The rising Natural Gas Industry of Cyprus. Recent developments and Turkey’s reaction.

by Elpida Theodoridou. Originally published on 2013/12/31

This year has been a particularly tough one for Cyprus. The economic crisis has severely hit the banking industry of the island, forcing the country to try resurrecting itself from its ashes. Part of this rebuilding process has been the ambition of reinforcing the energy sector. The issue of energy has always been a crucial one worldwide, however during the past few years the natural gas market has drawn most of the attention. With the energy landscape changing and the transition towards natural gas becoming more imperative, Cyprus is seeking for an opportunity that could help the country’s economy escape from the recession. But is it possible, and even more, is it advisable for Cyprus to opt for such a development? The Turkish side of the island and the bigger neighbour Turkey, have repeatedly stated that they will not tolerate any unilateral exploitation of the gas reserves.

The story so far

In 2008 the US energy company Noble Energy received the green light from the Cypriot Government to proceed with the exploration of Block 12, an offshore gas field which is located in the south coast of the island. This was preceded by the demarcation of the country’s maritime border with Egypt in 2003, based on the International Maritime Law. After that, two more countries followed Egypt’s steps, Lebanon in 2007 and Israel in 2010. However, as expected, Turkey refused to recognize any of these agreements and warned Cyprus not to proceed with any drilling operations in Block 12. Yet, despite Turkey’s reaction, Cyprus chose to defy these warnings and eventually on September 19, 2011 began the drilling operations in Block 12.

In 2013 new developments added to the gas industry agenda of Cyprus. In June, the country signed a deal with a US-Israeli partnership which involved among others the Houston-based company Noble Energy. Noble Energy has a 70% working interest in Block 12 while the Israeli partners Delek and Avner are operating with the remaining 30%. The encouraging results regarding the reserves have also attracted the interest of Lebanon. Thus, in November 2013, the two countries announced that they were interested in developing a future collaboration in natural gas production (despite the dispute that Lebanon has with Israel over the maritime border). Finally, during the same month, Cyprus signed an agreement with the French energy company Total for developing a liquefying natural gas plant. All of these continuous developments and agreements are a proof that Cyprus has serious intentions regarding the exploitation of its potential reserves. The country has put a lot of effort in making natural gas exploration a success story. Additionally, these singed deals among the neighbour countries reveal the ambitious plans that Cyprus has not only for supplying natural gas for domestic consumption but even for exporting it.

Turkey’s position

Perhaps unsurprisingly, Turkey has already expressed its reactions and objections on these newly formed plans of Cyprus. The country holds the opinion that the resources acquired from any extraction should be divided and distributed equally between the two parts of Cyprus in order to avoid any violations of the rights of the Turkish residents living on the island. What is more, Turkey stated that it would not hesitate to actually take unilateral actions if Cyprus does not abide by their warnings, even given that such warnings would apply for the foreign energy companies involved in investments in Cyprus. Thus, in March 2013 Turkey indeed suspended the energy projects that were planned with the Italian company ENI as it has been involved in drilling operations off the coast of Greek Cyprus. Moreover, Turkey has been challenging Cyprus’ territorial rights by stating that it is possible to send a vessel for exploration in the economic zone of Cyprus. The arrival of the GSP Jupiter drilling platform and the Barbaros Hayrettin Pasa vessel in the north of Cyprus signify this territorial contestation between the two countries.

Future developments

As it has already been mentioned, mainly due to the European financial crisis, Cyprus is in great need to find an economic solution that can help the country rebuild its economy. The plans for drilling and extracting the natural gas reserves combined with the signed agreements for cooperation among the different countries and companies show that so far the positive steps taken can lead to even greater benefits. Economi profits can help the country regain its stability in the market while the geostrategic position and the overall representation in various international and regional organizations can be improved. The countries that export energy, always have a leverage against these countries that depend on them.

Despite the fact that remarkable progress has been made so far, it is necessary to recognize that the objections rising from the big neighbour, Turkey, have the potential to hinder significantly the pace of development. The interstate disputes between the both countries and the constant challenges between the two sides can have a negative impact on the attraction of foreign investments. If the geopolitical environment destabilizes further it is quite possible that the investors will look for a safer place to invest in. Consequently, in order for Cyprus to continue to develop their energy strategy it is crucial to foster a safety plan that will help avoid any escalation of the conflict with Turkey. At the same time, Turkey’s hostility could jeopardize the country’s ties with their Western allies, and could be problematic for the cooperative environment that Turkey has developed within Europe in so many sectors. Thus, pursuing a stable and sustainable solution in the area should be considered as a desired option. Such an endeavour can be accomplished either by contracting bilateral agreements of mutual understanding with Turkey (something that seems highly unlikely) or by reinforcing the country’s ties with its allies. The second option seems to be the one that Cyprus has chosen to implement so far as its policy. Yet, as the future is always unpredictable, it is advisable for the country to put effort into smoothing out the situation with its closest neighbour.