articles | 05 March 2013

Gas from Cyprus and Israel could cover 10% of Europe’s annual needs

The discovery of natural gas in the Eastern Mediterranean is changing the geopolitics and economics of the region in ways that are still evolving, according to new research.

The extent to which Cyprus can exploit natural gas will heavily depend on factors that are out of its control, in particular on developments in Israel and its evolving relations with Turkey, according to a new report published by the Cyprus Centre of the Peace Research Institute Oslo (PRIO). The hydrocarbons issue is a complex topic with multiple aspects and the new report sets the topic within the geological, geographical, legal, political and economic contexts, outlining the positions of the various parties and concluding with an assessment of possible future scenarios.

“The presentation of the parties’ positions should not be taken as an attempt to defend anyone’s particular stance,” said one author of the report Harry Tzimitras. “Our aim throughout the work is to contribute to a better public understanding of the issues at stake and the reasons they are important to each of them.”

The 7 trillion cubic feet of projected reserves in Cyprus’ EEZ’s Block 12 are currently estimated to be enough to supply less than 2% ofEU demand per year (assuming a 25-year supply). Yet, although exploration has only just begun, the discoveries have generated much interest because even a small amount helps the EU diversify natural gas sources from a dependence on Russia. “It is not inconceivable that gas from Cyprus and Israel could eventually cover perhaps 10% of Europe’s annual gas needs,” say the authors.

The exploration for hydrocarbons has also attracted attention because of the objections by both the Turkish Cypriots and Turkey, these partly relate to Turkey’s stance on the United Nations Convention on the Law of the Sea (UNCLOS). However, objections have also risen because the Turkish Cypriots and Turkey regard exploration as involving the exercise of sovereign rights at an international level which, they maintain, the Turkish Cypriots and Greek Cypriots jointly possess by virtue of their being the equal constituent communities of the 1960 Republic of Cyprus.

While the international community supports the right of Cyprus to explore for oil and gas, various statements underline that it also has strong expectations that the hydrocarbons revenues be shared in the context of a solution to the Cyprus problem.

The authors give an account of the steps taken by the Turkish Cypriots and Turkey in response to Cyprus’ gas exploration. “The Turkish Cypriots have now developed a ‘policy of reciprocity’, whereby exploration activities undertaken by Cyprus are met with similar activities by the Turkish Cypriots in collaboration with Turkey, in areas to which the Turkish Cypriots feel they have an equal claim in principle”, says co-author Ayla Gürel.

The report notes that Turkey is likely to respond to exploration activities in areas that Turkish Cypriots intend to explore and which overlap with most of the blocks of Cyprus’ Exclusive Economic Zone. It could do so even more aggressively, in response to any exploration in the not yet licensed Blocks 1, 4, 5, 6, and 7, which it claims partly fall within its own continental shelf.

As regards the economic aspects, the authors conclude that, in the context of uncertainties about the impacton prices of shale gas and the current economic environment, the financing of a liquefied natural gas (LNG) plant will take many years, unless there is additional supply, either from Israel or from blocks granted in the second licensing round. LNG would generate around the same revenue as a pipeline to Greece, but less than a pipeline to Turkey. “We found that a pipeline to Turkey — which of course is unlikely under the current circumstances — would generate €15 billion more net revenue, after major investment costs, than revenue from an LNG plant,” said co-author Fiona Mullen.

How fast Cyprus can earn hydrocarbons revenue under the status quo – where official negotiations to solve the Cyprus problem are on-going but without much progress – will heavily depend on factors that are out of its hands, namely on whether Israel decides to export gas and whether it is comfortable exporting it from an LNG facility located in Cyprus. The authors conclude that gas revenue flowing to Cyprus would be most vulnerable if Israel and Turkey bridge their differences and Israel responds positively to Turkey’s recent overtures about building a gas pipeline between the two countries.

The report, entitled ‘The Cyprus Hydrocarbons Issue: Context, Positions and Future Scenarios”, by Ayla Gürel, Fiona Mullen and Harry Tzimitras, was launched at the Home for Cooperation in Nicosia on Wednesday, 27 February.

The extent to which Cyprus can exploit natural gas will heavily depend on factors that are out of its control, in particular on developments in Israel and its evolving relations with Turkey, according to a new report published by the Cyprus Centre of the Peace Research Institute Oslo (PRIO). The hydrocarbons issue is a complex topic with multiple aspects and the new report sets the topic within the geological, geographical, legal, political and economic contexts, outlining the positions of the various parties and concluding with an assessment of possible future scenarios.

“The presentation of the parties’ positions should not be taken as an attempt to defend anyone’s particular stance,” said one author of the report Harry Tzimitras. “Our aim throughout the work is to contribute to a better public understanding of the issues at stake and the reasons they are important to each of them.”

The 7 trillion cubic feet of projected reserves in Cyprus’ EEZ’s Block 12 are currently estimated to be enough to supply less than 2% ofEU demand per year (assuming a 25-year supply). Yet, although exploration has only just begun, the discoveries have generated much interest because even a small amount helps the EU diversify natural gas sources from a dependence on Russia. “It is not inconceivable that gas from Cyprus and Israel could eventually cover perhaps 10% of Europe’s annual gas needs,” say the authors.

The exploration for hydrocarbons has also attracted attention because of the objections by both the Turkish Cypriots and Turkey, these partly relate to Turkey’s stance on the United Nations Convention on the Law of the Sea (UNCLOS). However, objections have also risen because the Turkish Cypriots and Turkey regard exploration as involving the exercise of sovereign rights at an international level which, they maintain, the Turkish Cypriots and Greek Cypriots jointly possess by virtue of their being the equal constituent communities of the 1960 Republic of Cyprus.

While the international community supports the right of Cyprus to explore for oil and gas, various statements underline that it also has strong expectations that the hydrocarbons revenues be shared in the context of a solution to the Cyprus problem.

The authors give an account of the steps taken by the Turkish Cypriots and Turkey in response to Cyprus’ gas exploration. “The Turkish Cypriots have now developed a ‘policy of reciprocity’, whereby exploration activities undertaken by Cyprus are met with similar activities by the Turkish Cypriots in collaboration with Turkey, in areas to which the Turkish Cypriots feel they have an equal claim in principle”, says co-author Ayla Gürel.

The report notes that Turkey is likely to respond to exploration activities in areas that Turkish Cypriots intend to explore and which overlap with most of the blocks of Cyprus’ Exclusive Economic Zone. It could do so even more aggressively, in response to any exploration in the not yet licensed Blocks 1, 4, 5, 6, and 7, which it claims partly fall within its own continental shelf.

As regards the economic aspects, the authors conclude that, in the context of uncertainties about the impacton prices of shale gas and the current economic environment, the financing of a liquefied natural gas (LNG) plant will take many years, unless there is additional supply, either from Israel or from blocks granted in the second licensing round. LNG would generate around the same revenue as a pipeline to Greece, but less than a pipeline to Turkey. “We found that a pipeline to Turkey — which of course is unlikely under the current circumstances — would generate €15 billion more net revenue, after major investment costs, than revenue from an LNG plant,” said co-author Fiona Mullen.

How fast Cyprus can earn hydrocarbons revenue under the status quo – where official negotiations to solve the Cyprus problem are on-going but without much progress – will heavily depend on factors that are out of its hands, namely on whether Israel decides to export gas and whether it is comfortable exporting it from an LNG facility located in Cyprus. The authors conclude that gas revenue flowing to Cyprus would be most vulnerable if Israel and Turkey bridge their differences and Israel responds positively to Turkey’s recent overtures about building a gas pipeline between the two countries.

The report, entitled ‘The Cyprus Hydrocarbons Issue: Context, Positions and Future Scenarios”, by Ayla Gürel, Fiona Mullen and Harry Tzimitras, was launched at the Home for Cooperation in Nicosia on Wednesday, 27 February.

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