Saturday, 18 February 2012

New Cyprus Drilling Round Raises Tensions with Turkey

My latest post on Natural Gas Europe, about Cyprus's new drilling round and the risks of a Turkish retaliation. Original here:

A new oil and gas licencing round organised by the Republic of Cyprus is raising tensions with northern Cyprus and its Turkish backers. Although further drilling in the eastern Mediterranean will contribute to energy security in southern Europe, it may come at a high political cost.

The new round was announced by the Cypriot government on 13 February, with 12 offshore blocks available. The blocks being offered are located off the southern coast, where US explorer Noble Energy discovered a 5-8tcf field in December near the Israeli border. There are high hopes among explorers that the new blocks available will be equally productive.

Although Turkey has not (at the time of writing) publicly criticised the latest licencing round, it views any hydrocarbon production by the Republic of Cyprus as illegitimate whilst the conflict with the Turkish Republic of Northern Cyprus (TRNC) continues.

Last year Ankara retaliated to Nicosia’s first licencing round by announcing tit-for-tat plans to cooperate with the TRNC authorities on drilling in waters off Turkish Cyprus. Turkish state energy company TPAO signed an exploration deal with the TRNC which included blocks which were, by any reasonable estimate, in Greek Cypriot waters.

Turkey’s strong criticism of the Cypriot drilling was accompanied by the deployment of warships to the Mediterranean in support of exploration vessels. A Turkish research ship conducted seismic analysis of Block 12, the same block in which Noble discovered its field.

Although Turkish anger on the issue cooled, and in any case reflects the government’s bombastic style as much as genuine hostility, the latest licencing round is likely to cause another spike in tension. This is particularly true whilst relations between Israel and Cyprus – on energy projects along their maritime border and on defence issues – remain strong and whilst Turkey-Israel ties remain so strained.

For the Republic of Cyprus, major oil and gas discoveries will help sustain the struggling economy. The country’s booming energy demand is almost entirely dependent on imports: in 2010, the cost of energy imports was equivalent to 111% of total export value. Noble Energy may build a natural gas terminal on Cyprus to process and export its reserves as LNG. This would provide Cyprus with energy independence and boost European energy security by providing a new (albeit small) energy corridor, augmenting the Southern Corridor from the Caspian.

However, energy independence would also reduce the economic need for unification with the TRNC, providing a disincentive for Greek Cyprus to compromise and prolonging the conflict, which is almost 40 years old. This is one of the rationales for Turkey’s hostility to Cypriot drilling activities, so this is only likely to strengthen as Nicosia pushes ahead with exploration, production, and export. To a lesser extent, Turkey’s opposition is also based on competition: extensive oil and gas production from Cyprus would undercut Turkey’s strategic role as an energy hub for southern and southeastern Europe.

Fears of a shooting war over the Eastern Mediterranean’s energy reserves are undoubtedly overplayed, but Turkey is likely to use other strategies in order to hamper Cyprus’s exploratory activities. Blacklisting oil companies which drill in Cypriot waters from working on projects in Turkey is one probable tactic. TPAO’s contract with Shell in November may, from a strategic point of view, have been intended to lock such a huge and significant company into working with Ankara rather than Nicosia.

The one exception to this rule may be Russia’s Gazprom, which is apparently interested in taking part in Cyprus’s new licencing round. The extent of Turkey’s relationship with Gazprom would make it extremely difficult to blacklist the Russian energy giant.

Another tactic which Turkey may use is to increase political and economic pressure against the Republic of Cyprus on other fronts. This may include tightening restrictions on Cypriot goods and taking Cypriot drilling activities to international arbitration (on the grounds that the Exclusive Economic Zone of the island has not been agreed).

If tensions increase dramatically, Turkey may resort to using gunboat diplomacy – deploying its increasingly powerful naval forces to intimidate exploration vessels and drilling rigs under the guise of protecting the resources of Turkish Cyprus from unilateral expropriation by Greek Cyprus. Such tactics have been used elsewhere with mixed success.

Certainly, such action would provoke a diplomatic incident with Cyprus, and by extension the European Union, but Turkey’s leadership has shown its willingness to make controversial moves in pursuit of national interests. Given the paralysis in EU membership negotiations, Ankara may feel that it has nothing to lose by threatening Cyprus.

Eliminating these risks will require a more equitable division of hydrocarbon wealth between the Republic of Cyprus and the TRNC. Given the current political deadlock between them, this seems unlikely. In the current circumstances the best case scenario is for Cypriot drilling to occur significantly to the south, away from any potentially contested areas, and for Turkey to exercise restraint in its exploratory activities alongside the TRNC.

If both sides can agree to work separately and keep their rhetorical fireworks to a minimum, there are good prospects for the eastern Mediterranean to emerge as a new frontier for European energy.


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