• Cyprus Accepts Compensation to Israel
• The arrangement ensures legal certainty for investors
• Delays are lifted for the 4-billion-dollar investment and natural gas production

Cyprus’s energy policy is at a critical crossroads as the interstate agreement with Israel regarding the “Aphrodite–Ishai” natural gas reservoir enters its final stage of completion. Regulating the “sensitive” Ishai segment, which extends into Israel’s Exclusive Economic Zone (EEZ), was the necessary condition for advancing the four-billion-dollar investment and beginning natural gas production. With the upcoming Cyprus–Israel interstate agreement, the path opens for the exploitation of gas fields in Cyprus’s EEZ by the collaborating energy giants.

The Financial Benefit

Revenues for the Cypriot state from the exploitation of the reservoir are estimated between 2 and 3 billion dollars over a period of 20 to 25 years, according to the collaborating companies. This is a stable, zero-risk benefit, as Cyprus does not bear the investment or technical risk. These are fully covered by the consortium, which consists of Chevron, Shell, and Israel’s NewMed.

State revenues arise from three main mechanisms:

Royalties: A stable and predictable percentage of the value of natural gas at the wellhead.

Corporate Tax: Imposed on the companies’ net profits after deducting development and operating costs.

State Take and Profit Share: The companies first recover the 4-billion-dollar investment and operational expenses. The remaining profit is shared between the state and the consortium based on production-sharing contracts (PSCs).

However, the final cash flow depends on international natural gas prices and production costs. If prices remain high, the benefit will approach or exceed the upper limit of 3 billion dollars. If prices fall, state revenues will decrease accordingly.

Cyprus’s Upgrade

The “Aphrodite–Ishai” interstate agreement is a geopolitical act that transforms a political deadlock into a commercial arrangement and upgrades Cyprus’s position in the Eastern Mediterranean.

Diplomatic Victory: A decade-long interstate dispute with Israel is resolved as the arrangement ensures the necessary legal certainty for investors and removes delays in exploiting the reservoir.

Energy Axis: Cooperation between Cyprus and Israel is strengthened, supported by the United States (Chevron) and Europe (Shell), creating a reliable energy hub.

Role Upgrade: Cyprus transitions from a “discovery” country to a “production and export” country. The gas can be transported to LNG facilities in Egypt for export, making Cyprus a gateway to Europe and a strategic energy hub.

Israel’s Share

The Ishai issue concerns the portion of the reservoir belonging to Israel and the corresponding compensation. Aphrodite and Ishai form a single geological reservoir that stretches beneath the maritime border of the two countries.

An independent expert will determine, through a formula, the exact quantity of natural gas belonging to Israel. The consortium developing the Aphrodite reservoir (which extracts all the gas, including from the Ishai segment) will compensate the Israeli beneficiaries for the value of their share.

This compensation is paid by the consortium to the Israeli beneficiaries, ensuring economic benefit to Israel without development costs.

Israel’s share of the Ishai reservoir is estimated to range between 6% and 10%, with the final percentage to be determined by the techno-economic assessment.

The Major Challenges

Despite finalizing the agreement (with a target to sign it by the end of 2025), significant challenges remain, such as:

Technical Risk: Deep-water development requires high-risk management.

Cost: The 4-billion-dollar investment is covered by the consortium.

International Prices: Fluctuations in natural gas prices directly affect the state’s net revenues.

However, the “Aphrodite–Ishai” agreement remains a critical geopolitical and economic milestone for Cyprus. By resolving its dispute with Israel, Cyprus secures stable, risk-free revenues and establishes itself as an energy hub and gateway to Europe.

Source

Author: Chryso Antoniadou