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 Germanled 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.
COSTLY DRILLING
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 Executive Director of IENE)