Turkey has a corvette, frigate and helicopters escorting its exploration vessel, the Piri Reis, as it explores for gas and oil. The US has quietly dispatched an aircraft and Russian naval vessels have been seen patrolling. News reports say US reconnaissance planes have circled the vessel on at least two occasions and on another occasion low-flying Israeli warplanes and helicopters “harassed” a Turkish ship.

Once the preserve of fishing boats and yachts, in the space of just a few weeks the serene waters of the Eastern Mediterranean have become a field of contention. As Greek Cyprus begins exploiting its potentially vast gas and oil reserves, Turkey has asserts its growing role as a regional power, and a worried Israel is pushing back.

The actions have been matched by tough talk, too. “Turkey persists in acting illegally,” Cyprus government spokesman Stefanos Stefanou said.

“The Greek Cypriot administration and Israel are engaging in oil exploration madness in the Mediterranean,” Turkish Prime Minister Recep Tayyip Erdogan declared. Asked if a military option is still on table, he replied, “Not at the moment.”

Analysts agree that neither Turkey nor the other parties to the dispute want to see the saber-rattling turn into a real fight, but they warn that with the waters around Cyprus increasingly crowded with warships and aircraft, the risk it could happen is very real.

“I don’t think at this stage Turkey is looking for a problem,” James Ker-Lindsay, senior research fellow at the London School of Economics’ European Institute, told The Media Line. “The problem is when you have posturing and it’s being done with warships and fighter aircraft there is always the risk it can spin out of control.”

The proximate cause of the tensions is the decision by the Republic of Cyprus, the island’s official government but since an invasion by Turkey in 1974 one in control of only two thirds of the island, to move ahead last month with exploration of its coastal waters for energy reserves.

The U.S. Geological Survey last year estimated a mean of 1.7 billion barrels of recoverable oil and 122 trillion cubic feet of recoverable gas in the Levant Basin Province. Israel has already uncovered huge reserves in waters under its control and Credit Suisse says Cyprus would generate $5 billion in revenues from its reserves, equal to one-quarter its gross domestic product.

Tensions over Cypriot energy have been simmering for years as Greek Cyprus took another step in its energy-development plans and Turkey responded with warnings and the dispatching of a naval vessel or two. But for Ankara the Greek Cypriot government crossed a red line last month when it authorized the U.S. firm Noble to begin exploratory drilling last month. Turkey responded by sending its own exploration ship, with naval escort, to Cypriot waters.

“Turkey is using a bit of sledgehammer to crack a nut on this one, but this is necessary follow on from previous years whenever this comes up,” David Lea, senior analyst Europe at Control Risks, a London-based risk consultancy, told The Media Line. “It’s saber-rattling. Turkey feels it has to display force.”

Ankara has no direct interest in or rights to Cypriot’s energy assets, but it has positioned itself as the defender of the breakaway republic of Turkish Northern Cyprus and as a guarantor of the once-unified island’s constitution. Ankara charges the Greek Cypriots of trying to keep the island’s hydrocarbon wealth for itself, even as on-and-off unity talks continue.

The energy potential is cause enough for conflict, but Cyprus’ decision to move ahead last month comes amid a confluence of political upheavals.

Erdogan has been seeking to leverage Turkey‘s booming economy and new self-confidence to position itself as a regional power, forming a network of trade and diplomatic ties with Middle East neighbors like Syria, Iraq and Egypt and winning favor with the street by verbally attacking Israel.

Those ambitions have become undone by the Arab Spring, which has ousted some of Erdogan’s friends and disrupted trade and investment. But analysts said it has also opened up new opportunities, such improved ties with Egypt. Even though it has signaled its concerns with a small military presence in the area, the U.S. is preoccupied with domestic issues and discouraged by a lengthy war in Afghanistan.

Analysts said that as a result, Washington has been less aggressive in asserting its own interests in the region, leaving a power vacuum even though it would very much like to see Turkey and Israel patch up their differences and for Turkey to more closely adhere to Western policies.

Ankara’s stepped-up presence in the Eastern Mediterranean is in line with its aspirations to regional power, but Robert O’Daly, senior analyst at the Economist Intelligence Unit in London, said that Erdogan may be overstretching Turkey’s abilities to manage the situation.

“This goes down extremely well with the voters in Turkey and it matches the aspirations for regional leadership,” O’Daly told The Media Line. “But some of the more aggressive moves by Erdogan may be overreaching themselves. There may be risks in taking a more aggressive stance. It could damage relations with the U.S. and the EU.”

O’Daly said, however, Turkish foreign policy is ultimately ruled by practical concerns.

“By moving more ships around the Mediterranean, they could spark of something unexpected, but I do think the Turkish government is very pragmatic,” he said.

Indeed some analysts contend that Turkey has sought to escalate the Cyprus dispute in a bid to gain the attention of the EU. Ankara’s bid for membership in the bloc is all but dead, but Erdogan’s government may be trying to raise the stakes in Cyprus to get Brussels’ attention to help shepherd a comprehensive solution to the Cyprus problem.

The broad outline of such a solution would entail an agreement on Cypriot unity, which has been a major stumbling block for Turkey on the way to EU accession and would solve the issue of divvying up its energy revenues. Unity would then pave the way for Turkey’s admission to the EU as well as foster construction of a pipeline through Turkey to deliver Cypriot gas to Europe.

But Lea of Control Risks said he doubts such a strategy would work. “I’m skeptical that the EU will let Turkey in under any circumstances at any point even though Europe needs the gas and Turkey would quite like the transit fees,” he said.

Meantime, Turkey’s hardball policy threatens to make things worse. Cyprus is slated to take the rotating EU presidency in the latter part of 2012. If that happens – and under EU rotating presidency, there is nothing to stop it – Turkey will freeze relations with the EU, Deputy Prime Minister Besir Atalay threatened last month.

This story is reprinted with permission from the Middle East News Source, the Media Line.

Image via mrs logic

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Israel’s social activists and its energy barons drew their swords on Thursday as the fight over who will get what share of Israel’s natural gas windfall got underway. The lines of battle were laid out by a government commission, chaired by Hebrew University Professor Eytan Sheshinski, which the day before offered its preliminary recommendations about how Israel should tax profits from natural gas and oil. It will now hold hearings with the public before it makes its final recommendations prior to the parliamentary debate.

“There’s a big, big political battle ahead,” Brenda Shaffer, an energy expert at the University of Haifa’s School of Political Sciences, told The Media Line. “The prime minister hasn’t said anything yet and the infrastructure minister is against it. So it’s not clear at all yet what is going to emerge as the final legislation.”

At stake is tens of billions of dollars, which could stay with the energy companies as profits, or go to the government, depending on how the government finally decides to restructure its half-century-old tax regime. Activists say ordinary Israelis should benefit from the country’s natural resources with new government-funded schools and hospitals, but energy companies warn that excessive taxation will deter further exploration and production.

The bounty from oil and gas has only emerged as an issue for Israel in the last two years as explorers have uncovered increasingly large reserves of natural gas off the country’s Mediterranean coast. The first field, Yam Thetis, was a mere 32 billion cubic meters (bcm) and will be tapped out by 2013. The newest field – named Leviathan, the Hebrew for whale – is believed to hold as much as 600 bcm, although the estimates are very preliminary.

Israel’s current tax regime, devised in 1952, is among the most generous in the world for energy companies, with low royalties and tax breaks that enabled the partners in Yam Thetis to write off more in deductions than the total of the taxes they were required to pay, according to a report in the daily newspaper Ha’aretz.

The Sheshinski panel proposed leaving the royalty rate its current level of 12.5%, but it said the government should eliminate a deduction known as a depletion allowance. It proposed taxing oil profits on each well at a rate between 20% and 60%, rather than on companies, to prevent operators from finding other tax breaks. All told, the government’s share of proceeds would increase to about 66% from 30%.

But developers are only liable for tax after they have recovered 150% of their costs – and then only eight years after production begins.

An industry analyst, who spoke on condition of anonymity because of his ties to the operators, said Israel’s government would not see the tax windfall that social activists have been counting on. With a budget of about $85 billion, gas-tax revenues won’t make a significant addition. In any event, Shaffer said, Israel’s government already has the resources to fund social spending.

“The fact that the government becomes richer doesn’t mean it becomes better,” she said. Israel isn’t a poor country today but it allocates money on a political basis not necessarily what’s best for the future.”

Nevertheless, Israel’s Citizen Action Forum (links to Hebrew), whose chairman, Rabbi Michael Melchior has led the fight for boosting the state’s take of energy revenue, said it was satisfied with Sheshinski.

“We need to closely examine the long waiting time the panel has proposed before the country begins to enjoy tax revenues,” Melchior said in a statement. “Over the next few weeks we’ll have to fight the gas companies, who will do everything they can to undermine the Sheshinski committee’s proposals.”

Under the slogan “Gas belongs to the public – 80% for citizens/20% for gas barons,” the Forum wants the tax boon to fund social needs.

To broadcast its message, the video on the Forum website shows a tycoon lowering an Israeli flag fluttering at the top of an oil derrick and raising a banner with his picture and a dollar sign. Attaching himself to a fuel line, he pumps himself up to giant proportions, casting a show over Israel and picking up the Knesset building. Angry citizens march on the tycoon, removing the fuel line and attaching it to a government network, causing schools, parks and hospitals to spout up from the ground.

The energy companies responded today angrily to the proposed tax regime, arguing that the government is changing the business environment for the worse after they have invested hundreds of millions of dollars in developing the fields. Shares of the leading energy companies, including Delek Energy Systems, Avner Oil Exploration and Isramco Negev, fell in Tel Aviv Stock Exchange trading Thursday.

“We expect a significant increase in taxes imposed on the partners developing the gas fields and a negative impact on the business and operations of the partnership,” Isramco, one of the energy companies, said in a statement. “We will decide what to take after examining the full proposal.”

But the industry analyst said the companies’ protests were exaggerated.

“Putting aside the rhetoric and lobbying, it’s a very convenient tax regime for the producers comparable to other countries,” the analyst told The Media Line.

Read more about Israel’s natural gas:
Israel’s Natural Gas Could Promise Energy Independence
UN Mediates Natural Gas Standoff Between Lebanon and Israel
Corruption Plagues Lebanese Environment Movement and Energy Exploration
Tshuva’s Yam Tethys Gas Company Wins, but the Environment Suffers
Hezbollah Interferes With Israel Energy Exploration

Republished with permission from the Media Line – the Middle East News Source. Images via the Citizen Action Forum

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