31 Jan 2016 Can EastMed gas finally fix the Cyprus problem?

A few years ago, I was frequently asked if I thought natural gas discoveries in the Eastern Mediterranean could be a catalyst for a solution of the Cyprus problem. At the time I was sceptical.

Noble Energy had discovered the large Israeli Tamar field in January 2009, the even larger Leviathan field in October 2010 and in December 2011 declared its discovery of the smaller Aphrodite field in Cyprus’ offshore Block 12.

It was clear from Turkey’s reaction to drilling in the Cyprus Exclusive Economic Zone (EEZ) at the time that gas discoveries were more of a hindrance than a help.

As Noble started drilling in September 2011, Turkey issued a Navtex and sent a seismic vessel into the EEZ accompanied by military vessels. Although negotiations to solve the Cyprus problem under the Christofias government continued at that time and it was reconfirmed that hydrocarbons would be a federal competence in the event of a settlement, any discussion of hydrocarbons at the table was taboo.

Turkey reacted the same in late 2014 when ENI was drilling, issuing a Navtex, and again sending a seismic vessel accompanied by military ships. In response, President Nicos Anastasiades suspended the negotiations.


Lowering expecations

That was the low point for the idea of gas as a catalyst for peace. However, a number of developments have taken place since that have led me to alter my opinion.

The primary global development was the collapse in oil and gas prices, which changed companies’ calculations about risks and priorities.

While it took just four years from initial discovery to production for the Tamar field, the same has not happened for Aphrodite. This is partly because Noble received investment approval for Tamar in 2011, when oil prices were hovering at around $100/barrel. It is also because the field was bigger, at 10 trillion cubic feet (tcf) compared with an estimated 4.7 tcf for Aphrodite.

The second development was disappointing gas finds for Cyprus. ENI’s exploratory drilling in late 2014 and early 2015 found no discoverable reserves. Total did not even drill and initially gave up on the basis of seismic data.

Around the same time, the government also finally admitted that there was not enough gas in Aphrodite to make a viable land-based liquefied natural gas (LNG) plant. An antitrust decision in Israel that affected Leviathan also postponed hopes of reducing unit costs by joining forces with Israeli production.

Low prices and the absence of any bigger finds tempered the more outlandish claims about how much Cyprus could earn from Aphrodite gas. Until then, both sides (Turkey and the Turkish Cypriots on one side and Greek Cypriots on the other) thought that the other needed the gas more than they did, and that the other side, therefore, had the weaker hand.

The lowering of expectations about gas prospects came shortly before the election of Mustafa Akinci as Turkish Cypriot leader. The combination of no drilling distractions and a new face at the table brought new vigour to the settlement talks.


The Turkey-Israel-Egypt angle

Four more developments, in my opinion, turned the Cyprob gas curse into a potential blessing.

The first was the discovery of the large Zohr field offshore Egypt in late August 2015. The potential competition from this gas find probably prompted Israel’s Prime Minister Benjamin Netanyahu to use his prerogative to override a year-old antitrust decision that had prevented the development of Leviathan.

Hot on the heels of that decision, Turkey and Israel made it public that they were in discussions about re-establishing diplomatic relations, and Delek, partner in both Aphrodite and Leviathan, said it was keen to export gas to Turkey as soon as possible.

Probably not unrelated was the major spat between Turkey and Russia after the downing of the Russian plane on the Turkish border in November. Turkey imports more than 50% of its gas from Russia and is now keen to find alternatives.

Last but not least, Turkey and Egypt started a dialogue about a deal in which Turkey would recognise the Al-Sisi government in Egypt in exchange for Egypt lifting the death penalty on the ousted former president, Mohamed Morsi, whom Turkey’s president, Recep Tayyip Erdogan, had long supported.

If Israel wants to send gas to Turkey by pipeline it must pass it through the Cyprus EEZ. While Israel has a right to lay the pipeline under the UN Convention on the Law of the Sea (UNCLOS), “the delineation of the course … is subject to the consent of the coastal State”.

Of course, Cyprus could hold out and refuse Israel permission on the course of the pipeline. However, Israel might respond by sending Leviathan gas to Egyptian LNG plants instead—and from there potentially to Turkey’s two regasification plants in Izmir and Marmara.

Meanwhile, without the economies of scale that come from combining forces with Israel, Cyprus would struggle to finance exports to Egypt from the much-smaller Aphrodite field.


The EU’s EastMed anchor

In sum, a region in which Egypt, Turkey and Israel are talking gas deals is one that Cyprus does not want to miss out on. But it requires a solution of the Cyprus problem to grasp the new opportunities.

A Cyprus solution would also bring significant geopolitical benefits.

The discovery of gas offshore Cyprus had already encouraged the Republic of Cyprus government to bolster relations with both Israel and Egypt.

That investment in relations should pay off handsomely with a settlement of the Cyprus problem.

As the only country in the EastMed that can talk to all of its neighbours as well as Russia, Cyprus would become the EU’s trusted anchor in the region, making use of all those formidable diplomatic and negotiation skills honed during decades of negotiations.

Being a diplomatic hub would also bring economic benefits. The opportunities for conference tourism alone are enormous. And who knows, it might even revive the idea of a regional energy hub centred on a land-based LNG plant in Cyprus.