Cyprus on Wednesday signed an agreement with French energy major Total to conduct exploratory drilling for gas and oil in two blocks off its southern shore.
The deal comes as Cyprus aspires to become a regional energy hub with the prospect of oil as well as natural gas being tapped beneath the sea bed.
"With today's act the government has completed one of the most crucial aims in its energy policy, that of successfully conducting a second round of licensing," Commerce Minister Neoclis Sylikiotis told reporters after the signing ceremony.
Total signed a deal to exploit blocks 10 and 11 that are adjacent to a large natural gas find in block 12 and said it seeks to proceed in drilling for oil as well as gas reserves in the said blocks.
Turkey has protested strongly against Nicosia's energy search, branding it illegal and beginning its own exploratory drilling off the breakaway north of the island.
Ankara has warned that companies involved in the Cyprus process could be shut out of Turkey's energy investment.
Sylikiotis said that having countries such as France, America and Italy involved in the island's hydrocarbon exploration acted as a "political shield" against Turkish threats.
Cyprus has been divided since 1974, when Turkish troops invaded and occupied its northern third in response to an Athens-engineered coup in Nicosia aimed at union with Greece.
It is estimated that there could be around 60 trillion cubic feet of gas lying in the 13 blocks that make up Cyprus's 51,000 square kilometre exclusive economic zone.
Some analysts believe Cyprus is sitting on potential energy revenues of 600 billion euros.
Cyprus is banking on its energy bonanza to eventually rescue it from recession as it seeks a European Union bailout.
Last month, Cyprus signed licence agreements with Italy's ENI and South Korea's Kogas for exploratory drilling aimed at exploiting offshore oil and gas deposits.
In October, drilling permits subject to negotiation were approved for blocks 2, 3, 9 and 11 of Cyprus's Exclusive Economic Zone, and in December block 10 was added to the list.
An Italian-South Korean partnership signed a deal worth 150 million euros ($200 million) for permits to explore blocks 2, 3 and 9.
US firm Noble Energy Inc was the first to drill when awarded Block 12, and in December 2011 said it had discovered gas reserves of up to 8 trillion cubic feet (226.5 billion cubic metres), with an estimated value of 100 billion euros.
Charles Ellinas, who heads the newly-established Cyprus National Hydrocarbons Company, said Total is looking to drill for oil which is easier to extract and deliver to markets.
Cypriot waters are estimated to hold at least 60 trillion cubic feet (1.7 trillion cubic meters) of gas, according to Ellinas. That would be plenty to cover domestic needs for decades and supply Europe's growing demand for the fossil fuel.
Ellinas said that at the going price of €7.4 billion ($10 billion) for 1 trillion cubic feet of gas, Cyprus stands to earn big profits once a planned onshore processing facility is built to produce liquefied natural gas, which can then be exported. He said the start of gas exports has been set for 2019.
Cypriot Commerce Minister Neoklis Sylikiotis said the aim is for Cyprus to become a regional energy hub. The country is now in talks with Israel, which has discovered substantial offshore gas fields of its own, on ways to jointly process their reserves at the planned Cypriot facility for export.
Lebanon could also join the project with its own potential offshore gas deposits.
In the long term, Cyprus estimates it can supply up to 10 percent of the EU's energy demand, making the bloc less dependent on Russia.
However, Cyprus' gas ambitions face strong opposition from Turkey, which doesn't recognize it as a sovereign country. Cyprus was split into an internationally recognized Greek Cypriot south and a breakaway Turkish Cypriot north in 1974, when Turkey invaded after a coup by supporters of Union with Greece.
Turkey says Turkish Cypriot rights are being ignored, has claimed some of Cyprus' offshore blocks as its own and has warned that it would react strongly to gas exploration by Cyprus.
Cyprus says exploiting its natural resourses is its sovereign right backed by the United Nations and the European Union and that Turkish Cypriots can reap the benefits once a political accord reunifying the island is reached.