Ministry of National Infrastructures director general Shaul Tzemach is promoting an initiative for Israel and Cyprus to hold a joint campaign across the US to attract large investors for the two countries' developing natural gas industry. As in every successful relationship, each side in this promising partnership has advantages that complement each other: Israel brings (relative) economic stability, the ability to protect the reserves and offshore facilities, and a capital market hungry to raise capital for gas and oil companies. Cyprus brings international connections, political stability under EU protection, available land, and an attractive tax regime that has never heard the name Eytan Sheshinski.
Such an idea would have been fantastical not long ago: Israel has never considered Cyprus to be a hostile country, but neither has it considered it an ally. The fact that the initiative is seriously being considered is an indication of how tight relations between Israel and its Greek speaking neighbor across the sea have become.
"The improvement in relations has been fantastic," Cypriot Ambassador to Israel Dimitris Hatziargrou told "Globes" in an interview. The enthusiasm is understandable: this business opportunity fell into Cyprus' hands in the nick of time, as the country tries to rehabilitate itself following an explosion that damaged its main power station, and as the Greek debt crisis storm threatens to reach Cyprus' coast.
On December 17, 2010, Israel and Cyprus signed an agreement to demarcate their maritime exclusive economic zone (EEZ) border. This agreement is crucial for Israel since Israel needs the UN to recognize its waters as an "exclusive economic zone." This recognition could prevent claims from hostile parties, like Lebanon or Hizbullah, which claim the gas reserves belong to Lebanon. Moreover, the signing of the political agreement with Cyprus demarcated Israel's second maritime border with one of its neighbors (after Jordan in 1994). As long as we are dealing with symbolism, since this past December, Israel is an official neighbor of the EU, since Cyprus joined in 2004. Ambassador Hatziargrou was one of the agreements' patrons.
"Globes": How were the negotiations handled?
Hatziargrou: "The talks were not particularly difficult. The moment there was political intent, it went very quickly. The cartographers began working and drew the mid-line between the countries, according to UN Law of the Sea Convention principles. The entire process took maybe two or three months."
While Israel was busy thinking what Lebanon's reaction to the agreement would be, Cyprus busied themselves with thoughts about the response from another country: Turkey. In 1974 Turkey occupied 37% of Cyprus' land in a military invasion. In December, following the signing of the agreement with Cyprus, Turkey requested a clarification from Israeli representatives.
What did you think about Turkey's reaction?
"We expected disagreements, and I must note that the Israeli position was quite direct and courageous. They told the Turks, 'This is not connected to you, this is an agreement between two sovereign countries, and that's it.' We have a similar agreement with Egypt from 2005, and an agreement with Lebanon that was signed two years ago, but has not yet been ratified. We are currently working on a unitization agreement that will determine how we can develop joint gas and oil reserves for facilities that are located on both sides of the demarcation line. There is also a treaty to prevent double taxation that will come into effect in January 2012. In total, 11 agreements between Israel and Cyprus have been signed over the last three years."
Waiting for drilling results
The discovery of the Tamar natural gas reserve in January 2009 changed Israel from a country with no natural resources into a natural gas powerhouse. Cyprus hopes to experience the same thing in January 2012 - the expected end date for the deepwater drilling in the Block 12 concession. According to surveys that were published this past June, there is a gigantic natural gas reserve in that area, even larger than Tamar, which may contain $60 billion worth (non-capitalized) of natural gas. Tamar and Leviathan partner Noble Energy Inc. (NYSE: NBL), which holds the Block 12 concession, will perform the drilling. Delek Group Ltd. (TASE: DLEKG), its Israeli partner, is expected to profit from it.
Cyprus, a country whose GDP barely reaches $20 billion, needs this natural gas like it needs oxygen. If we can judge by reports over the last few days, the country is going to need a rescue package from the EU, though both sides deny this.
Hatziargrou confirms that a natural gas discovery will have a far-reaching effect: "The energy matter is new for us, but we intend to investigate all the possibilities, including cooperation between Cyprus, Israel and Greece. There are a few possibilities for cooperation. Firstly, selling gas to the local market in Cyprus. Secondly, if we find gas, Israel and Cyprus could cooperate in building a facility that will enable us to export gas. Block 12 and Leviathan are very close to each other, which makes it economical to cooperate on this project. There have been discussions and good intentions; however serious talks will begin only after we know for sure that there is gas."
Cyprus has announced that it intends to distribute additional licenses for gas and oil exploration. When will this occur?
"Israel is highly interested in these rights, but in my estimation it will not happen in Block 12 before 2012. And when we will have a full picture of what is happening, we will make a decision."
Weddings, tourism, and lots of real estate
Alongside the signing of agreements, relations between the two countries have strengthened as a result of symbolic humanitarian gestures: Cyprus sent firefighting planes to aid Israel in putting out the Carmel forest fire, and two week ago, Israel was able to pay back the favor when it sent ten Israel Electric Corporation (IEC) (TASE: ELEC.B22) generators to supply electricity to the island, after an explosion at a munitions bunker disabled Cyprus' central power station killing twelve firefighters and sailors, among them the Cypriot fleet commander.
Relations have also tightened thanks to Israeli businesspeople who visit the island often. The balance of trade between Cyprus and Israel is favorable to Israel with €300 million of Israeli exports to Cyprus, compared with a few million euros in imports. Israeli businesspeople take advantage of Cyprus' proximity to open offices and list offshore companies there, since its corporate tax is only 10%, compared with 25% in Israel. "We have a very attractive tax regime, and we traditionally espouse low taxation, also on a personal level," the Ambassador elaborated.
What sectors are Israelis interested in?
"There is great interest in real estate. We had a real estate boom that peaked after we were accepted into the EU. Since 2009, business has slowed down due to the global credit crisis and the European debt crisis. I do not think that the bubble has burst, but it has certainly lost a lot of air. We are seeing considerable growth in tourism, and of course there are the weddings - in Larnaca, my hometown, they say that the city has turned into the Israeli wedding capital. Last June, there was a massive event in which 170 couples got married on the same day. They arrived by boat, and got married in the castle. From our direction, visitors to Israel are mainly pilgrims, and medical patients who wish to go to Israeli hospitals."
"There are also Cypriot doctors who do specializations at Sheba Medical Center Tel Hashomer in Tel Aviv, and research cooperation between Sheba and the University of Nicosia. The bottom line is, I feel that we are pouring the foundation for a long-term friendship."
Published by Globes [online], Israel business news - www.globes-online.com - on August 8, 2011
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