Blockade by Turkey’s navy poses risks for businesses in the eastern Mediterranean

The ongoing dispute over natural gas reserves off the coast of Cyprus poses considerable risks for energy companies with interests in the region. The blockade of a drill ship by the Turkish navy in February has increased the likelihood of an escalation between Cyprus and Turkey.

Oil Rig Ship Ocean

Background

Cyprus discovered commercially significant natural gas reserves in its EEZ in 2011. Since then, Turkey has repeatedly threatened to prevent the development of hydrocarbon fields in the area, over which it also claims sovereignty. Ankara has opposed planned drilling efforts, which it argues are being driven unilaterally from the Greek Cypriot government with no consideration towards the Turkish Cypriot community living in north of the island. The Turkish government deems that any profits from the offshore fields should be equally shared between Greek and Turkish Cypriot entities.

Turkey’s position on Cyprus dates back to 1974, when it invaded northern Cyprus, splitting it from the southern part of the island, which is mainly populated by Greek Cypriots. Turkey does not maintain any diplomatic relations with the internationally recognised Republic of Cyprus (RoC), which governs the south, but claims that some exploration blocks are located within its own EEZ. Despite this, Cyprus has signed a series of delimitation agreements with its other neighbours, including Egypt, Israel and Lebanon.

Since the discovery of hydrocarbon reserves in 2011, several international energy companies such as French oil and gas group Total, Italian energy company Eni, and U.S.-based ExxonMobil have acquired exploration licences in Cyprus’s EEZ. Surveys by Noble Energy and Israeli conglomerate Delek Group from 2013 estimate that the Aphrodite field, off the south-eastern coast of the island, contains between 3.6 and 6 trillion cubic feet (tcf) of natural gas. In September 2016, the Cypriot government expected the Aphrodite field alone to generate annual revenues of up to EUR600 million over a 12-year period. In February 2018, Eni and Total announced that the Calypso field, located in block 6, contained between 4.8 and 8.1 tcf of natural gas.

A key issue that policymakers have faced relates to the export of the gas

A key issue that policymakers have faced relates to the export of the gas. According to some studies, the most cost-effective option for the export of natural gas would be to build an undersea pipeline which would pass through Turkey. However, due to abysmal relations between Turkey and the RoC, the Greek Cypriot government has been considering alternative ways to export the gas. In December 2017, Italy, Greece, Cyprus and Israel announced their support to build a 2,000km-pipeline that would transfer offshore gas reserves from the eastern Mediterranean to Europe, at an estimated cost of EUR6 billion. The proposed EastMed pipeline would decrease the reliance European countries have on gas imports from Russia, a strategic goal shared by many governments in the E.U., amid deteriorating relations between Moscow and Brussels.

A main challenge for the construction of the pipeline, which would transport an estimated 10 billion cubic metres per year (Bcm/y), is the considerable cost of building it. For the project to be economically viable, natural gas from the eastern Mediterranean fields would need to cost European consumers an average of about USD5 per million British thermal units (MMBtu). Current estimates state that EastMed gas would cost considerably more. Another challenge is that the proposed pipeline would be built in an area located between Cyprus and Greece in which there is high volcanic activity, and any potential damage to the project would be challenging to repair.

Despite assurances by the RoC that both Greek and Turkish Cypriot communities would benefit from the natural gas reserves, in February 2018 the Turkish navy prevented a ship chartered by Eni from drilling in Block 3, located in south-east Cyprus. The Saipem 12000 deep-water drillship was re-routed to another region following the incident at a considerable cost to Eni. E.U. leaders have condemned Turkey’s move to blockade drilling efforts.

Map Turkey Cyprus

Despite the incident in February, ExxonMobil has moved ahead with exploration efforts in Cyprus. ExxonMobil has acquired an exploration licence in Block 10 through a consortium with Qatar Petroleum.

Recent events are a setback for the reunification of Cyprus

The discovery of natural gas reserves has acted as both an impetus and an obstacle to the reunification of the island. Negotiations that had lasted over two years broke down in July 2017. A key reason for this was the continued opposition of the Greek Cypriot government and Greece to the continued presence of Turkish troops on the island. The re-election of Nikos Anastasiades, who is favourable towards reunification, as RoC president in February renewed hopes for a settlement on the Cyprus issue, but Turkey’s actions towards the drilling ships have dimmed hopes again.

The reunification of the island and the development of gas reserves have become increasingly interlinked

The reunification of the island and the development of gas reserves have become increasingly interlinked. For instance, the significant discoveries made in recent years, all of which are off Cyprus’s southern coast, have coincided with the election of pro-unification candidate Mustafa Akıncı as president in the north. These events, in addition to increasing pressure from the U.N., provided considerable momentum in the most recent talks. A U.N. peacekeeping force of about 1,000 troops is stationed along the area separating the north and south parts of the island.

However, the energy discoveries have also impeded the peace process. For instance, in October 2014 the Greek Cypriot government announced that it was halting talks on the reunification issue after the Barbaros Hayreddin Paşa, a Turkish seismic vessel, was sent to conduct surveys in the island’s EEZ. Talks later resumed, but the event demonstrated an increasingly tougher stance by Ankara both on the Cyprus issue and the potential exploitation of energy reserves.

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