Aphrodite’s blues...

Financial Mirror (Cyprus) - - FRONT PAGE -

As the fi­nal prepa­ra­tions for the May 8 tri­lat­eral sum­mit be­tween the heads of State of Cyprus, Is­rael and Greece were be­ing laid out – the fourth such sum­mit in just over two years, with so far, more words than ac­tions – news broke out that Cyprus and Is­rael might re­sort to in­ter­na­tional ar­bi­tra­tion to re­solve a dis­pute over Aphrodite, a gas field lo­cated in the Cypriot Ex­clu­sive Eco­nomic Zone (EEZ), with a tip ex­tend­ing into the Is­raeli EEZ.

In De­cem­ber 2010, Cyprus and Is­rael signed an agree­ment de­lim­i­tat­ing their mar­itime bor­der. It was sup­posed to be fol­lowed up by a uni­ti­sa­tion agree­ment pro­vid­ing a frame­work for co­op­er­a­tion in the ex­ploita­tion of cross-bor­der nat­u­ral gas or oil reser­voirs, but the two sides have yet to agree to such a deal. A year later, to­ward the end of 2011, Texas-based No­ble En­ergy an­nounced the dis­cov­ery of Aphrodite in Block 12 off the Cypriot coast.

When it was first dis­cov­ered, Aphrodite was es­ti­mated to con­tain around seven tril­lion cu­bic feet (tcf) of nat­u­ral gas, but a sub­se­quent ap­praisal drilling in 2013 re­vised th­ese es­ti­mates down to a mean of 4.5 tcf. En­cour­aged by this dis­cov­ery, on the edge of Block 12 in the Cypriot EEZ, the right hold­ers of the Ishai li­cense on the op­po­site side of the bor­der, within the Is­raeli EEZ, drilled a well in Novem­ber 2012 that demon­strated that Aphrodite in­deed partly ex­tends into their li­cense, though it only showed neg­li­gi­ble quan­ti­ties of nat­u­ral gas.

At the time, Eyal Shuker, CEO of Is­rael Op­por­tu­nity, one of the Ishai li­censees, de­clared: “We re­gret the re­sults, and we would have been happy were they dif­fer­ent.”

Yet, much to the dis­be­lief of the Cypriot side, on Novem­ber 2015, the Pe­tro­leum Com­mis­sioner at the Is­raeli En­ergy Min­istry clas­si­fied th­ese find­ings as a dis­cov­ery, a term im­ply­ing a com­mer­cial value.

Ex­actly how much of th­ese nat­u­ral gas re­sources ex­tend to the Ishai li­cense is un­known at this point. The Cypri­ots claim it is only a neg­li­gi­ble frac­tion, pos­si­bly around 3% of the reser­voir or less, the Is­raelis, on the other hand, in­sist it is larger than that and have men­tioned shares that range from 5 to 10% of the reser­voir.

The fact that Aphrodite ex­tends to the other side of the bor­der gives Is­rael a say in the de­vel­op­ment of the reser­voir. In the ab­sence of an agree­ment, Is­rael would likely refuse to al­low the de­vel­op­ment of the gas field given that ex­tract­ing gas from Aphrodite will lead to ex­tract­ing gas from the Ishai prospect. There are other ob­sta­cles that have com­pli­cated the de­vel­op­ment of Aphrodite so far and which ex­plain why the gas field has not been de­vel­oped yet, seven years af­ter its dis­cov­ery.

As the lo­cal mar­ket is too small to jus­tify, on its own, the de­vel­op­ment of Aphrodite, the gas field’s li­cense hold­ers need to find ex­port mar­kets. So far, all op­tions on the ta­ble are prov­ing to be chal­leng­ing, from a com­mer­cial point of view. The high cost of de­vel­op­ment, com­bined with rel­a­tively low global gas prices, makes it hard for Aphrodite gas to be com­pet­i­tive, and that ex­plains the dif­fi­cul­ties in se­cur­ing firm sales agree­ments to date. The ab­sence of a frame­work to ex­ploit joint reser­voirs be­tween Cyprus and Is­rael is an ad­di­tional chal­lenge that com­pli­cates de­vel­op­ment even fur­ther.

The is­sue was brought back to the spot­light with news that the ne­go­ti­a­tions be­tween Cyprus and Egypt to con­nect the Aphrodite gas field to Egypt have reached fi­nal stages and a deal is ex­pected to be signed in the com­ing weeks. But this would be an in­ter-gov­ern­men­tal agree­ment lay­ing out the frame­work to fa­cil­i­tate pos­si­ble gas trans­fers to Egypt in the fu­ture, and not a deal com­mit­ting vol­umes of Aphrodite gas to Egypt. In­deed, the de­vel­op­ment of the Aphrodite gas field in still on hold with no real progress on this front since No­ble En­ergy, the op­er­a­tor of the field, sub­mit­ted a de­vel­op­ment plan in 2015. The com­pany is fo­cus­ing its ef­forts in the Eastern Mediter­ranean on de­vel­op­ing Le­viathan, the gi­ant 22-tcf gas field in Is­rael, which at this time is its ab­so­lute pri­or­ity in the re­gion.

The Cypri­ots have

been

dis­grun­tled

over

what

they per­ceive as an ag­gres­sive han­dling of the af­fair by the Is­raeli side, es­pe­cially in light of the flour­ish­ing re­la­tions be­tween the two coun­tries in re­cent years. Ahead of the tri­lat­eral sum­mit in Ni­cosia on May 8, Is­raeli En­ergy Min­is­ter Yu­val Steinitz made it clear that “the gov­ern­ment of Is­rael can­not give up, not even as a ges­ture of friend­ship, on its ter­ri­to­ries or its nat­u­ral re­sources”.

Iron­i­cally, the Is­raelis have in­ter­ests on both sides of the bor­der, with Delek Drilling, an Is­raeli com­pany, hold­ing a 30% stake in Aphrodite.

In­ter­est­ingly, and since we are Beirut-based, we couldn’t help but no­tice (and feel pri­mar­ily con­cerned by) one of the ar­gu­ments the Ishai li­censees are us­ing to sup­port their case in front of Is­raeli of­fi­cials whose sup­port with re­gards to their share of Aphrodite they ap­pear to per­ceive as frag­ile.

Rony Hal­man, Chair­man of Is­rael Op­por­tu­nity, was quoted as say­ing: “An Is­raeli con­ces­sion to Cyprus and fur­ther de­vel­op­ment of the Aphrodite reser­voir that ig­nores Is­rael’s rights in it will rep­re­sent a dan­ger­ous prece­dent that in the fu­ture will af­fect ad­di­tional reser­voirs in the Mediter­ranean basin that ex­tend across the mar­itime bor­ders be­tween Is­rael and its neigh­bours. Such be­hav­iour will lead to a sig­nif­i­cant loss of state rev­enue.”

In any case, com­pa­nies with stakes in the cross-bor­der gas reser­voir will con­tinue dis­cus­sions in the com­ing months. If they fail to reach an un­der­stand­ing, they will turn to an in­ter­na­tional ex­pert, or pos­si­bly an ar­bi­tra­tor, to pro­pose a so­lu­tion. Tri­lat­eral tracks have proven to be an ex­cel­lent venue for dis­cus­sions. This was the fourth tri­lat­eral sum­mit for the three coun­tries in two years, and a fifth is al­ready sched­uled for later this year.

Count­less other lower-level diplo­matic meet­ings have also been held, with so far, few con­crete re­sults when it comes to some of the grandiose projects un­der dis­cus­sion. Yet, there is a ten­dency to bran­dish th­ese projects even though the com­mer­cial vi­a­bil­ity of at least some of them is hard to prove. In the mean­time, more press­ing is­sues, such as a uni­ti­sa­tion agree­ment, have seen slow progress.

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