Cyprus & World News

Troika to look at Cyprus gas sovereign wealth fund

01 November, 2013

 * But when will it start receiving income? *

By Fiona Mullen  

One of the tasks of the troika of international lenders this week will be to look at the government’s plans for the natural gas sovereign wealth fund, as the establishment of a “resource fund” was one of the pledges of the Memorandum of Understanding (MoU) agreed by all parties.
A key motive behind forcing the government to include this as part of the troika programme is what is known as the “resource curse”.
At best, the resource curse pushes investment, education and government resources into one sector at the expense of others. At worst, it leads to military conflict: think Angola, Nigeria and Sudan, to name a few.
In both cases the resource curse makes the country over-dependent on one source of income and vulnerable to economic downturn when that source starts to run out.
There are two reasons why we cannot be complacent that Cyprus will be immune from the resource curse.
The first is that Cyprus has twice paid for over-dependence on one sector in the past.
At the turn of the 21st century Cyprus was too dependent on British tourists, who accounted for 58% of the total in 2003. But they stayed away as the EU-related boom led to price increases that did not keep pace with quality.
Then from the middle of the same decade Cyprus increased its dependence on Russian businesses. This led in part to banks being so liquid they took the massive risk of investing in Greek government bonds.
Russian dependence also made us vulnerable to German public opinion that doubtless influenced the decision to grab deposits instead of giving Cyprus a full bailout.

Who on earth is in charge of gas policy anyway?
A second reason why we need to be careful of the resource curse is that the prospect of gas revenue has already led to damaging rivalries among the ministries, semi-government organisations and various other bodies with some responsibility for gas.
As one small example, just before the long weekend, the Ministry of Finance was still waiting for critical documents from the Ministry of Commerce in order to prepare for the troika’s questions on the sovereign wealth fund.
But these are not the only two institutions where gas rivalry is causing confusion.
Each of these institutions has its own party political affiliation, its own preferences for gas import or export options and therefore its own behaviour towards potential investors.
During a discussion on Twitter about who was in charge of gas policy the other day, a politically well connected person replied that it was the foreign minister.
Yes, that’s right, the foreign ministry is apparently in charge of gas, because it is a geostrategic issue. The commerce minister does sit on the committee, but the foreign minister is in charge.
Where that leaves the ever-changing national hydrocarbons company (KRETYK), the advisory board selected under the previous government which we have never heard from again, the natural gas company (DEFA) or the Electricity Authority of Cyprus (EAC), not to mention individual politicians who take a keen interest in gas, is anyone’s guess.
But the result is total confusion for foreign investors. Worse still, if you happen to be a company involved in a project whose goalposts keep moving, it results in a lot of anger and resentment against Cyprus that gets spread around the foreign communities in Cyprus and reported back home.
And if you think I have a particular company in mind, I actually have two!

And when is the money coming?
The other irony of the rivalry over gas is that we do not even know when the first gas money will come.
The government’s official aim is to have the first gas exports by 2020.
Regular readers will know that I have always been sceptical about this deadline, partly because of volumes but also because I am sceptical about politicians keeping out of the way of business.
But the government’s deadline is in more doubt than ever now that the average estimated gas resource in Block 12’s Aphrodite field was revised down to 5 trillion cubic feet instead of 7 tcf.
Talk to any industry specialist, and they will tell you that 5 tcf is not enough to build a liquefied natural gas (LNG) plant. It does not guarantee security of supply so it will not get you financing.
That means we’ll have to wait until Noble finds more in Block 12, or until Israel decides it can trust Cypriots to look after its precious newfound resource in a jointly run LNG plant, or until Total and Eni-Kogas find gas in the other blocks.
The complexities of Israeli gas politics and the tight availability of rigs means that any of these options will likely take years rather than months to become certain.
This will push our first gas exports into a future when prices could be negatively affected by more supply from US shale or potentially Chinese shale gas, or Australian or East African LNG.
This is why you have not heard anyone official talk about proven reserves. In the gas market, as I learned from an industry specialist at the Levantine Training Centre course last week, gas resources do not become gas reserves until “commerciality” has been declared.
And declaring something to be commercially viable depends as much on the timing of the cash-flows, not just the size. In my October Sapienta report, I shall be revisiting my earlier estimates for the NPV of Aphrodite’s gas based on various scenarios for gas exports.

*Fiona Mullen is Director of Sapienta Economics Ltd and author of the monthly Sapienta Country Analysis Cyprus. 



Sovereign Wealth Funds: The Cyprus link