* Israel, Cyprus leaders meeting this week
* Cyprus' Aphrodite gas field extends into Israeli waters
* Companies on Israeli side prepared for legal battle
* Dispute may need international arbitration
By Ari Rabinovitch and Michele Kambas
JERUSALEM/NICOSIA, May 7 (Reuters) - An ownership squabbleover Cyprus' main natural gas field is threatening to delaymulti-billion dollar plans to turn the eastern Mediterraneaninto a major energy hub.
Israeli Prime Minister Benjamin Netanyahu and EnergyMinister Yuval Steinitz are flying to Cyprus on Tuesday to spurplans to join the two countries' electricity grids and constructa pipeline to link newly found gas fields to mainland Europe.
Standing in the way, however, is a dispute over Aphrodite, agas field discovered in 2011 at the edge of Cyprus' economicwaters. One tip of it stretches across the border into Israel'smaritime zone.
At stake is 7-10 billion cubic metres of gas worth close to$1.5 billion, according to one recent estimate in Israel.
That is less than 10 percent of Aphrodite's total reservesand a fraction of the gas already discovered in Israel.
Israel says it will not give up on the gas and the companiesoperating on the Israeli side are ready for legal action in caseAphrodite is developed without them.
"I assume we will find a solution in good spirit so we cankeep cooperating on bigger, more important, things," Steinitztold Reuters.
Several large gas fields have been discovered in the regionover the past decade and Israel and Cyprus have grown closewhile collaborating in their development.
Steinitz says he and his Cypriot counterpart, YiorgosLakkotrypis, have become good friends.
But that does not guarantee a quick solution.
"The government of Israel cannot give up, not even as agesture of friendship, on its territories or its naturalresources," Steinitz said.
He said the governments have asked the companies to reach anunderstanding among themselves on how much gas is on each side.
"If they don't reach an understanding, then we will ask aprofessional arbiter or a professional group ... to examine thefindings from both sides and decide on the proper division," hesaid.
The Cypriot Energy Ministry declined to comment, butofficials in Nicosia said Lakkotrypis has suggested a similarcourse of action.
Steinitz said during his visit that the countries may agreeon a general format to solve the issue, but a final agreementcould take weeks or months.
Charles Ellinas, CEO of energy consultancy e-CNHC, said thisshould not be a deal breaker.
"If the two governments between them agree to abide by thefindings of the arbitration then it takes the heat out of it.And that’s what they need to do at this meeting this week,” hesaid.
IT'S ALL CONNECTED
Aphrodite is smaller than two huge gas fields, Tamar andLeviathan, discovered in Israel around the same time, but it wasa milestone for Cyprus.
Developing it are Royal Dutch Shell, Texas-basedNoble Energy and Israel's Delek Drilling.They are looking to sell the gas domestically and abroad, with afocus on Egypt, where Shell has a liquefaction plant.
The field is also meant to be a link in the 2,000 kmpipeline being planned by IGI Poseidon, a joint venture betweenGreece’s natural gas firm DEPA and Italian energy group Edison,to carry Israeli and Cypriot gas to western Greece.
A final investment decision on the pipeline, with anexpected price tag of up to 6 billion euros ($7.2 billion),could come next year.
Deep-sea exploration in both countries continues and manycurrent and future discoveries will likely be connected to eachother to cut costs on infrastructure.
The Aphrodite partners would not comment on the dispute,though a footnote in Delek's 2017 financial report stated that"the vast majority" of gas was in Cyprus and a "minority" was inthe adjacent Yishai prospect on the Israeli side.
The Yishai consortium, which includes energy firm IsraelOpportunity and Nammax Oil and Gas, a company linkedto billionaire Beny Steinmetz, has already spent $120 million onexploratory drilling.
The group commissioned a third-party assessment thatconcluded Yishai's estimated 7-10 bcm of gas could be worthclose to $1.5 billion.
Production will have to happen in Cyprus since that is wheremost of the gas lies, said Rony Halman, chairman of IsraelOpportunity, but he envisions the Yishai group being like"smaller partners for Aphrodite, but we will be part of thesystem".
They are prepared to bring a legal challenge in Europe incase of any opposition.
"We as a company will bring a commercial claim that willstop the development. We have already sat with lawyers inLondon. We retained lawyers for this issue," Halman said. "Weare not willing to give up on this."
($1 = 0.8363 euros)(Additional reporting by Ron Bousso; editing by Jason Neely)
