such a discovery.
  • Exploitation Licence: An authorization for exploitation shall not exceed twenty five years and may be renewed for a maximum of ten years subject to the terms of the Exploration and Production Sharing Contract (hereinafter the "Contract") signed between the applicant and Cyprus and may be renewed provided that the holder of such authorization has fulfilled all his obligations arising from the authorization and has submitted an application to the Council of Ministers, through the Minister, one year prior to the expiry of the current term. An exploitation licence with respect to a commercial discovery during exploitation shall be granted after the approval of a Development and Production Plan in accordance with the Contract to be signed between the applicant and Cyprus.

 

THE LOCAL MARKET ON NATURAL GAS

Oil/Petroleum products

The Energy Service of the Ministry of Commerce and Industry is, amongst others, responsible for the oil product industry and is focused on maintaining and managing oil products stocks. Due to Cyprus' accession to the European Union, it is obliged to keep security stocks in Cyprus as set by the European Union standards. Thus, the Cyprus Organisation for Storage and Management of Oil Stocks (COSMOS) was established and is responsible to maintain and manage the strategic stocks for Cyprus.

Natural Gas

As regards the regulation of natural gas in Cyprus the Law on Regulation of Purchase of Natural Gas 183/2004 (the "Natural Gas Law") was enacted in order to implement in Cyprus the provisions of EU Directive 2003/55 EC.

Section 8 of the Natural Gas Law provides that a license needs to be granted by CERA before any person is engaged in activities which include (i) the construction of plants for the import / storage / gasification of natural gas, (ii) operation and use of plants for the import / storage / gasification of natural gas, (iii) import / storage gasification of natural gas for own use of natural gas etc.

Further, the Natural Gas Law provides that CERA shall take the necessary measures so that:

(a) natural gas undertakings established within the Republic of Cyprus shall be able to supply the eligible customers through a direct line;

(b) any such eligible customer within Cyprus shall be able to be supplied through a direct line by natural gas undertakings.

In addition DEFA is responsible for the import, storage, distribution, transmission, supply and trading of natural gas, and the management of the distribution and supply system of natural gas in Cyprus.  The council of Ministers of Cyprus appointed DEFA as the sole importer and

Distributor of Natural Gas in Cyprus. According to DEFA's constitution the purpose of DEFA is to buy, import, store, distribute, transmit, sell, supply natural gas and to operate the natural gas transmission and distribution network in Cyprus.

 

THE ELECTRICITY MARKET REGULATION

The Law Regulating the Electricity Market 122(I)/2003 as amended (the "Electricity Law") governs the electricity sector in Cyprus. Section 3 of the Electricity Law regulates the electricity market in Cyprus and amongst others, provides for the establishment of the Cyprus Energy Regulatory Authority (ie CERA); regulates issues relating to the protection of consumers and provides for the creation of a new licensing regime regarding the generation, transmission, distribution and supply of electricity.

Subject to section 35 of the Electricity Law no person shall carry out any of the activities mentioned in section 35 unless that person has been granted an authorization by CERA under the terms of the Electricity Law to supply electricity. Amongst others, these activities include constructing a generating plant or generating electricity and supplying electricity to eligible consumers.

 

RENEWABLE ENERGY

Cyprus' energy policy is in accordance with the EU 20-20-20 initiative and thus aims to promote renewable energy sources such as solar energy, wind energy, biomass and small hydrocarbons.

In May 2012, the Special Fund Management Committee of Renewable Energy Sources and Energy Savings ("Special Fund Management Committee") announced the launch of the following support schemes for the year 2012 in order to encourage electricity generation from large commercial wind, solar, photovoltaic systems and biomass utilization; the use of renewable energy sources for physical persons and organizations to the extent that they do not carry out economic activities and the use of renewable energy sources for physical and legal persons as well as public sector bodies that carry out economic activities.

We highlight below some of the main provisions of the aforesaid schemes in connection with photovoltaic systems which may be of interest.

Support scheme regarding the encouragement of the use of large commercial wind, solar, photovoltaic systems and biomass utilization:

Renewable energy systems that may benefit from this scheme include amongst others   commercial photovoltaic systems between 20kW to 150 kW which are connected to the electricity energy grid of the EAC and large commercial photovoltaic systems of a capacity from 151kW and 10MW connected to the grid of EAC.

The owners and/or producers of photovoltaic energy are able to sell the energy produced by their photovoltaic system to EAC at a fixed price or to another supplier. The fixed price sold to EAC for commercial photovoltaic systems connected to the grid of EAC of a capacity of up to 20kW and between 20kW to 150kW amounts to €0,25/kWh. The monetary amount which will be given to the producer of the photovoltaic energy i.e. €0,25/kWh upon selling the energy produced to EAC will come from EAC itself and from the Special Fund of Renewable Energy Sources and Energy Savings ("Special Fund") in the following manner: EAC will purchase the energy produced by the photovoltaic system at a certain price which is determined by the Cyprus Energy Regulatory Authority and whatever the remaining amount is in order to reach the fixed price of €0,25/kWh, the Special Fund will also participate financially so as to enable the selling price to amount to €0,25/kWh. For large commercial photovoltaic systems of a capacity from 151kW to 10MW connected to the grid of EAC the maximum acceptable selling price to EAC amounts to €0,21/kWh.

The state subsidy for commercial photovoltaic systems of a capacity between 20kW to 150kW and for large commercial photovoltaic systems of a capacity from 151kW to 10MW connected to the grid of EAC will be provided for 20 years from the date the photovoltaic system is connected to the grid of EAC.

The support scheme has placed a limit on the total maximum capacity amount of applications eligible for the said state subsidy. For new applications regarding commercial photovoltaic systems of a capacity up to 150kW the maximum amount of applications that are eligible for the state subsidy amounts to 26,45MW. This ceiling includes applications already submitted in previous years but were not approved (because of budget or capacity constraints) as well as applications who had secured all licenses for the installation of photovoltaic systems. Thus once the maximum amount of 26,45MW is reached no more applications for state subsidy will be accepted. As regards large commercial photovoltaic systems of a capacity from 151kW and 10MW connected to the grid of EAC the maximum amount of applications that are eligible for the state subsidy amounts to 50MW.

Support scheme regarding the use of renewable energy sources for physical persons and organizations to the extent that they do not carry out economic activities:

This scheme includes small household photovoltaic systems of a capacity of up to 7kW which are connected to the grid of EAC to the extent that the total annual electricity production does not exceed the annual requirement of the premises where the photovoltaic system is installed and also includes autonomous photovoltaic systems (not connected to the grid of EAC) of a total capacity of up to 20kW, connected or not to other power producing systems.

The price sold to EAC for small household photovoltaic systems of a capacity of up to 7kW which are connected to the grid of EAC (installment on the roof a the house or on the same grounds where the house is situated) amounts to €0,28/kWh. The guarantee price scheme for electricity sold to EAC is not applicable for autonomous photovoltaic systems (not connected to the grid of EAC) of a total capacity of up to 7kW (household) and up to 20kW for organizations which do not carry out economic activities (whether in combination or not to other power producing systems). However, there is support scheme in place for such abovementioned systems whereby the maximum amount of subsidy for selected expenditure to be given to households, physical persons, school boards and charitable institutions, municipalities and communities and other non profit organizations

to the extent that they do not carry out economic activities, amounts to a maximum amount of EUR 33.000.

Support scheme as regards the use of renewable energy sources for physical and legal persons as well as public sector bodies that carry out economic activities:

Systems of renewable energy which may benefit from this scheme include autonomous photovoltaic systems (not connected to the grid) of a total capacity of up to 20kW (whether in combination or not to other power producing systems) and autonomous photovoltaic water pumping systems up to 20kW. For both these photovoltaic systems there is a special support scheme of a maximum amount of EUR 24.000.

The final date of accepting applications based on the above mentioned support schemes will be the 31st of October 2012 unless the Special Fund Management Committee announces otherwise.

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This material has been prepared by professionals of Ergoserve Consulting Ltd. It is intended as a general guide only, and its application to specific situations will depend on the particular circumstances involved. Accordingly, we recommend that readers seek appropriate professional advice regarding any particular problems that they encounter. This information should not be relied upon as a substitute for such advice. While all reasonable attempts have been made to ensure that the information contained herein is accurate, Ergoserve Consulting Ltd accepts no responsibility for any errors or omission it may contain or any opinions contained herein whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies upon it.

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