Gas dispute with Israel is in ‘no one’s interest’

Article featuring Dr. Constantinos Hadjistassou and Dr. Charles Ellinas which appeared in Cyprus Mail newspaper on May 6, 2018.


By Elias Hazou

Fresh reports this week of Cyprus and Israel resorting to arbitration to resolve a dispute over future earnings from the Aphrodite gas field appear to be driven by angst on the Israeli side.

The likelihood of the two sides going for arbitration seems far-fetched, said Constantinos Hadjistassou, assistant professor at the University of Nicosia.

“Nobody really wants that, so I was surprised to read these press reports. More likely, the Israelis are playing hard ball,” he said.

He was alluding to the article in Israeli news outlet Globes, citing sources claiming that the two neighbouring nations might be seeking international arbitration sometime over the coming months.

The Aphrodite reservoir is located on the border between the economic waters of Israel and Cyprus, with most of the reservoir lying on the Cypriot side.

According to Globes, Israel’s energy ministry estimates the quantity of gas in the Israeli section at 7-10 billion cubic metres (bcm), while the gas in the Cypriot section of the reservoir is estimated at 100 bcm.

Because the gas in the Yishai prospect on the Israeli side is part of a single geological reservoir, its production depends on agreements between the two countries.

Pumping gas from Aphrodite will also cause gas to be pumped from the Yishai prospect.
The two countries signed an agreement delineating their respective exclusive economic waters in 2010. At the time, this was expected to be coupled with a unitisation agreement – a deal on joint development and revenue distribution from shared reservoirs – but it never happened.

It appears the concerns on the Israeli side emanate from recent reports that a deal is on the cards between Cyprus and Egypt for exporting gas from Aphrodite to the Arab nation.

This prompted the concession holders in the Yishai prospect to write to Israel’s Petroleum Commissioner asking him how the state of Israel planned to safeguard their rights.
Hadjistassou believes these are tactical moves.

The point of contention, he noted, has always been about the share of the pie in the Aphrodite reservoir.

But Hadjistassou doubts matters will be drawn out, as it is in no one’s interest.

If a deal is struck, the Israeli ‘cut’ on Aphrodite’s revenues will initially be relatively low.

As more reliable data on the gas is accumulated during extraction, and as Noble Energy and their partners start recovering their investment costs (infrastructures, pipeline) the revenues distribution would be revised, with the Israeli percentage going up.

Conversely, an arbitration process could take several months, possibly years, meaning further delays to developing Aphrodite.

Here, it is the Aphrodite partners – Noble Energy, Shell and Delek – who are under the cosh. It is they who are anxious to develop the gas play, as they will be the ones earning the lion’s share of revenues.

Talk of arbitration therefore appears to be a pressure lever on the ‘Cypriot’ side to make concessions regarding the distribution of revenues.

“Distribution agreements are very common in the industry, in fact they’ve been used since the 1920s in the United States,” Hadjistassou explains.

The issue lay dormant for years but has now acquired urgency as it appears a deal may be imminent for selling the Aphrodite gas to Egypt.

But although the absence of a unitisation agreement was in the background, it never completely dropped off the radar.

The Aphrodite discovery in Cyprus’ Block 12 was made in late 2011.

In 2012 the concession holders in Yishai drilled the Aphrodite 2 well on the Israeli side. In April 2013, Israel Opportunity Energy Resources LP announced on the Tel Aviv stock exchange that the Aphrodite 2 well held only negligible quantities of gas. According to reports at the time, drilling the well cost approximately $100 million, for which Israel Opportunity put up $10 million.

Despite this, in November 2015 the Israelis took the Cypriots aback by declaring the
Yishai licence a commercial discovery.
Globes at the time quoted an unnamed Cypriot official expressing annoyance at the Israeli move.

Energy analyst Charles Ellinas said one could understand Israeli concerns, given that potential cash revenues from Aphrodite are by no means insubstantial.

Assuming the 7-10 bcm figure is correct, and assuming a $2 profit per mmbtu, that works out to around $700m overall to be shared between the state of Israel and the concession holders in Yishai.

According to the expert, the problem lies in the lack of an inter-state unitisation agreement. This should have been concluded right away in 2010 when Cyprus and Israel delineated their respective EEZs.

A unitisation agreement essentially is a framework agreement between two states laying out how joint reservoirs are to be exploited. It is a generic agreement, applying to any and all potential shared reservoirs. Among others, it prescribes the course of action in the event of disagreement.

Then, once a shared reservoir is actually discovered, the interested companies engage in negotiations between themselves to hammer out the details but using the unitisation agreement as a reference point.

“In 2011, when Aphrodite was discovered off Cyprus, there was still no unitisation deal, but by this time the dispute over spillage was already there. That is why the Israeli companies are now urging their government to get involved, precisely because there is no prescribed method of handling such situations.

“It’s a bit of a muddle,” said Ellinas.

Because of the fluid state of affairs, in the event of arbitration the parties or litigants would include the governments as well as the private oil and gas corporations on either side.

They would first need to agree which body to resort to – such as the International Chamber of Commerce or the International Centre for Settlement of Investment Disputes.

This alone could take months, while the entire process until resolution might drag on for years.

Meantime negotiations are ongoing between Noble Energy and Shell, the majority stakeholder in the LNG plant in Idku, Egypt.

The Cypriot gas would be transported via pipeline to Egypt, liquefied there and then re-exported to European markets.

Ellinas attended a workshop in Cairo two weeks ago, where Egypt’s Petroleum Minister Tareq El Molla stated clearly that an inter-governmental agreement for gas exports would be signed between his country and Cyprus over the coming weeks.

But at the same conference, Ellinas also heard concerns from industry people that the price of natural gas on European markets is currently too low. Shell, which operates the LNG plant at Idku, might not be able to get a reasonable profit for selling the Cypriot gas.


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