Weekly Offshore Rig Review: Mess in the Med

Cyprus Gets Serious About Oil & Gas
As the eastern Mediterranean has become a more and more attractive region for hydrocarbon exploration, the Greek Cypriot government has made some important moves towards establishing oil and gas exploration within the waters surrounding the island nation, which have thrust the tiny nation into the international spotlight in recent weeks. In particular, the government in Nicosia has taken these steps:

  • In 2002, Cyprus embarked on the delineation of its Exclusive Economic Zone (EEZ) bordering Egypt, its neighbor 200 miles (320 km) to the south. Those efforts resulted in the signing of several agreements with the Egyptian government including deals for joint exploration of oil and gas resources near the median line between the two nations and the sharing of scientific and technical data.

  • Based on Egyptian seismic surveys that indicated hydrocarbons trending north from Egyptian to Cypriot waters, PGS Geophysical was commissioned to run and interpret seismic surveys in the EEZ north of Egypt during the first half of 2006. As Cypriot Foreign Minister George Lillikas noted in May, 2006: "The chances [of finding hydrocarbons, particularly gas] are quite high in light of results from searches carried out by Egypt in an area not far from the boundary delineating the exclusive economic zones of both countries."

  • In the latter months of 2006, Cyprus announced and began to promote its First Hydrocarbon Exploration Licensing Round offshore Cyprus with a road show in London. The official opening of this licensing round is scheduled for February 15, 2007, and the licensing period is set to last for five months until July 16th. In total, 12 offshore blocks will be open for bidding with a total area covering approximately 27,000 square miles (70,000 sq km). According to Lillikas, these blocks will be offered under production sharing agreements that should result in 75 percent of the revenue going to Cyprus. Additionally, operators will be expected to bear all the costs of exploration and will be required to drill within two years of licensing any blocks.

  • Most recently, Lillikas traveled to Beirut, Lebanon on January 17th to sign an agreement on the delineation of the Cypriot and Lebanese Exclusive Economic Zones in the eastern Mediterranean. The two countries are separated by only about 120 miles (190 km) of open water.

The beginning of oil and gas development offshore Cyprus could have a very notable impact on the country, which has a population off less than 1 million people and GDP of about $22 billion for 2006. Earlier estimates placed potential oil and gas reserves at 6 to 8 billion barrels of oil equivalent, according to former Cypriot Energy Minister Nicos Rolandis. At a price of $50 per barrel, those reserves could be worth $300 to $400 billion, which could generate well over $200 billion in government revenues.

Turkey Wants A Piece
Turkey is Cyprus' closest neighbor with the two nations separated by only about 50 miles (80 km) of sea. As such, about 18 percent of the Cypriot population is made up of Turkish Muslims, with the rest of the population consisting primarily of Greek Christians. These two ethnic / religious groups came into conflict quickly after the nation achieved independence from the United Kingdom in 1960. After violence erupted in the capital of Nicosia in late 1963, the UN established a peace-keeping force there to help control the situation. However, in 1974, the Greek government sponsored an attempt to seize control of the entire island. This led to the quick intervention of the Turkish military, which seized the northern third of the island with its predominantly Turkish Muslim population. That division persists to this day. The government based in Nicosia that controls the southern portion of the island is internationally recognized as the official government of Cyprus. Meanwhile, Turkey maintains and funds the government of the so-called "Turkish Republic of Northern Cyprus," a national entity that only Turkey recognizes within the international community.

Obviously, the Turkish government in Ankara has long had a hand in Cyprus, and it was not at all happy about the announcement of the EEZ deal between Lebanon and Cyprus. Within days, the Turkish government had lodged a protest about the agreement with the Lebanese government insisting that its control of northern Cyprus entitled it to being consulted on such matters. At the same time, the Turkish government also awoke to the Cyprus-Egypt relationship that also focuses on oil and as exploration and has issued a warning to the Egyptian government not to deal with the Cypriots on such matters. At the same time, leaders of the Turkish Cypriots in the northern portion of the island stated that the "secret" agreements with Lebanon and Egypt would certainly "raise tensions" and that they "will not allow [their] interests to be harmed."

Cyprus has not remained silent on the issue, as Cypriot President Tassos Papadopoulos has asserted that Turkey has no right to interfere in the signing of an agreement between Cyprus and Lebanon. He went on to emphasize that Turkey also has no rights to oil and gas reserves that may exist offshore Cyprus, particularly to the south. Similarly, Cyprus' Foreign Minister Lillikas rejected any possibility of sharing oil and gas revenues with Turkish Cypriots of northern Cyprus except through the process of reunification.

Little mentioned, but of particular importance in the debate between Cyprus and Turkey over oil and gas resources is the fact that the Turkish government has performed at least preliminary analysis of the hydrocarbons potential of the waters between the two nations. Turkey clearly has no legitimate claims to the resources lying to the south of Cyprus and much closer to Egypt. However, below the seabed that separates Turkey from Cyprus, the Turks believe a very large supply of oil and gas may be waiting to be tapped, a supply to which the Turkish government does have a legitimate claim.

According to Dr. Doğan Perinçek, a consultant to the Turkey National Gas and Oil Company (TPAO), the area between the Mersin bay on the southeastern coast of Turkey and the northeastern tip of Cyprus could hold sizable reserves. He is quoted on the Turks.us web site as stating "Turkey does not have oil reservoirs in the Eastern Black Sea or the Mediterranean larger then these. We must insistently focus our work on this zone. It has the potential to supply half of Turkey's oil needs."

So, while the upcoming tender and the deals with Egypt and Lebanon focus on regions to the south of Cyprus, the real bone of contention lies to the north. Turkey seems to be looking to maintain a greater deal of control over Cyprus and its ability to form partnerships with other nations and businesses in its efforts to exploit its potential oil and gas resources. It would appear that by threatening, Ankara hopes to keep Cyprus from being able to form the necessary business relationships and attract the required capital to begin oil and gas production on its own. By so doing, Turkey would succeed in crippling Cyprus' efforts and potentially driving the much smaller island into negotiations that would allow Turkey to gain greater control of the hydrocarbons that lie between the two nations. If Turkey could succeed in legitimizing its claim to northern Cyprus or force the Greek Cypriot government to capitulate, it could potentially claim full rights to all the reserves believed to be located in the northeast corner of the Mediterranean.

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