Special report: Cyprus
10 December 2012
Cyprus is mired in bailout talks yet has massive untapped gas reserves. We ask the experts how the island’s law firms are coping with this complexity
Q: What progress has been made on the natural gas developments over the past six months and how has your firm been addressing this potential new practice area?
Andreas Neocleous, chairman, Andreas Neocleous & Co: Exploratory drilling has revealed a gross natural gas reserve of between 85 and 250 billion cubic metres, with a 60 per cent probability of geological success. If proved, this would put Cyprus among the top 50 countries in the world for gas reserves. The second licensing round, which has been taking place in the past few months, produced bids for four more blocks and negotiations are in progress with preferred bidders. Several disappointed bidders have indicated they are likely to dispute the process.
It is expected to take at least six years before gas is extracted commercially and a great deal of infrastructure, both physical and commercial, will need to be put into place in the meantime.
All this activity will undoubtedly produce great opportunities for law firms and, judging from their announcements, many Cyprus firms have instantly become energy specialists. The energy sector is extremely complex and it takes years to develop the necessary expertise and market presence - it simply cannot be simply bought in. We are therefore partnering with overseas firms that are leaders in the energy sector on a non-exclusive basis, building on our strength in Cyprus and EU law, and organically developing our capacity and expertise.
Marios Hadjigavriel, partner, Antis Triantafyllides & Sons: The oil and gas industry is an area on which our firm has acquired extensive experience and expertise through strong and established international finance and corporate business. Consequently, following the government grant of an exploration licence in 2008 for a particular offshore block, our firm was involved in obtaining the necessary permissions and licences regarding the import, export and use of machinery, and material required for the exploration and extraction of natural gas. We were further involved in negotiations on plans and projects relating to the operations.
In October the government said it would issue four licences for gas exploration in offshore blocks, pending negotiations with the shortlisted companies and consortia. We don’t anticipate the legal work from this development will be routed to local firms directly but will instead be assigned by the international law firms mandated by such companies and consortia. Because of this our firm is focusing on exploiting its existing network with a number of international law firms.
Yiota Kythreotou-Theodorou, partner, Pamboridis: Cyprus’ gas reserves offer an opportunity for development and prosperity, and in the longer term we hope it will become a regional energy centre. But aside from this optimism, if our reserves are as rich as predicted, we will soon be facing significant legal, regulatory and operational and technical challenges. The sheer scope of construction projects, the danger of pollution incidents, the politics of who owns what resources, the arrangements for transporting and exploiting any gas reserves and many other issues require specialist legal advice.
We have recognised the need for high quality, reliable and commercially oriented legal knowledge and expertise, and have been educating our lawyers. Our energy team is able to represent clients in the energy sector, from international oil companies to independent juniors and, potentially, state-owned companies and the government.
Significantly, we have established a relationship with DLA Piper boasting a global energy footprint unmatched by any other firm.
Q: Cyprus is in bailout talks with the Troika. Do you expect the bailout to generate any work for lawyers?
Neocleous: Yes, and for us it already has. We cannot discuss specific assignments due to confidentiality agreements, but we have already advised on substantial potential mergers of financial institutions.
One of the big issues in the negotiations is the extent to which the banks require recapitalisation. That will depend on the extent of their non-performing debt which, in turn, is influenced by the security held for the debt. An independent assessment is in process and a key element is the validity and enforceability of the security.
In due course, when credit institutions are restructured, lenders and borrowers will require extensive legal support in negotiating and documenting the terms.
Alexandros Economou, partner, Chrysses Demetriades & Co: Since we have long held a dominant position in the banking and finance sector we benefited from the increase in capital raisings. We acted for the dealers in the establishment by the Bank of Cyprus of its €5bn (£3bn) covered bond programme and the first two issues thereunder. This was the first covered bond programme in Cyprus. We have since acted for other similar programmes.
As a result of the economic downturn, litigation is on the rise and I also expect a big rise in national restructurings and refinancings.
In the present environment I expect full-service law firms to suffer least or even grow (like our firm), as opposed to law firms that specialise in troubled markets.
Kythreotou-Theodorou: The crisis and the anticipated bailout agreement will bring about big changes - and have already done so in many respects - to the Cyprus business environment as well as the financial and services sector. As a result, some areas of law have seen a substantial increase in the volume of work. To mention but a few, these include debt collection and recovery, bankruptcies and administrations, debt restructuring and employment. In addition, mergers and acquisitions are on the rise and we expect this trend to continue.
At the same time, Cyprus’ banks and the Cyprus Central Bank are carrying out investigations into the causes of the huge exposure to Greek debt, suspect loan transactions and allegations of impropriety and misconduct among high-ranking officers. For this work and any resulting civil law actions, and perhaps even criminal proceedings, they have mandated local law firms, but primarily magic circle firms.
Parallel to this, we expect initiatives designed to attract foreign investment. For example, a new scheme allowing non-EU citizens investing €300,000 in property to acquire residency permits has generated notable interest in China.
Q: Overall, how would you sum up 2012 for your firm?
Neocleous: The economic situation has created challenges from which the legal sector - and particularly firms that depend on domestic work - has not been immune. But we have escaped most of the adverse effects - activity and revenue have continued to grow. And the softer employment market has allowed us to strengthen our resources by selective recruitment.
We have also had other successes. After extended procrastination by the authorities we finally achieved the modernisation of the Cyprus International Trusts regime. This returns Cyprus to the Premier League of trust jurisdictions and greatly increases its attractiveness as an international finance centre.
The Euro-Mediterranean Alternative Dispute Resolution Centre, a not-for-profit initiative we are also leading, should open its doors in the next few months.
The past year has been challenging but, to paraphrase Socrates, we should remember that there is nothing stable in human affairs, that we should avoid undue depression in adversity and approach our present circumstances as an opportunity to learn from the mistakes of the past.
Hadjigavriel: Taking into account the international financial situation 2012 was a relatively satisfactory year, more or less on the same level as 2011.
Economou: Although investor confidence in Cyprus is muted as a result of the debt crisis that resulted in fewer M&A transactions, our firm has not suffered. On the contrary, at all levels we are much better than 2011. That is because of our foreign clients, most notably from Russia.
Kythreotou-Theodorou: 2012 has been an interesting year and, in many respects, a transitional one. As we enter the ‘Troika era’, the legal sector is adapting to accommodate areas of law showing a significant increase in volume. At the same time we are faced, as lawyers, with the tremendous opportunities that the natural gas developments are creating.
Energy law is pretty much in its infancy and law firms are in a race against time to acquire the expertise and know-how to respond to the needs and demands of this new sector.
In view of all this 2012 has been a busy time for us. The volume of financing, banking transactions and start-ups has been modest (although better than 2011), but we have invested a lot of time in adapting so that we can respond in those areas of law that are prospering and promising, and to place ourselves at the forefront of the profession in matters of energy law.
We are optimistic. Although 2013 will be a testing time for the economy there will also be opportunities for growth for firms that are quick and willing enough to adapt.
GDP: (US$, 2011) 24.7bn
Annual inflation (October 2012): 2.6%
Population (December 2011): 862,000
Life expectancy at birth: 80
Unemployment rate (October 2012): 12.9%
Source: World Bank, Cyprus Statistics Service, Eurostat