This summer the EU island-state of Cyprus is “holding its breath” for a second time in less than six months. This time the anxiety is not related to its ability to avoid bankruptcy and pay salaries or pensions. This time the anticipation will not be provoked by fear generated by the unprecedented loss of hard-earned deposits that were used to bail-in Cyprus and partially guarantee the long-term viability of its sovereign debt. This time Cypriots are holding their breath in anticipation of hope as the company Noble & Delek will conduct the appraisal drilling on the “Aphrodite” gas field.
The drilling will last for three months. Unless a second appraisal drilling is required, by the end of this summer or at the latest around Christmas-time, the Republic of Cyprus and the Noble-Delek consortium will know the exact quantity, quality and commercial exploitability of Aphrodite’s reserves which are estimated to contain 196 bcm (billion cubic meters). What is also necessary though for the successful development of Cypriot hydrocarbons is to drill through several layers of misperceptions that either grossly over-estimate the current potential of Cypriot hydrocarbons or drastically underestimate the significance of the Aphrodite discovery for Cyprus, the EU, and the evolution of regional geopolitics in the Eastern Mediterranean.
The shifting geopolitical context
The burgeoning of Greek-Israeli cooperation that followed the Mavi Marmara incident between Israel and Turkey, combined with the delimitation of the Cypriot-Israeli Exclusive Economic Zone (EEZ) in December 2010, created the impression that a small diplomatic revolution was at hand. The most extreme proponents of this rapprochement in Nicosia and Athens went so far to suggest that the traditionally good relations of Greece and Cyprus with Arab states were becoming increasingly obsolete. A strong strategic alliance between Greece, Cyprus, and Israel would be formulated in order to help Cyprus develop its hydrocarbon resources in the face of Turkish opposition while offering Israeli/Cypriot gas exports a secure transit to central and southeast Europe primarily via Greece.
Although Greece and Israel helped Cyprus overcome Turkey’s reactions during Noble’s exploratory drilling that led to the discovery of the Aphrodite field, a strategic energy alliance has remained heretofore unconsummated. Diplomatic exchanges increased, joint military exercises multiplied, and the flow of Israeli tourists to Greece and Cyprus grew almost exponentially, but the energy part of this alliance has remained theoretical with the notable exception of Delek’s participation with a 30% share in the Noble-led consortium which is currently exploring the Aphrodite field.
Until recently, Israel’s hesitancy in deciding on a long-term gas export strategy combined with the fall of the Papandreou government in Athens and Turkey’s inability to dissuade prominent international oil companies (IOCs) such as Total and ENI from investing in the further exploration of the Cypriot EEZ contributed to the partial recalibration of geostrategic priorities on all sides of this emerging triangular relationship. What Cyprus hopes is that this recalibration could make the country less dependent on the utilization of Israeli gas for the materialization of its own export plans in ways that neither exclude nor antagonize Israeli interests.
This development might also add a greater level of diplomatic flexibility to the triangular relationship. Despite US and UK objections, Greece and Cyprus decided to support the Palestinian Authority in its quest to become a full member state of UNESCO in October 2011 and voted, along with France and Italy, in favor of the PLA’s adhesion to the UN as a non-member observer state in November 2012. Yet a few weeks before the UN General Assembly vote Greek and Israeli Air Forces conducted a series of sensitive common exercises in the maritime zone that would connect the eastern borders of the future Greek EEZ with the westernmost extension of the Cypriot EEZ. Moreover, throughout 2011 and 2012 both Cyprus and Greece promoted at the EU level the construction of electricity and gas links interconnecting the two Eurozone states that were eventually recognized in July 2013 by the European Commission as Common European Interest Projects (CEIP) eligible for Community Financial Assistance over the forthcoming EU budgetary period of 2014-2020. Although the level of financing is limited the CEIP “seal of approval” carries considerable diplomatic significance that could facilitate the complementary financing of these projects by the European Investment Bank (EIB) and other International Financial Institutions should these projects prove to be commercially viable.
This increased flexibility has also made it possible for Greece and Cyprus to follow a more pragmatic approach with regards to developing their relationship with Israel that is increasingly governed by a non-zero sum game mentality vis-à-vis Turkey. On the one hand, this does not mean that the three states will not coordinate their reactions in case Turkey attempts to militarily coerce Cyprus into abandoning its exploration program, especially when Israeli companies and interests are involved, as is in the case of the Aphrodite field and all other prospective discoveries that neighbor or cross into Israel’s EEZ. On the other hand, the Greece-Cyprus-Israel triangle is not a geopolitical “panacea” for Nicosia or Athens. It is not even an alliance that targets a specific state, although it could become one if all three states feel sufficiently threatened by what they perceive as Turkey’s aggressive posturing. The most accurate perception of this trilateral developing relationship is one that is flexible enough to allow all three states a certain margin of maneuvering in dealing with the principal factor that brought them together i.e. the rupturing of the Turkish-Israeli alliance and what they perceive as Turkey’s regional hegemonic aspirations. The extent of this margin is not easily discernible and will primarily depend (a) on the dynamic of the Turkish-Israeli rapprochement, which is merely in the initial stages of its prospective re-normalization, and (b) the feasibility of a viable and equitable resolution of the 'Cypriot Question' that would drastically ameliorate Greek-Turkish relations.
Given the fact that the resolution of the Cypriot question is a highly unlikely prospect, especially after the bail-in/bail-out agreement Nicosia was forced to accept and the political destabilization of the Turkish and Turkish-Cypriot administrations, the parameter which could modify the regional geopolitical dynamics is the prospect of a Turkish-Israeli rapprochement and in particular the possibility of Israeli gas exports to Turkey. Although Israel has not yet decided the details of its export strategy the Israeli cabinet decided on 24 June 2013 to export 40% of its ultimate recoverable resources that could reach, according to the Zemach Interministerial Committee, up to 950 bcm.
Israeli authorities have not yet clarified whether they would send part of Leviathan’s gas to Cyprus’ planned LNG liquefaction terminal in Vassilikos or whether they will construct an LNG terminal in Israel and /or allow the export of smaller quantities to Jordan and Turkey. What is important to note though is that the reduction of the total exportable volumes by 120 bcm compared to what was (500 bcm) the Zemach’s Committee final recommendation in September 2012, severely limits Israel’s export options to a combination of LNG-focused alternatives and a smaller capacity pipeline to neighboring Jordan.
In any case an Israeli-Turkish pipeline would have to cross through Cypriot or Lebanese and Syrian waters and denies Israeli producers the flexibility of selling their gas to multiple clients in both Europe and Asia. Furthermore its impact on the ability of Cyprus to implement its alternative export plans is limited given the increased opposition within the Israeli government to any LNG liquefaction facility that would be based outside Israeli sovereignty. In effect, several months before the informal apology of Prime Minister Netanyahu to his Turkish counterpart over the Mavi Marmara incident, the possibility of major Israeli gas exports to Cyprus already looked unlikely. The failure of the exploratory drilling by the Pelagic consortium on the Israeli extension of Aphrodite, which is known as Ishai, has forced Cyprus to re-examine its export strategy without the possibility of any major Israeli contribution other than the Israeli share of Aphrodite.
The hydrocarbon potential: current and prospective estimates
The discovery of the 140-224 bcm Aphrodite gas field has given rise to a series of expectations that are much larger than the actual size of the field itself. This has happened because (a) it constituted Noble’s third consecutive major find in the Eastern Mediterranean in less than three years, (b) it legitimized the views of senior Cypriot bureaucrats and politicians who had been advocating the need for an aggressive exploration program for at least a decade and (c) created the erroneous impression that Aphrodite could somehow provide a quick-fix solution for the Republic’s financial problems. In June 2012 the Christofias government and in March 2013 the Anastasiades government both acknowledged as their principal export choice the construction of an LNG liquefaction plant in the Vassilikos area with an initial capacity of 6.8 bcm.
The difference between the timing of the two government decisions is that Christofias expected that Israeli gas from Leviathan would be liquefied in Vassilikos and thus secure the financial viability of the project. In effect, Noble/Delek proposed since early 2011 the construction of two underwater pipelines linking both Aphrodite and Leviathan with Vassilikos. Such a volume would necessitate the construction of three liquefaction trains increasing the Vassilikos export capacity to 20.4 bcm. In mid-2013 Anastasiades understood that there is a high probability that no Israeli gas would be coming to Vassilikos and that he could no longer afford to wait on the Israelis to make up their mind on how much gas they would export in what way and in what direction. What Anastasiades and his government also appear to understand is that the size of Aphrodite’s reserves, which are estimated on average at 196 bcm, only marginally suffice to make the cost of an LNG terminal affordable given the fact that Cyprus’ domestic long-term demand, projected by DEFA (Cyprus Public Gas Co.) at around 30-40 bcm, is too small to justify an investment the size of Vassilikos. This is exactly why the appraisal drilling on the Aphrodite field is of vital importance for Cyprus’ emergence as a potential gas exporter. The drilling, which began in mid-June 2013, will be completed by September-October 2013. Yet it will only be by the end of 2013 that the commercial viability of the discovery will be fully assessed. Although there is a 50% probability that the initial estimate of a 196 bcm reserve will be confirmed, there remains a 25% chance that the reserve may be closer to 140 bcm and another 25% chance that the field is actually larger than 224 bcm.
If the drilling confirms a 140 bcm reserve basis Cyprus would most likely freeze its efforts in expectation of additional discoveries and not consider a floating liquefied natural gas (FLNG) export option since it needs to consume part of Aphrodite’s gas internally. In the case that the drilling confirms either the 196 bcm reserves estimate or anything larger than that, Nicosia is expected to proceed with the plans to construct a single-train LNG terminal in Vassilikos before the results of the exploration program scheduled by ENI/Kogas and Total for 2014-2016.
Charles Ellinas the Executive Chairman of Cyprus National Hydrocarbons Co. (CNHC) recently noted that the Vassilikos terminal could become financially viable with as little as 168 bcm. On 26 June 2013 Nicosia signed a MoU with Noble, Delek Drilling and Avner Oil on the Vassilikos LNG project, although the final investment decision on the actual building of the plant will most likely to be taken in late 2014 or early 2015 only after the expected confirmation of Aphrodite’s reserves, Noble second Block 12 exploratory drilling, and Total’s exploratory drilling in Blocks 10 and 11. Given Cyprus’ limited domestic demand, any additional discoveries in the Republic of Cyprus’ newly awarded Eastern Blocks (2,3,9,10 & 11), including a second prospect within Block 12 identified by Noble in March 2013 would in effect be available for exports.
Solon Kassinis, the Executive Vice-Chairman of the Cyprus National Hydrocarbons Company (CNHC) has on several occasions estimated that all 13 Blocks of the Cypriot EEZ could hold as much as 1.698 bcm although neither Total nor ENI/Kogas have yet announced any pre-drilling estimates of what they expect to find in their Blocks. Ellinas, has estimated a 1.132 bcm reserves basis for the six blocks which have been tendered off including Aphrodite. Only Noble has announced a pre-drilling estimate for its second prospective target at 85-141 bcm Noble is expected to drill this prospect in 2014 and is presently conducting a 3-D seismic survey over the potential target that should be completed by September 2013. In effect by the end of 2013 Nicosia and Noble/Delek should know the exact volumes of commercially exploitable gas that exist in Aphrodite and have a credible estimate of the reserves in Block 12. Before this volume is accurately defined all else remains speculative.
Total and ENI/Kogas have merely noted that they are currently in the process of further analyzing the seismic data in their possession. Once this analysis is complete exploratory drilling will follow in 2014. It is not clear if all five blocks will be drilled in 2014 but the process is likely to move fast since both companies are expected to bring their own drilling platforms from outside the region. Noble has faced significant delays in its exploratory efforts in both Cyprus and Israel due to the unavailability of drilling rigs in the area.
By deploying their own rigs ENI and Total indicate their willingness to complete their exploration program as soon as possible. Total in particular is most likely to complete its initial exploration program in 2014. To most Cypriot policy-makers, it is only a matter of time before enough gas is discovered or confirmed to support a 6.8 bcm liquefaction plant in Vassilikos. For some the real question is how to best manage future discoveries lying underneath the Cypriot EEZ and in particular Block 9 which according to Ellinas and Kassinis holds reserves even larger than those discovered in Aphrodite.
Financial pre-requisites and emerging policy-making institutions
Regardless of when Cyprus would find enough gas to finance the Vassilikos LNG, an important issue that Nicosia will have to deal with, is its ability to finance the export infrastructure necessary to monetize Aphrodite’s reserves. Since Noble/Delek will carry the entire financial burden for the production of gas from the sea bed to the floating production and storage and offloading (FPSO) vessel, Cyprus will have to share the cost for the transportation of the natural gas to Vassilikos and the construction of the liquefaction plant although it is not clear whether the present government will follow Christofias’ decision to control 51% of the LNG plant and the Aphrodite-Vassilikos pipeline. The combined cost for the LNG plant and the offshore pipeline varies between $8 and $10 billion of which Cyprus may decide to finance 51% should the Anastasiades government confirm the decisions of its predecessor. If this is the case, how can a nearly bankrupt island-state be able to marshal the necessary $4-5 billion? One way to reduce the cost for Nicosia would be to drop its demand regarding the control of the offshore pipeline connecting the Aphrodite field with Vassilikos.
Due to water depth, pressure, and seabed morphology the pipeline would have a maximum transportation capacity of around 15-16 billion cubic meters per year and cost around $2-$2.5 billion of which Nicosia may finance 51%. Given the fact that Noble/Delek are not able to finance the construction of an LNG plant in Cyprus without the support and approval of the Cypriot government, it would be impossible for Noble/Delek to build the pipeline and not liquefy the gas in Vassilikos. Hence it would be preferable for Nicosia to focus its efforts on the financing of what actually matters, namely the liquefaction plan and in doing so reduce its financial contribution by $1-$1.25 billion. Even if Anastasiades revises Christofias’ plans and concentrates its efforts on the financing of the LNG plant Cyprus still needs $3-$4 billion that it doesn’t have and can’t borrow from international markets. In such an asphyxiating environment the most realistically available option is the ability of the Cypriot National Hydrocarbon Company (CNHC) to pre-sell part of the approximately 7 bcm/y from Aphrodite’s production that would be available for export over a 20 year period. CNHC plans to negotiate pre-selling contracts with a series of probable buyers next year however this is a complicated process that holds considerable risk for the seller in case he is unable to fulfill the deadlines set in the contract. It is not yet clear whether the present government has approved the plans of CNHC and the extent of Cyprus’ participation in the joint venture company that will build, own and operate the LNG facility. CNHC may also use the confirmed Aphrodite reserves as collateral for an International Public Offering bid, although this could prove to be less appealing to international investors who may be willing to finance the LNG’s construction cost in exchange for guaranteed product.
Part of the reason why the government has yet to approve the plans of CNHC may relate to the internal policy-making review which is ongoing under the supervision of Minister Lakkotrypis with regards to the roles of DEFA and CNHC. The results of this policy-review cannot be taken for granted as well as there are talks of merging DEFA and CNHC. Should this merger be implemented it could complicate or even neutralize the ability to CNHC to make critical decisions such as the pre-selling of Aphrodite’s gas or in following up with the implementation of the MoU it signed on 26 June 2013 regarding the future of the Vassilikos LNG terminal.
Regardless of the liquidation, restructuring or merging of DEFA and/or CNHC, Cyprus is most likely to keep a significant share of the JVC which will develop Vassilikos in ways that minimizes its obligation to finance the project in the short-to-medium term. In any case if the reserves in Aphrodite are confirmed, Cyprus would be able to count on EIB assistance as it was stated by EIB’s President Werner Hoyer during a recent visit to Nicosia in late May 2013.
Geopolitical risks and export options
The discovery of Aphrodite, and more importantly the probable discovery of 3-4 Aphrodite-size reserves as a result of the forthcoming European exploration program, could offer a very positive incentive for the resolution of the Cypriot question provided that Nicosia is able to partly balance off Ankara’s geostrategic preponderance and simultaneously encourage the Turkish-Cypriots to follow a more conciliatory approach in the stagnated peace process. If Turkey continues to have a geostrategic stranglehold over the isolated EU-island it has no incentive whatsoever to reach a compromise over Cyprus in ways that would also be acceptable to the Greek-Cypriots and Greece.
The challenge for Cyprus is to find the appropriate mix of incentives for Turkey and the Turkish-Cypriots that would generate the impetus for a compromise without: (a) endangering its sovereignty, (b) legally recognizing the so-called “Turkish Republic of Northern Cyprus” or (c) freezing its hydrocarbon development in case a resolution of the Cypriot Question is not reached. Most of the major Greek-Cypriot parties have formulated a zero-sum game approach with regards to Turkey and the Turkish-Cypriots. This position is hardly unjustified given Turkey’s maximalist positions as presented below.
Source: Ayla Gürel, Fiona Mullen and Harry Tzimitras, The Cyprus Hydrocarbons Issue:
Context, Positions and Future Scenarios. PCC Report 1/2013 (Nicosia: PRIO Cyprus Centre, 2013), p.53
Ankara does not recognize the existence of the Republic of Cyprus. Further it hasn’t recognized claims the near entirety of Cyprus’ EEZ either directly (Blocks 1, 4, 5, 6, & 7) or on behalf of the Turkish-Cypriots (Blocks 1, 2, 3, 8, 9, 12 & 13) and has attempted to use its military might coercively in order to deter Nicosia and Noble Energy from carrying out the exploratory drilling that discovered Aphrodite. In June 2013 Turkey’s ships also tried to stop Noble’s exploratory vessel from reaching Block 12. Ankara is also claiming large areas that fall within Greece’s continental shelf around the island of Castelorizo and questions Greece’s future EEZ boundaries with both Cyprus and Egypt. Only Blocks 10 & 11 (below) of the Cypriot EEZ are not claimed by either Turkey and/or the Turkish Cypriots.
Source: Gürel, Fiona Mullen and Harry Tzimitras, The Cyprus Hydrocarbons Issue:
Context, Positions and Future Scenarios. PCC Report 1/2013 (Nicosia: PRIO Cyprus Centre, 2013), p.65
These blocks were tendered by Nicosia to Total in February 2013. Moreover, Turkey has threatened to impose an investment embargo to any IOCs active in Cyprus’ EEZ and has carried out this threat against ENI’s 50% participation in the Samsun-Ceyhan oil pipeline project. TPAO, Turkey’s state oil & gas company has also commenced its own exploratory drilling (April 2012) onshore in the occupied territories of Northern Cyprus and plans to drill offshore within the blocks awarded by the Turkish-Cypriots to TPAO in 2012. It has also said that it will dispatch its recently acquired oceanographic vessel Hayrettin Barbarossa to conduct 3-D seismic surveys inside the Cypriot EEZ, a move that is perceived as highly provocative by the Greek-Cypriots.
The cumulative effect of what the Greek-Cypriots perceive as Turkish threats has removed from the negotiating table the option of constructing a gas pipeline that would export Aphrodite’s resources to the Turkish market. This option has now become dependent on the resolution of the Cypriot problem but remains the easiest and cheapest pipeline option to construct if Nicosia decided to sell its gas only to Turkey’s domestic market. It should be noted though that such a theoretical pipeline would not necessarily be the most profitable option for Aphrodite’s developers given the fact that Turkey’s gas prices are partly subsidized and that the logical price to expect would not surpass an average of $8.5/MBTU (million British thermal units). Nicosia, Noble and Delek can get $11-$12/MBTU for an EU long-term LNG contract and as much as $14-$18/MBTU for a long-term LNG contract that would be delivered to South Korea, China or Japan. Cyprus would have a real incentive to send its gas north only in the context of a comprehensive solution of the Cypriot question but should not overestimate the importance of its current “gas card” in its forthcoming negotiations with the Turkish-Cypriots.
In geostrategic terms, the “gas card” does not mean that Nicosia could turn the tables on Turkey as a result of its potential hydrocarbon discoveries, but it could mean that Cyprus may grow important enough to get a settlement that is significantly better than what it got in 2004 by the so-called Kofi Anan Plan which was overwhelmingly rejected by the Greek-Cypriots. Turkey understands this potential shift in the bilateral balance of power and that is part of the reason why it wants to re-start the proximity talks between Turkish-Cypriots and Greek-Cypriots as soon as possible.
Yet, despite its urgency and relative hastiness, Ankara is finding it increasingly difficult to dissuade major IOCs from investing in the emerging Cypriot natural gas market. This does not mean that the risk of heightened tensions will be eradicated. The risk will always exist and are inherent to the oil & gas business. What is pertinent though is that this risk is not likely to paralyze the development of Cypriot hydrocarbons nor is it likely that the development of Cypriot hydrocarbons would be dependent on the resolution of the Cypriot question.
The possibility of a Turkish military strike against Cypriot LNG facilities or against the IOCs developing the Republic’s hydrocarbon resources is not perceived as a serious risk by the interested state parties, the EU and the IOCs that are involved (or are willing to get involved) in Cyprus. That is why Turkey is more likely to increase its diplomatic and economic pressure on the major Anglo-Saxon companies, such as Shell, Exxon and BP, which are already active in Turkey in order to keep them out of Cyprus if further major discoveries are made by ENI/Kogas and Total.
In addition, Turkey is also likely to step up its own exploration efforts in the occupied territories and waters of northern Cyprus in an attempt to diplomatically counterbalance the progress already made by the Republic of Cyprus since 2011. If exploitable reserves are discovered in the self proclaimed “TRNC” or the yet undetermined EEZ of Cyprus with Syria and Turkey, Nicosia will be faced with an additional diplomatic headache since it would be forced to block the export of these resources outside the “TRNC” and hinder Turkish attempts to utilize international assistance in the development of these resources. Turkey’s TPAO may also buy its own drilling platform and attempt to drill next to Noble’s, ENI’s or Total’s offshore platforms, a move that is most likely to be countered by Israel since the Aphrodite field is shared between Israel and Cyprus.
In any case from the Cypriot point of view, a 7 bcm/year LNG terminal in Vassilikos by 2020 (or 20.4 bcm by 2025) may cost more to develop than a pipeline to Turkey, but its commercial and geostrategic benefits could out-weigh the cost of its expected capital investment 100 times over since it can transform Cyprus from a European problem into a European opportunity. As the EU’s Energy Commissioner Gunther Oettinger recently noted during an Energy Investment conference organized by The Economist in May 2013 regarding Turkish reactions vis-à-vis Cyprus “the natural gas discoveries off Cyprus do not belong to Turkey...Cyprus can play an important role in the European energy markets and the prospects that are opened in the natural gas sector constitute a “win-win” situation for all countries in the Southeastern Mediterranean. In that sense, I am confident that Turkey will keep a constructive approach since it has to gain a lot of economic benefits by the transportation of these resources”.
Apart from the political impossibility of a Turkish pipeline option in the absence of a comprehensive settlement, Cyprus simply does not currently have enough gas to build the Vassilikos LNG and a pipeline to Turkey, Greece or anywhere else. If more gas reserves are discovered over the next three years, a pipeline option to Greece and via Greece to Europe could become more realistically attainable, although such a project would still have to overcome major technical challenges. In any case Nicosia is more likely to seriously consider such an option after more than one LNG train in Vassilikos is fully operational.
Contributor Theodoros Tsakiris is a Assistant Professor for Geopolitics of Hydrocarbons, University of Nicosia & Director, Energy & Geopolitics Program, at the Hellenic Institute for European & Foreign Policy