Major international oil companies have submitted bids to participate in Cyprus' third licensing round for three southern offshore blocks adjacent to Egypt's northern waters.
The three Cypriot licensing rounds have encountered a number of challenges. Turkey's threats to operating firms overshadowed the first licensing round. It threatened to boycott IOCs operating in Cypriot waters. It did not allow the IOCs to take crude oil from Turkish ports. The IOCs were also not allowed to distribute petroleum products in the Turkish market. Turkey has boycotted Eni but the Italian firm challenged the decision in court and the dispute is being adjudicated.
The second licensing round occurred during the Cypriot financial crisis that involved the collapse of two major local banks. The third licensing round has been taking place during the global price collapse. Oil firms have reduced investments in new offshore fields and cut costs drastically. About 5,000 blocks are on offer worldwide.
The IOCs' interest in the third Cypriot licensing round stems from Eni's major Zohr gas discovery in August 2015, in northern Egyptian waters about five miles from Cypriot waters. Zohr's significance lies in its huge reserves of approximately 30 trillion cubic feet, the largest field so far in the Mediterranean, and because it was found in a previously unexplored deep Eastern Mediterranean geological structure.
Cypriot Energy Minister Yiorgos Lakkotrypis briefed the Cabinet on July 27 that the third oil and gas licensing round received offers from a consortium of ExxonMobil and Qatar Petroleum, a second from a consortium of Total and Eni and a third from Norway's Statoil. Other offers were received from a consortium consisting of Capricorn and Israel's Delek, Avner and another one from Eni.
Zohr, along with the BP gas discovery of Baltim SW-1 well in June 2016, is expected to enhance Egypt's plans to be gas self-sufficient within the next decade. Zohr is projected to enter production around 2020.
Egypt is the largest gas importer among Arab countries — despite being a gas-producing state. Gas consumption has increased substantially in the past few years, rising more than domestic production.
This was due to disputes between the government and the oil firms over payments, which delayed the development of new fields. Consumption increased because of high subsidies, which were recently reduced, and due to rapid utilization of gas in power stations (more than 85 percent of Egyptian power stations burn gas instead of petroleum products), petrochemical and other industrial plants.
Egypt also committed to four gas-export projects (two piped gas and another two liquefied natural gas projects) that burdened the country's resources, obliging it to become a gas importer.
The interest expressed by major U.S. and European firms in the Cypriot third licensing round has raised expectations of the Eastern Mediterranean gas potential and its role in regional markets. The gas could provide a take-off for the domestic economies of the regional countries.
It is projected that the availability of sufficient gas supplies in energy-poor Eastern Mediterranean countries will reduce the dependence on crude oil imports and that the import substitution will lessen the balance of payments deficit in the new producing countries. Gas is more environmentally friendly than petroleum products.
The discovery of natural gas in the Eastern Med has added political risk to volatile region riddled with geopolitical problems. Most of the gas discovered has been in Exclusive Economic Zones of neighboring countries. Many of the boundaries between them are not demarcated and lack the necessary border treaties.
There are also historical feuds among the countries concerned. Israel, for example, has blocked the development of the East Gaza marine field that was discovered in Palestinian Authority waters in 2000.
A demarcation treaty was drafted by Cyprus and Lebanon but it has not been ratified by the Lebanese parliament, following a Cypriot-Israeli bilateral border accord, which Lebanon considers is in violation of its draft agreement with Cyprus. The conflict has resulted in a disputed zone between Lebanon and Israel.
Lebanon and Syria also need to demarcate their EEZ territories. Syria has awarded a Russian firm a concession that straddles northern Lebanese waters. Cyprus and Turkey are holding negotiations under UN auspices to settle the Cyprus problem and resolve the gas issue between the island's Greek and Turkish communities. Nicosia reports that the negotiations have been encouraging but it is not clear what Turkish President Recep Tayyip Erdogan's position will be following the latest attempted coup.
These disputes and others overshadow offshore gas developments in the Eastern Mediterranean. Future political tensions could spill over into the offshore areas. Protests are already being heard that gas from one country is being siphoned by another. The lack of accords to deal with fields that straddle borders is a possible source of conflict. Armed regional conflicts could also spill offshore.
By Walid Khadduri
This article originally appeared at The Arab Weekly.
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