Turkey warns against Israel-Cyprus gas deal

At Eurasian Economic Summit in Istanbul, Turkish envoy tells his Israeli counterpart that a potential Israel-Turkey gas pipeline could be squandered by Israeli partnership with Cyprus on natural gas.

By Itai Trilnick and Reuters

Israel's energy cooperation with Cyprus would stand in the way of any proposed Israel-Turkey natural gas pipeline, Turkey's deputy minister for energy and natural resources told an Israeli emissary last week. The meeting took place at the Eurasian Economic Summit held in Istanbul, according to the Turkish newspaper Hurriyet Daily News.

The newspaper reports that Michael Lotem, the Foreign Ministry's special envoy for energy affairs who attended the summit's energy forum, was denied an official meeting with Deputy Minister Murat Mercan due to downgraded diplomatic relations between Ankara and Jerusalem. Lotem, however, was granted an "unofficial" audience with the deputy minister during a summit recess.

Mercan reportedly told Lotem that, beyond the dispute between the two countries over the blockade of Gaza and the Marmara flotilla affair in 2010, any cooperative venture between Israel and Turkey would also be hindered by Israel's natural gas development cooperation with Cyprus.

Relations between Israel and Turkey have been sour since Turkey's Justice and Development Party, headed by Prime Minister Recep Tayyip Erdogan, assumed power in 2003. Tensions, however, reached a climax after the Israel Defense Forces forcibly seized the Mavi Marmara aid flotilla headed for Gaza in May 2010 and nine Turkish activists were killed. Turkey has demanded an official apology from Israel and compensation for the activists' deaths, and downgraded diplomatic relations until Israel complies.

Turkey, which holds sovereignty over the northern part of Cyprus, also objects to the development of gas fields surrounding the island. After the Cypriot government controlling the southern part of the island issued tenders for offshore gas exploration, a large reserve was discovered by Noble Energy.

The field, dubbed Aphrodite, lies partly in Israeli economic waters. Israel has maintained close ties with Cypriot government officials over the development of offshore gas fields, which includes the possibility of jointly exporting the gas overseas.

Turkey, however, has objected to exploration tenders issued by Cyprus and has stated that it will boycott participating companies. In the past Turkey also threatened to take military action on this issue, but chances it actually will appear slim. Meanwhile the Turks have also begun drilling for oil on the northern side of the island in what is considered a politically motivated move.

Cyprus granted Italy's ENI and South Korea's Kogas licenses for offshore gas exploration last week, in a boon to an economy in line for an international bailout because of its exposure to debt-crippled Greece.

The island, which discovered natural gas at sea in Dec. 2011, issued licenses covering three offshore areas lying south and southeast of Cyprus to a consortium made up of both firms.

"The discovery of hydrocarbons (around) Cyprus, in conjunction with those found in the wider Mediterranean region, create new realities and prospects for the country," Cypriot energy minister Neoclis Sylikiotis said.

Cyprus sits in the Levant Basin, an area of the eastern Mediterranean thought to be rich in largely untapped reserves.

U.S. Noble Energy reported discovering between 5 trillion and 8 trillion cubic feet (tcf) in Cyprus's first attempt to find natural resources offshore in Dec. 2011. Neighboring Israel has made major natural gas discoveries there in the past few years.

In signing production-sharing contracts with the consortium of the two companies, the state will earn 150 million euros, badly needed as Cyprus has been limping along on short-term high-yield borrowing for the past few months.

Now in line for an international bailout, cash strapped Cyprus hopes the prospect of sitting on sizeable hydrocarbons reserves will give its stuttering economy a boost.

The island sought aid from the EU and the IMF in June 2012 to recapitalize a banking system badly exposed to Greece, and because of fiscal slippage.

It expects to conclude in March a bailout deal anticipated to be as high as 17 billion to 17.5 billion euros, equivalent to its national output.

Sylikiotis said before the signing ceremony last Thursday that separate talks with France's Total, bidding for another two blocks, were progressing well.

"I would say we are close to concluding," he said.

"There are very strong indications of gas, and possibly oil, in the area," Sylikiotis said, referring to the offshore maritime area known as the exclusive economic zone.

He said there would be synergies from the licensing to ENI and Kogas, since two of the blocks run in the path of a pipeline planned to transport gas from the Noble concession to a terminal which will convert gas into its liquefied form onshore.

Gas companies planning to ship gas exports

An idea was floated in the past to lay an undersea pipeline between Israel and Turkey that could be connected with a network of pipelines carrying gas to Europe, thereby opening the European market to Israeli gas. Similar underwater pipelines exist elsewhere, like the pipe carrying gas from Norway to Britain or the pipeline running from Russia to Germany. But the cost for laying the pipe is estimated in the billions of dollars, and such a project could run into opposition from Lebanon and Syria, whose economic waters lie between Israel and Turkey.

The issue of exporting gas from Israel still isn't settled. However, the partners in the Leviathan reserve, which is estimated to contain 470 billion cubic meters of natural gas, are preparing to build gas liquefaction facilities for exporting by ship in hopes of selling the gas on the global market. They are particularly interested in the Far East market where the price has reached $18 per million British thermal units (BTU) β?" up to double the price in Europe.

The partners, Delek Group β?" 45%, Noble Energy β?" 40%, and Ratio Oil Exploration β?" 15%, have agreed to sell a 30% stake in the Leviathan project to Australia's Woodside Petroleum for $1.5 billion. Woodside's role is to establish the project's export infrastructure.