The Regional “Power” Struggle in the Eastern Mediterranean and What it Means for Investors

(Use of ‘the Region’ in this article represents the Eastern Mediterranean region.) What is happening? Located within the…

(Use of ‘the Region’ in this article represents the Eastern Mediterranean region.)

What is happening?

Located within the disputed waters of the island of Cyprus are huge natural gas deposits, giving the Eastern Mediterranean region the possibility of being one of the last great fossil fuel exploits. The Region has been largely unexplored for decades; the potential exploration can rejuvenate energy supplies in the Region and allow cross-border relationships to be built. 

Countries such as Egypt and Israel; and Greece and Cyprus are collaborating with the short-term aim of using the gas reserves to fuel Egypt’s economic growth. The longer-term growth strategy is to provide gas supplies to Southern Europe- a region heavily dependent on Russia for its gas supply. However, the existence of conflict between Turkey and the countries in the Eastern Mediterranean, particularly Cyprus, has created a power struggle in the Region which could prevent fulfilment of these short-term and long-term goals. 

Why is it happening?

Multinational oil and gas companies such as France’s Total and Italy’s Eni, as well as other firms, have an agreement with Cyprus to conduct exploration in the Region – a commercial agreement which Turkey views invalid. Cyprus believes it is entitled to explore the Region under international law through the 1982 UN convention. However, Turkey is not a signatory to the convention and objects to its holding. 

It is understood by Turkey that they are entitled to a share of the gas deposits. This understanding derives from the Turkish invasion of Cyprus in 1974, which involved the eviction of the majority Greek Cypriot population in Northern Cyprus. Since the invasion, Turkey have claimed ownership of Northern Cyprus through placing their military in the area and by renaming the North of Cyprus the Turkish Republic of Northern Cyprus, thus making Northern Cyprus independent from Cyprus. However, Turkey are the only country to recognise this independence, with the rest of the world seeing Northern Cyprus as being a part of Cyprus. 

Accordingly, Turkey have taken intimidating measures, to make their discontent with Cyprus’ dealings clear. In June, Turkey deployed their own drill ship ‘Yavuz’ to follow a drilling block licensed to Total and Eni. Turkey has also previously deployed warships to block an Eni rig drilling off Cyprus.

Consequences

Investors in the Region are keeping a close eye on developments in this conflict to assess the profitability of investments. When corporations such as Total and Eni invest, they expect returns on their investment and more importantly, for that investment to be protected from unwarranted government intervention. If Turkey’s government are consistently interfering on such operations, investors could commence arbitration proceedings against Turkey to receive compensation. However, if it is concluded that the commercial agreement between Cyprus and the investors in the Region is invalid, since Turkey had exclusive rights to agree to such contracts, Turkey may be able to seize and nationalise the operations of Total and Eni. 

The current conflict in the Eastern Mediterranean has widespread impacts. Investors face legitimate concerns over the future profitability and security of their investments and should possibly consider taking legal action against Turkey; if their operations continue to be disrupted. The Region is most certainly a current high-risk investment for any energy company.

Moreover, the energy security of Turkey, Egypt and Southern Europe are in play. Turkey and Southern Europe want to diversify their current energy sources, whilst Egypt require the gas supply to maintain their economic growth. Without a compromise, these countries may find themselves without access to this highly sought gas supply, as the regional conflict continues to create risks to exploration for investors.

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