For Cyprus a Sudden Need to Play Nice With Turkey

By JAMES KANTER New York Times March 27, 2013 

BRUSSELS — With its economy in tatters, Cyprus urgently needs to tap its natural gas deposits. But opening the spigot will force the easternmost member of the European Union to make the tough choices it has long been loath to confront.

Since the discovery of the gas two years ago in nearby waters, Cyprus has been laying plans to get the gas to market by circumventing Turkey, which has occupied the northern third of the island for nearly 40 years.

But in less than a week, those Cypriot ambitions have been dealt a double blow.

On Monday, Cyprus was forced to shrink a banking sector that could have helped channel capital for vital energy infrastructure as a condition for a €10 billion, or $13 billion, bailout from the European lenders and the International Monetary Fund. The deal fended off an uncontrolled default and the country’s exit from the euro, but snatched away the keys to Cyprus’s prosperity in recent decades.

Three days earlier, Israel — on whose additional gas Cyprus was relying to turn itself into an energy export hub — mended fences with Turkey. The reconciliation, over an Israeli raid three years ago that left nine Turks dead on an aid vessel bound for Gaza, has opened the way for normal relations between Israel and Turkey that could include direct cooperation in the energy sector, bypassing Cyprus.

The sudden reversal of fortunes implies that fiercely self-reliant Cypriots may need to brush up on their own relations with Turkey to make its gas wealth a reality.

“The saddling of Cyprus with so much debt could be an indirect way of the E.U. pushing Greek Cypriots into some kind of resolution of the Cyprus problem,” said Fiona Mullen, director of Sapienta Economics, a consulting firm based in Nicosia. “If you have to pledge the wealth of future generations to save your souls today, then this puts a premium on making as much revenue out of the gas as fast as possible.”

E.U. lawmakers also regard the Cypriots’ desperate need for cash as leverage for a settlement with Turkey, but underline the huge political challenges.

For Cyprus and Turkey, “gas exploration and export could be the coal and steel commodity that united France and Germany after the war,” said Andrew Duff, a British member of the European Parliament, referring to the foundations of economic alliance that developed into the modern-day European Union.

“The thing that we haven’t as yet seen in the Eastern Mediterranean that we saw after the war here is leadership of a statesmanlike quality that can carry such a deal through,” said Mr. Duff, who participates in an E.U.-Turkey Joint Parliamentary Committee.

The two halves of the island have been split between the mainly Turkish-speaking north, occupied by Turkey since an invasion in 1974, and the internationally recognized, mainly Greek-speaking Republic of Cyprus in the south.

Both sides have sparred over ownership of the gas, creating another obstacle to reunification rather than an incentive to cooperate. Yet the closest natural customer is Turkey, which imports most of its oil and gas and is the biggest potential, and rapidly growing, consumer.

Those tensions bubbled to the surface again last weekend when the Turkish Ministry of Foreign Affairs warned the Cypriots against making the gas part of a potential deal, now apparently off the table, to repay bailout loans to the Union or Russia.

“It is not acceptable that the Greek Cypriot side uses the economic crisis it is facing as an opportunity to create new fait accomplis,” the ministry said in a statement. The “only way to exploit the natural resources of the island” is “the clear consent of the Turkish Cypriot side regarding the sharing of these natural resources,” according to the ministry.

On Wednesday, the Turkish energy minister, Taner Yildiz, said his government was suspending planned projects with the Italian energy giant Eni partly over the energy company’s involvement in energy exploration in Cyprus.

Cyprus has nurtured ties with Israel to protect future gas facilities to produce and deliver liquefied natural gas, or L.N.G., drawn from offshore fields in the Eastern Mediterranean and to avoid the need for a pipeline to Turkey to reach markets.

For its part, Israel had been turning to Cyprus as a regional partner, signing defense and cooperation agreements partly aimed at protecting their overlapping gas fields, since the raid on the aid vessel, the Mavi Marmara. Then, on Friday, in a dramatic overture, and apparently with a push from the United States, the Israeli prime minister, Benjamin Netanyahu, apologized for the loss of life, a move immediately welcomed by the Turkish prime minister, Recep Tayyip Erdogan.

The thaw is mainly aimed at containing the conflict in Syria. Rebuilding trust still could take time. But the move already looks like a game-changer for the region’s energy politics.

“Détente between Israel and Turkey could make the export of Israeli gas to and through Turkey feasible,” said Michael Leigh, a senior adviser with the German Marshall Fund of the United States. “This is among Israel’s most commercially viable export options.”

Cyprus’s diminished stature makes “a new Israel-Cyprus-Greece Mediterranean energy corridor or political alignment unlikely,” he said. “All three countries should seek ways to cooperate with Turkey in developing the region’s resources.”

Focusing on hydrocarbons would be a smart move for the Cypriots, who need to diversify their “economy away from dependence on offshore banking” and should “like the Israelis and the Norwegians, develop energy-related high-tech industries,” Mr. Leigh added.

A key player is Noble Energy, based in Houston, which is leading the drilling in Cypriot waters, along with Israeli partners, giving both the United States and Israel huge stakes in the find.

Noble has announced finds of 35 trillion cubic feet and said last year that about 20 percent of it is in Cypriot waters. Noble has been working with Israeli partners under license from Greek Cypriot leaders, many of whom regard the undersea area as theirs to exploit as they please.

A “potential” scenario is to build an L.N.G. plant in Cyprus, but cost estimates and a timeline for the project still need to developed, Ben Dillon, a spokesman for Noble, wrote in an e-mail Wednesday. The main alternative — a pipeline from Israel or Cyprus to Turkey — “would need to be studied carefully in the light of the difficult physical terrain,” Mr. Dillon wrote.

Significant investment is still needed to begin extracting the gas and get it to market. Exports also may not begin until 2019.

But with its bailed-out and bombed-out economy, the goal of building a liquefied natural gas plant on Cyprus now looks like an insurmountable financial challenge, leaving the Cypriots with little choice but to pipe gas to Turkey.

“You get higher and faster revenues — I estimated €15 billion more — if you export gas via a pipeline to Turkey rather than pour money into a costly and energy-intensive L.N.G. plant that will initially not create jobs for Cypriots,” said Ms. Mullen, of Sapienta.