Identifier
Created
Classification
Origin
07NICOSIA120
2007-02-08 15:40:00
CONFIDENTIAL
Embassy Nicosia
Cable title:  

CYPRUS OIL AND GAS LICENSING RIGHTS CHALLENGED BY

Tags:  EPET ETRD PGOV PREL EINV ECON TU CY 
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SIPDIS

SIPDIS

E.O. 12958: DECL: 02/06/2017
TAGS: EPET ETRD PGOV PREL EINV ECON TU CY
SUBJECT: CYPRUS OIL AND GAS LICENSING RIGHTS CHALLENGED BY
TURKEY

REF: 06 NICOSIA 1361

Classified By: Ambassador Ronald Schlicher. Reasons 1.4 b and d.

C O N F I D E N T I A L NICOSIA 000120

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/06/2017
TAGS: EPET ETRD PGOV PREL EINV ECON TU CY
SUBJECT: CYPRUS OIL AND GAS LICENSING RIGHTS CHALLENGED BY
TURKEY

REF: 06 NICOSIA 1361

Classified By: Ambassador Ronald Schlicher. Reasons 1.4 b and d.


1. (C) Summary: The GoC intends to go forward with its first
licensing round for the exploration and exploitation of
potential offshore oil and natural gas deposits, despite
strong criticism and thinly-veiled threats from the
Government of Turkey and the Turkish Cypriot leadership. The
GoC plans to auction off 11 offshore blocks lying to the
south and southwest of Cyprus within Cyprus's Exclusive
Economic Zone as delimited in agreements with Egypt (2003),
Lebanon (2007) and Israel (under negotiation). None of the
blocks fall between Cyprus and Turkey or off the coast of the
area administered by Turkish Cypriots. Nevertheless, the
GoT, which unlike the rest of the world community does not
recognize the GoC, has strongly objected to the auction,
arguing that the GoC does not have the right to enter
international agreements without Turkish Cypriot consent,
that the Turkish Cypriot community should share in any
proceeds from Cypriot natural resources, and that any
delineation of the continental shelf in the Eastern
Mediterranean should include all the countries in the region.
According to the Turkish Cypriot press, Turkish Cypriot
authorities granted permission five years ago to the Turkish
Petroleum Incorporated Company (TPAS) to explore for oil and
natural gas off Cyprus's north coast, although actual
exploration had yet to begin. UK officials have told us
privately that, while none of the current blocks impinge on
the territorial waters of its Sovereign Base Areas (SBA),
they do impinge on the SBA's continental shelf. While the UK
is likely to find a way to note this publicly, the UK is
unlikely to object to the process, having concluded that it
will not affect its military operations. End summary.

First Licensing Round to Run February 15 to July 16
-------------- --------------



2. (U) On January 25, the Ministry of Commerce briefed the
diplomatic community on its latest plans to auction off the
oil and natural gas exploration and exploitation rights for
11 offshore blocks located to the south and southwest of
Cyprus. (English language slides from this presentation,
including a rough map of the blocks, are available on the
Ministry's website www.mcit.gov.cy.) The 11 blocks cover
approximately 60,000 square kilometers and are located in
Cyprus's Exclusive Economic Zone as negotiated in agreements
with Egypt (2003) and Lebanon (2007). The exact border of
two of the blocks will depend on the outcome of GoC-Israeli
negotiations reportedly under way. None of the blocks fall
between Cyprus and Turkey or off the coast of the area
administered by Turkish Cypriots. (Note: According to the
MFA, the GoC opted for negotiating EEZ agreements rather that
continental shelf agreements due to the relative ease of
concluding the former, even though the latter would appear to
provide more legal certainty. End note.) The GoC has hired
Beicip Freilab, a subsidiary of the French Petroleum
Institute, to be its outside consultant for the auction.
Last year the Norwegian firm Petroleum Geo-Services (PGS)
completed seismic surveys of the region, which interested
companies can purchase from the GoC.


3. (U) It is too early to determine the extent of the
possible reserves, and GoC officials are being careful not to
speculate. Press reports, however, suggest that preliminary,
unsubstantiated information suggests that there may be as
many as six to eight billion barrels of oil (or the
equivalent in natural gas) with an overall value of USD 400
billion -- although critics have dismissed this as wishful
thinking and note that the relative depth of any likely
deposits will make drilling extremely expensive.


4. (U) The first licensing round will officially open to
interested companies on February 15 and close on July 16.
GoC officials have suggested that it may take as long as six
months to evaluate all applications. Winning bidders will be
invited to enter into production-sharing agreements that are
likely to be signed shortly before the February 2008
presidential elections.


5. (U) Representatives of the Ministry of Commerce held
briefings on the planned auctions for interested companies
/
/
/
/
/

November 20 in London and January 30 in Houston. Both
presentations were reportedly well-attended. Cyprus also
promoted the auction at the February 1-2 NAPE Expo in
Houston. The Embassy has informed U.S. companies about the
auction through its website, the U.S. Export Assistance
Center in Houston, and through other FCS channels. According
to MoC officials, several U.S. companies have shown interest,
although none have approached the Embassy directly. MoC
officials have privately dismissed press speculation on which
companies are likely to compete as wildly inaccurate.

Opposition from Turkey and the Turkish Cypriots
-------------- --


6. (SBU) The Turkish Government and the Turkish Cypriot
administration have strongly denounced the agreements with
Egypt and Lebanon and the planned auction. Both the GoT and
Turkish Cypriots have publicly claimed:

-- that the Government of Cyprus does "not represent the
island as a whole. Consequently neither the legislation
adopted nor the bilateral agreements concluded by the Greek
Cypriot Administration have any effect." This stance is
based on the GOT policy -- rejected by the international
community -- that the GOC is not the sovereign authority on
the island.

-- the Turkish Cypriot community has a right to Cyprus's
natural resources and should share in any proceeds from
potential oil and gas deposits.


7. (SBU) The GoT has also claimed that any delineation of the
continental shelf in a "semi-enclosed sea" like the Eastern
Mediterranean should not be concluded bilaterally but
multilaterally taking into account the interests of all the
countries in the region. Consequently, the GoT has demarched
Lebanon and Egypt over their agreements with Cyprus and asked
the former not to ratify its January 2007 EEZ agreement with
Cyprus, sent (pre-scheduled) navy vessels to patrol the sea
south of Cyprus, and called on companies to respect Turkish
sensitivities and refrain from participating in Cyprus's oil
and gas exploration.


8. (U) Following Turkey's statements, the Turkish Cypriot
press also announced that, in clear contradiction to the
putative principles at play, the Turkish Cypriot "Council of
Ministers" had given permission five years ago to the Turkish
Petroleum Incorporated Company (TPAS) to begin exploring for
oil and gas off the "TRNC" coast. While actual exploration
had yet to start, TPAS would now accelerate its preparations.
TPAS, which according to the press lacks the technical
capability needed for deep sea drilling, was reportedly
looking to subcontract the work to a major international
company.

UK Bases Have Issues, but HMG Unlikely to Oppose Auction
-------------- --------------


9. (C) A UK High Commission Official told us that the UK,
having determined that the licensing round would not
negatively affect its military operations at its two
Sovereign Base Areas (SBA) in Cyprus, was very unlikely to
object to the auction or place any obstacles in the auction's
way, although technically some of the blocks may impinge upon
the SBA's continental shelf. (Indeed, the UK has been
unequivocal in its statements acknowledging the GoC's legal
rights). Consistent with its unilateral declaration
accompanying the Treaty of Establishment of the Republic of
Cyprus, (under which the UK pledged not to introduce
commercial activities into the SBA and to pass all mineral
rights to the GoC) the UK was not interested in any proceeds
from the oil and natural gas. Opposing the GoC's
exploitation of potential deposits in the SBA's continental
shelf would also be politically damaging and further
undermine the already weak support for the bases in Greek
Cypriot public opinion. As a result, the UK would find a way
to note its rights concerning the SBA's continental shelf
without opposing the auction or the winning bidders' ability
to exercise their exploration and exploitation rights. The
UK would object, however, if the GoC were to auction of any
areas within 6 miles of the SBA coastline. (Currently the
nearest block falls 6 miles from the SBA. While insisting on
its right to expand the SBA's territorial waters to 12 miles
at a later date, the SBA currently claims only three.)

Comment
--------------


10. (C) The GoC's plans appear to be well within Cyprus's
legal rights. While the GoT may not have a legal leg to
stand on, its political opposition has the potential to
sabotage the auction by scaring off many serious bidders.
Most of the major international energy companies are already
active in Turkey. Why risk a sure thing in Turkey to pursue
unproven reserves in Cyprus? The GoC's timing of the auction
also appears to have a political dimension, since it would
allow contracts to be signed shortly before next year's
Cypriot presidential elections. A successful auction would
give Papadopoulos an electoral boost, and further distract
attention from his failure to move the ball forward on the
Cyprus problem. Nevertheless, as is often the case with the
larger Cyprus issue, he is unwilling to explore any political
compromises that could help blunt Turkish opposition and
ensure the auction's success, instead doggedly insisting on
the GoC's legal rights. Like most controversies on the
island, this dispute is in essence a microcosm of the larger
Cyprus problem and further demonstrates the zero-sum
mentality that dominates thinking here. We continue to note
publicly that the Government of Cyprus obviously has the
right to enter into international agreements, but that the
issue illustrates the essential point that the potential
deposits be used in a way that enhances prospects for
reunification of the island. Moreover, any disputes over the
issues involved should be dealt with through peaceful, legal
means. In short, this dispute once again highlights the need
for a comprehensive solution to the Cyprus problem. We will
also continue to inform U.S. companies about this opportunity
and urge them to do the proper due diligence, as we do with
all projects.
SCHLICHER