London (Platts)--24Jan2013/820 am EST/1320 GMT

Italy's Eni and South Korea's Kogas on Thursday signed contracts to explore three natural gas-rich blocks in deepwater off Cyprus, where political tensions have arisen over exploration in the Mediterranean island's exclusive economic zone.

An exploration and production sharing contract for Blocks 2, 3 and 9 covering an area of around 12,530 sq km in the offshore Levantine basin was signed with the Cypriot government Thursday, Eni said in a statement.

The contract, which marks Eni's first upstream foothold in the country, follows months of talks to hammer out the final terms of an initial block award granted last year.

Eni was first awarded the three blocks as 80% operator alongside Korean partner Kogas (20%) under Cyprus' second offshore licensing round) in October 2012.

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The block 9 license was initially granted to a consortium comprising France's Total and Russian companies Novatek and Global Resources, but contracts talks with the preferred bidders fell through.

"This result is of significant importance for the consolidation of Eni's position in the Mediterranean region, which is a strategic area in the company's exploration and production portfolio," Eni said, referring to the final award for three blocks.

The government of Cyprus was keen to finalize the blocks before the first round of presidential elections are held on February 17.

The Eni/Kogas blocks lie closer to the island's southern shore than block 12, where the US' Noble Energy discovered an estimated gross mean resources of 7 Tcf of natural gas in December 2011.

Total is still awaiting final approval for a PSC on Blocks 10 and 11 which lie in waters adjacent to Egypt's deepwater area.

ENI'S TURKISH PROJECT UNDER THREAT

Oil and gas companies have recently been attracted to the little-drilled Levantine basin which has fast become one of Europe's hottest exploration frontiers with a "giant gas potential", Eni said.

But Turkey, which has been at diplomatic loggerheads with the divided island for years, has accused the Greek Cypriot government of undermining peace efforts on the island by proceeding with its exploration plans.

Cyprus also has yet to reach firm agreements with neighboring Lebanon and Syria over exploration in its claimed exclusive economic zone.

Turkish energy minister Taner Yildiz in November warned Eni that Turkey might reconsider its participation in the planned Samsun-Ceyhan oil pipeline if the company went ahead with plans to explore for natural gas in Cyprus.

The pipeline would provide an overland bypass for oil shipments to and from the Mediterranean Sea through the congested Turkish straits.

Eni and Turkey's Calik Enerji signed a cooperation agreement in 2005 for a planned 1.5 million b/d pipeline from Samsun on Turkey's Black Sea coast to its Mediterranean oil hub at Ceyhan.

In 2009, the two companies signed a memorandum of understanding with Russian companies Rosneft and Transneft, which were both expected to commit crude to the project.

But as of yet no company with crude arriving in the Black Sea from Caspian fields has committed oil to the project and with the volume of tanker traffic through the straits having fallen in recent years as new pipelines have carried crude from the Black Sea to European refineries, it has been unclear for some time whether the project will proceed.

The Turkish government maintains that the Republic of Cyprus had no right to conclude international treaties with its east Mediterranean neighbors delineating their respective Exclusive Economic Zones, or to hold licensing rounds before a settlement had been reached between the two halves of the divided island.

Turkey has won some international support for its position that any mineral reserves found in Cyprus EEZ are the property of the people of the whole of Cyprus, and not just the Republic of Cyprus, which occupies the southern two thirds of the island.

--Robert Perkins, robert_perkins@platts.com
--Edited by Jeff Barber, jeff_barber@platts.com

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