Cyprus Mail
Opinion

Optimism over gas drilling, but it’s the sharing that counts

Turkey's Fatih drilling ship

By Charles Ellinas

ExxonMobil, using the Stena Icemax drilling rig, has started drilling in block 10 at the first target named Delfini, a very apt name associated in Greek mythology with Delphi and the goddess of birth and the ancient Greek word for womb. Let’s hope it brings the birth of a new era for Cyprus.

After all the hype, the start of drilling has been uneventful. But its significance and importance to Cyprus and the region belies this quiet start.

All indications from the seismic data point to a potential for a substantial discovery. The proximity of Delfini to Zohr and Calypso also adds confidence to the indications that the reservoir lies in carbonate formations, with similarities to these discoveries. However, until drilling is complete it is prudent to exercise restraint and caution.

We should remember Onasagoras in block 9. Based on seismic data there was great optimism, but the drilling results were highly disappointing. Typical success rates for exploration drilling, even when targets are identified using 3D seismic data, are of the order of 40 per cent.

Tristan Aspray, ExxonMobil vice-president for Europe, Russia and Caspian, advised caution at the Economist Summit in Nicosia on November 2, but he also said he is cautiously optimistic. Depending on how drilling progresses, we should know the result in January at the latest. It is then expected that the rig will move on to continue drilling a second target in block 10, probably Antheia or Glafkos.

Turkish threats

As expected, Turkey has not intervened to physically threaten or stop ExxonMobil’s drilling activities. These are proceeding unhindered. However, this does not alter Turkey’s position that it will take measures to ‘protect’ what it sees as its own interests and those of the Turkish Cypriots.

This is manifesting itself through the increasing frequency of intimidating statements and threats that Turkey will continue to take measures to protect these interests.

“The decision by the Greek Cypriot government is proof that the equal rights and interests of the Turkish Cypriot side with regard to the island’s natural resources continue to be ignored,” the Turkish foreign ministry said in a statement last month, referring to the planned drilling by ExxonMobil.

It added that Turkish Cypriots are “co-owners” of the island and its resources.

As far as block 10 is concerned, neither Turkey nor the Turkish Cypriots have made any direct claims, other than Turkey’s position that all resources around the island belong to both communities irrespective of where these are. As a result, it is unlikely that Turkey will intervene directly.

However, it is likely that Turkey will not remain a spectator. In addition to the seismic exploration activities of Barbaros in areas that include blocks 4 and 5, the Turkish drilling rig Fatih may eventually drill in Cyprus’ undeclared exclusive economic zone (EEZ) in areas claimed by Turkey, either north, west or north-west of the island. In Turkey’s eyes, this would establish a ‘fait-accompli’ situation, further challenging Cyprus rights to its EEZ.

US Assistant Secretary of State for Energy Resources Francis Fannon with Energy Minister Giorgos Lakkotrypis on Friday

The position of the international community

The international community almost universally supports Cyprus’ right to explore and exploit any hydrocarbon resources within its EEZ as defined by the UN Convention on the Law of the Sea.

Kathleen Doherty, US ambassador to Cyprus, reiterated the position of the US at the Economist Summit. She reconfirmed an earlier statement by US Assistant Secretary of State for European and Eurasian Affairs, Wess Mitchell, that the US supports Cyprus rights to develop its hydrocarbon resources without harassment, with the benefits to be shared equitably between Greek and Turkish Cypriots. How this should be done, should be worked out between the two sides. She also emphasised that military intervention has no place in commercial activities.

The EU went further. It advised Turkey earlier in the year to refrain from any threats against Cyprus, adding that “Turkey needs to commit unequivocally to good neighbourly relations and avoid any kind of source of friction, threat, or action directed against a member state … The EU stresses the need to respect the sovereignty of member states over their territorial sea and airspace.”

Doherty also confirmed that the US is in the process of developing a broader strategy for the region and strongly supports the tri-lateral meetings that have been taking place between Greece, Cyprus and their neighbours, leading to closer cooperation. The US is planning to expand and increase its presence in the region.

This week’s visit by US Assistant Secretary of State for Energy Resources Francis Fannon to Tel Aviv and Jerusalem, Nicosia, and Cairo is confirmation of this.

During his trip, Fannon met with government officials and private sector representatives to discuss energy security and regional cooperation on energy issues. His trip highlights the economic opportunities in the energy sector for East Med gas development and related exports, and seeks to encourage discussions on how countries can harness this potential for increased regional stability and economic growth.

In his report to the UN Security Council, Secretary-General Antonio Guterres, referring to Cyprus’ hydrocarbons, said “… the natural wealth in and around Cyprus must benefit both communities on the island and provide a strong incentive for all parties concerned to work towards a mutually acceptable and a viable solution. Considering that all parties have recently reaffirmed their continued commitment to this end, all efforts should be made to avoid unnecessary escalations in the coming months and to engage in dialogue on this issue.”

This is now being followed by consultations to determine whether Greek and Turkish Cypriots can restart negotiations. It is under this climate that drilling in block 10 is taking place. Solution of the Cyprus problem is key.

What should Cyprus do?

Cyprus policy, announced by Foreign Minister Nikos Christodoulides, not to be drawn into responding to Turkey’s provocations is correct.

However, Cyprus should take measures to demonstrate convincingly how the benefits from hydrocarbons exploitation will be shared equitably between Greek and Turkish Cypriots.

One way to do this is by finalising and enacting into law the Cyprus sovereign wealth fund – named as the ‘National Investment Fund’. Even though this has been under discussion since 2013, it is still awaiting finalisation.

This should undergo a final review by a reputable international institution, such as IMF or the World Bank, to ensure that it incorporates all hydrocarbon revenues, it is transparent, incorruptible and fit for purpose. In other words that it is a fund that will be ‘equitably shared’ and benefit directly the Greek and Turkish Cypriot people, not just as an ‘effective instrument for fiscal and economic management’ it claims to be now. The Christofias-Talat accords could make a good start. Its use and management should be beyond questioning by either community.

Enacting this into law as soon as possible should demonstrate beyond any doubt that both communities in Cyprus will benefit from it, whatever the solution of the Cyprus problem is.

Gas prospects

Tristan Aspray said that that global gas demand is growing and that gas has a critical role to play as a natural partner to renewables. The company is in the process of increasing its natural gas reserves and LNG production capacity. It is for this reason that ExxonMobil came to our region, specifically because of the prospect of such a major gas discovery. Should that become reality, it is likely to pursue rapid realisation of LNG exports by all means available to it – technical, commercial and political – provided of course this is commercially viable.

The global market is price-sensitive. Longer term forecasts made at LNG conferences in London in October confirmed that by mid-2020s spot LNG prices will converge to about $8/mmBTU in Japan and $6/mmBTU in north-western Europe.

This is what LNG from the East Med will have to compete with if it is to succeed finding markets. As ExxonMobil’s Aspray made clear, this will be essential in demonstrating commercial viability of an LNG export project in Cyprus.

As stated at the Economist Summit, there is also a need to find ways to reduce regional geopolitical risk. LNG projects involve multi-billion dollar investments the returns from which take decades to materialise. Such projects and investments need certainties.

In addition to ExxonMobil’s promising block 10, ENI is in the process of drilling the Noor prospect offshore Egypt. This is also very promising and may lead to a significant new gas discovery. Such discoveries could completely alter East Med gas development plans and unlock its export potential.

Particularly in Cyprus, a major discovery by ExxonMobil and the potential of LNG exports could alter Cyprus’ and regional geopolitics irrevocably.

 

Dr Charles Ellinas is nonresident senior fellow at the Global Energy Centre of the Atlantic Council @CharlesEllinas

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