Cyprus Gas in the Spotlight

Cyprus' natural gas reserves, both the newly found Aphrodite Block 12 and the prospective sites to be explored by the likes of ENI, Kogas and Total are in the spotlight due to the change of course by the Israelis, who are optioning multiple export corridors for their own nearby reserves not necessarily in tune with their Cypriot counterparts.

The President of the Republic of Cyprus, Nikos Anastasiades, recently stated that Turkey could become a client of the region's natural gas if it wishes, but not a 'strategic partner', meaning that Cyprus can export gas to Turkey but it will not accept partnership of its reserves.

Concurrently, the Minister of Foreign Affairs of Cyprus, Ioannis Kasoulides, noted that Cyprus should strive to form partnerships with both Egypt and Israel to make use of the peripheral offshore gas reserves, at a time when leading global media describe Israel's position as one that is moving away from Cyprus and thinking of inviting Turkey to establish a bilateral pipeline route. In fact the key question with regards the future export of both Israeli and Cypriot gas resources is the role (or not) of Turkey.

The Israeli Foreign Minister Lieberman at a recent visit in Athens, Greece, retracted from his former hardline position against Turkey and told Greece that indeed a pipeline to Turkey is being seriously mulled over, whilst an LNG terminal in Cyprus is decreasing rapidly as a possibility for gas exports to the EU.

Moreover Egypt is also emerging as a potential export route by making use of the established terminal infrastructure in which EU companies such as ENI are willing to participate, further decreasing Nicosia’s negotiation strength which for the time being is not satisfied with the quantities found in Block 12 and has to wait for years before it can announce its own solid strategy on the matter.

Furthermore, Cyprus is presently entangled in sensitive rounds of negotiations with Turkish Cypriots and with Ankara regarding a potential re-unification of the island. Under this political context no business decisions can be taken by external partners who would like to know and be certain of the political risk involved and for the future of all key stakeholders, state and non-state ones.

The Aphrodite field was discovered in 2011 and the Cypriot government had high hopes that substantial amounts of natural gas in the Aphrodite field of Cyprus’ Exclusive Economic Zone would allow it to build an LNG terminal at its Vasiliko coastal site. In October 2013, Noble Energy made an announcement following its appraisal drilling downsizing the field to a range of 3.6 tcf to 6 tcf with a gross mean of 5 tcf, less than earlier tests had suggested, whilst local and international pundits expect even lower assessments, up to 40% less. The revised estimates and Israel’s uncertainty around its export options led the Cypriot LNG plan to be put on hold until further exploration activities in Cyprus’ waters commence.

Companies such as Total and ENI/Kogas plan to start exploration activities off Cyprus’ shores in the next two years. The ENI/KOGAS consortium that was awarded a license for hydrocarbons exploration in blocks 2, 3 and 9 of the Cyprus EEZ, is planning to drill in the third quarter of 2014, while France’s Total holding the license for blocks 10 and 11 will drill in 2015.

The Israelis from their part have discovered around 500 bcm of proven reserves, but they have been unable to decide if and where to export the amounts, whilst political and corporate brinkmanship amongst Tel Aviv key players is raging. As the situation evolves there are several scenarios that could be examined closer.

One is to establish an offshore LNG terminal or a floating one in the Leviathan reserve which is the largest one, for exports in various international market, with priority given to Asia - willing to pay $16 to $20 per 1,000 bcm of LNG equivalent, significantly more than EU markets.

Another option which is also greatly pursued by American political interests is to ship the gas directly to Turkey through a $5 billion sub water pipeline, to be linked with the prospective TANAP-TAP system of pipelines, also known as the Southern Corridor. In that case Azerbaijan who is for the moment the sole supplier, would not be content due to reasons of pricing policy and competition, whilst it is certain that this would reflect negatively to Cyprus and Greece that aim for their own pipeline to link with TAP directly into Greek soil.

Presently Israel consumes around 8 bcm per annum and strives to further gasify its energy infrastructure. Moreover, deals have already been announced with the Palestinian Authority and with Jordan that have rising gas needs and also political reasons that bind these three countries together. Thus the largest quantities of the proven reserves seem to be moving not in Turkey or the international markets, but rather inward into Israel and its immediate neighbors. The excess amounts, if any, are likely to be directed to the Asian markets, through the Red Sea Eilat port where an export LNG terminal can be established, a vision shared according to all reliable information on the subject, by Netanyahu’s aides and consultants.

Nevertheless, due to intense political frictions between Cyprus, Israel and Greece and the overall upturn in the EU gas market due to the Ukrainian crisis, it looks as though considerable time will pass before the situation settles down, and the current climate of daily frantic negotiations by interested parties will continue.

Although Israel would prefer to cement the option mentioned previously, it will play along the rest of the neighbouring states for reasons of public diplomacy in order to gain more time to explore and possibly discover yet more reserves. In such terms it should be assessed that 2014 will pass along without any definite decisions, whilst EU gas markets will have to make their own strategic decisions without taking into account the viability of exports from the Eastern Mediterranean, due to all the complicated factors being described above.