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Cyprus gas boom lifeline still only on paper

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(Globalpost/GlobalPost)

The bankruptcy-threatened Mediterranean island of Cyprus is often painted as having a lucrative lifeline -- offshore gas deposits that could just pull it back from the financial brink.

But those deposits are so far only potential, and it will be many years and a lot more money spent before the pipeline begins to swell with cash-generating hydrocarbons.

And that is before geopolitical pitfalls are taken into account.

For several years the eastern Mediterranean has been a hive of exploratory activity, with the Cyprus government granting permits to international prospectors after Israel discovered massive offshore gas deposits in 2010.

US major Noble Energy made the first find off Cyprus's southeast coast in 2011 near the Israeli maritime boundary, in a test well named Aphrodite-1 after the island's mythological goddess of love.

The discovery was greeted like manna from heaven and seen as a saviour from the financial ills which have plagued the small island nation.

The government has tried to use the gas deposits as a bargaining chip or security in negotiations to secure financial aid from Europe or Russia, and Russia's gas giant Gazprom was among those wooed.

But even if Cyprus's current woes are survived, the potential bonanza remains uncertain.

The road to gas wealth is paved not only with promise but also obstacles which must be carefully negotiated before Nicosia can exploit it, and probably not before the end of the decade.

In a presentation to analysts in December, Noble Energy estimated the first deposit to be between five and eight trillion cubic feet (226.5 billion cubic metres).

But at this stage, it is still only "resources" -- and firmly below the seabed with no infrastructure yet in place for extraction.

Noble Energy has not yet tallied up the corresponding "reserves" -- the amount of gas that can actually be technically and economically extracted, and is expected this year to begin further test drilling in an effort to do so.

The Cyprus government has played up the potential of the gas windfall, with the ministry of agriculture, natural resources and environment estimating it at 60 trillion cubic feet, but this figure has to be verified through exploration.

It will also take several years for revenue to be generated.

Earlier this year, Cyprus signed additional agreements with French energy giant Total and a consortium between ENI of Italy and South Korea's Kogas for oil and gas exploration in its waters.

But according to analyst Catherine Hunter of IHS The Energy Daily, it is too soon for Nicosia to begin turning its potentially valuable asset into cash.

"The larger financial rewards of monetising the country's newfound hydrocarbon wealth are unlikely to emerge before 2020 at the earliest," she wrote in a recent note.

Hunter said the exploration licences granted so far will "ensure far greater clarity on Cyprus' resource holdings by 2015-16."

Before actual production can begin, several challenges have to be tackled.

These include building new infrastructure from scratch in a country currently geared towards tourism and -- until the latest crisis hit -- financial services.

The European Union, which Cyprus joined as a full member in 2004, would be a prime prospect for natural gas sales in addition to supplies from Russia, hence the interest of the Kremlin and Gazprom.

But first a pipeline to transport it and a liquefied natural gas (LNG) plant must be constructed, the latter at an estimated cost of nearly 10 billion dollars.

And there is also the political issue.

Even if Cyprus emerges from its current economic crisis, the island continues to be divided politically.

Turkey, which invaded the north in 1974 in response to a coup sponsored by the military junta then ruling Greece, has reacted angrily to the Greek Cypriot-led internationally recognised government's search for energy.

Ankara has protested, despite the involvement of US and Israeli firms, branding Nicosia's gas hunt illegal and beginning its own exploratory drilling off the breakaway north of the island.

The so-called Turkish Republic of Northern Cyprus is recognised only by Ankara, which in turn does not recognise the government of the Cyprus Republic, despite its own aspirations to join the European Union.

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http://www.globalpost.com/dispatch/news/afp/130322/cyprus-gas-boom-lifeline-still-only-paper