By Anthony Alfidi
It's hard to
say whether Cypriot savers should take this promise seriously without some
analysis of its viability.
Let's use the European bailout sum
for Cyprus of US$13B as a proxy for the
amount of savings about to be confiscated from Cyprus' resident depositors.
I need a proxy because I have no idea how much the government of Cyprus
will actually collect from this levy. The natural gas revenue needed to
back the bonds that would make savers whole would likely come from the Aphrodite field. Title to
this field is unclear; Turkey has made a
competing claim for the sovereign right to control drilling. There is
currently no pipeline from Cyprus to either Turkey or Crete which could deliver
the gas to market; that would cost US$1B to build and Cyprus has no money.
Building a $10B LNG terminal is ten times as unlikely, because Cyprus is
still broke. The energy supermajor that ends up building it will get the
lion's share of the revenue from the gas field as compensation for its costs
and will have to deal with the likelihood of being shut out of other projects
in Turkey.
The lack of
drilling and delivery infrastructure means that no Aphrodite gas will go to
Europe until 2018 at the earliest. A lot can happen with the price of
natural gas in five years. The wide availability of shale gas in the U.S.
will keep the price down in North America. Europe's need for gas is met
mainly by Russia, and Gazprom can adjust its rates at will to pressure Russia's
neighbors.
There is no single European energy market and the
price of natural gas by country varies widely. The caloric value of
natural gas is about 1000 BTU per cubic foot (cf), so this gives us a way to
find the value of the Aphrodite field if we have a single market price. I
will use the U.S. price because the CME trades the Henry
Hub futures market in natural gas, giving this
particular commodity some price predictability for several years.
BTW, that's the instrument that global hedge funds will use to speculate
on gas prices and that energy producers will use to hedge delivery
contracts.
The current U.S. natural gas Henry Hub
spot price is $3.72 per million BTUs.
Math: ($3.72
/ 1M BTU) x (1000 BTU / 1 cf) x (7 tcf) = $26.04B total present value
The good news for
Cyprus is that the total value of their natural gas discovery is about $26B,
twice the value of what Cyprus is expected to receive in the bailout.
This begs the question: Why didn't Cyprus just pledge the value of
its gas field as collateral for the bailout instead of giving in to Brussels'
demand that they shake down depositors? Brussels may trust cash up front more
than the expected future value of gas revenues, given the competing sovereign
claims and lack of infrastructure. A bird in hand is worth two in the
bush.
The savings levy
itself is not quite a done deal until a majority of the fractious Cypriot
parliament votes for it. This will be fun to watch.
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