Energy

Cyprus And Turkey: East Med Gas Aspirations

Analysis 28 September 2018
Cyprus And Turkey: East Med Gas Aspirations

The discovery of the Egyptian Zohr giant gas field accelerated Cyprus’ declaration of the 3rd International Licensing Round. The geological structures of the Zohr field are similar to the auctioned Cypriot offshore blocks, suggesting the existence of significant gas reserves and exploitable oil deposits. The Zohr field’s expedited development positively affects Cyprus’ initial plans to export gas destined for the domestic market of Egypt, as well as plans for liquefaction at the Idku and Damietta facilities to re-export gas to Europe.

A general vote of confidence in the Cyprus EEZ is indicated by the attraction of international majors and the subsequent distributions of various exploration blocks. This includes the awarding of exploration block 6 to the ENI Cyprus Ltd and Total E&P consortium; of exploration block 8 to ENI Cyprus; and, of block 10 to the consortium of ExxonMobil Exploration & Production Cyprus Ltd and Qatar Petroleum International. ENI’s 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.

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). Various arbitration cases are considered as model for the settlement of competing EEZ claims between Cyprus and Turkey with most prominent “The Philippines arbitration case vs China over South China Sea” or alternatively the Malta-Libya arbitration case on the basis that Turkey is not signatory to 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. The trading hub is envisioned in proximity to the East Mediterranean, the Middle East, and Europe with Turkey at the epicenter.

It is in this context that Turkey promotes policies for turning natural gas into an economic benefit in the form of transit fees and trading facilities and looks into filling the East Mediterranean’s energy infrastructure gap. In fact, Turkey has heavily invested in its energy infrastructure over the last three years to increase daily capacity through two new Floating Storage Regasification Units (FSRU) that are online in south and northwest Turkey; the expansion of the Marmara Ereğlisi LNG Terminal; and, investment in two gas storage facilities in the central Anatolian province of Aksaray and in Istanbul province.

Concurrently, Ankara 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. Electronic trading of natural gas in Turkey’s energy stock market started in April 2018 with expectations centering on the creation of a benchmark price for the market that will contribute to price security empowering Turkey in negotiations of long-term contracts with its suppliers.

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.

Pessimism seems to prevail over monetization of East Mediterranean gas due to the lack of sufficient gas quantities available for export and pertaining political obstacles like the Cyprus conflict and cold Israel-Turkey relations. Political tensions can impact negatively regional energy cooperation. For example, it is widely acknowledged that the pipeline project connecting the Israeli Leviathan gas field to the Turkish coast is currently not feasible, as the pipeline’s route would have to cross Cyprus EEZ. Thus, Nicosia would effectively veto the pipeline under its rights as a signatory of the United Nations Convention of the Law of the Sea (UNCLOS).Additionally, in view of Turkey’s worsening relations with European countries and radicalization of its regional policies, Ankara has become increasingly isolated and therefore it does not currently present an attractive option for transporting gas from Israel, Egypt and Lebanon to third markets like Europe.

Additionally, 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 unimpeded arrival of ExxonMobil’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 Cyprus has the right to develop energy resources within its EEZ.

It seems that 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.

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.

This article was first published on www.eurasiareview.com.

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