The Gas Fallout from the Cyprus Crisis

The claim that the Chinese word for crisis is the same as the word for opportunity may be wrong, but Turkey is putting it into practice over Cyprus nonetheless. The island’s rapid descent into financial turmoil and its attempt to use gas reserves as collateral has increased political tensions with Ankara and drawn in Russia and the EU.

For Russia the issue would seem relatively straightforward. It has money, and Cyprus has gas. Russia has already loaned the island €2.5 billion and has been keen to protect the rights of Russian investors there. Consequently Moscow offered to assist “in a way that would make economic sense for Russia”, according to Cypriot Finance Minister Michalis Sarris.

But Russia declined to help, presumably fearing a deeper and deeper entanglement in the island’s troubled finances, and Sarris was sent packing from Moscow on 22 March without a deal in sight.

The offer on the table – the rights for Russian firms to develop Cypriot deepwater gas blocks – was not attractive enough. Prime Minister Dmitry Medvedev, speaking to European media on 21 March, gave two reasons: “First of all, I have only a vague idea of [the gas fields’] value. And, secondly, we know there are some problems with Turkey there. So, as I said, the issue is a complicated one.” 

An Energy Ministry source followed up by saying that neither Gazprom nor Rosneft were interested, because “a seismic survey has not been completed yet, and it is unclear what kind of deposit they have”. But most agree that reserves are significant and the Russian companies have taken bigger punts in the past. The Turkish angle seems to be the real issue here. Exploring in Cypriot waters would have led to a showdown between Moscow and Ankara, which neither side wants.

Turkey has taken the crisis to tighten the screws on Cyprus’s plans for offshore drilling, which Ankara says is forbidden until revenue-sharing is agreed as part of a peace deal with Turkish Cyprus in the north. Not only has it warned that any attempt to use exploration rights as collateral is unacceptable and “may lead to a new crisis in the region”, it has also decided to block Eni from any activity in Turkey because of its ongoing drilling work offshore Cyprus.

Eni has been working with Cyprus for months, and was awarded a licence for the eastern Blocks 2 and 3 (in a consortium with Korea’s Kogas) back in January. And Ankara has been warning foreign firms since early last year. So the timing is an obvious attempt to pressure IOCs into leaving Cyprus, or at least punish them for refusing to do so. Ironically, this is almost exactly what Iraq has done to Turkey’s TPAO – among others - for its close links with the Kurdistan Regional Government.

Eni has no upstream activity in Turkey, but holds stakes in a number of active and planned pipelines. One of these – the Samsun-Ceyhan pipeline – has been stalled for years, but Eni also holds a 5% stake in the Baku-Tbilisi-Ceyhan pipeline from Azerbaijan to Turkey’s Mediterranean coast, participates in a joint venture with Gazprom in the Blue Stream pipeline, and holds 20% in Gazprom’s planned South Stream project which will cross Turkish territorial waters. Eni is therefore central to Turkey’s plans to be a corridor for energy pipelines.

An anonymous Turkish official has said that Ankara is probably only going to eject Eni from the Samsun-Ceyhan pipeline, which is more or less a dead letter anyway. Kicking it out of active projects would be a Pyrrhic victory: it would annoy Russia and Azerbaijan and deal serious damage to Turkey’s reputation as a reliable energy consumer and transit state. Imposing only a partial ban, however, makes its blacklist look rather flimsy and underlines that Turkey’s bargaining position is not actually that strong. If forced between delaying or disrupting vital pipeline projects and tightening the net around Cyprus, Ankara will probably err on the side of caution.

In the absence of better options, it has threatened to carry out its own seismic research off the Cypriot coast, in blocks claimed by both the Turkish north and Greek Cyprus. But as a Cyprus-based energy expert told me recently, TPAO will struggle to lease a drilling rig for exploring these blocks, given that Greek Cyprus is a recognised EU member and Turkish Cyprus – and its offshore blocks - are recognised by no country except Turkey. “Nobody is going to drill wells for Turkey offshore Cyprus, in blocks awarded to Eni or Total. They’ll get sued,” he said. The solution - building a rig from scratch for an essentially political stunt - would be very costly.

Turkey’s actions look deeply polarising and rather stern, given Cyprus’s dire situation. But preventing Cyprus unilaterally exploring its gas reserves is a longstanding policy (Eni’s CEO Paolo Scaroni acknowledged that “many were expecting such a reaction”), and it’s not clear whether Nicosia genuinely thought it could find anyone to take up its gas-for-cash deal. Trying to monetise gasfields which aren’t confirmed to exist is not exactly standard practice.

With the EU reluctantly stepping in to bail out Cyprus instead of Russia, the gas issue looks to be on the back burner again. But only temporarily: Cyprus is now more urgently in need of investment than ever, so expect it to push ahead with offering up gasfields to companies willing to take the risk. 

The question is what Turkey will do now that it realises how seriously the Cypriots are about planning to drill. Blacklisting foreign companies is a self-defeating path – as the half-hearted block on Eni shows, Ankara is fully aware of this. And trying to drill in Cypriot waters will probably come to nothing. So Turkey may try to take more serious steps, leading to a new stand-off with the EU. A lot of trouble for gas that hasn’t even been discovered yet.

Alex Jackson is an analyst of political, energy and security issues in the Caspian region. He is based in London and can be contacted at ajackson320@gmail.com.