Israel-Cyprus gas talks disappoint Ishai partners

Cyprus offshore rig Credit: Cyprus Public Information Office, Reuters
Cyprus offshore rig Credit: Cyprus Public Information Office, Reuters

The Israeli partners prefer joint development with Aphrodite partners Chevron, Shell and Delek, rather than a one-time compensation payment.

Last week talks began between the two groups holding the two parts of the Aphrodite offshore gas field. The largest part is in Cypriot economic waters and is owned by Delek Drilling LP (TASE: DEDR.L), Chevron and Shell. The smaller part, known as the Ishai gas field, is in Israeli economic waters and owned by four Israeli companies - Israel Opportunity, Nammax Oil & Gas, Petroleum Services Holdings (PSH), and Eden Energy. The fact that the same field stretches across the border of the economic waters of the two countries requires economic arrangements on the matter.

The negotiations begin with the Ishai Partners disgruntled with the Israeli government and Ministry of Energy. The Ishai partners claim that they have not gained full Israeli backing for their demand to develop the field jointly, which would also bring Israel revenues on the profits from the gas, rather than aiming for a one-off compensation payment.

Without the consent of the Israeli companies, which hold a small stake in the field, the Cypriots, in part with themselves to blame, are unable to develop their larger share in the field.

Israel and Cyprus signed a cooperation agreement in 2010 dealing with any gas fields that might be discovered in the Mediterranean, which includes a clause about offshore fields that straddle the maritime border. In 2012, it transpired that the Ishai gas field was a continuation of Cyprus's gas field. Since then the partners in the two fields have been struggling to reach agreement.

The delay in solving the issue resulted in unilateral measures by the partners on the Cypriot side, who announced plans to develop the field in 2019, and an agreement with Egypt to lay a gas pipeline between the Aphrodite field and the giant liquefaction plant on the Egyptian coast, which belongs to Shell. In response, Udi Adir, director general of Israel's Ministry of Energy, sent a letter to the Aphrodite partners warning them not to begin developing the field until the talks between Israel and Cyprus were completed. The letter created a diplomatic storm and the Israeli Ambassador to Cyprus was summoned to a meeting and reprimanded by the Cypriot government.

Subsequently, Cyprus's newly appointed Minister of Energy Natasa Pilides decided to solve the matter and remove the obstacles to developing the field. Last month, she reached an agreement with Israel's Minister of Energy Yuval Steinitz on the outline for swift negotiations to solve the issue, in which talks would begin without delay between the partners of the gas fields on both sides of the border, "to agree the way in which the Israeli companies would be compensated for their stake in the field."

The meaning was that in practice Israel has accepted the compensation plan and not joint development. The Israeli companies (Ishai partners) see this as Israel having relinquished its claim in advance on national resources. They have presented estimates in the past that this involves loss of about NIS 3 billion in tax revenues, if calculating the price of gas as $6 per thermal unit, although since then the price of gas has fallen significantly.

The Israeli Yishai partners claim that Israel has left them alone to face energy majors like Chevron and Shell.

Solving the dispute is a Cypriot national priority

Israel's Ministry of Energy dismisses these charges and points out that the Aphrodite partners have threatened to walk away from developing the field, if Israeli consent is not forthcoming. Regarding the Israeli companies, the Ministry of Energy says that in practice the Yishai field is not worth developing separately. The possibility of still separating the smaller joint field, despite the currently proposed plan, would allow Israel to present its position, even before international arbitration if necessary, while the State of Israel retains the right to approve or not approve any future settlement.

Cyprus sees the solution of the Aphrodite dispute as a national priority, which would allow the development of the largest gas field found in its national waters. Progress in the talks can be credited to Pilides, who is determined to solve the dispute.

Cyprus's Ministry of Energy said, "In a very short period, and through productive dialogue between senior officials of the ministries, we have succeeded in achieving major progress on all topics including the Aphrodite-Ishai issue. The agreement on the framework of the talks will bring about the promotion of a solution in the shortest time possible and allow the development of the field, while retaining the rights of the countries and the companies involved."

The power of Chevron and its status in gas in the region, nevertheless raises a warning flag. Through its acquisition of Noble Energy, Chevron has become the main partner in both the Tamar and Leviathan gas fields as well as the Cypriot Aphrodite field and holds large supply contracts to the Israel Electric Corporation (IEC) (TASE: ELEC.B22) and other major organizations in Israel and the region.

Chevron also plans to lay the gas pipeline to Egypt from Cyprus, which will likely also serve the Israeli fields, because there would be no economic sense in laying two parallel gas pipelines.

Chevron also plans to bid in dozens more tenders in the coming years for concessions in the economic waters of Israel, Lebanon, and other countries in the Eastern Mediterranean. There are concerns that this gives Chevron too much power in the region, especially over Israeli regulators.

The Ministry of Energy sees the half of the cup that is full. Chevron has been able to completely shatter the remains of the Arab boycott, which previously prevented large international energy companies from doing deals in Israel and has become an important player on the international scene. In Israel's first confrontation with Chevron, over halting the supply of gas to the IEC over the prices charged, Chevron backed down and agreed to cut prices for future contracts.

Chevron's interest in more moderate policies vis-a-vis the IEC and future tariffs should create a more comfortable atmosphere with the Israeli regulator, regarding future tenders while reaching a settlement on the issue of the pipeline to Egypt, requires Israeli consent. An agreement on this will only be reached if Chevron commits to allow use of the gas pipeline for rival companies from rival fields in the region, the Ministry of Energy says.

Chevron said that the company has been happy to enter Israel and support the state's strategy of developing energy resources for the benefit of Israel and the entire region. "With more than 141 years of operations, we know the value of partnership, creating long-term networks of relationships and mutual benefits, and it is our intention to do this in Israel and all the countries in which we operate in the region."

Published by Globes, Israel business news - - on May 2, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Cyprus offshore rig Credit: Cyprus Public Information Office, Reuters
Cyprus offshore rig Credit: Cyprus Public Information Office, Reuters
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