EU Caught Playing Dirty and it’s all about Russian Gas

Oil and gas, that's all it's ever been about …

There was a lot going on this week, but it's all being overshadowed by the fascinating geopolitical game over Cyprus. This is a stage on which a country's pending financial collapse hinges explicitly on its hydrocarbons potential, and whoever turns up with aid will win access to exploration blocks.

Yesterday morning, Oilprice.com's Jen Alic took us through the nuances of this game, noting that Russia could bail out Cyprus in return for a nice chuck of exploration acreage offshore. By the close of the day, that is exactly how things appeared to be unfolding. Later in the day, it began to emerge that Gazprom had reportedly offered Cyprus a bailout deal in return for offshore exploration rights. But by Friday, Russian and Greek Cypriot officials had said no deal had been reached. The deal Cyprus put on the table was the creation of a Cypriot state company with control of gas reserves into which Russian companies could invest, along with a nice stake in Cypriot banks to be rescued by the Russian investment fund. It's not enough for Moscow, which is holding out for more-and likely to get it if the EU refuses to budge.

This all came after the EU tried to get Cyprus to agree to partially fund an EU bailout package by putting a levy on bank deposits and offering account-holders compensation in the form of potential gas futures. This is where the EU was caught playing dirty-and it's all about Russia. Russian oligarchs use Cyprus for their offshore banking needs, and as such hold a lot of the bigger accounts that would have been targeted under this scheme.

The EU would never have done this in the past because Russia would have just turned off the gas spigots that control European supplies. What's behind the new bravado? Quite simply, 122 trillion cubic feet of Mediterranean gas in the Levant Basin, discovered by Israel (in a US-Israeli partnership), and in Lebanon, Syria and Cyprus. If all goes well, the estimated 425 billion cubic meters (16 trillion cubic feet) of gas found in Israel's Leviathan field will eventually be pumped via undersea pipeline directly to Turkey and then on to Europe. Another Israeli gasfield, Tamar, has 250 billion cubic meters (9 trillion cubic feet) and production should begin in April. This is Europe's answer to the Russian gas stranglehold. It's no longer afraid of Russia turning the spigot off.

However, it gets tricky when Cyprus isn't playing along. The Greek Cypriots rejected the EU bailout scheme and headed straight for Moscow, knowing full well the power of negotiation behind the island's estimated 60 trillion cubic feet of gas.

Moscow played hard to get for a few days, but it wants Cyprus because if Europe gets ahold of the island's  gas then Russia will certainly lose its hegemony over the European market. And it's not ready quite yet. Its diversification plans to Asian markets has not been solidified.
This is a race to the finish line to develop Mediterranean gas. When all is said and done, this Mediterranean gas could provide 40% of Europe's total gas needs.

Europe took a gamble here with Cyprus through bailout politics. Russia's energy strategy is far more decisive. Not only will Russia now get a nice chuck of Cyprus' offshore exploration acreage-it also saves its oligarchs from a probably 10% loss in their Cyprus bank accounts courtesy of the now-rejected EU bank deposit levy scheme.

Cyprus has known from the beginning that its bailout is tied to its potential petrol dollars, while the EU has attempted to couch this in all manner of moral-high-ground rhetoric.

What will the EU do now? Will it bail Cyprus out on kinder terms to keep Russia from getting hold of the island's gas?  Monday is D-Day: This is the deadline the European Central Bank has set for Cyprus to come up with $6 billion in order to "qualify" for a bailout package.

Cyprus is playing Russia and the EU offer each other right now, hoping to bring the specter of a deal with Russia close enough to make Brussels blink and give Cyprus more negotiating power.

Watch the deals in progress with this in mind: Not only is Cyprus' financial collapse at stake here. Also at stake is Russia's monopoly on the European gas market and the Europe's entire gas future.

And this is where you simply can't miss this week's premium newsletter, where trader Dan Dicker highlights a US E&P company that stands to make big earnings on this geopolitical game. What we're offering is a combination that is hard to come by these days: Heads up from one of the most prominent traders out there backed up by geopolitical insight that puts all the pieces of the puzzle in place. You won't need to 'mind the gaps' here. There aren't any.

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This week's analysis piece is taken from the Executive Report section of Premium and takes a look at new opportunities for investors and companies in Turkmenistan. This leading Caspian gas exporter with massive untapped oil and gas potential is now open for business after years of eccentric isolation-and the playing field is wide, wide open. You can read the report by subscribing for Free to Oil & Energy Insider - click here.

I hope you enjoy the report below and have a nice weekend.

James Stafford
Editor, Oilprice.com