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Cyprus: oil, gas and geopolitics

Tensions escalate between Cyprus and Turkey

Tension between the governments of Cyprus and Turkey over rights to explore for hydrocarbons offshore tends to escalate when the two sides are involved in talks over the reunification of the divided island. The last two months have been no exception. This time, however, there is the added frisson of the Cypriot government's plans to build the island's first liquefied natural gas (LNG) import terminal, which would take its supplies from Russia's Gazprom.

The waters to the south and east of Cyprus lie on the edge of the East Mediterranean basin area, where Egypt has found hydrocarbons; offshore discoveries have also been made close to Palestine, Israel, Lebanon and Syria. Cyprus has been searching for hydrocarbons there for several years and has signed agreements with Lebanon and Egypt to delineate exploration boundaries. It has marked out 11 blocks and is set to auction exploration rights in early 2009. In the meantime, two Norwegian vessels have been hired to explore on behalf of the Cypriot government.

However, the status of Cyprus as a divided island has complicated the issue. Turkey has protested that exploration is pushing ahead without the authorities in Turkish-occupied northern Cyprus being consulted; northern Cyprus' independence is recognised only by Turkey, whose troops occupied the region in 1974. The north has been in stop-start reunification talks with the internationally recognised Greek Cypriot government for decades, but no full agreement has been reached. The latest talks took place in early December.

Turkey argues that no oil exploration should take place before a settlement is reached on the island, to enable Turkish Cypriots to share in decision-making and any rewards, but the Cypriot government has refused to stop the exploration programme The dispute has not been restricted to a war of words. Cyprus complained in December that Turkish warships had been repeatedly harassing exploration vessels since mid-November. Turkey countered with claims the ships had entered Turkish territorial waters on some occasions.

Such tit-for-tat claims are nothing new in the strained relations between the two countries, which are made more complicated by Turkey's ambitions to join the EU, of which Cyprus is already a member. However, the possibility that Cyprus, which wants to replace some of its oil imports with natural gas, may build an LNG terminal in conjunction with Gazprom may be regarded by Turkey with greater suspicion.

Russia has long-standing close relationship with the Greek Cypriot administration and the Turkish government is keen not to see its influence diminished. Analysts say that if the LNG terminal is built, it may allow Cyprus and Gazprom to create a hub for gas distribution in the region, raising the prospect of a greater Russian presence in the energy markets on Turkey's doorstep.

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