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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