Cyprus is bound to suffer a severe recession in the next two to three years, fanning concerns about a euro exit despite the desire of the overwhelming majority of its political elite to keep the country in the single currency club.
Cypriot officials and others are betting highly on the island’s gas potential becoming the new engine for growth and picking up the slack from the hard-hit financial and related services. Even though there does seem to be gas potential offshore, it is too early to specify the size of the reserves and their commercial viability, both complicated by disputes with Turkey. In this respect, the island’s gas potential should at best be viewed by policymakers as a medium-to-long term card to revive its economy.
“The Cypriots are smart and energetic people and will find ways to get out of this mess,” a Cypriot lawyer, residing in Athens, told Kathimerini English Edition recently, painting an optimistic picture. He pointed out that bank deposits with balances of more than 100,000 euros may be rare in Greece but are commonplace in Cyprus. “The Cypriots have money,” he added, citing tourism and natural gas as the most promising locomotives for growth in coming years.
A high-level executive at a well-known real estate broker and advisory firm in Greece and Cyprus was also optimistic but less upbeat. “We made it after the (Turkish) invasion in 1974 when there was no transportation means other than ships to connect us with the outside world for months, so why wouldn’t we make it now?” he asked.
However, he is bracing for a tough period ahead, saying that the destruction of personal wealth via haircuts in uninsured deposits at the country’s two largest banks, the wiping out of the value of bank securities and shares, combined with rising non-performing loans, have made many Cypriots’ fat bank accounts look slimmer and real estate holdings less attractive.
The executive expected real estate and construction activities to be hit as well, and pointed to natural gas and tourism as a source of optimism. He recognized that the tourism industry may be affected by the expected drop in traffic related to offshore financial transactions and the capital controls if they stay in place for a long time.
The two accounts above underline the importance attached even by the more sophisticated to natural gas discoveries as an engine of growth. A similar and perhaps stronger view regarding gas potential appears to be shared by politicians of different stripes in Cyprus.
With the economy expected to shrink by anything between 12 and 23 percent in 2013-2014, depending on the projection, it is important that an existing or a new sector partly or fully offsets the negative impact from the financial and related sectors, from real estate, construction and the large public sector.
The latter represent more than 40 percent of GVA (Gross Value Added), a measure of output.
Cyprus’s offshore gas sits in the Levantine Basin in the Eastern Mediterranean. The basin holds an estimated 120 trillion cubic feet of natural gas and more than 1.5 billion barrels of oil. The only gas discovery so far is in Block 12, which is next to Israel’s Leviathan and Tamar gas fields, holding 16 and 9 trillion cubic feet respectively.
The discovery in Block 12 was made in 2011. The block is licensed to Nobel Energy Inc, a US company, and is estimated to hold some 8 trillion cubic feet of gas. Noble Energy is expected to begin exploratory drilling this summer, though it may not be that simple given that Turkey sent in warships to stop drilling in 2011.
The Cypriot government has also awarded offshore exploration licenses to France’s Total SA and a joint venture between Italy’s Eni and Korea Gas Corp. Turkey recently barred Eni from licensing opportunities in its territory in response.
However, analysts point out that even if more gas reserves are discovered, it will take years before they are extracted, processed and taken to the market.
Analysts say it may take at least five years for production to start and even more to begin exporting. So, 2018 could be the year when offshore gas extraction takes place at the earliest.
Then, of course, the gas has to be pumped onshore and be liquefied so that it can be transported by tankers. This requires considerable investments in infrastructure, which will take place only if gas reserves are deemed commercially viable.
In this regard, the international price of gas will play an important role and the prospects are not bright for producers at this point as new technology will help turn the US into a natural gas exporter in coming years, according to experts.
Undoubtedly, the natural gas reserves off Cyprus could provide a big lift to its economy and provide a geopolitical boost as well, especially if estimates by the previous government putting reserves at 60 trillion cubic feet – accounting for some 40 percent of the EU’s gas supplies – are accurate.
But the lift can only come if the reserves are indeed big and commercially viable, and, of course, if differences with Turkey are settled. This looks like a long shot at this point and there is always the risk of distracting policymakers’ and the public’s attention from tackling more urgent issues, not to mention the possibility of disappointment if the actual gas potential turns out to be smaller than expected.