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Cyprus gas: Stuck between a rock and a hard place?

5 May 2013

The discovery of natural gas off South Cyprus shores last year heralded the potential for an economic upturn for the country. Drilling licences were offered for tender, with various consortia succeeding in their bids. Two major issues then arose; how to deliver the gas to its clients and in the minds of many Turkish Cypriots and mainland Turks was the infringement of their sovereign rights and the absolute lack of consultation on leasing drilling rights to energy companies.

This has not stopped the economically shattered South proceeding as rapidly as it can to launch its nascent gas industry, offering potential gas revenues as collateral when negotiating with the Troika on its bailout terms. Part of the South’s efforts to raise money was to offer Russian energy giant Gazprom drilling licences, so far, they have declined. However, those two questions remain.

In addressing the first question, how to deliver gas to its clients, Turkey suggested that the gas be piped to its mainland – the cheapest option. So far, the Greek Cypriots have appeared to dismiss this proposition. However, Turkish analysts, looking at the financial and political problems of the Greek Cypriot plan to extract natural gas offshore, are thinking that attitudes towards Turkey may be changing. They also say that political circles within the Greek Cypriot administration are currently questioning what they have gained so far, with their hard-line political stance that has portrayed Turkish Cypriots and Turkey as enemies for decades. So, there is potential for South Cyprus to draw nearer Turkey.

On the other hand, the Chief Executive of Cyprus National Hydrocarbons, Charles Ellinas stated thatNorth Cyprus News - Cyprus gas fields a facility to liquify natural gas (LNG) would be built at Vassilikos. The cost would be 10 billion US dollars (7.6 billion euro). South Cyprus would have to pass the hat round to fund that project.

Noble Energy, who has drilling licences from the South, intends to open a second exploratory well in mid to late June. The company expressed a preference to liquify the gas on Cyprus and see the product shipped to European customers. Israel too, although it has had some discussions with Turkey regarding piping the gas to the Turkish mainland, may also prefer liquifying the gas (LNG) and shipping it onwards. The main fear is that a gas pipe could be subject to attack, whereas an LNG terminal would be much easier to protect and it also allows flexibility to serve clients in a variety of locations.

Thus far, the energy companies have found quantities of gas; while large, they only just come over the minimum amount to justify building an LNG terminal. So at current estimates, a new terminal would only be marginally profitable. Noble, for its part, has a relatively modest annual capital budget of about 4 billion US dollars, and has commitments elsewhere, including Israel.

Russia has said that it would not involve itself in gas exploration without the approval of Turkey, which contests the sovereignty of South Cyprus to drill for gas. Russia depends heavily on Turkey to transport gas across the mainland to other destinations.

Nevertheless, last month, Greek Cypriot President Anastasiades declared that the building of an LNG terminal at Vassilikos would go ahead. He did not clarify how it would be paid for.

So this takes us back to Turkey. Could South Cyprus swallow its pride and agree to pipe gas to southern Turkey? Many people think this most unlikely.

In the Greek Cypriot president’s Easter speech to the nation, he still referred to the TRNC as the occupied territory. (Perhaps this was the usual rhetoric many Greek Cypriots would expect to hear; there will be bargaining during the Cyprus talks). So unless there is a drastic sea change, perhaps brought about by a settlement of the Cyprus problem, it appears that if funding is in place, an LNG terminal will be built in the South.

However, that leaves the vexed question of sovereignty. The Turkish Cypriots say that they should have a share in profits and are resentful that the South made deals with energy companies with no reference to the TRNC.

Turkey claims that its continental shelf would be breached by the gas explorations. It has not signed up to the UN Convention on the Law of the Sea, on the grounds that its general provisions, including definitions of territorial waters, were vague and not compatible with Turkey’s interests.North Cyprus News - Turkey's claim to territorial waters

Recently, in an attempt to defuse tensions in the eastern Mediterranean, John Koenig, the US ambassador to Cyprus requested that the South does not allow exploration rights to block 5 and 6 off its southern shores, as territorial rights were being disputed. Turkey had also expressed an interest in exploring blocks 4, 5, 6, and 7.

As to the future of hydrocarbon resources offshore Cyprus, Hugh Pope, Turkey/Cyprus Project Director at the International Crisis Group says this:

“But the idea of hydrocarbon salvation in the eastern Mediterranean is wishful thinking. The potential riches remain buried under decades of sterile politics: a lose-lose-lose failure to compromise between Greece, Cyprus and Turkey that will likely keep gas in the ground for much longer than is ever admitted…”

He adds that the reason is that neither Turkey, Greece nor South Cyprus can, with any certainty, claim territorial waters. The U.N. Law of the Sea states that exclusive economic zones can extend as far as 200 nautical miles. If there is an overlap between two countries, a median line between the two territories would have to be agreed.

Therefore, without major compromises (and solving the Cyprus problem would be a route to these), exploiting natural gas may work out to be far less profitable than originally estimated. Without a workable resolution, tensions too, will certainly heighten in the eastern Mediterranean.

 

 

 

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