Cyprus and Turkey: Walking a Line Between Boom and Bust on East Mediterranean Natural Gas

By Antonia Dimou

Originally Published at In Depth Newsletter, Vol. 15, Issue 2, Cyprus Center for European and International Affairs, University fo Nicosia, March 28, 2018  

http://cceia.unic.ac.cy/wp-content/uploads/IN_DEPTH_2018_15_2.pdf

In search of commercially viable levels of hydrocarbon resources, Cyprus third international licensing round for three blocks within its Exclusive Economic Zone (EEZ) resulted in the awarding of licenses to Italian ENI and French Total for Block 6; ENI for block 8; and, American Exxon Mobil and Qatar Petroleum for block 10. The July 2017 drilling in block 11 commissioned to Total and ENI in the second licensing round has been critical as first results show that the geology of Egypt’s Zohr gas field extends into Cyprus’s EEZ. This assessment raises expectations for the findings of the two drillings scheduled for the second half of 2018 in block 10 that lies in close proximity to the super-giant Zohr gas field.

Additionally, ENI’s recent gas discovery in Block 6 offshore Cyprus with Calypso 1 NFW that could contain more than 230 bcm of gas paves the way for focused exploration leading to successful drillings given the geological structure’s similarity to that of Zohr’s field. It is estimated that oil majors’ plans center on connecting gas discoveries in Cyprus with Egypt’s by pipeline and re-export reserves as liquefied natural gas (LNG) by utilizing the Egyptian Idku and Damietta LNG facilities.

Political tensions however as consequence of the collapse of the Cyprus Peace talks and competing EEZ claims between Cyprus and Turkey can impact negatively regional energy cooperation. The prevention of ENI’s Saipem 12000 drill ship from reaching block 3 southeast of Cyprus by military means highlights not only the exercise of unilateral steps by Turkey as a third country in the Cypriot setting but also the existence of accrued problems related to maritime boundaries and to the United Nations Convention on the Law of the Sea (UNCLOS). A number of Cypriot energy experts maintain that “the Philippines arbitration case vs China over South China Sea” can serve as model for the settlement of competing EEZ claims between Cyprus and Turkey, while many from the Turkish side consider the Malta-Libya arbitration case as more appropriate given that Turkey is not signatory to the UNCLOS.

There is widespread belief that the resolution of the Cyprus conflict is prerequisite for constructing a pipeline that would connect Israeli Leviathan field to the Turkish coast given that the pipeline will have to cross through the island’s EEZ. Thus, Nicosia could effectively exercise its veto power to the pipeline under its rights as a signatory of the UNCLOS.

Turkey seems to solidly promote its potential as a trading hub, on the basis that the country’s geographic location and growing demand for natural gas- reflected by its annual imports of approximately 48 bcm- qualify it as a trading hub rather than a transit country. It is in this context that Turkey proceeds with market liberalization and regulatory reform in cooperation with private oil and gas companies; intends to create a reference price to be able to influence the pricing of gas in the region; and, plans to increase oil and gas exploration and production activities so that the country turns into a viable energy hub for Europe.

It is noteworthy that the normalization of Turkish relations with Russia falls within Ankara’s broader strategy to become a competitive regional market player and a strong transmission system operator. The reason is that Ankara’s emergence as a prominent regional energy player can be achieved through the development of adequate physical entry and exit points for capacity allocation, thus securing diversification of supplies and energy liquidity. Turkey, which imports 98% of its gas, must diversify energy sources but its energy dependence is connected to Russia. It is no secret that long-term energy contracts and a “take-or-pay” clause tie Russia and Turkey together for at least 8 more years. According to the take-or-pay provision, the contract places the danger of worsening energy market conditions on the buyer, by requiring the buyer to always be accountable for the payment of a minimum purchase commitment, thus leaving the seller to deal only with the market price risks.

When it comes to the East Mediterranean, the declared decision by Turkey to carry out seismic surveys off Cyprus’s southwestern Paphos along with the its intention to proceed with offshore exploration in the northern part of the island through its state-owned Turkish National Oil Company highlight the shift of its focus on exploration efforts to the Mediterranean region. The latest gas discoveries in the East Mediterranean coincide at a time of tension in Turkish-US relations.  Turkey so far appears cautious in not crossing a threshold beyond which Washington would be forced to respond decisively as evidenced by the recent unimpeded arrival of Exxon Mobil’s Med Surveyor and Ocean Investigator to Limassol port. The operation of Exxon Mobil’s chartered research vessels  in Cyprus’s southwest coast falls within the American position that the Republic of Cyprus has the right to develop energy resources within its EEZ.

No doubt that the existence of sufficient gas quantities available for export is necessary for the monetization of East Mediterranean gas. Upon this reality, Cyprus and neighboring Egypt should consider the joint monetization of their gas resources on the basis that economies of scale could reinforce profitability and produce higher government revenues. Commitment on resolving the Cyprus problem is important and, in the meantime, implementation of concrete confidence building measures such as Track-II diplomacy between Greek and Turkish Cypriots on the future use of the East Mediterranean natural gas resources could invalidate any third country’s meddling in Cyprus. Concurrently, Cyprus should speedly proceed with the establishment of a National Investments Fund where revenues from hydrocarbon exploitation will be deposited for the benefit of Greek Cypriots and Turkish Cypriots, while Turkey needs to refrain from harsh political rhetoric and military provocations to avoid incidents at sea or in the air that carry the risk of regional escalation.

Evidently, the principle of good neighbourly relations should unequivocally commit the East Mediterranean’s littoral countries so that prosperity becomes a shared gain; or otherwise intensified tensions run the risk of trapping the region in a state of persistent stagnation.