* 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 squabble over Cyprus' main natural gas field is threatening to delay multi-billion dollar plans to turn the eastern Mediterranean into a major energy hub.
Israeli Prime Minister Benjamin Netanyahu and Energy Minister Yuval Steinitz are flying to Cyprus on Tuesday to spur plans to join the two countries' electricity grids and construct a pipeline to link newly found gas fields to mainland Europe.
Standing in the way, however, is a dispute over Aphrodite, a gas field discovered in 2011 at the edge of Cyprus' economic waters. One tip of it stretches across the border into Israel's maritime 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 reserves and a fraction of the gas already discovered in Israel.
Israel says it will not give up on the gas and the companies operating on the Israeli side are ready for legal action in case Aphrodite is developed without them.
"I assume we will find a solution in good spirit so we can keep cooperating on bigger, more important, things," Steinitz told Reuters.
Several large gas fields have been discovered in the region over the past decade and Israel and Cyprus have grown close while collaborating in their development.
Steinitz says he and his Cypriot counterpart, Yiorgos Lakkotrypis, have become good friends.
But that does not guarantee a quick solution.
"The government of Israel cannot give up, not even as a gesture of friendship, on its territories or its natural resources," Steinitz said.
He said the governments have asked the companies to reach an understanding among themselves on how much gas is on each side.
"If they don't reach an understanding, then we will ask a professional arbiter or a professional group ... to examine the findings from both sides and decide on the proper division," he said.
The Cypriot Energy Ministry declined to comment, but officials in Nicosia said Lakkotrypis has suggested a similar course of action.
Steinitz said during his visit that the countries may agree on a general format to solve the issue, but a final agreement could take weeks or months.
Charles Ellinas, CEO of energy consultancy e-CNHC, said this should not be a deal breaker.
"If the two governments between them agree to abide by the findings of the arbitration then it takes the heat out of it. And that’s what they need to do at this meeting this week,” he said.
Aphrodite is smaller than two huge gas fields, Tamar and Leviathan, discovered in Israel around the same time, but it was a milestone for Cyprus.
Developing it are Royal Dutch Shell, Texas-based Noble Energy and Israel's Delek Drilling. They are looking to sell the gas domestically and abroad, with a focus on Egypt, where Shell has a liquefaction plant.
The field is also meant to be a link in the 2,000 km pipeline being planned by IGI Poseidon, a joint venture between Greece’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 an expected price tag of up to 6 billion euros ($7.2 billion), could come next year.
Deep-sea exploration in both countries continues and many current and future discoveries will likely be connected to each other 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 in the adjacent Yishai prospect on the Israeli side.
The Yishai consortium, which includes energy firm Israel Opportunity and Nammax Oil and Gas, a company linked to billionaire Beny Steinmetz, has already spent $120 million on exploratory drilling.
The group commissioned a third-party assessment that concluded Yishai's estimated 7-10 bcm of gas could be worth close to $1.5 billion.
Production will have to happen in Cyprus since that is where most of the gas lies, said Rony Halman, chairman of Israel Opportunity, but he envisions the Yishai group being like "smaller partners for Aphrodite, but we will be part of the system".
They are prepared to bring a legal challenge in Europe in case of any opposition.
"We as a company will bring a commercial claim that will stop the development. We have already sat with lawyers in London. We retained lawyers for this issue," Halman said. "We are not willing to give up on this."
$1 = 0.8363 euros Additional reporting by Ron Bousso; editing by Jason Neely