Kronos: A historic milestone

But who reaps the economic benefits?The signing on October 26 of the main contracts for the development of the Kronos gasfield, worth up to $1.8 billion, marks the project’s transition into the construction phase. This is undoubtedly a historic milestone. Fifteen years after the discovery of Aphrodite, Cyprus is finally approaching the production and export of natural gas. Eni and TotalEnergies are proceeding with the development of the field, with first gas expected by mid-2028. However, behind the celebrations, the most important question remains unanswered: What will be the real economic benefit for Cyprus? Concessions to Eni The development of Kronos proceeded following difficult negotiations over commercial terms and the allocation of risks. Energy industry sources and the specialist publication MEES reported that the Cyprus government chose to approve the field’s development rather than insist on securing better commercial terms, even though its concerns over risk allocation had not been fully addressed. They also indicated that the final terms raised serious reservations regarding the economic benefits and liabilities assumed by Cyprus. Despite these reservations, the political decision was to proceed with the project. This raises legitimate questions about whether the pursuit of rapid development took precedence over securing better long-term economic returns. Achieving a historic political success does not automatically mean securing an economically advantageous agreement for the country. Who benefits from Egypt’s infrastructure? This is one of the project’s most important economic dimensions, yet it is almost entirely absent from public discussion. The development of Kronos relies on use of existing infrastructure at Egypt’s Zohr gasfield and the Damietta LNG export terminal. Zohr’s production has fallen below 1 billion cubic feet per day (bcf/d), while its processing facilities have a capacity of 3.2 bcf/d. This leaves substantial underutilised capacity. At the same time, Damietta has struggled to secure sufficient gas supplies because of declining Egyptian production. Kronos offers a solution to both problems. It enables Eni to make better use of existing infrastructure, generate additional revenues from gas processing and transportation, and secure feedgas for LNG production. At the same time, it supports Eni’s strategic objectives of increasing LNG exports. Kronos is therefore not simply an investment in Cyprus. It is also an investment that significantly improves the economic utilisation of Eni’s underutilised Egyptian assets. President Nikos Christodoulides, receives the CEO of ENI, Claudio Descaltzi How Cyprus’ revenues are reduced Using existing infrastructure reduces upfront investment costs and accelerates development. However, access to this infrastructure is not free. The transportation, processing and liquefaction of natural gas involve substantial charges. These charges represent costs along the Kronos value chain while simultaneously generating revenues for the companies that own or operate the infrastructure. Eni participates on both sides of this value chain. The critical question is how these charges affect the value of gas used to calculate government revenues and which costs are eligible for recovery. The greater the deductions permitted under the contractual arrangements, the lower the potential economic returns for Cyprus. Routing Kronos gas through Egypt, although faster and less capital-intensive, limits potential economic returns. This reinforces the need to examine not only how much gas will be produced, but, more importantly, how much of its economic value will remain in Cyprus. Cyprus excluded from LNG trading and profits Even more significant is Cyprus’ exclusion from LNG trading. Approximately 0.4 bcf/d will be delivered to Damietta, enabling production of 2.8 million tonnes of LNG annually. Eni and TotalEnergies will each market 50 per cent of these volumes. Cyprus, by contrast, will receive revenues from the exploitation of the gasfield under the agreed commercial and fiscal terms. It will not participate in the additional commercial profits that may arise from liquefaction and LNG sales in international markets. The companies can therefore capture economic benefits across several stages of the value chain, while Cyprus’ participation is confined to the upstream production stage. Although Cyprus owns the natural resource, it does not participate directly in a significant part of its commercial exploitation — precisely where much of the project’s added value is created. Who bears the risks? The allocation of risks is another equally serious issue. Offshore gas developments involve technical, commercial and financial risks, including cost overruns, delays and infrastructure availability and production problems. Companies naturally seek to minimise their exposure to these risks. The government, however, has a responsibility to ensure that the risks assumed by the country are matched by commensurate economic benefits. If Cyprus accepted greater risks while simultaneously securing a limited share of profits, this raises serious questions about the balance of the agreement. Without disclosure of the key contractual terms, an independent assessment is impossible. The geopolitical significance should not be overstated Kronos will make Cyprus a natural gas producer, but it will not transform the country into a regional energy hub. Instead, it is primarily Egypt that stands to strengthen its position, bringing together natural gas from different sources and providing the infrastructure needed for its export. Nor should Kronos ‘ contribution to European energy security be overstated. Even if all Kronos LNG is exported to Europe, the volumes remain small relative to total European gas consumption, representing approximately 1.2 per cent. Its contribution to supply diversification is positive, but limited. A dangerous precedent The concessions that may have been made for Kronos could influence future negotiations over Aphrodite and other gas discoveries. Companies will naturally seek similar terms. Cyprus must avoid allowing an agreement accepted under exceptional circumstances to become the standard model for developing its remaining discoveries. Furthermore, having facilitated the development of Kronos, the government should seek reciprocal benefits from Eni. One important opportunity would be the development of Calypso to supply the domestic market, particularly given the serious problems affecting the Vasilikos LNG import terminal and the high cost of electricity generation. A historic success, but at what price? The development of Kronos is a historic achievement. That is beyond dispute. However, the construction contracts do not, in themselves, generate immediate revenues for Cyprus. They create the conditions for future production, from which government revenues are expected to materialise after 2031, depending on the agreed contractual terms. The government knows these terms and their economic implications. Despite the significance of the decision, there has been no meaningful public disclosure of the commercial concessions, the allocation of risks or the expected range of government revenues. Instead, public discussion has focused almost exclusively on investment, exports and geopolitical significance. Cyprus has secured the development of its first natural gasfield. But has it also secured a fair share of its economic value? This question remains unanswered. Ultimately, the project’s real success will be judged not only by when production begins, but by what Cyprus actually gains from it.