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    The Real Reason Turkey is in Cyprus’ EEZ [GGP]

Summary

The EU, apart from strong words and relatively mild measures, has not applied any serious sanctions to force Turkey to change direction. The responses by the UN, the US, Russia and China are more or less even-handed, mostly asking both sides to refrain and solve problems through negotiations.

by: Charles Ellinas

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Complimentary, Global Gas Perspectives

The Real Reason Turkey is in Cyprus’ EEZ [GGP]

The EU, apart from strong words and relatively mild measures, has not applied any serious sanctions to force Turkey to change direction. The responses by the UN, the US, Russia and China are more or less even-handed, mostly asking both sides to refrain and solve problems through negotiations.

Cyprus is putting a brave face to this response yet again. How can it be? The objective was to force Turkey to pull out of drilling in Cyprus’ EZZ. But Turkey is still there and has no intention of changing direction. If anything, it is intensifying its actions. The overarching conclusion is then that the objective has failed.

It’s time for Plan B. Current policies are running into a dead-end and if we carry on pursuing them without a credible Plan B, by the time we are forced to consider alternatives it may be too late. This appears to be a recurring process in Cypriot politics.

Despite all the warnings in my and others’ articles spanning three years, the inevitable has happened and what is our response so far? As more often than not, misplaced optimism – looking for a positive angle in what is fast getting out of hand.

Strong words and mild ‘sanctions’ were never going to be enough to deter Turkey. This has been confirmed by the country’s foreign minister, Mevlut Cavusoglu, who also went on to say that Turkey will carry-on drilling around Cyprus “until the Greek Cypriots come to the negotiating table”. And make no mistake. Having established new facts in our EEZ in support of its claims, Turkey will be in an increasingly stronger position to dictate the terms of such negotiations.

Unfortunately, the unfolding events confirm my warning in earlier articles that Turkey’s main objective in drilling in Cyprus’ EEZ is not to discover gas, but has always been to establish facts from which to force future negotiations under its own terms.

But what if Turkey makes a discovery?

A number of unconfirmed articles published recently claimed that the Turkish drilling rig Fatih has made a sizeable gas discovery west of Paphos. But Turkey’s Minister of Energy, Fatih Donmez, confirmed this week that this news is incorrect. Drilling by Fatih is still in progress, expected to be completed end of July.

But what if Fatih makes a discovery? The drilling location is firmly within Cyprus EEZ, but also within the area claimed by Turkey to belong to its continental shelf. As such, it will not be subject to negotiations related to the Cyprus problem. In any case, Turkey has made it clear that it will not enter into such negotiations until after settlement of the Cyprus problem.

Turkey may not rush into proceeding with plans to develop any discovery immediately, but any such discovery will make future negotiations that much harder.

However, emboldened by developments and given Cavusoglu’s recent statement, Turkey is planning to continue drilling around Cyprus, likely to include the declared blocks south of the island that are within the area claimed by Turkey to be part of its continental shelf. More drilling increases the probability that a discovery may be made, complicating an already difficult situation even further.

The future of the hydrocarbons

Turkey’s actions will not stop the oil companies from going ahead with their drilling programmes over the next two years, as announced recently. But an emboldened Turkey will make it difficult, and possibly intervene if they plan to drill exploratory wells in areas claimed by Turkey or the Turkish Cypriots. Turkey will maintain pressure until Cyprus agrees to put hydrocarbons on the negotiating table.

However, it is important that appraisal drilling proceeds as planned so that the quantities of gas discovered at Aphrodite, Calypso and Glafcos are confirmed. These will be important to Cyprus’ position in any future negotiations.

But the question that still needs serious consideration is what is the value of this gas and what are the prospects of exporting it to international markets? I covered this to some extent in my article in Cyprus Mail on June 23.

What I would like to stress here is that the oil companies are under increasing pressure from the inexorable global shift towards clean energy. The problem is not supply, because there is plenty, or demand. The challenge is how to maintain trust and markets as they continue to work in a business which is increasingly seen by the public as doing damage.

In order to fight divestment, which is already happening, oil companies are placing emphasis on maintaining their dividends and returns to their shareholders. This means that they must maintain profitability now, when the oil price is hovering between $60-65/bl, to the same levels as when the oil price was $100/bl. This can be achieved only by investing in projects with high returns, over 20 per cent, and fast payback.

Gas prices in Asia are expected to remain low in the longer-term. Cyprus gas is expensive to produce and export and profit margins are likely to be low and as such may not attract the required investment. In addition, the longer it takes to bring it to markets the more likely it becomes that it will stay where it is. So, repeating the question in my earlier article, is it worth the trouble? With the perceptions of riches from hydrocarbons becoming increasingly unjustifiable, should hydrocarbons be allowed to continue to play such a major role in Cyprus politics?

If exports become difficult then regional markets might become an option. But with Egypt becoming self-sufficient in gas, the main available regional market is Turkey. It so happens that a number of existing gas import contracts will be coming up for renewal between 2021 and 2025. But without a solution of the Cyprus problem, the Turkish market will not be accessible to Cyprus gas.

Clearly the way out of Cyprus’ present predicament is a resumption of negotiations coupled with a realisation that hydrocarbons may not worth the trouble, and a solution of the Cyprus problem. Cyprus needs to do whatever it takes to enable this to happen.

Charles Ellinas

Dr Charles Ellinas, Senior Fellow, Global Energy Centre, Atlantic Council.  First published in the Cyprus Mail

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