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Eurozone Crisis Impacts Cyprus's Natural Gas Dreams

Cyprus, thrilled to be taking over presidency of the European Union on 1 July, has a more immediate problem. Several of the largest banks there last month were essentially downgraded to junk status.

On May 22 New York and London-based Fitch Ratings Ltd. downgraded to junk status some of the bonds issued by the Cyprus Popular Bank, Bank of Cyprus and Hellenic Bank, the island’s three main financial institutions. On 24 May Moody's credit agency confirmed Fitch Ratings Ltd.’s evaluation of Cyprus Popular Bank, also downgrading its rating.

Wait, it gets worse - Central Bank governor Panicos Demetriades said that Cyprus is struggling to find $2.49 billion to inject into Cyprus Popular Bank (known on the island as Laiki Bank), its second largest lender, by a 30 June deadline. Adding to the apocalyptic scenario, since Cyprus doesn't have its own money to recapitalize the bank, it’s possible cap in hand options include asking for assistance from Brussels, even though the EU is struggling with fiscal meltdowns in Greece and Spain, approaching the Russian Federation for loans, or attempt to tap into Greek bailout funds already allocated by the European Central Bank.

And it’s going to be a tough slog for Cyprus Popular Bank to scare up such capital, given that not one but two credit agencies have downgraded them to junk bond status.

During an interview Demetriades noted, "clearly, the closer you get to the deadline, the less unlikely (asking for EU bailout money) becomes," before adding that it was “crunch time.”

President Demetris Christofias said his country had been engulfed by large exposure to Greece, commenting, "I don't want to absolutely exclude it."

One of the first casualties of the Cypriot fiscal crisis is likely to be Nicosia’s dreams of developing its offshore natural gas reserves, not that they haven’t already been engulfed in political controversy.

In 2010 the U.S. Geological Survey estimated that the Mediterranean’s Levant Basin Province, covering offshore waters of the Gaza Strip, Israel, Lebanon, Syria, Cyprus and the Turkish Republic of Northern Cyprus (TRNC), could contain as much as 122 trillion cubic feet (tcf) of natural gas. USGS Energy Resources Program Coordinator Brenda Pierce said, "The Levant Basin Province is comparable to some of the other large provinces around the world, and its gas resources are bigger than anything we have assessed in the United States."

It hardly takes a crystal ball to predict that the discovery would set off a feeding frenzy of interest and maritime claims and counter-claims. In short order Turkey was warning Cyprus over its drilling activities, while Israel’s interest in offshore waters angered Lebanon. Stress between Turkey and Cyprus dated back to 2003, when the Republic of Cyprus signed a deal with Egypt over drilling rights and continued to expand cooperation in 2007 with Syria, Lebanon and Israel, ignoring the TRNC in the process.

Politics also impacted the debate. On 31 May 2010, an unprovoked assault by Israeli Shayetet 13 Naval Special Forces commandos in international waters on six civilian vessels attempting to deliver humanitarian aid to Gaza resulted in the deaths of eight Turkish civilians and an American. Despite Turkish insistence that Israel apologize for the assault Tel Aviv has steadfastly refused to do so, leading to a deep freeze in Israeli-Turkish relations that persists to the present day.

And last month, after Cyprus announced that 29 companies had made 15 bids for exploratory drilling in a second round of licensing to exploit offshore oil and gas deposits Turkey threatened reprisals against companies bidding for the oil and gas contracts, the Turkish Foreign Ministry stated, "The companies ... which cooperate with GKRY (the Greek Cypriot administration] will not be included in energy projects in Turkey in the future."

And the turmoil in Syria is also complicating the overall picture, as on 22 June Syria downed a Turkish jet off its coast, which Damascus claims was two miles from its coast but that Ankara insists was well outside Syria’s 12-mile territorial waters.

While international energy companies are known for taking risks, the current political and economic issues involved in drilling for potential hydrocarbons in the eastern Mediterranean has more layers than a baklava. Few companies will want to invest the necessary capital in such a risky venture if the host country’s economy is in such a parlous state.

Given how overextended Brussels already is in coping with Greece and Spain, Cypriot politicians had better hope then President Putin is in a generous mood.

By. John C.K. Daly of Oilprice.com

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  • Kyriacos C. Kyriakides on July 02 2012 said:
    The author goes out of his way to give legitimacy to the illegal concoction called "TRNC" as well as undermine the Cyprus Republic by referring to it by some weird four letter acronym. Mr Daly, did some one oil your pen?
  • CHRIS on July 02 2012 said:
    The so called "Turkish republic of northern Cyprus "doesn't actually excists as far as international law is concerned. Is the product of an illegal occupation, ethnic cleansing and hundreds of other violations and is recongnised only by Turkey. So an occupying power doesn't have rights on the exclusive economic zone of Cyprus.
  • Andreas on July 02 2012 said:
    I hope the author is not intentionally condoning ethnic cleansing and invasion of a country, since the "TRNC" is nothing but the product of invasion and ethnic cleansing. This is why the UN and the international community have condemned its proclamation and this entity is still unrecognized to date.

    I know this site is about oil and markets, but some things that make us human are just not for sale.

    Turkey is admitedly the neigborhood bully with an active military of over a million (that's more than the pupulation of Cyprus) and an expansionist policy. Maybe on that close I may agree Putin could be an answer and I am sure that any involvement in the region would not be driven by good moods or simply rightusness... but as they say the lesser of two evils...
  • Nicos Hadjipetrou on July 02 2012 said:
    It doesn't take a genius to immediately figure out that the author of the above article is merely "dancing"" to the tunes of the turkish davuls and zurnas...
  • John C.K. Daly on July 02 2012 said:
    To the writers of the above comments,

    While I appreciate your obvious deeply held commitments to Cyprus, the above "ad hominem" attacks do little to advance your cause. I note at the outset of the article that Cyprus on 1 July assumed presidency of the EU, and this is an article on energy issues rather than political issues such as the division of Cyprus.

    Should your patriotism allow it, you might better direct your energies towards working with the Cypriot government to resolve its fiscal problems rather than gratuitously trashing an author for having the temerity to point out that the eastern Mediterranean's offshore waters are subject to a number of contesting claims.
  • John T on September 01 2012 said:
    I love the way "Mr" John C.K. Daly responds to all the comments and essentially pisses on them regarding "TRNC".

    The correct response would be to apologise for the mistake, and reword "TRNC" as the "occupied territory of the Republic of Cyprus". And yes, there are disputes in the area for the resources, and one of the main problems is the illegal occupation, nobody disputes that.

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