Bloomberg News

Erdogan’s Gunboats Challenge Cyprus Gas Search in Mediterranean

October 12, 2011

Oct. 10 (Bloomberg) -- The four-decade clash between Turkey and Cyprus has moved offshore, drawing warships into an area where some of the past decade’s biggest natural gas fields were found.

Turkey sent frigates and fighter jets to escort the seismic ship Piri Reis when it set off last month. Days earlier, the Greek Cypriot government, which Turkey doesn’t recognize, authorized the start of drilling in the divided island’s waters. Off nearby Israeli and Egyptian coasts, companies including BP Plc and Noble Energy Inc. have found gas and are investing billions of dollars.

The dispute adds to tensions fueled by Turkey’s feud with Israel over the killing of activists aboard an aid ship, which already led Prime Minister Recep Tayyip Erdogan to promise a stronger naval presence in the Mediterranean. It may also hurt the United Nations effort to speed up talks on reunifying Cyprus, and Turkey’s bid to join the European Union, which depends on their success.

“What we’re seeing now is a redrawing of the strategic terrain of the eastern Mediterranean,” said James Ker-Lindsay, a specialist on Turkey and Cyprus at the London School of Economics. Any confrontations stemming from drilling there “would pretty much close Turkish hopes to become an EU member.”

Gas finds further south have added to expectations of success off Cyprus, raising the stakes.

The U.S. Geological survey estimates that the Levant Basin, a triangular slice of the Mediterranean lying between Cyprus and Israel, may hold 122 trillion cubic feet. That’s more than the 86.2 trillion cubic feet held by all EU countries combined, according to the BP Statistical Review of World Energy.

Biggest Discovery

Noble says its Leviathan field off Israel is the biggest deep-water gas discovery of the past decade. The Houston-based company says Leviathan and Tamar, another field it’s exploiting with Israel’s Delek Group Ltd., may hold 25 trillion cubic feet, double the U.K.’s proven reserves in 2009.

“It increases the chances of finding something, given that the findings on the sides validate the geology,” said Lionel Therond, head of oil and gas research at SBG Securities, a unit of Standard Bank Group Ltd., in London. “That’s why Cyprus was keen to license acreage and attract interest from the industry.”

National Interest

Noble, which expects to start gas production in Israel next year, won the first gas exploration license issued by the Cyprus government in 2008. Cyprus says it may offer more licenses within a year. Noble started drilling off Cyprus Sept. 18, prompting the launch of the Turkish expedition five days later.

The southernmost point where the Piri Reis is exploring overlaps with the area that Noble is drilling, said Huseyin Avni Benli, head of the marine science and technology institute at Dokuz Eylul University in western Turkey, which owns the ship. The university is waiving more than $1 million in fees it would typically charge because “the country’s interests are at stake,” he said.

Dependence on imported energy has helped push Turkey’s current account deficit to about 10 percent of gross domestic product this year.

Turkey invaded Cyprus in 1974 in response to a coup by supporters of union with Greece. It’s the only country to recognize a Turkish Cypriot administration in the island’s north, where it keeps thousands of troops.

Talks Frozen

The diplomatic standoff has hobbled Turkey’s bid to join the EU, which buys about half its exports. The bloc admitted Cyprus in 2004 and has frozen sections of Turkey’s entry talks because Turkey won’t recognize the Greek Cypriot government or allow its ships to use Turkish ports. Cyprus takes over the EU’s revolving presidency for six months in January.

Erdogan called Cypriot drilling a “provocation” that could sabotage UN talks on Cyprus. UN Secretary General Ban Ki- moon has said he expects to push those negotiations forward this month by meeting Turkish and Greek Cypriot leaders in New York.

The gas dispute coincides with a shift in Turkey’s foreign policy. Erdogan has this year downgraded ties with Israel, a longtime military ally. Israel, meantime, has deepened ties with Greece, Turkey’s historical rival, and the two countries have discussed routes for exporting Israeli gas to Europe.

Instead, Erdogan is pursuing ties with Arab countries. An alliance between Turkey and Egypt would “form a force 150 million people strong,” he told a cheering crowd in Cairo on Sept. 13. “We are virtually encircling the Mediterranean.”

Blacklist Threat

The premier has threatened to blacklist oil and gas companies working with Cyprus. His energy minister, Taner Yildiz, said last week that Turkey may shift resources from energy exploration off its northern Black Sea coast to the Mediterranean.

An energy find would help ease pressure on President Demetris Christofias, who is struggling to avoid becoming the latest European leader to seek a bailout, while resisting opposition pressure to quit.

Cypriot two-year and 10-year bonds are trading at about 15 percent and 10 percent respectively, the highest in the EU bar Greece and Portugal. Opposition parties say Christofias should resign over a July explosion at a munitions depot that knocked out half the power supply.

Cyprus’s right to drill is “inalienable and non- negotiable,” government spokesman Stefanos Stefanou said last week. Cyprus bases its claim to territorial waters on the UN Convention on the Law of the Sea, concluded in 1982, which Turkey hasn’t signed.

‘Just Words’

A gas find may generate $5 billion, or one-quarter of Cypriot gross domestic product, based on the reported size of the field, Credit Suisse Group AG said in an Oct. 7 report. Production probably wouldn’t begin before 2016, it said.

Erdogan has been praised by the EU for backing previous efforts to reunify Cyprus, including a 2004 UN plan submitted to a popular vote on both sides of the island. Turkish Cypriots voted two-to-one in favor, Greek Cypriots three-to-one against.

The energy dispute may erode that credit, said Robert O’Daly, senior analyst at the Economist Intelligence Unit in London.

“Turkey is in danger of finishing on the wrong side of this by being seen as the aggressive side,” though ultimately Erdogan will avoid confrontation because his foreign policy is “very pragmatic,” he said.

Still, such disputes always carry the risk of escalation, the LSE’s Ker-Lindsay said.

“People like to think situations are manageable,” he said. “They can have a nasty habit of spiraling out of control.”

--With assistance from Abdel Latif Wahba in Cairo. Editors: Ben Holland, Andrew J. Barden

To contact the reporter on this story: Emre Peker in Ankara at epeker2@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden in Dubai at barden@bloomberg.net.


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