Comment: Keep Gas off the Cypriot Peace Talks Agenda

The leaders of the Greek and Turkish communities in Cyprus, together with a host of international officials, are meeting in Geneva now to try to end a partition that has lasted for 43 years. But it might be best if they agreed to omit any substantive discussion at this stage of a particularly difficult issue – gas.

The reason is that the discovery of gas in the eastern Mediterranean in general, and off the south coast of Cyprus in particular, is fraught with both practical and emotional problems that makes it much easier to conceive of successful development in the wake of a Cyprus settlement than as a significant constituent part of the negotiation process. 

The most obvious problem is that the only Cypriot discovery to date, Aphrodite, lies in waters off the south coast of Cyprus that are under the full control – both de jure and de facto, of the internationally recognised – and Greek Cypriot-run –government of Cyprus. This means that, even though the government has said that gas development should serve the interests of the whole island, in practice Aphrodite development can be carried out in co-ordination with only the Greek Cypriot authorities.

To the Turkish Cypriots, who regard the government of their self-proclaimed – and generally unrecognized – Turkish Republic of Northern Cyprus as having an exact equivalence to the government of Cyprus, this poses a massive problem. Put simply, how can they ensure that they, too, have a stake in gas development?

Yet there are good reasons for arguing that this is really a long-term problem. The immediate issue is that Aphrodite is a relatively small field, estimated by its developers to contain around 4.54 trillion ft³ (127.4bn m³) of recoverable gas. 

That makes it an adjunct to other major fields in the region, such as Egypt’s Zohr with its 32 trillion ft³ of proven reserves or Israel’s Leviathan, with 18 trillion ft³.

Moreover, most of the principal shareholders in Aphrodite – the US Noble Energy and Israel’s Delek and Israel’s Avner group – are also engaged in developing not only Leviathan but another big Israeli field, Tamar, with 10 trillion ft³ of in proven reserves. So, for the time being at least, their focus will naturally be on developing these finds in Israel’s Exclusive Economic Zone (EEZ).

And even though the Anglo-Dutch Shell group has a major stake in Aphrodite – the result of the purchase by the former BG of half of Noble’s original 70% stake in the field – the development of Aphrodite will naturally remain a secondary consideration for its owners, especially in an era of relatively low gas prices.

There is also a further difficulty that will impede Aphrodite’s development. Almost certainly the southeastern section of the little field extends over the maritime boundary separating the Cypriot EEZ from that of Israel. This means that Aphrodite’s development will either require a unitisation agreement or some other arrangement will have to be reached so that while production is essentially carried out on the Cypriot side of the line, Israel is also properly compensated for its share of the field.

Of course, matters could change if there were to be further discoveries in Cyprus’s territorial waters or exclusive economic zone.

Keep a cool head

This is where emotion plays a major role. Aphrodite was discovered in 2011, in an era of relatively high gas prices – and with a reserve base that was initially thought to be somewhat higher than a later examination has revealed it to be. This prompted the Cypriot government to start preparing plans to develop a major plant, likely to cost at least $8bn, to produce liquefied natural gas (LNG) at a terminal at Vassilikos on the south coast.

It also prompted some exaggerated claims. The commerce minister at the time, Praxoulla Antoniadou, was quoted as saying: “If you want an indication of the value of the gas, if you consider that 6,000 cubic feet is equal to one barrel of oil, then approximately 7 trillion ft³ are equivalent to 1bn barrels, and to give an indicative value of these deposits based on the barrel analogy, the deposits in one of the 13 blocks are worth around 100bn.”

The minister was clearly referring to the field’s putative value in Euros – the Cypriot currency – so at the time she appeared to be saying that Aphrodite was worth as much as $130bn.

No one would say that today.

Nor did the hype end when prices started to fall in 2014 and throughout 2015.On March 2 last year, energy minister Giorgos Lakkotrypis noted that data compiled by the government's foreign consultants had produced evidence that the geological origins of Egypt’s Zohr field were to be found in the Eratosthenes Seamount, a massive underwater feature located within the Cypriot EEZ.

The next day’s front page banner headline in the Cyprus Mail read: “Egypt’s Gas comes from Cyprus’ EEZ”. But perhaps the most important element came in the sub-heading, which read: “Seafloor formation off Cyprus is source of Zohr gas play, prompts hopes for finds in Block 11.”

It is, indeed, Block 11 that is the immediate focus, with France’s Total expected to start drilling there in May. Yet it should also be noted that it was the underlying geological analysis that prompted the government to hold a third licensing round in 2016, attracting interest from such majors as ExxonMobil, Qatar Petroleum, Statoil and Eni, as well as the UK’s Cairn Energy and the Israeli partners in Aphrodite.  On 14 November, Lakkotrypis said that a final decision awarding concessions for bidders in the licensing round should be made in early 2017.

Interest in gas is longer term

What this interest demonstrates is that the search for gas – and oil – off the south coast of Cyprus will continue regardless of whether there is a successful conclusion to the talks in Geneva.

Under any likely scenario – whether based on reunification, formal division of the island, or an interim agreement to continue on an ad hoc basis without a settlement – the search for new hydrocarbon resources off the island’s southern coast will continue and, through probably not for some time, Aphrodite will be developed.

This leaves the Greek Cypriots full of hope – dreams might be a better word –  that one day they will reap the rewards of an offshore hydrocarbons bonanza. Yet for the Turkish community, this is the stuff of fears and even nightmares, with the division between a relatively rich south and a relatively poor north becoming even more marked.

Precisely because real field development remains some way off, it may be best for the principal parties involved to play down the gas issue for the time being. Right now, their leaders of the Greek and Turkish communities have far more pressing issues to tackle, including constitutional structures, territorial adjustments, compensation for seized properties and security arrangements, notably the role of Greece, Turkey and the UK as external guarantors of the 1960 agreement that secured the island’s independence, and the continued presence of some 30,000 Turkish troops in northern Cyprus.

These are the major issues they need to focus on. Gas can be left for another day.

John Roberts, Chief Analyst