Aphrodite’s blues

Cyprus and Israel diverge over shared gas reservoir

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 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 delimiting their maritime border. It was supposed to be followed up by a unitization agreement providing a framework for cooperation in the exploitation of cross-border natural gas and 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, in November 2012 the holders of the Ishai license within the Israeli EEZ bordering Block 12 drilled a well that demonstrated that Aphrodite did partly extend 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, in 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 percent of the reservoir or less, while the Israelis, on the other hand, insist it is larger than that and have mentioned shares ranging from 5 to 10 percent of the reservoir.

Obstacles to development

The fact that Aphrodite extends to the other side of the EEZ 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. However, this is not the only obstacle to the development of Aphrodite. Other factors explain why the gas field has not been developed yet, seven years after its discovery. As the local market is too small to justify 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 their 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 is 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.

Disagreeing allies

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, Yuval Steinitz, the Israeli energy minister, 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 percent stake in Aphrodite.

A matter of concern for Lebanon is 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 neighbors. Such behavior 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 planned for later this year. Countless other lower-level diplomatic meetings have also been held, with few concrete results so far 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 unitization agreement, have seen slow progress.

Mona Sukkarieh is the cofounder of Middle East Strategic Perspectives (http://www.mesp.me), a Beirut based political risk consultancy

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