Cyprus and Israel Dispute over Aphrodite Gas Field

Recently news broke out that Cyprus and Israel might resort to international arbitration to resolve a dispute over Aphrodite, a gas field located in the Cypriot Exclusive Economic Zone (EEZ), with a tip extending into the Israeli EEZ.

In December 2010, Cyprus and Israel signed an agreement delimiting their maritime border. It was supposed to be followed up swiftly by a unitization agreement providing a framework for cooperation in the exploitation of cross-border natural gas and oil reservoirs, but the agreement stalled from the Israeli side. A year later, toward the end of 2011, Texas-based Noble Energy announced the discovery of Aphrodite in Block 12 off the Cypriot coast.

Aphrodite was estimated to contain a mean 4.5 trillion cubic feet (tcf) of natural gas based on appraisal drilling in 2013. Encouraged by this discovery, in November 2012 the holders of the Ishai license within the Israeli EEZ bordering Block 12 drilled a well that demonstrated that Aphrodite did partly extend into their license, though it only showed negligible quantities of natural gas. At the time, Eyal Shuker, CEO of Israel Opportunity, one of the Ishai licensees, declared: “We regret the results, and we would have been happy were they different.” Yet, much to the disbelief of the Cypriot side, in November 2015 the petroleum commissioner at the Israeli energy ministry classified these findings as a discovery, a term implying a commercial value.

Exactly how much of these natural gas resources extend to the Ishai license is unknown at this point. The Cypriots claim it is only a negligible fraction, possibly around 3 percent of the reservoir or less, while the Israelis, on the other hand, insist it is larger than that and have mentioned shares ranging from 5 to 10 percent of the reservoir.

Obstacles to development

The fact that Aphrodite extends to the other side of the EEZ border gives Israel some rights in the reservoir. In the absence of an agreement, Israel would likely refuse to allow the development of the gas field given that extracting gas from Aphrodite will lead to extracting gas from the Ishai prospect. However, this is not the only obstacle to the development of Aphrodite. Other factors explain why the gas field has not been developed yet, seven years after its discovery. As the local market is too small to justify the development of Aphrodite, the gas field’s license holders need to find export markets. So far, all options on the table are proving to be challenging from a commercial point of view. The high cost of development, combined with relatively low global gas prices, makes it hard for Aphrodite gas to be competitive, and that explains the difficulties in securing firm sales agreements to date. The absence of a framework to exploit joint reservoirs between Cyprus and Israel is an additional challenge that complicates development even further.

The issue was brought back to the spotlight with news that the negotiations between Cyprus and Egypt to connect the Aphrodite gas field to Egypt have reached their final stages and a deal is expected to be signed in the coming weeks. But this would be an inter-governmental agreement laying out the framework to facilitate possible gas transfers to Egypt in the future, and not a deal committing volumes of Aphrodite gas to Egypt. Indeed, the development of the Aphrodite gas field is still on hold with no real progress on this front since Noble Energy, the operator of the field, submitted a development plan in 2015. The company is focusing its efforts in the Eastern Mediterranean on developing Leviathan, the giant 22 tcf gas field in Israel, which at this time is its absolute priority in the region.

Disagreeing allies

The Cypriots have been disgruntled over what they perceive as an aggressive handling of the affair by the Israeli side, especially in light of the flourishing relations between the two countries in recent years. Ahead of the trilateral summit in Nicosia on May 8, Yuval Steinitz, the Israeli energy minister, made it clear that “the government of Israel cannot give up, not even as a gesture of friendship, on its territories or its natural resources.”

As till now Cyprus and Israel failed to reach an understanding, they will turn to an international expert, or possibly an arbitrator, to propose a solution.

 

Source: Executive Magazine