Sunday, May 21, 2017

Cyprus EEZ is heating up - IN CYPRUS / CYPRUS WEEKLY

May 21, 2017
Charles Ellinas

As we get closer to the July start of drilling by Total in block 11 Cyprus EEZ is hotting-up, from the usual headlines and often exaggeration in the local press, to political positioning, possibly driven by the forthcoming presidential elections, and Turkey’s predictable and expected bullying. But, thankfully, it is the oil and gas companies that have their feet on the ground, proceeding with the serious business of exploration and drilling as planned. This is the subject of my article today.

Turkey’s position

In order to understand Turkey’s disruptive and often provocative actions in Cyprus EEZ, it is important to understand its position.

Turkey maintains two claims on Cyprus EEZ. One is that it sees its role to be the protector of Turkish-Cypriot rights until a solution of Cyprob. It claims that the Cyprus government cannot represent the interests of Turkish – Cypriots unless the island is reunified. For Turkey, development of the EEZ is directly linked to the bi-communal negotiations and reconciliation on the island, and should be left to the discretion of the new federal government. As a result, Cyprus should cease all activities until this position is reached. The second and most serious position is its own claim to part of Cyprus’ EEZ.

Lets look at the latter in more detail. Turkey has not yet formally declared its EEZ in the Med and is not a signatory of UNCLOS, the UN law of the seas. As a result, it does not consider itself to be legally bound by it.

Instead, it takes the position that its EEZ delimitation in the East Med should be based on the “equity” principle which, it says, ‘calls for consideration of special circumstances with respect to proportionality and non-encroachment rules’, especially with regards to Greek islands and Cyprus against the Turkish mainland.

In effect it takes the view that its continental shelf takes precedence over those of islands. As a result, its claim to part of Cyprus’ EEZ is closely inter-linked with Turkey’s position with regards to the Aegean and Greek islands. It sees the EEZ delimitation dispute between Greece and Turkey as linked to the issue of Cyprus EEZ. This, of course, makes matters more complicated.

In addition, as a result of this position, it does not recognise Cyprus’ EEZ delimitation agreements with Egypt, Lebanon, and Israel.

Moreover, Turkey considers any activities by Cyprus in Block 7 and west of it, including Blocks 4, 5 and 6, to be a ‘red-line’, which will cause it to intervene. How this will be pursued in practice is not clear.

The position of the oil companies is that Blocks in Cyprus’ EEZ are awarded to them legally and they will proceed with exploration and drilling. Presumably they have the political support of their countries, i.e. Italy, France and the US. Recent statements from these countries support this. Turkey’s position is untenable. Cyprus’ declaration of its EEZ and delimitation agreements with neighbouring countries are in accordance to UNCLOS and are recognised by its neighbours and the international community.

Turkey’s provocations

Having taken these positions, Turkey has left itself no option but to defend them, no matter how unjustified its actions are. As a result, every time physical activity takes place in Cyprus’ EEZ Turkey resorts to threats and provocations. It happened when Noble Energy was drilling in Block 12 and when ENI was drilling in Block 9 and it is happening now and very likely in the future. Other than bringing Turkey’s actions to the attention of the UN, the EU and the international community, as President Anastasiades has already done, there is no other action Cyprus can or should take against such aggression.

The way forward for Cyprus is continuation of the negotiations, with good intention, to solve the Cyprus problem. This should be the top priority, whether it is achieved before or after the forthcoming elections.

Implications for Cyprus

Turkey and Turkish-Cypriots take the view that all hydrocarbon-related activities in Cyprus should stop until solution of Cyprob. However, should the exploration process be delayed, for one reason or another, Cyprus will be the loser. Long-term structural changes in global energy supply mean that hydrocarbons are gradually being phased – out by low-carbon energy, with the risk that if exploitation and production of Cyprus’ gas is delayed it may become stranded. The Christofias-Talat convergences covered hydrocarbons and agreed the method to divide any future benefits between the two communities. All hydrocarbon resources will belong to and will be developed by the federal government through collaboration between the two communities. President Anastasiades supports this. The way to safeguard the interests of the two communities on the island is through the continuation of this dialogue. And there is time for this. Any serious income from hydrocarbons will not materialise for at least 10 years. Cyprus government and the oil&gas companies are resolute to continue with their drilling plans and this is the right way to proceed.

In the meantime…

In the meanwhile the oil and gas companies are proceeding with their plans and the serious business of exploration and drilling. As Total said, it considers the bidding process and award of offshore blocks by Cyprus for exploration and production to be legal under international law. As a result, it will proceed with drilling in July as planned. Which is as it should be.

The East Med region is geopolitically volatile. Developing and exporting its gas is a challenge, especially in the prevailing low demand – low price environment. East Med plans need to be tempered with a dose of reality. The world is awash with gas and LNG and with US shale on the resurgence, and renewables penetration unstoppable, competition to secure markets is fierce. Prices are low and will stay low forever.

In the longer term, and especially if Total is successful with drilling in Cyprus’ Block 11 this summer, as we all hope, FLNG may become a serious option for gas exports to the Asian markets.

Gas discoveries in the East Med are deep-water and expensive to develop. They are also far from the likely markets in Asia. Collaboration will be key to keeping development costs down.

In this respect, news that ENI and ExxonMobil are discussing a potential tie-up for the development of Block 10 are welcome. Coupled with the ENI-Total tie-up for the development of Blocks 6 and 11, it bodes well for the integrated approach I suggested in earlier articles. A grand – collaboration among all key players in Cyprus EEZ would indeed be the best in terms of minimising development costs and improving chances to secure exports. A single Joint

Venture including all Cyprus’ gasfields, known and to be discovered, developed as a single project, through subsea completions and pipeline tie-ups to new liquefaction trains to be built in Egypt’s existing LNG plants, may be the way forward. Cyprus’ dream to build a greenfield LNG plant at Vasilikos is challenged by lack of infrastructure and consequently high development costs.

In a low – price environment, only integrated projects which minimise costs from well-to-export will stand a chance to become financially viable and secure export markets. And even then it will be challenging.

Dr. Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council