* Using gas reserves to raise money is a rather foolish option *
By Costis Stambolis
Following the Eurogroup conspiracy of March 15, the subsequent Troika-inspired “bail out” and the consequential collapse of Cyprus’s banking system, the question arises as to what model, if any, could be applied to help restart the island’s economy. With the huge loss of the country’s credibility in the international markets, the options are not that many. Tourism is certainly one area of the economy which can be further developed but it is held back by higher costs associated with the euro. Another sector is logistics and support services to companies engaged in Middle East related work. A third option is hydrocarbons which is just emerging following the discovery of significant gas deposits in an offshore section within Cyprus’s Economic Exclusion Zone (EEZ).
The US oil company Noble Energy announced in late 2011 that it had found an estimated seven (7) trillion cubic feet of gas or 200 bln cubic meters (BCM). That, of course, pales against the reserves held by major producers but it is significant for a country like Cyprus which is currently totally dependent on oil imports and whose total energy needs do not exceed 70 bln cubic feet a year or 1.96 bcma of consumption. That leaves considerable margin for exports to Europe and to the global markets.
A second exploratory drilling by Noble has been planned for June this year in order to ascertain in greater detail the size and characteristics of the deposit already discovered. The size of the Aphrodite gas field is not insignificant and according to some estimates it could meet German gas demand for three years. And Cyprus certainly hopes that a lot more gas will be found. Earlier this year it sold further exploration licenses to ENI, Total and Kogas, all well known and well funded international companies, netting some 250 mln Euros from signature fees. According to oil geologists, Cyprus offshore deposits may hold as much as 60 trln cubic feet of gas or approx 1.7 trln cubic meters, which is of the same order of magnitude as that of Azerbaijan, which is favoured by EC energy planners in Brussels as capable of providing an alternative supply source to Russian dominated European gas supply.
With only Noble's discovery confirmed so far, it is too early to substantiate the 60 trln cubic feet reserve estimate, according to energy consultants Wood Mackenzie. The present uncertainties are also reflected in the range of valuations for Aphrodite. Cyprus's state-owned oil-and-gas company, Kretyk, reckons it could earn around $50 bln from its gas fields over the next 25 years, assuming European gas prices remain at around their current level. Others are more circumspect predicting that earnings could range from €5 bln to €32 bln ($6.5 bln to $41.4 bln) over 20 years, based on a range of prices and exploration success rates, as estimated by Morgan Stanley. Such value uncertainties cast doubt on the gas reserves' worth as, say, collateral for any loan to Cyprus.
On the other hand, using the island’s gas reserves to raise money in the international markets is a rather foolish option given the country’s perilous financial condition and the total control of its economic and monetary policies by the German-led Eurogroup. “A gas linked international bond would only strengthen the Troika’s position and could sooner or later have Cyprus’s gas reserves offered on a plate to the country’s creditors,” said a banker who participated in the recent negotiations for the IMF-EU €10 bln bailout.
Looking at gas as a potential new resource capable of revitalising the economy, one has to realise that Cypriot gas production may not materialise until 2019, even on an optimistic timetable. With most of the gas more than 1,500 meters, or 4,921 feet, below sea level, production could prove costly. Building a gas pipeline to Greece is likely to be expensive and logistically complex, so the Cyprus government is having as priority the building of a liquefaction plant in order to produce and export gas in LNG form, an investment estimated to reach some $10.0 bln. Nor has Cyprus yet finalised a fiscal or regulatory regime for gas production.
But with global gas supplies becoming more ample, Cyprus's resource may have only marginal strategic benefit. However, Cyprus is not alone in the gas game. According to many analysts, Israel stands to be the main beneficiary of the Eastern Mediterranean’s newly found riches, mainly due to the geographic distribution of recent discoveries which are bordering, through its own EEZ, with Cyprus. In 2009 and 2010, a pair of U.S.-Israeli consortia exploring the seabed near Haifa discovered the Tamar and Leviathan fields, which collectively hold an estimated 26 trln cubic feet (tcf) of natural gas. The timing of these discoveries was opportune. Since the beginning of the Arab Spring, Israel has suffered frequent supply interruptions and the eventual termination of its contract with Egypt, which had previously provided 40% of the gas Israel consumed, at below-market rates. The Tamar and Leviathan fields, once fully developed, could satisfy Israel’s electricity needs for the next 30 years and even allow it to become a net energy exporter. It is significant to note that since early April, gas from the Tamar field has started flowing onshore and is already providing for Israel’s power supply needs.
Israel’s gas export options remain strong but priority is currently given by the government to covering domestic needs. However, industry sources observe that some of Israel’s gas exports could only be realised in partnership with Cyprus on the grounds of geography and security. Indeed, a 5.0 mln ton per year liquefaction plant to be built in the Vasilikos area could serve a large part of Israel’s gas exports.
TURKEY’S ROLE CHALLENGED
Meanwhile, Turkey has viewed the Israeli-Cypriot gas bonanza with apprehension. Turkey, which invaded the northern part of Cyprus in 1974 to prevent a coup aimed at uniting the island with Greece, doesn’t recognise the Greek-Cypriot government in Nicosia. Ankara maintains that unilateral exploitation of natural resources is against Turkish–Cypriot interests and continued United Nations efforts to reunify the island. Ankara does not recognise either Cyprus’ border agreements with its neighbours and fears that Turkish Cypriots will be excluded from Nicosia’s future gas profits in spite of assurances by the government of Cyprus that special provision has been made for part of the proceeds to go to Turkish Cypriots. Turkey also sees a possible gas export route through Cyprus and Greece as a threat to its own ambitions as a transit country feeding Caspian and Central Asian gas to the European market. Ankara has thus protested the cooperation between Israel and Cyprus and supported Lebanon’s position in boundary disputes with Israel.
Upping the ante, Turkey in September 2011 scheduled major naval exercises to coincide with drilling by Greek Cypriot contractors the USA company Noble Energy and sent its own exploration vessels to disputed waters, threatening to drill on behalf of Turkish Cypriots in the Aphrodite field – which lies partly within Israel's economic zone. At the time the US government send a stern warning to Turkey to keep away from Cyprus EEZ and Noble Energy’s drilling activity, while both Russia and the EU issued clearly worded statements supporting Cyprus’s right to prospect and drill within its internationally recognised sea boundaries. As a result of international pressure, Turkey backed off but has since kept expressing its disagreement on every possible occasion.
In spite of Turkey’s deep routed apprehension – since being the major energy player in the region does not obviously want to see a competitive energy hub emerging in its southern flank – Cyprus is pressing ahead with its plans for the full development of its hydrocarbon resources protected by International Law of the Sea provisions, which form part of EU legislation. The Cypriot government’s position is further strengthened by the fact that already four major international companies – Noble, Total, ENI and Kogas – have signed long term concession agreements and are actively engaged with exploration programmes which are likely to lead to substantial new oil and gas discoveries. Finding and exploiting oil and gas in offshore Cyprus is not just the concern of the government of Cyprus but is now also a top priority and a major commitment for all the above companies. In that sense, the utilisation of Cyprus hydrocarbon deposits is expected to proceed at full speed and will play a key role in restarting the island’s economy and providing a solid base for economic growth and employment for the years to come.
Costis Stambolis is a regular contributor to the Financial Mirror, based in Athens.