Michele Kambas

NICOSIA - Huge untapped gas deposits almost 20,000 feet below the surface of the Levantine Sea could be a life-changer for debt-crippled Cyprus and candidates in Sunday's presidential election are rushing to reap political gains.

Experts believe Cyprus, a novice in the energy sector, could be potentially sitting on hydrocarbons worth up to $400 billion. That would dwarf a 17.5 billion euro financial bailout under discussion with international lenders.

"Prima facie, its huge. Much bigger than anyone is talking about," said Michael Economides, an energy consultant based in Houston, Texas.

But this treasure is buried deep in the Mediterranean and is trapped in one of the most bitterly-contested regions of the world, with arch-rival Turkey openly branding Cyprus's efforts to tap it illegal.

With a massive bailout bill from lenders amid a deep recession, Cypriots are bracing themselves for years of austerity and the gut-wrenching frustration that billions might be languishing under the Mediterranean sea bed.

The three main candidates in the island's election have sensed the potential to score points and the gas has become a campaign issue.

One contender has suggested "securitization" - pledging future profits to secure loans in advance, so that Cyprus can solve its financial problems without waiting for the gas to flow. It is an idea that is gaining currency in Brussels, where the finances of the small island are a big headache for the EU.

But even if Cyprus does try to sell its future gas revenues early, getting any money is still probably years away. Other countries have pledged future oil and gas revenue to securitize loans, but only from proven reserves that are ready to produce.

Cyprus's sales pitch on what lies below the surface is a compelling one, sharing a sea boundary with Israel, where two of the world's largest gas finds of the past decade were reported.

The US Geological Survey estimates a mean 122 trillion cubic feet of recoverable gas in the basin. There could also be 1.7 billion barrels of recoverable oil.

Of that, experts believe between 50 and 60 tcf could lie within Cyprus's maritime boundaries.

"The ultimate value to Cyprus is enormous," said energy consultant Economides. "Even if we take a conservative number of 50 tcf of gas, without encountering oil, you are looking at potential revenue of $400 billion by the time it is commercial."

Sovereign fund

Cyprus's outgoing, Communist-led government has proposed a "National Resource Fund" when revenue starts trickling in. Revenues would be used to support industry, and pay for new infrastructure, invest with long term returns and boost the national budget, the energy ministry said in a written statement. The plan is backed by Communist presidential candidate Stavros Malas, who places second in most polls.

Conservative front-runner Nicos Anastasiades has a similar proposal for future gas revenues to be paid into a sovereign wealth fund. Both he and Malas say any attempt to sell future revenues too far in advance would amount to giving the country's wealth away too cheaply.

However, third-placed candidate George Lillikas, who is backed by the Socialist Party, thinks the discovery is bankable enough to swiftly extricate Cyprus from onerous bailout terms, and has suggested either pre-selling or securitizing reserves.

"Cyprus should not be economically dependent on anyone, because states that have an economic dependence have political dependence too. That is why I intend to utilize natural gas immediately," he said.

Such a proposal is tempting for Cypriots who are fed up with austerity, and for lenders in Brussels searching for a way to guarantee that Cyprus can sustain a bailout loan. But economists say it is too soon to hope for a quick fix.

"In the short term the prospects of Cyprus's gas-related wealth is not going to help it," said Laura LeCornu, a partner with Strata Insight consultancy. "This is a long-term prospect and there are so many uncertainties."

Geopolitics

Cyprus reported its first natural gas find in late 2011. US-based Noble Energy reported a gross mean of 7 trillion cubic feet (tcf) in a well south-east of the island. Experts believe it can only start producing in 2018 or 2019.

Energy officials say a conservative estimate valuing the specific Noble find, based on present gas prices, is 80 billion euros. Taking into account the whole offshore area under Cypriot control still untapped, that figure could potentially rise fivefold.

Noble is carrying out a second appraisal well on its 2011 find this year, and only at that point will it decide if it is a commercial concern.

Meanwhile, the prospect of a gas bonanza is fueling long-simmering regional disputes. Turkey, which supports a breakaway Turkish Cypriot state in north Cyprus, says tapping the gas would be a "legal transgression" by Greek Cypriots running Cyprus's internationally recognised government, and gas should be used equally and by both Greek and Turkish Cypriots.

"I see this as a handicap to relations we are trying to nurture," Turkish Energy Minister Taner Yildiz told Reuters.

Turkey has warned companies of repercussions if they get engaged in Cyprus. ENI which signed a production sharing contract with Cyprus in January, has been warned that its involvement could impact its Turkish operations.

The Italian firm is a partner in BlueStream, a pipeline which supplies Russian gas to Turkey. It is also a partner in the Shah Deniz project supplying natural gas from Azerbaijan through Turkey, as is France's Total, another company awarded an exploratory contract by Cyprus.

[Reuters]