Cyprus’ third licensing round: Questions and observations

The Republic of Cyprus officially launched its third licensing round for hydrocarbon exploration on March 24, 2016. Blocks 6, 8 and 10 are open for licensing, and the application deadline is set for July 22, 2016, four months after the launch.

The announcement came just over a month after the Council of Ministers approved the third licensing round. The haste must have surprised many observers. The time provided by the organizers to companies to evaluate blocks on offer and submit their application is relatively short. Though not exceptional (the previous licensing round in 2012 was open for three months), this relatively short timeframe coupled with the rapid launch of the tender might reflect a certain confidence in a successful outcome. A confidence we hope is based on solid data.

Turkey reacted angrily to the announcement, which it perceives as disregarding the rights of Turkish Cypriots and as violating its own continental shelf rights. In a statement released on March 25, the Turkish Ministry of Foreign Affairs said that Turkey would not allow foreign companies to explore for hydrocarbons.

Over the past few years, Ankara repeatedly disturbed exploration activities conducted in the Cypriot Exclusive Economic Zone, monitored operators’ activity in Block 12 (Noble Energy) and Block 9 (ENI), deployed warships and sent research vessels to explore areas within Cyprus’ EEZ. On March 18, the EU and Turkey reached an agreement aimed at stopping the flow of irregular migration via Turkey to Europe, which also included a clause to “re-energise” Turkey’s accession process by opening Chapter 33 during the upcoming Netherlands presidency. Assuming new licenses are awarded at the end of the tender and preparations for exploratory activities are undertaken, what would be the extent of Turkish measures this time in reaction to exploration in Cyprus’ EEZ? Will they be restrained in order not to harm negotiations with the EU? Or will Ankara choose to assert (what it perceives as) its rights at the expense of the accession process? In this case, how will the EU react? Did these elements contribute towards the decision to effectively launch the third licensing round?

Parts of Block 6 fall in an area claimed by Turkey. Will foreign oil and gas companies overcome their traditional fear of disputed areas and bid for it? If applications are indeed submitted for Block 6, will national security be at play when choosing the successful applicant? Will Turkey attempt to disturb the operator’s exploratory activities in the future as it did in February 2014 when a Norwegian surveyor conducting seismic research for Total was harassed by a Turkish frigate and ordered to “leave Turkish waters”?

The decision to launch the third licensing round might also be, in part, motivated by political considerations: Greek Cypriots want to show that they are pursuing their plans and it is business as usual even during negotiations with Turkish Cypriots, knowing that the hardest part of these negotiations has yet to come, and they might be tempted to consider gas resources as one of the tools in their hands to be used as leverage.

In all cases, and considering current market conditions and a weak appetite for investing in exploration, particularly in difficult areas such as the Eastern Mediterranean, it wouldn’t be too farfetched to say that all eyes in East Med will be on Cyprus. The third licensing round is an opportunity to assess foreign companies’ interest for being involved in the region at this stage. Israel is hoping to resume offshore exploration and is considering a potential bid round in 2016 or 2017, although the High Court’s decision (March 27) to dismiss the gas deal is likely to complicate things for the Israeli gas sector. Egypt had to postpone a bid round in January 2016 due to low oil prices but is planning to organize a tender later this year for exploration rights in the Mediterranean and Nile Delta. Lebanon, despite a dormant oil & gas sector, will also be keeping a close eye and will be drawing lessons from the Cypriot experience.

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