Israel Stays Mum as Development Work Begins at Giant Cyprus Gas Field

Countries have failed to agree on rights of license holders in adjacent Israeli field, but Aphrodite partners begin development anyway

An Israeli gas platform west of Israel's port city of Ashdod
\ AMIR COHEN/ REUTERS

After years of delays, development of Cyprus’ Aphrodite gas field is getting under way without any Israeli government role, even though part of Aphrodite’s reservoir lies in Israeli economic waters and is licensed by the government for development.

Critics say Israel’s inaction jeopardizes not only 3 billion shekels ($820 million) in future tax revenues but also its ability to guarantee its stakes in other reservoirs shared with neighboring countries in the Eastern Mediterranean.

“It’s not clear, to say the least, why the government is acting this way, in particular the inexplicable ease with which it could cause a loss of 3 billion shekels in taxes,” said Rony Halman, the chairman of Israel Opportunity, a partner in the Ishai field adjacent to Aphrodite.

“The inaction of the Israeli government also threatens to create a dangerous precedent in connection with other joint reservoirs we have with our neighbors — Lebanon and Egypt,” Halman told TheMarker.

Aphrodite is an enormous field, with an estimated 125 billion cubic meters of gas, while tiny Ishai has between 7 bcm and 10 bcm. But the two share the same reservoir, meaning extracting gas by one side will necessarily be taking gas that belongs to the other.

Two-state solution?

The partners of the fields as well as the two governments involved have been sparring over the issue of how to divide revenues from the field, but they haven’t been able to overcome issues like whether the formula should be based on the rules of the Organization for Economic Cooperation and Development or those of the European Union.

In 2010 Cyprus and Israel signed an agreement covering exploration, development, production and the division of economic waters. In addition, they have a memorandum of understanding on joint exports. But a follow-on agreement over joint reservoirs has never been reached.

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Adding to the complications is that two of the Aphrodite partners also control the Israeli gas fields Tamar and Leviathan. Delek Group, the Israeli holding group controlled by billionaire Yitzhak Tshuva, has 30% of Aphrodite and Noble Energy, a U.S. company, holds 35%. The British–Dutch energy giant Shell owns the rest.

The Aphrodite partners have apparently run out of patience. They recently submitted a plan to the Cypriot government — but not Israel — for developing the field and have begun talks to sell the gas to Cypriot users and export it to Egypt.

Among their prospective customers is Shell, which would reexport the gas from Egypt to Europe as liquid form. Shell is also talking to the Leviathan partners about a similar deal.

“We will do what Cyprus tells us, not the government of Israel, because Aphrodite is a Cypriot reservoir, not Israeli,” a senior Delek executive who was speaking on condition of anonymity told TheMarker.

“International law doesn’t recognize the right of an adjacent field with just 5% of a big reservoir to delay development of Aphrodite.”

He questioned whether the reservoir really extended beyond the area of the Aphrodite license and said he welcomed the Ishai partners to drill on their own. He said, however, he doubted that Ishai was economically viable as a standalone field.

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A source at Ishai said the partners were weighing international arbitration or other legal steps, but for now there is nothing they can do to stop the Aphrodite partners. Israel’s Energy Ministry takes the view that the Aphrodite partners can’t begin development until all the sides have an understanding.

Meanwhile, the Knesset is weighing a law that would formalize the state’s rights in its economic water. At a meeting of the Knesset Economic Affairs Committee last month, the Ishai partner’s representatives criticized the legislation for failing to impose sanctions on violators, but they failed to get it included into the bill.

“The government is working to pass legislation under the radar screen that regulates everything related to Israel’s economic waters, with a strange insistence of not including sanctions,” said a source who works for one of the Ishai partners. He hinted that that was due to pressure from Delek and Noble.

The energy and justice ministries said in separate statements that international law addresses the issues of sanctions and that the draft legislation doesn’t need to reiterate that, only to complement it.