David O'Byrne in Istanbul
May 17, 2012
Only a few short years ago, the prospect of finding commercial reserves of hydrocarbons in the eastern Mediterranean was, to use the inevitable pun, little short of a pipe dream. Offers of acreage were many, expressions of interest few. Now, if the results of the Republic of Cyprus' second licensing round that ended May 12 is anything to go by, that has certainly changed.
Of the 12 blocks covering 45,000 square kilometres on offer, a total of 33 bids were received for nine blocks from 15 companies and consortia. Those bidding included some of the continent's biggest gas operators, Gazprom – through its subsidiary GPB Global Resources, Italy's Eni – in partnership with South Korea's Kogas, Italy's Edison, French giant Total and US independent Marathon – not to mention several UK- and Israel-based independents.
The level of interest is not difficult to fathom. Just to the east in the Israeli sector of the Mediterranean lies the Leviathan gasfield, holding an estimated 450bn cubic metres (cm) of gas and 600m barrels of oil, and the Tamar gasfield holding an estimated 275bn cm of gas. And drilling late last year by US company Noble Energy in Cyprus' own block 12 struck what was announced at the time as a substantial gasfield, which the company in May confirmed to hold 991bn cm of gas.
Individually, the reserves are substantial enough to ensure energy independence at current consumption levels for both countries for centuries to come – a situation which raises the opportunity of monetizing part of the reserves through export to the huge European market to the north. The discovery of more reserves in any of the 12 blocks now on offer would make turning that opportunity into an imperative.
Irrespective of Israel, Cyprus' own gas demands requiring the construction of a pipeline north from the gasfield to the island. That in turn would leave the twin options of either constructing a liquefied natural gas (LNG) export plant to monetize the gas as LNG or construct a second line to Turkey from where gas could be exported via the planned TANAP pipeline.
Given that an LNG plant costs around $1bn- $1.5bn to build and will use roughly half of the gas reserve in liquefying the other half, a pipeline is by far the most financially viable option. Sadly, poor relations between Turkey and the internationally unrecognized Turkish Republic of North Cyprus (TRNC), which occupies the northern third of the island, and the Greek half of the island the Republic of Cyprus, that option looks a very distant prospect.
Relations between the three have deteriorated considerably since 2004 when the Kofi Annan plan to reunite the island collapsed after being rejected by the Republic of Cyprus. Most recently, Turkey has objected to Cyprus allowing Noble to start drilling Block 12 before the conclusion of ongoing talks aimed at reaching a reunification settlement ahead of Cyprus taking on the EU presidency in July. With those talks now likely on hold until next year, Turkey has reached its own agreement with the TRNC to allow state upstream operator TPAO to drill in the north of the island – a symbolic move which even Turkish officials admit will not strike hydrocarbons.
More worryingly though, TPAO has ordered a new seismic survey vessel apparently with the intention of prospecting off the southern shores of Cyprus. While Turkey has received some international support for its claim that Cyprus' mineral reserves should be exploited for the benefit of the island's entire population and not just the Greek population of the south, it is unlikely that support could go so far as to condone Turkey drilling in Cyprus zone of the Mediterranean.
Whether or not Turkey would be prepared to risk such a confrontation given the astronomical cost of developing deepwater offshore facilities remains to be seen. And equally unclear is the extent to which the Republic of Cyprus is prepared to risk ending hopes of re-unification in pursuit of its own energy sufficiency.
What is clear is that the discovery of further substantial gas reserves in the newly tendered blocks could change the picture, making export as LNG a more viable proposition or even raising the possibility of a pipeline bypassing Turkey altogether, running from Cyprus to Greece and on to Italy.
Subsea pipelines are prohibitively expensive and for such a line to be viable, the reserves available would need to be substantial. But that such a possibility exists is evidenced by the line up of interested bidders – Gazprom and Eni are both major players who together constructed and operated the equally expensive and unlikely Blue Stream pipeline carrying Russian gas across the Black Sea.
At the same time, Italy's Edison is one half of the consortium that proposed the ITGI project to carry Azeri gas through Turkey and Greece and across the Adriatic to Italy – a project whose western half could equally be used to carry Cypriot gas, should it arrive in Greece.
Such a pipeline, though, would court further problems with Turkey given that no agreement exists delineating the Mediterranean either to the west of Cyprus, or between Turkey and Greece's Aegean and Mediterranean islands. Given that the delineation issue has never been resolved despite discussions, and depends on relative interpretations of peace treaties dating back as far as 1923, it might be unwise for potential gas exporters to bank on a swift resolution.
Unlikely as it may seem at this juncture, negotiating a settlement between Turkey and Cyprus may actually prove simpler, not to say offering a far cheaper alternative.