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Eastern Mediterranean Energy Project
Summary: The United States welcomed the discovery of gas reserves in the eastern Mediterranean over the past decade as these resources can bolster the energy security of Israel, Cyprus, and Europe as a whole and reduce, to some degree, the European Union’s dependence on exports from Russia. The prospect of new energy sources is particularly encouraging at a time when the EU is struggling with the sovereign debt crisis to which Greece and Cyprus are particularly exposed. At the same time, the United States would like the door to remain open to Turkey’s future involvement when political circumstances permit. Meanwhile the United States seeks to avoid the escalation of tensions in the region. A number of U.S. strategic and commercial interests are at stake in the development of these newly discovered resources. The views expressed here are the views of the author alone and do not necessarily reflect the stance of The German Marshall Fund of the United States.
Resource Rivalry in the Eastern Mediterranean: The View from Washington
by Jeffrey Mankoff
Background The U.S. government faces short and long-term challenges in dealing with the implications of the discovery of gas in this sensitive region. The immediate challenge is to encourage the parties directly involved, notably Israel, Lebanon, Cyprus, and Turkey, to avoid escalation of tensions over delimitation disputes, drilling, and related issues. Within the administration, it is a challenge to keep the question of eastern Mediterranean energy on policymakers’ radar screens at a time when much of the broader Middle East and North Africa is in turmoil. Uprisings and violent repression in Syria; the risk of war between Israel and Iran; profound uncertainty in Iraq; the withdrawal from Afghanistan; and incomplete transitions in Tunisia, Libya, Egypt, and Yemen together make it difficult for Washington to prioritize opportunities and challenges related to the gas discoveries. Washington’s involvement in eastern Mediterranean energy questions over the past few years has focused largely on protecting the commercial interests of U.S. companies and on ensuring that disputes between the various regional players do not flare into overt conflict. The eastern Mediterranean is at the nexus of three issues of concern to Washington: the conflict between Israel and its neighbors, the division of Cyprus, and European energy security. U.S. policymakers would like to see the discovery of new energy resources contributing to positive outcomes in these areas or at least not exacerbating existing problems. In particular, Washington seeks to ensure that the energy issue does not deepen the rift between Israel and Turkey, or lead to conflict between Israel and its neighbors, principally Lebanon and the Palestinians in Gaza. Israel’s interest in exporting gas to Europe, when it is available in sufficient quantities, without depending on supply routes through Turkey, has encouraged cooperation with Greece and Cyprus. While the United States supports cooperation among Israel, Cyprus, and Greece, if it contributes to regional security, this should not preclude Turkish involvement, when political circumstances permit. Israel, Cyprus, and Greece have all courted Russian investment in their energy sectors but Washington would not wish the involvement of Russian companies to undermine European efforts to diversify energy sources. Commercial Interests At the working level, U.S. interest in eastern Mediterranean energy issues stems to a considerable degree from
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Eastern Mediterranean Energy Project
the involvement of U.S. companies in developing the new gas fields. Houston-based Noble Energy is currently the major private company involved. It controls a 47 percent stake in Israel’s offshore Mari-B field, which has been producing gas since 2004 for the Israeli domestic market. Noble Energy is also a member of the consortium developing Israel’s much larger Tamar and Leviathan gas fields, which the company estimates could together hold 26 trillion cubic feet (Tcf, equivalent to 731.25 billion cubic meters) of natural gas, along with several smaller fields. Noble also holds a stake in the main production site off Cyprus, known as Block 12, which is adjacent to Leviathan and appears to hold gas reserves of approximately 7 Tcf (196.9 bcm).1 Much of Washington’s engagement until now has had a commercial focus, seeking discreetly to support Noble in disputes with the Israeli government over tax and royalties. Noble’s initial production agreements with the Israeli government were negotiated before the scale of the offshore resources became clear, under a regulatory and tax framework devised in the 1950s. In November 2010, an Israeli Finance Ministry commission recommended raising taxes on energy production to bring them into line with current international practice, recommendations that the government of Prime Minister Binyamin Netanyahu subsequently endorsed.2 This put Washington in an awkward position, as it came under pressure from the industry and members of Congress to oppose the commission’s recommendations, which were quite popular with the Israeli public. As the companies presently involved have little experience in bringing resources on this scale to market from offshore fields, industry analysts expect they will seek to bring in a major foreign energy company as a partner, possibly a European or U.S. firm, Russia’s Gazprom or Novatek, or the Chinese National Offshore Oil Company (CNOOC), all of which have held preliminary discussions about acquiring stakes in the eastern Mediterranean. Several of these companies have bid for exploration and production rights in Cyprus’s exclusive economic zone. Most energy majors hesitate to become involved, however, because of the modest scale of the resources hitherto discovered and
1 Noble Energy, Eastern Mediterranean Fact Sheet, 2012, http://www.nobleenergyinc. com/operations/international/eastern-mediterranean-128.html. The two largest fields, Tamar and Leviathan, are generally believed to hold approximately 25 Tcf of gas (9 Tcf from Tamar and 16 Tcf from Leviathan). Leviathan also holds commercial quantities of oil. 2 State of Israel Ministry of Finance, Summary of Draft Conclusions by the Sheshinski Committee, November 10, 2010, http://www.financeisrael.mof.gov.il/FinanceIsrael/ Pages/en/News/20101110.aspx
because of the likely reaction from their current partners in the Gulf and elsewhere. Rivalries in the Eastern Mediterranean U.S. officials consider that, in the longer term, potential commercial benefits could encourage reconciliation in the region but that, in the short term, rash or inadvertent actions could provoke renewed tensions. The sharp deterioration of relations between Israel and Turkey has changed political dynamics in the region. While a pipeline from offshore Israel and Cyprus to Turkey would be the most direct and commercially viable route to Europe, this option is not feasible in the current political environment. In order to develop its export capacity without relying on a pipeline through Turkey, Israel has been considering a range of alternatives, including pipelines or electricity cables to Cyprus and Greece, a liquid natural gas (LNG) plant in Cyprus, an onshore pipeline to Jordan, as well as a floating LNG plant allowing Israel to sell gas in European or Asian markets. Each of these options has its strengths and weaknesses, including security risks.3 A pipeline to Europe built in conjunction with Cyprus and Greece would deepen the split between Israel and Turkey and risk involving Israel in the Cyprus conflict. Ankara would view a possible gas export route to European markets through the Mediterranean, connecting Israel, Cyprus, and Greece, as a threat to its own ambitions to become the major non-Russian transit route for gas sales to Europe. It could raise further questions about the viability of the “Southern Corridor” through Turkey. Turkish Foreign Minister Ahmet Davutoğlu announced in September 2011 that the Turkish navy would patrol the eastern Mediterranean’s international waters more actively to prevent what he termed Israeli “bullying.”4 Ankara suggested its navy would be used to escort vessels attempting to run the Israeli blockade of Gaza and would monitor sea traffic between Israel and Cyprus.5 Turkish diplomats urged their European and U.S. counterparts to dissuade the Israelis from drilling, warning of the dangers of a military clash. Subsequently Turkish pressure appears
3 These options are considered further in the accompanying paper by Simon Henderson, “The Case of Israel,” German Marshall Fund, June 2012 4 “Erdogan warns Israel: Turkey can send warships to east Mediterranean at any time,” Reuters, September 15, 2011. 5
“Israel’s bullying in the eastern Med is over,” Hürriyet, September 2, 2011.
Eastern Mediterranean Energy Project
to have eased off, partly as a result of messages it has received from Washington. In recent years, the governments led by Recep Tayyip Erdoğan have sought to position Turkey as a regional power, challenging Iranian and Saudi influence, and as a source of inspiration for emerging leaders in North Africa and the Middle East, following the overthrow of autocratic governments. This shift has led Turkey to take further distance from Israel and to become more actively involved in its disputes over energy resources with Lebanon, Egypt, Jordan, and the Palestinians. Turkey has suggested it could assist with exploration and drilling in Gaza’s offshore waters, although Israel and the Palestinian Authority oppose any development that would benefit the Hamas regime. Lebanese officials have claimed that the Leviathan field crosses into Beirut’s exclusive economic zone, though Israel and Lebanon, which remain in a state of war, have not delimited their maritime boundary.6 Hezbollah leader Hassan Nasrallah has threatened military action to prevent Israel “stealing” Lebanese gas.7 Turkey supports Lebanon’s position, even though it does not recognize Beirut’s maritime delimitation agreement with Cyprus. This illustrates the clash between Ankara’s aspirations to regional leadership and its role as a party to several of the region’s disputes. In response to growing differences with Ankara, Israel has increased its own naval patrols around its Mediterranean gas fields. It is upgrading its naval capacity to address potential threats from the Turkish navy and rockets launched from Lebanon by Hezbollah. Israel has also strengthened its military cooperation with Greece and Cyprus. Greek and Israeli military forces began holding joint annual exercises in 2008 and signed a defense cooperation agreement in September 2011. Israeli Prime Minister Benjamin Netanyahu and Cypriot President Demetris Christofias signed a search and rescue agreement in February 2012, which will permit the Israeli air force and navy to intervene if there are accidents or threats against energy installations in the exclusive economic zone of Cyprus. Noble Energy and its consortium partners have asked U.S. based security firms to provide additional protection. Creeping militarization creates new risks of deliberate or inadvertent confrontation. Investigations in Turkey into the military’s alleged role in fomenting conspiracies against the
6 See accompanying paper by Tullio Scovazzi, ”Maritime Boundaries in the Eastern Mediterranean Sea,” German Marshall Fund, June 2012 7
Creeping militarization creates new risks of deliberate or inadvertent confrontation.
AKP-led government have reduced the number of experienced naval officers. There is a risk that officers more aligned with the AKP and less experienced in handling confrontations are more likely to precipitate incidents at sea.8 The United States has, with some success, sought to restrain rhetoric and actions that could deepen the present divide between Israel and Turkey. Following Davutoğlu’s September 2011 warnings about the deployment of the Turkish navy, U.S. Secretary of State Hillary Clinton urged her Turkish counterpart to refrain from actions likely to make the tension with Israel worse.9 Yet Washington has been reluctant to take a stronger public stand. Such caution reflects the central role Turkey is playing with regard to Syria and Iran, as well as Turkey’s willingness to host radar stations for NATO’s missile shield. Erdoğan has become Washington’s key interlocutor with respect to Iran and, indeed, the Muslim world more generally. Turkey is absorbing much of the shock of the current violence in Syria and, after initial hesitation, is pushing for the removal of Syrian leader Bashar al-Assad. As long as tensions between Turkey on one hand and Israel and Cyprus on the other do not lead to armed clashes, the United States will remain reluctant to push Ankara on the energy issue. But even if Washington is reluctant to press Ankara directly, it has provided reassurance to the Israelis, as well as the Greeks and Cypriots, about its commitment to their security. The U.S. Sixth Fleet based at Naples could well be drawn into any attempt to defuse a crisis at sea, though this is a scenario that U.S. planners seek to avoid. U.S. naval vessels regularly visit the Naval Support Activity (NSA) facility at Souda Bay in Crete.
8 “Sledgehammer and Turkish Navy,” Turkish Naval News, February 17, 2011. See also Gareth Jenkins, “Ergenekon, Sledgehammer, and the Politics of Turkish Justice: Conspiracies and Coincidences,” Meria, June 2011, 15(2), http://www.gloria-center. org/2011/08/ergenekon-sledgehammer-and-the-politics-of-turkish-justice-conspiraciesand-coincidences/. 9 U.S. Department of State, Secretary Clinton’s Meetings with Turkish Foreign Minister Davutoğlu and Kosovar President Jahjaga and Prime Minister Thaci, September 19, 2011, http://www.state.gov/r/pa/prs/ps/2011/09/172734.htm.
“Hezbollah: Lebanon will not let Israel seize its natural gas,” Haaretz, July 14, 2011.
Eastern Mediterranean Energy Project
Naval forces from the United States, Turkey, and Israel conducted annual exercises in the eastern Mediterranean (called “Reliant Mermaid”) before the deterioration in Israeli-Turkish relations. After the Turkish government ended military cooperation with Israel in 2009, the United States and Israel agreed to continue with the annual exercise (renamed “Noble Dina”) and to invite the Greek navy to participate in place of Turkey. The 2012 Noble Dina exercise involved resistance to an unnamed enemy force, with capabilities similar to those of the Turkish navy, and focused on the protection of offshore drilling platforms of the kind that may be constructed off the Israeli coast. Washington has long supported efforts under UN auspices to find a solution to the division of Cyprus. Since the discovery of gas, the United States has advocated including revenue sharing from energy resources in Cyprus settlement talks.10 It suggests creating an escrow account from the gas revenues, to be disbursed on both sides of the island once a comprehensive settlement has been agreed. Though Greek Cypriot leaders are willing in principle to share the benefits of future gas production with Turkish Cypriots, they are adamant that future gas revenues should not benefit the nearly 30,000 Turkish soldiers stationed in the “Turkish Republic of Northern Cyprus (TRNC).” While the U.S. administration considers that Israel and Cyprus are within their legal rights in prospecting and developing energy resources in their EEZs, Washington is quietly urging them to remain open to Turkey’s involvement in future projects, when political circumstances permit.11 Russia, China, and the Diversification of Europe’s Energy Supplies The diversification of Europe’s energy supplies to avoid excessive dependence on Russia is a goal endorsed by the United States. Washington supports diversification because of concerns that a Europe dependent on Russian gas will prove more susceptible to Russian political influence and be less united.12 In 2006 and 2009, disputes between Russia and Ukraine led Gazprom to cut deliveries through its pipelines.
10 U.S. Department of State, Daily Press Briefing, September 28, 2011, http://www.state. gov/r/pa/prs/dpb/2011/09/174549.htm. 11
Gazprom sought to pressure Ukraine into signing new supply contracts on Russian terms and to pay back debts, but the cuts affected EU countries too since most Russian gas exports to Europe transit Ukraine.13 The impact on Europe was exacerbated by the fact that Southeastern European countries such as Bulgaria, Greece, Macedonia, and Slovakia receive 85 percent or more of their domestically consumed gas from Russia.14 In response, the EU made new efforts to improve the functioning of Europe’s internal energy market and to diversify supplies by seeking new sources of gas. Diversification has proved difficult, however, for both political and economic reasons. Countries whose utilities have established close relations with Gazprom (particularly Germany and Italy) are less keen on diversification than the countries directly affected by the 2006 and 2009 cutoffs and others in Eastern Europe who see dependence on Russia and Gazprom as a security threat. The primary focus of these diversification efforts is the Caspian Basin, which holds some of the world’s largest untapped natural gas reserves. The first pipelines from the Caspian to Europe were built in the mid-1990s but the availability of additional resources in Azerbaijan, Kazakhstan, and Turkmenistan has led European and U.S. officials to promote additional pipelines through the planned Southern Gas Corridor, whose creation the EU adopted as a priority goal in its 2008 Second Strategic Energy Review.15 Difficulties with the Southern Corridor, coupled with declining production volumes within Russia itself (which contributed to shortfalls in Europe during the unusually cold winter of 2011-12), have raised European interest in eastern Mediterranean gas, though it will remain marginal to Europe’s overall needs on current projections. The United States is supportive of plans to sell eastern Mediterranean gas to Europe as this will somewhat reduce Europe’s dependence on Russia and strengthen relations between Israel and the EU. The United States has little interest in Russia becoming involved in exploration and production of eastern Mediterranean gas. Yet Israel, Cyprus, and Greece view Russian
13 See Simon Pirani, Jonathan Stern, and Katja Yafimava, “The Russo-Ukrainian Gas Dispute of January 2009: A Comprehensive Assessment,” Oxford Institute for Energy Studies, February 2009, http://www.oxfordenergy.org/pdfs/NG27.pdf. 14 U.S. Department of Energy, Energy Information Administration, “Country Analysis Brief: Russia,” http://www.eia.doe.gov/emeu/cabs/Russia/pdf.pdf. 15 European Commission, “Second Strategic Energy Review,” November 13, 2008, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008:0781:FIN:EN:PDF.
See “East Mediterranean Gas Politics: A Third Corridor?” Natural Gas Europe, March 28, 2012, http://www.naturalgaseurope.com/east-mediterranean-gas-third-corridor.
For an overview, see Jeffrey Mankoff, “Eurasian Energy Security,” Council on Foreign Relations Special Report, February 2009 (43), http://www.cfr.org/content/publications/ attachments/Eurasia_CSR43.pdf.
Eastern Mediterranean Energy Project
The United States has little interest in Russia becoming involved in exploration and production of eastern Mediterranean gas.
investment as a way to ensure Russian political backing in their quarrels with Turkey and in Israel’s case other hostile neighbors. Israeli experts have raised the possibility of attracting Chinese investment, both upstream and downstream (including LNG liquefaction), though few industry analysts believe such an arrangement is economically viable given the high costs of liquefying gas in Israel and shipping it to China. Gazprom’s interest in the eastern Mediterranean stems in part from a desire to compensate for the declining productivity of its domestic fields. Exporting eastern Mediterranean gas to Europe might prove more economical for Russia than producing and transporting gas to Europe from eastern Siberia or the Russian Far North. Involvement in the eastern Mediterranean would enable Gazprom to become a global player in the market for LNG.16 This might offset the high costs involved in acquiring the technology and infrastructure for deep sea drilling, production, and liquefaction. Moscow’s wish to remain Europe’s dominant supplier and to prevent the emergence of another competitor for the European market gives it an incentive to push for Russian companies to take a significant role in exploration and production in the eastern Mediterranean. Russia has close ties with Israel, Cyprus, and Greece. Around 1 million of Israel’s 7 million citizens are immigrants from the former Soviet Union, including many prominent business people. Moscow views the Republic of Cyprus as an important partner and continues to back it in disputes with the “TRNC” and Turkey. Cyprus is the single largest channel for foreign direct investment in Russia, totaling more than $179 billion at the end of 2010, much of it Russian capital originally transferred to Cypriot banks
Yekaterina Safonova, “<Gazpromu> ne daët pokoya gaz Izrailya,” RBC Daily, March 23, 2012.
to avoid Russian taxes.17 Moscow provided a €2.5 billion loan in December 2011 when Cyprus faced the risk of default.18 Cyprus may well need further support in light of its exposure to Greek debt. These financial ties represent a potentially significant source of Russian influence. Moscow supports Cyprus’s right to prospect for and produce gas offshore despite Turkey’s objections. Russia’s ambassador to Cyprus referred to Turkey’s opposition to drilling in the Cypriot EEZ as “not very wise.”19 This has put Russia at odds with Turkey, despite the wide-ranging rapprochement between Moscow and Ankara over the past decade. Russia deployed naval vessels, including one or two submarines and the aircraft carrier Admiral Kuznetsov, to the eastern Mediterranean near Cyprus in late 2011. Some observers interpreted this as support for Cyprus though it may have been prompted by fears of foreign intervention in Iran or Syria.20 Gazprom is also seeking to acquire a financial stake in the development of eastern Mediterranean gas. In late 2010, it offered to buy 50 percent of the shares in an Israeli company holding licenses for production at Tamar and Leviathan. In March 2012, the members of the production consortium working in these fields signed a memorandum giving a Gazprom daughter company the right to purchase 2-3 million tons of LNG from Tamar each year starting in 2017 (dependent on the successful completion of an LNG plant, whose costs may well prove prohibitive). Gazprom has also proposed building an LNG liquefaction plant and storage facility in Cyprus. In partnership with Total and the private Russian gas company Novatek (whose largest shareholder, Gennady Timchenko, is a close associate of
17 Central Bank of Russia, “Russian Federation: Inward Foreign Direct Investment as of December 31, 2009 and as of December 31, 2010,” http://www.cbr.ru/eng/statistics/ print.aspx?file=credit_statistics/dir-inv_in_country_e.htm&pid=svs&sid=ITM_14544. 18 Anastasia Bashkatova, “Rossiya spasaet ofshornyi rai na Kipre,” Nezavisimaya Gazeta, December 26, 2011. 19
Russian Federation Ministry of Foreign Affairs, “Otvet ofitsial’nogo predstavitelya MID Rossii A.K. Lukashevicha na vopros SMI otnositel’no osushchestvleniya Respublikoi Kipr deyatel’nosti po razvedke i dobyche mineral’nykh resursov v svoei eksklyusivnoi ekonomicheskoi zone,” August 19, 2011. On the Russian ambassador’s response, see Cem Barber, “Russian navy nears Cyprus drilling zone,” Famagusta Gazette, November 24, 2011.
20 “Greek Cyprus to ignite gas row with ceremony,” Hürriyet Daily News, October 24, 2011. Conversely, see Sergey Konovalov, “Moskva optimiziruet voennuyu gruppirovku na yuge,” Nezavisimaya Gazeta, December 15, 2011.
Eastern Mediterranean Energy Project
Vladimir Putin), Gazprom submitted a bid in the May 2012 tender for the other 11 blocks off Cyprus.21 Meanwhile, Gazprom is making an effort to purchase stakes in Greece’s state-run gas and oil companies as part of its strategy of seeking an expanded presence across Southeastern Europe. Besides attempting to acquire Ukraine’s pipeline system to settle the debts that sparked the 2006 and 2009 gas crises, Gazprom has been buying stakes in energy companies and downstream assets in Belarus, Hungary, Austria, Serbia, and Germany, raising concern in both Brussels and Washington that it is seeking to undermine European diversification from within. For now, these steps remain tentative, but U.S. officials have begun speaking out against Gazprom taking on a leading role in the eastern Mediterranean.22 Conclusion Gas from the eastern Mediterranean has the potential to advance a series of U.S. foreign policy priorities: supporting Israel’s energy security, providing an inducement for political reconciliation among states in the region, and promoting European energy supply diversification. The United States seeks to avoid the risk that exploration and production of gas will exacerbate regional tensions. Navigating the increasingly tense relationship between Israel and Turkey has in recent years become one of Washington’s most delicate and unwelcome foreign policy challenges. Israel’s discovery of gas and oil resources adds a new potentially explosive element to its tense relationship with Turkey. As it seeks to smooth over ties between its two most important regional allies, the United States needs to ensure that energy rivalry does not spark a crisis that complicates its efforts to promote an eventual reconciliation. The United States has no interest in seeing the Cyprus conflict and the rift between Israel and Turkey become interlinked as this would make both even more difficult to resolve. The United States has urged restraint on all sides, but is reluctant to become involved given its other preoccupations in the Middle East. Security and energy cooperation between Israel, Cyprus, and Greece can contribute to regional stability and is not inimical to U.S. interests.
However any hardening of an alignment between these three countries, with implicit Russian backing, would not be welcome if it further alienated Turkey. Similarly, the United States is alert to any attempt by Russia to control gas production in the eastern Mediterranean and transport of the gas to Europe. There are fewer concerns about Chinese involvement. If sufficient gas becomes available and transport to Asia proves economically viable, investment by Chinese firms to supply the Chinese market would not weaken efforts to promote the diversification of Europe’s energy sources. Overall the discovery of energy in the eastern Mediterranean offers an attractive source of revenue to U.S. companies and can bolster the economic and political security of Israel. It can eventually solve Cyprus’s problem of stable electricity supply and might provide incentives for cooperation between the two communities on the island. In time, it can make certain European countries, particularly in Southeastern Europe, less dependent on energy supplies from Russia. U.S. policymakers and diplomats need to ensure that the issue is high on the agenda of the incoming administration and that the United States plays an active and visible role in maximizing the gains and minimizing the risks associated with this important new resource.
About the Author
Jeffrey Mankoff is with the Center for Strategic and International Studies.
The German Marshall Fund of the United States (GMF) is a nonpartisan American public policy and grantmaking institution dedicated to promoting better understanding and cooperation between North America and Europe on transatlantic and global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has six offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, and Bucharest. GMF also has smaller representations in Bratislava, Turin, and Stockholm.
According to Cypriot sources, 29 companies have made 15 bids for exploratory drilling (covering 12 of the 13 blocks). Among the companies are Total (France), Petronas (Malaysia), KOGAS (South Korea), Delek (Israel), ATP (United States), Novatek (Russia), Petra Petroleum (Canada), and Vitol (Britain). A final decision on the contracts is expected to be taken by the Cypriot cabinet within the next six months. U.S. Department of State, “Ambassador Morningstar on U.S. Eurasian Energy Policy.”