Op-Ed: Cyprus' Bailout Hopes All About Petrodollars
Cyprus is preparing for total financial collapse as the European Central Bank turns its back on the island after its parliament rejected a scheme to make Cypriot citizens pay a levy on savings deposits in return for a share in potential gas futures to fund a bailout. But as investors monitor developments with the banks and bailout talks, they may be missing the more important context to the Cypriot crisis: energy resources--and a lot of them.
On Wednesday, the Greek-Cypriot government voted against asking its citizens to bank on the future of gas exports by paying a 3-15 percent levy on bank deposits in return for a stake in potential gas sales. The scheme would have partly funded a $13 billion EU bailout.
It would have been a major gamble that had Cypriots asking how much gas the island actually has and whether it will prove commercially viable any time soon.
In the end, not even the parliament was willing to take the gamble, forcing Cypriots to look elsewhere for cash, hitting up Russia in desperate talks this week, but to no avail.
The bank deposit levy would not have gone down well in Russia, whose citizens use Cypriot banks to store their "offshore" cash. Some of the largest accounts belong to Russians and other foreigners, and the levy scheme would have targeted accounts with over 20,000 euros. So it made sense that Cyprus would then turn to Russia for help, but so far Moscow hasn't put any concrete offers on the table.
Plan A (the levy scheme) has been rejected. Plan B (Russia) has been ineffective. Plan C has yet to reveal itself. And without a Plan C, the banks can't reopen. The minute they open their doors there will be a withdrawal rush that will force their collapse.
(Read more Oilprice: Gazprom Offers to Bail out Cyprus in Exchange for Exploration Rights)
In the meantime, cashing in on the island's major gas potential is more urgent than ever—but these are still very early days.
In the end, it's all about gas and the race to develop massive Mediterranean discoveries. Cyprus has found itself right in the middle of a geopolitical game in which its gas potential is a tool in a showdown between Russia and the European Union.
The EU favored the Cypriot bank deposit levy but it would have hit at the massive accounts of Russian oligarchs. Without the promise of Levant Basin gas, the EU wouldn't have had the bravado for such a move because Russia holds too much power over Europe's gas supply.
Cyprus is playing Russia and the EU off each other right now, hoping to bring the specter of a deal with Russia close enough to make Brussels blink and give Cyprus more negotiating power.
By Friday, Russian and Greek Cypriot officials had said no deal had been reached. According to reports, the deal Cyprus put on the table was that it would create a Cypriot state company that controlled the gas reserves, and into which Russian companies could invest, along with a nice stake in Cypriot banks to be rescued by the Russian investment fund. But that deal was not enough for Moscow, which is holding out for more—and likely to get it if the EU refuses to budge.
Cypriot Gas Potential
The Greek Cypriot government believes it is sitting on an amazing 60 trillion cubic feet of gas, but these are early days—these aren't proven reserves and commercial viability could be years away. In the best-case scenario, production could feasibly begin in five years. Exports are even further afield, with some analysts suggesting 2020 as a start date.
In 2011, the first (and only) gas was discovered offshore Cyprus, in Block 12, which is licensed to Houston-based Noble Energy. The block holds an estimated 8 trillion cubic feet of gas.
To date, the Greek Cypriots have awarded licenses for six offshore exploration blocks that could contain up to 40 trillion cubic feet of gas. Aside from Noble, these licenses have gone to Total SA of France and a joint venture between Eni SpA of Italy and Korea Gas.
But the process of exploring, developing, extracting, processing and getting gas to market is a long one. Getting the gas extracted offshore and then pumped onshore could take at least five years and some very expensive infrastructure that does not presently exist. The gas would have to be liquefied so it could be transported by seaborne tankers.
(Read more Oilprice: Turkish and Cypriot Relations Sour Due to New Gas Field)
The potential is there: Cyprus' gas discoveries adjoin Israeli territorial waters where the discovery of the massive Leviathan gasfield (425 billion cubic meters or 16 trillion cubic feet) and smaller Tamar gasfield (250 billion cubic meters or 9 trillion cubic feet) have foreign companies in a rush to cash in on this.
There are myriad problems to extracting Cypriot gas—not the least of which is the fact that some of this offshore exploration territory is disputed by Turkey, which has controlled part of the island since 1974.
Gas exploration has taken this dispute to a new level, with Turkey sending in warships to halt drilling in 2011, and threatening to bar foreign companies exploring in Cyprus from any license opportunities in Turkey. The situation is likely to intensify as Noble prepares to begin exploratory drilling later this year in Block 12.
In the meantime, there is no shortage of competition on this arena. Cyprus will have to vie with Israel, Lebanon and Syria—all of which have made offshore gas discoveries of late in the Mediterranean's Levant Basin, which has an estimated total of 122 trillion cubic feet of gas and 1.7 billion barrels of oil.
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