by Nick Butler | Financial Times
The controversial bailout deal for Cyprus proposed
by eurozone finance ministers has led President Nicos Anastasiades to promise
investors who stay in the country after the compulsory forfeit of 9.9 per cent
of their deposits that they will share in the country’s future wealth from
natural gas.
In return for the forfeit they will be given
shares in the banks and what are described in press reports as ” equity
returns, guaranteed by future natural gas revenues”.
Whatever equity returns means, nothing can be guaranteed
by future gas revenues at this stage. The facts are simple. Only one well has
been drilled offshore Cyprus. The field identified – in Block 12 to the South
East of the island – is said to contain perhaps 7 tcf of gas. But with only one
well there can be no hard estimate. It could be more, but it could just as
easily be less. Nor does anyone yet know what the cost of extraction will be.
The head of Cyprus’ State Hydrocarbons Company –
Charles Ellinas – said last week that Cyprus could have up to 40 tcf of gas
within its exclusive economic zone. He talked about Cyprus exporting gas to
Europe via an LNG terminal by 2019.
Yes, and pigs might fly over Nicosia. No one will
build an LNG terminal until someone drills more wells to confirm the existing
find and several more successful wells on other blocks. The licensing round has
barely begun, and interestingly Noble Energy, who drilled the first successful
well, are not bidding for more acreage. That is a very odd decision if the
company shares Mr Ellinas’ view that the area holds 40 tcf.
Let’s say more gas is found in the next year or
two. A major new greenfield LNG plant will take a minimum of seven or eight
years to build. That means there will be no gas flowing to Europe before the
early 2020s at best. That is a long time to wait for a guarantee.
And then there is the small problem of Turkey
which does not recognise the independence of Cyprus and which retains claims on
the north of the island. To pass from one part of Cyprus to another you have to
go through a checkpoint under the eyes of armed soldiers. Turkey has said it
will not tolerate the development of gas in Cypriot waters.
International investors, many of whom have
significant interests in Turkey, do not take the threat lightly. In some
countries, Turkish Ambassadors, on instructions from Ankara, have advised major
companies to stay out of Cyprus. Quite a number have taken the hint and the
list of applicants for licences in Cyrpus is pretty thin.
Finding and developing any fields which are found
will not be simple and will require some agreement between Cyprus and Turkey.
Building a LNG facility will be costly (say $8bn) and heavily dependent on
selling the gas into a secure market. The gas market in Europe is anything but
secure and the existing players including Gazprom are not likely to roll over
and allow Cypriot gas to take their market share. At best there will be fierce
price competition.
In short, the guarantee is worthless. Any revenue
flow from Cypriot gas is a long way off and inherently uncertain. Indeed, the
EU proposition which the Cypriots are due to vote on this week may make some
players hesitate still further about investing. If ordinary depositors (who are
hardly to blame for the current problems) suddenly find their assets shrinking
what guarantee do energy investors have that anything they find will not be
expropriated, or made subject to penal taxation rates to cover the country’s
debt.
The situation facing Cyprus is very difficult and
a sign that the eurozone crisis is not over. But the solution proposed could
make a bad situation worse, particularly if it is grounded in a false promise
about guarantees provided by revenues from gas sales which owe more to hope
than to present realities.
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