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
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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
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I hope you enjoy the report below and have a nice weekend.
James Stafford
Editor, Oilprice.com
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