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Can Natural Gas Save Cyprus?

Christopher Coats, Forbes

After Cyprus was left scrambling to salvage a bailout package left nearly dead after a titanic misstep last week, the country’s new-found energy potential finally entered the conversation despite assurances from on high that it would not.

Cyprus is one of a handful of countries in the Eastern Mediterranean with a firm claim on one of the largest natural gas finds in the region, offering access to an estimated 50 to 60 tcf of gas and 1.7 billion barrels of crude in waters off its southeastern coast. If exploited with care, the reserves could bring in as much as $400 billion over the coming years, providing a boon to a deeply damaged economy as well as meet domestic demand.

Despite such promise, many local leaders have insisted that no pressure be put on the reserves until they actually start producing revenue, which they expect as early as 2018 or 2019. To do otherwise – and start securing loans on the back of future earnings – would be irresponsible and run the risk of selling off the country’s future at low rates; a sentiment held by Nicos Anastasiades, the center-right candidate who won national elections earlier this month. However, a new and potentially crippling development with the country’s banking system has cast doubt on the country’s immediate future, forcing the issue to the forefront of the country’s political and economic future.

First, for some background.

For those who missed it, Cyprus has been in search of a way to secure a bailout that some have put as high as the country’s annual GDP – $18.3 billion. After months of negotiations, the center-right’s Nicos Anastasiades won national elections behind the pledge to finally bring negotiations to an end and secure a support package from the European Union and the IMF. However, after four such bailouts of beleaguered EU economies, Anastasiades encountered some stiff resistance on the other side of the table. Instead of $18 billion, Cyprus was offered around $12.9. More importantly was how the EU and IMF expected the remainder to be met – with a one-time levy taken from accounts in Cyprus, with increasing rates applied to different balances. With hopes that the action would bring in about $7.5 billion, the plan was introduced to the public last week and was met with an almost immediate backlash from far and wide.

International observers called it misguided and critics called it bullying. Worse still, locals panicked and moved to withdraw their funds, only to be met with closed doors at the order of the government. Notably, Russia’s Vladimir Putin offered a sharp rebuke to the plan, calling it “unjust, unprofessional and dangerous” and it’s not difficult to imagine why. According to the AP, Russian companies have long appreciated the country’s “investor-friendly jurisdiction with lax banking regulations and low taxes” to the tune of $19 billion in current deposits.

Anastasiades and the parliament reacted with further delays on the vote to approve the plan, making its passage less and less likely with each passing hour. Finally, the government announced what they called Plan B, which “would require state pension funds to hand over about ($5.17) billion of their reserves.” The additional amount could come from Russia in exchange for an agreement freeing Russian companies with money in Cypriot banks from the one-time penalty.

Uneasy with the lack of local contributions, the EU and the IMF turned down the Plan B, issued a deadline for a final response (Monday March 25) and sent a firm message to Nicosia – to figure it out and fast.

So, with Cyprus short a few billion, their banks still shut and creditors increasingly nervous about what comes next, the question has become, where can they possibly find the money and for some, will the country’s natural gas claims play a part in where it comes from?

From where things stand now, it looks like Cyprus will be looking to expand on its relationship with Russia with an extension of an existing loan, an appeal for a lower interest rate and most importantly, introducing the role of untapped gas reserves to the conversation. According to a Reuters report, support could be backed up with investment efforts and direct shares of Cypriot gas reserves. Locally, the idea emerged that those depositors that kept their money in Cypriot banks for the next two years would receive bonds “linked to revenues from natural gas”. These options mark a stark difference to campaign rhetoric from Anastasiades, who insisted energy earnings be left alone until real revenues started flowing.

However, even with this change of pace from the country’s new leadership, Cyprus’ energy options may be limited. Put simply, the country’s gas claims are not yet proven, making deals made on the back of uncertain earnings all the more risky.

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