As Israel And Cyprus Ally Over Energy, The Rest Of The Region Feels The Aftershock

In February, Israel's Prime Minister Benjamin Netanyahu visited the Greek-Cypriot capital of Nicosia (the first such trip ever by an Israeli leader) to expand and formalize trade pacts between the two unlikely partners.

To a large degree, it was an interesting development but a relatively straightforward pact. That is, except for one aspect of the agreement, which was keenly watched by capitals in the Near East as it represented yet another wrinkle in the jockeying for power and sovereign rights in the region affecting Greece, Turkey and even Lebanon.

It all began with the discovery last year of huge natural gas reserves off the coast of the Greek-dominated Republic of Cyprus, which comprises the southern portion of the Eastern Mediterranean island of Cyprus.

This attracted the interest of nearby Israel, which itself made two stunning gas discoveries of its own -- Tamar and Leviathan -- in recent years. The two countries began to discuss how they could help each other take advantage of their new finds, which could make both states energy-independent, if not exporters of natural gas.

From Israel's perspective, Cyprus is appealing because it is an EU member, a stable democracy and has a highly developed infrastructure and untapped natural resources. Also, Israel's relationships with former allies Turkey and Egypt are strained and it needs new friends in the region.

Meanwhile, Israel is attractive to Cyprus due to its scientific know-how, relative economic stability, strong military for the protection of gas reserves, and robust capital markets hungry to finance energy ventures and companies.

Netanyahu said at the signing that the gas could be liquefied in either Cyprus or Israel, and subsequently exported either to Europe (through Cyprus) or to Asia (through Israel).

“Israel has offshore discoveries close to Cyprus, as well as already-producing fields, so it would make sense to create commercial synergies for Israeli and Cypriot energy development given the close proximity of the two countries,” said Peter Kiernan of the Economist Intelligence Unit in London.

With a GDP of about $23 billion (about one-tenth that of Israel) and living under the threat of Greece's debt crisis reaching its shores, Cyprus sorely needs the bounty that would be provided by a giant gas project and the foreign investments that would trigger.

Israel is already exporting about €300 million of goods to Cyprus annually, and this figure is bound to keep climbing.

Indeed, Cyprus' low corporate tax rate (10 percent versus 25 percent in Israel) has already attracted scores of Israeli business people to set up shop on the island.

These developments represent a dramatic about-face since the 1990s when the Jewish state enjoyed warm relations with Turkey and cool ties with the Cypriots. In retaliation, at that time, Nicosia expressed support for the Arab cause and invited Palestinian refugees onto the island. Relations worsened after Antroulla Vasiliou, the wife of then-Cypriot President George Vasiliou, tried to meet with Palestinian leader Yasser Arafat, and two alleged Israeli spies were expelled from Cyprus.

Turkey's Looming Shadow

Today, though, Turkey is clearly not pleased.

Since 1974, when the Turkish military invaded Cyprus (in response to a coup by Greek Cypriot officers aiming to unite with mainland Greece) and formed the Turkish Republic of Northern Cyprus, an entity recognized only by Ankara, the island has been hopelessly and perhaps permanently partitioned.

Turkey subsequently sent thousands of poor immigrants onto the island, precluding any hopes of reunification.

Ankara keeps a close eye on Cypriot affairs and became alarmed when Greek Cypriots commenced oil drilling activities off the coast last September. In response, the Turks signed their own energy development pact with their allies on the northern part of the disputed island.

Now, the involvement of Israel in Cypriot oil-and-gas projects has further irritated the Turks. Ankara has formally declared that the Greek Cypriots had no authority to sign gas deals with Israel without the participation and permission of Turkish Cypriots.

Turkey views energy development on Cyprus' territorial waters as illegitimate under international laws, while status issues from the 1970s remains unresolved, but there isn't much Ankara can really do about it, Kiernan said.

Relations between Israel and Turkey, once strong allies, have deteriorated sharply since Israeli commandos killed Turkish activists who boarded a flotilla challenging the blockade of Gaza in 2010. Turkey's Prime Minister Recep Tayyip Erdogan has since taken a decidedly anti-Israeli stance in his public pronouncements, thereby earning admiration across the Muslim world.

In mid-May, the Turks were further enraged by the entry of Israeli air force jets onto northern Cypriot airspace - a provocation that spurred Turkish jets to patrol the area, but did not lead to any confrontations.

In a particularly inflammatory gesture, Turkey even accused Israel of planning to deploy 20,000 troops in Cyprus to protect the gas projects – an assertion immediately denied by Israel’s Foreign Ministry (Turkey stations about 30,000 troops in northern Cyprus).

Turkey's claims concerning territorial waters appear to be based upon the assertion of illegitimacy -- or at least non-recognition -- of the state administered from Nicosia, the capital of Greek Cyprus. But Turkey’s claims have little currency beyond Ankara, and besides, its navy is really no match for the Israeli military, said Robert Cutler, senior research fellow in the Institute of European, Russian and Eurasian Studies at Carleton University in Canada.

“[Turkey] recently threatened to shut out any firms participating in Cyprus's offshore gas development from projects in Turkey,” said Cutler. “However, no major international firms fall into that category.”

Kiernan cautions, however, that regardless of Turkey's views, the Israel-Cypriot partnership is still in its embryonic stages.

“Nothing concrete has been decided on yet between any of these countries in terms of energy development,” he noted.

If and when Cyprus begins producing gas, its first priority will be to supply its domestic market, Kiernan said, but there will likely be enough left over for exports.

“Eventually, there may be some kind of cooperation between Israel and Cyprus over supplying each respective market, or developing liquefied natural gas capability jointly, but this is a long way down the road,” he indicated.

Even in the most optimistic scenario, Cyprus would not even begin exporting LNG until the end of this decade.

Enter Greece, Stage Left

Turkey's historic enemy and the motherland for most Cypriots, Greece, is also a player in this unfolding drama.

Not surprisingly, Israel's relationship with Greece has also improved as its ties with Turkey have weakened.

Prior to the 21st century, Israel and Greece endured strained relations due to a number of factors - among them, Israel's resentment over Athens' support of the Palestinians, as well as Israel's then-close ties with Turkey.

But last summer, Netanyahu and then-Greek Prime Minister George Papandreou signed mutual defense pacts. And despite Greece’s massive economic crisis, Quantum Energy, a consortium that includes Greece's state-controlled power utility Public Power Corp. of Greece, plans to construct the world's longest sub-sea power cable, between Israel, Cyprus and Greece - to be called the EuroAsia Interconnector project.

Still, its historical and cultural ties to Cyprus notwithstanding, Greece's role in the natural gas agreement between Israel and Cyprus is likely to be limited, given its crippling fiscal problems and lack of natural resources.

Lebanon's Futile Play

The right to explore for oil and gas in the eastern Mediterranean is complicated by the fact that Israel is not recognized by most of its neighbors.

For example, Lebanon has complained that the Cyprus-Israel energy agreement infringes on its sovereign rates since it claims some territory in the area of the gas finds.

There is an issue between Israel and Lebanon as the nautical boundary has not been formally agreed to between these states, which is a symptom of the broader Arab-Israeli conflict, Kiernan said.

Of course, Lebanon and Israel have no diplomatic relations, which makes boundary issues even more problematic.

But there is little that Beirut can do about this quandary.

Exclusive Economic Zones, or EEZs, give nations the right under international laws to tap resources in an area up to 200 nautical miles from a country's coastline.

What [gas reserves] Israel and Cyprus have discovered so far [falls] within these respective zones, and any resources within that boundary belongs to the country concerned, Kiernan said. For any third party [like Lebanon] to claim differently would be a long stretch that wouldn't get very far in a court of law.

A New Energy Paradigm in the Eastern Mediterranean?

In a survey of the Eastern Mediterranean maritime region, the U.S. Geological Survey said there were potential resources of 122 trillion cubic feet (3.45 trillion cubic meters) of gas, more than twice Libya’s proved reserves, and a potentially enormous amount of resources in a world increasingly hungry for energy. Indeed, said Avraam Zelilidis, a professor of geology at the University of Patras in Greece, the European Union is excitedly building a pipeline from Azerbaijan to Kazakhstan to carry 1.3 trillion cubic meters of gas, a drop in the bucket compared to what is believed to be in the southern Cypriot basin.

“The Eastern Mediterranean is still a frontier region and there is still a lot to learn, but the recent discoveries made so far in Israel and Cyprus last year are definitely encouraging,” Kiernan added.

Well, at least to Israel and Greece; Turkey and other countries in the region would have something else to say about it.