Charles Ellinas Netanyahu’s visit to Cyprus – Israel-Cyprus energy implications

Netanyahu’s visit to Cyprus – Israel-Cyprus energy implications

Israel Prime Minister Netanyahu’s flying visit to Cyprus on Tuesday 28 July was another success in the growing political cooperation between the two countries. Both before and after, the visit has been hailed for its contribution to energy cooperation. But is that the case? What has actually been achieved so far in energy terms, other than political mileage?

Energy Cooperation claims

One of the headlines was that Israel and Cyprus agreed on Tuesday to expand their cooperation on energy issues, including the use of pipelines and electricity grids to link to European markets. In fact President Anastasiades said: “In particular, we discussed in concrete terms the way forward in our energy cooperation, as well as regional prospects, such as the potential for the East-med pipeline and the possibility of the Eurasia interconnector.”

Both of these projects have been selected as ‘projects of common interest’ by the EU and have received funding for feasibility studies. But their chances to become real projects are low, possibly minimal. Companies and financial institutions do not undertake projects unless they are commercially viable, have low risk and can produce good returns on investment. These projects are not likely to fulfill these criteria, even if they have the full political support of Israel, Cyprus and Greece.

The much discussed and studied ‘Unitization Agreement’ is another example where such cooperation is needed. Discussions on this started four years ago and it is mentioned as a key topic at every such high level meeting. This agreement is an essential step in the development of hydrocarbon fields that straddle the EEZ line between two countries. It provides the framework and regulates the development of the field, sharing of resources, revenues, etc. Development of the Aphrodite gas field cannot proceed without such an agreement in place. In accordance to the plans submitted by Noble and Delek for Aphrodite, yet to be approved by the government, development is scheduled to start next year. As a result the Unitization Agreement should be a top priority.

There has also been much reference to joint development of pipelines from Leviathan and Aphrodite for export of gas to Egypt. But Leviathan is still in the doldrums, with the anti-trust case against Noble and Delek still pending, and gas sales from Cyprus to Egypt are far from certain due to gas pricing challenges and other issues.

Practical energy implications

As another headline said, so far when it comes to practical energy implications we have “Fine words but little of significance….The truth is that the meetings between Anastasiades and Netanyahu have produced nothing of practical value, only words. All we hear is about the intention of the two sides to co-operate on energy issues without anything practical, such as the signing of an agreement, ever taking place.”

Israel has always been keen to take practical steps on energy collaboration and Natanyahu has often been quoted saying “let’s create facts.” But instead we are still talking about potential energy cooperation.

We are still waiting for facts to be created, and after the Nicosia meeting it was announced that the two sides were exploring “various options on collaboration”, which has now become the much repeated standard statement at the end of such high level meetings.

The single area of collaboration which should have been relatively to achieve is the unitization agreement. But after four years of negotiations it is still under discussion! Cyprus reached such an agreement with Egypt in a matter of months. It is difficult to understand what is holding it.

Future potential

Future opportunities to take this cooperation to practical outcomes paradoxically may be dictated by current problems:

·      In Israel development of Leviathan has stalled because of the unresolved anti-trust case brought against Noble and Delek. The ensuing delays and other developments since have put future gas sales to Egypt and Jordan in jeopardy.

·      In Cyprus ongoing negotiations to sell gas to Egypt also have many challenges to overcome to become a success, mostly related to pricing.

·      The negotiations to resolve Cyprob appear to be progressing well, and even though it is not stated government policy, delaying any gas developments removes a contentious issue during this critical period.

With solution of Cyprob looking increasingly possible, two options appear both for Cyprus and Israel:

1.    Gas export to Europe and/or Turkey through a pipeline through Cyprus’ EEZ. This could carry both Aphrodite and Leviathan gas, provided the political problems between Israel and Turkey are resolved. Alternatively Cyprus gas could be sold to Turkey on its own

2.    Even though currently the LNG market is suffering from a glut of LNG, demand is growing and projects commencing around 2-3 years from now for LNG sales in 2022-24 may be viable. As a result, should gas sales to Egypt or Turkey not progress the option of an LNG plant at Vasilikos to liquefy and export both Cyprus and Israeli gas may return.

And another factor which will need to be considered is that all these future developments may be the subject of a new federal government in Cyprus, bringing its own complexities and potential changes and delays. One hopes though that commercial factors will prevail. After all a key driver behind these developments is their potential contribution to the economies of Cyprus and Israel.

Whichever way the future goes, signing the unitization agreement is essential in unlocking cooperation between Israel and Cyprus. Press articles indicate that this may happen in September. It will be a good start.

In any case, developing good relations with neighbouring countries in the East Med is essential for future stability and prosperity even if these relations do not lead anywhere in practical terms. This is epitomized by Netanyahu’s statement that “Israel and Cyprus have many common interests in areas such as defense, the economy and energy. We will continue to act to reinforce the relationship between our two countries.”

Dr Charles Ellinas

31 July 2015