Mediterranean Gas: Salvation for the EU, Opportunity for Cyprus?

With just 840, 000 people and a GDP of USD24 billion, Cyprus isn’t a country that would often fill front pages of major newspapers. But for the past few weeks, Cyprus has been repeatedly making headlines due to its banking and debt crisis.

Image courtesy of Hibr, © 2012, some rights reserved.
Image courtesy of Hibr, © 2012, some rights reserved.

Following last month’s turmoil, Mr Anders Borg, Swedish Finance Minister, was quoted saying that “in Cyprus, they have only a financial sector and beaches; now that the financial sector is heading for closure, nothing but the beaches will remain.” This, however, could not be further from the truth. According to the British energy giant BP, Cyprus has natural gas reserves of 60 trillion cubic feet. Nobody knows for sure how large the reserves are but just the possibility of significant deposits has raised hopes in Brussels that Cyprus could be the solution for breaking the EU’s dependence on natural gas from Russia.

Russia is Europe’s most important supplier of natural gas, accounting for 36% of Europe’s natural gas imports. Following the 2006 and 2009 supply cut-offs, the EU has sought to promote diversification of Europe’s natural gas supplies, especially through the development of the Southern Corridor that would transit natural gas from the Caspian region and Central Asia. The long time centrepiece of this strategy, the proposed Nabucco pipeline, was meant to carry up to 31 billion cubic meters of gas per year from eastern Turkey to a hub in Austria. But the amount of non-Russian gas needed to fill Nabucco never materialised, mainly due to Russia’s competing project South Stream as well as Russia’s influence in the region. With the Nabucco-west pipeline expected to be operational by 2017, the EU is casting its gaze towards Baku, hoping to secure gas supplies from the Shah Deniz gas field in Azerbaijan.

However, the solution might be closer than we think. According to the US Geological Survey, released in 2010, the area of Eastern Mediterranean, and especially the Levant Basin underneath the waters of Cyprus, Israel, Lebanon and Syria, could contain up to 122 trillion of cubic feet of natural gas and 1.8 billion barrels of recoverable oil. The Leviathan gas field, which lies in Israel’s Exclusive Economic Zone, holds an estimated 16 trillion cubic feet of natural gas. The Tamar field, Israel’s next biggest offshore field, has an estimated capacity of 9 trillion cubic feet. These natural gas reserves together with the on-shore oil shale field in the Shfela Basin with an estimated 260 billion barrels of oil are likely to secure Israel a long-awaited energy independence and even position the Jewish state as a significant exporter of natural gas.

The Cypriots believe they are sitting on as much as 60 trillion cubic feet of gas. These are only estimates and commercial viability could be years away but 60 trillion cubic could make Cyprus a major player in the European energy market. Focusing on hydrocarbons could be the way to go for the Cypriots, who need to diversify their economy, which is now dependent on the troubled banking sector. In addition, energy-related industry would help create thousands of new jobs and an increase in investment spending which could help boost GDP.

Cyprus has for a long time seen Israel as its regional partner. A recently signed maritime border agreement and other bilateral agreements aimed, among other things, at protecting their overlapping gas fields, contribute to closer political, economic and military cooperation between the two countries. “We can cooperate in generating this newfound energy, and use it for the benefit of the entire region,” said Israel’s President Shimon Peres shortly after Israeli energy company Delek announced its plan for a 10-billion-dollar LNG plant in Cyprus. Cypriot officials say they are currently negotiating a joint underwater pipeline connecting Israel’s Leviathan field with Cyprus. From here, the plan is for a pipeline that would transfer Cypriot and Israeli gas to Greece and then to the Balkans and to the EU through Italy.

According to some reports, Israel has been simultaneously planning an underwater pipeline to Turkey. Last month’s “détente between Israel and Turkey could make the export of Israeli gas to and through Turkey feasible,” says Michael Leigh, a senior adviser with the German Marshall Fund of the United States. Normalized relations between Israel and Turkey could open the way for cooperation in the energy sector, bypassing Cyprus. The energy-hungry Turkey that is paying through the nose for gas supplies from Russia and Iran seems to be the closest natural customer for Israel. Additionally, the gas sent to Turkey could then add to the Nabucco-west pipeline and export further to the EU.

Turkey’s conflict with Cyprus plays a major role in this issue. Turkey, which does not officially recognise the Republic of Cyprus, has controlled the Northern part of the island since 1974 and disputes Cyprus’s right to develop its Exclusive Economic Zone. Ankara emphasised that Turkish Cypriots have inherent rights to a share of the island’s natural resources and as such should be included in the deal. Consequently, the Turkish Foreign Ministry warned of a “new crisis” in the region if the Greek Cypriots act unilaterally regarding the island’s natural resources.

But following the last months events that showed Cyprus’s complicated financial and debt situation, and given the fact that Israel has mended fences with Turkey, the Greek Cypriots might need to reconsider their relationship with Turkey to get their gas revenues as soon as possible. Cyprus’ desperate need for cash might thus become a leverage for a settlement with Turkey, or eventually even a push for a resolution of the Cyprus problem, despite the apparent political challenges. For Turkey and Cyprus, “gas exploration and export could be the coal and steel commodity that united France and Germany after the war,” says Andrew Duff, a British MEP. The hydrocarbon reserves have so far created more conflict between the two sides rather than an incentive to cooperate, but the current situation in Cyprus could speed up the process leading to a settlement.

It takes a long process of exploring, developing, extracting and processing until gas can be pumped into market. Moreover, it requires significant investment into infrastructure before the actual extraction part can begin. Taken all this into account, we might not see significant exports before 2019. The natural gas deposits in the Eastern Mediterranean, however, will provide a tremendous opportunity for Cyprus and Israel, and much of the gas that Europe is seeking. As a result, the EU could keep up with its growing demand and at the same time diversify its natural gas imports away from Russia.

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