Israel-Cyprus Dispute Over Gas Field Risks Delay for Creating Energy Hub

Disagreement over ownership threatens to delay multi-billion dollar plan

Cyprus' Energy, Commerce, Industry and Tourism minister Yiorgos Lakkotrypis talks during the Eastern Mediterranean gas conference in capital Nicosia, Cyprus, on Wednesday, March 21, 2018.
Petros Karadjias/AP

An ownership squabble over Cyprus’ main natural gas field is threatening to delay multi-billion dollar plans to turn the eastern Mediterranean into a major energy hub.

At issue is a dispute over Aphrodite, a gas field discovered in 2011 at the edge of Cyprus’ economic waters. One tip of it stretches across the border into Israel’s maritime zone. At stake is as much as 10 billion cubic meters of gas worth close to $1.5 billion, according to one recent estimate in Israel.

That is less than 10% of Aphrodite’s total reserves and a fraction of the gas already discovered in Israel. Israel says it will not give up on the gas and the companies operating on the Israeli side are ready for legal action in case Aphrodite is developed without them.

On Tuesday, Prime Minister Benjamin Netanyahu and Energy Minister Yuval Steinitz flew to Cyprus to spur plans to join the two countries’ electricity grids and construct a pipeline to link the newly found gas fields to mainland Europe.

Steinitz said he was optimistic that the dispute will be solved within six months and said the governments have asked the companies to reach an understanding among themselves on how much gas is on each side.

“The affair has already been resolved in principle between the countries, which have already agreed on an outline for reaching an agreement. The companies can reach an understanding in one or two months and if the dispute isn’t resolved, we will turn to an international expert, not an arbitrator, as has been reported,” Steinitz told TheMarker.

The Cypriot Energy Ministry declined to comment, but officials in Nicosia told Reuters that Energy Minister Yiorgos Lakkotrypis has suggested a similar course of action.

Several large gas fields have been discovered in the region over the past decade and Israel and Cyprus have grown close while collaborating in their development. But Steinitz said that does not guarantee a quick solution.

“The government of Israel cannot give up, not even as a gesture of friendship, on its territories or its natural resources,” he told Reuters before Tuesday’s meeting.

Aphrodite is smaller than Tamar and Leviathan, two huge gas fields discovered in Israel around the same time, but it was a milestone for Cyprus.

Developing it are Royal Dutch Shell, Texas-based Noble Energy and Israel’s Delek Drilling. They are looking to sell the gas domestically and abroad, with a focus on Egypt, where Shell has a liquefaction plant.

The field is also meant to be a link in the 2,000-kilometer pipeline being planned by IGI Poseidon, a joint venture between Greece’s natural gas firm DEPA and Italian energy group Edison, to carry Israeli and Cypriot gas to western Greece.

A final investment decision on the pipeline, with an expected price tag of up to 6 billion euros ($7.2 billion), could come next year.

Deep-sea exploration in both countries continues and many current and future discoveries will likely be connected to each other to cut costs on infrastructure.

The Aphrodite partners would not comment on the dispute, though a footnote in Delek’s 2017 financial report stated that “the vast majority” of gas was in Cyprus and a “minority” was in the adjacent Yishai prospect on the Israeli side.

The Yishai consortium, which includes energy firm Israel Opportunity and Nammax Oil and Gas, a company linked to billionaire Beny Steinmetz, has already spent $120 million on exploratory drilling.

The group commissioned a third-party assessment that concluded Yishai’s estimated 7 to 10 billion cubic meters of gas could be worth close to $1.5 billion.

Production will have to happen in Cyprus since that is where most of the gas lies, said Rony Halman, chairman of Israel Opportunity. However, he envisions the Yishai group being like “smaller partners for Aphrodite, but we will be part of the system.”

Halman said the consortium is prepared to bring a legal challenge in Europe in case of any opposition.

“We as a company will bring a commercial claim that will stop the development. We have already sat with lawyers in London. We retained lawyers for this issue,” Halman said. “We are not willing to give up on this.”