Cyprus’ bid to become an eastern Mediterranean energy hub is hindered by soaring tensions over Turkish drilling off its coast while it needs game-changing finds to spark a multi-billion-dollar gas bonanza, analysts told AFP.
Turkey has vowed to escalate its activities in waters designated as a Cyprus maritime zone after the European Union agreed measures to punish Ankara for pursuing “illegal drilling” operations despite repeated warnings to withdraw.
“This is a tit-for-tat game where nobody is ready to back down with Turkey willing to go one step further,” professor of history and political science Hubert Faustmann at the University of Nicosia told AFP.
“Turkey is in the Cyprus EEZ (exclusive economic zone) and they will continue to drill, they may even decide to drill in blocks licensed by the Cypriot government …it’s a game of chicken,” he added.
It was the discovery of huge gas reserves in the eastern Mediterranean region that sparked the dispute between EU member Cyprus and Turkey.
Ankara has sent two ships to carry out drilling off the Cypriot coast despite EU condemnation and strong words from Washington.
The absence of an UN-sponsored peace process since the collapse of a Cyprus conference in 2017 has compounded the situation.
While negotiations to reunify the island remain on ice, Cyprus has moved to start gas and oil exploration by issuing licences to international companies.
Turkey had warned Nicosia and the oil and gas majors not to go ahead with exploratory drilling.
8 new drils in 24 months
In May, Cypriot energy minister George Lakkotrypis said Cyprus will beef up its energy search with eight drills scheduled over 24 months.
Cyprus’ determination to upscale its oil and gas exploration comes at a time Turkey disputes its right to do so.
The first Turkish drillship entered the island’s EEZ also in May as Ankara announced it would start exploration for gas off the Cyprus coast until September.
This prompted Brussels to warn Turkey against such a move and withdraw from the area, these warnings were ignored, and a second ship was dispatched.
In response, EU foreign ministers agreed measures including cutting EUR 145.8 mln in pre-accession financial funds to Turkey allocated for 2020.
“Turkey won’t step down and EU sanctions are mild, the sanctions are not painful, and Turkey knows there is no determination for a confrontation,” said Faustmann.
He argues that Cyprus needs to find more gas to make it commercially viable to extract.
“Unless there’s a big find, it might be a lot of noise over nothing, there isn’t enough extractable gas at the moment.”
Experts also argue that if the escalation continues it will be difficult for energy companies to explore off Cyprus due to the risk.
“Interest in operations is there, however tensions with Turkey are not helping. If tensions subside then there will be a lot of interest because there is support from the markets and the EU too,” said MENA energy expert Cyril Widdershoven.
Standoff could go on for months
Atlantic Council senior associate Charles Ellinas believes the energy standoff could go on for months as Turkey will not stop try and convince the EU that Cyprus is not prepared to negotiate hydrocarbons with Turkish Cypriots.
Cyprus last week rejected as “unacceptable” a Turkish Cypriot proposal on energy revenue sharing to help de-escalate tensions created over Turkish drilling activity.
Nicosia argues that jointly managing the island’s untapped energy resources can only be workable once a decades-elusive peace settlement has been agreed while assuring Turkish Cypriots will get their equal share.
“Turkey will not back off unless the EU and the US apply serious sanctions that hurt its economy. But I do not see that happening…NATO, trade and refugees are important to them,” Ellinas told AFP.
He said the rising tensions will make the waters choppier for energy companies when they resume drilling in blocks licensed by the Cyprus government, especially in areas disputed by Turkey.
“Turkey will maintain aggression until Cyprus agrees to put hydrocarbons on the negotiating table.”
Ellinas estimates Cyprus’ discovered reserves so far is at around 10 trillion cubic feet (tcf).
“There is probably as much still to be discovered and possibly more. Given low global gas prices, selling this gas will be a challenge. It is a highly competitive market and margins for Cyprus gas will be low.”
He estimates total gas revenue could be about $160 billion, out of which profits could be $30 billion over 20 years.
“Cyprus’ share could be $17 bln. But first, sales need to be secured, and there lies the challenge, in a market inexorably moving towards renewables and clean energy. The longer it takes the more difficult it becomes.”
Cyprus will earn $9.3 bln over 18 years from exploiting its first Aphrodite gas field after Nicosia renegotiated a contract with industry giant Shell, US-based Noble and Israel’s Delek.
Lakkotrypis told reporters in June that a re-working of the production contract ensures the Cyprus government receives an average yearly income of $520 mln over the lifespan of the gas field.
He said the figures were based on the average price of oil being around $70 a barrel with first gas to be extracted by 2024-25.
The waters off Cyprus have attracted international giants such as ExxonMobil, France’s Total and Italy’s Eni. Sizeable natural gas deposits have been discovered in three areas but yet to be extracted.
Turkey says its actions abide by international law and that it's drilling inside its continental shelf, but it does not recognise Cyprus as a sovereign or EU member state.
US energy giant ExxonMobil discovered the largest natural gas reserve off the coast of Cyprus in February.
The "world-class discovery" is one of the largest finds worldwide in recent years with an estimated five to eight trillion cubic feet (141.5 to 226.5 cubic metres) of natural gas.
Ankara argues that such exploration deprives the Turkish Cypriot minority of benefiting from the island's natural wealth.
But its decision to press on with drilling in the EEZ has also sparked criticism from Egypt and Israel which seek energy cooperation with Cyprus.
