Cyprus hopes gas export income will flow by 2019

Fri Jul 6, 2012 3:15pm IST

* Vast gas reserves found off Cyprus coast last year

* Island hopes for domestic flows by 2017, exports by 2019/2020

* Income too far off to help with current financial shortfall

* Russia among international players interested in gas fields

By Luke Baker

NICOSIA, Cyprus, July 6 (Reuters) - Cyprus should generate foreign income from the export of natural gas by 2019, its industry minister said on Friday, which is too far in the future to help the island overcome financial problems caused by its stricken banking sector.

The island's commerce, industry and tourism minister said the vast reserves of natural gas discovered in the waters between Cyprus and Israel should be developed for domestic use in 2017 and provide export revenue from 2019 or 2020.

"Commercial exploitation will begin in 2019," Neoclis Sylikiotis said, explaining that it would require large-scale investment in liquefied natural gas (LNG) plants offshore.

"We expect important export income to flow from 2019-2020," he told Brussels-based journalists during briefings in Nicosia to launch the Cyprus's six-month presidency of the European Union.

Cyprus, which reported the natural gas discovery last December, took another step towards its exploitation in May when it received 15 bids from international companies to develop nine offshore blocks.

Among the bidders are Italy's ENI, France's Total , Malaysia's Petronas and Russia's Novatek.

Surveys suggest more than 100 trillion cubic feet (2.831 trillion cubic metres) of reserves lie untapped in the eastern Mediterranean basin between Cyprus and Israel - almost equal to the world's total annual consumption of natural gas.

While that has sparked major commercial interest, it has also raised political concerns. Turkey is now exploring for gas off Cyprus's Turkish Cypriot coast, and Russia, a financial backer of Cyprus, is keen to expand its footprint in the region.

Turkey, which does not recognise the government in Nicosia, has threatened to block international oil firms from bidding on Turkish energy projects if they also take part in Cyprus's offshore energy ventures.

Lebanon, whose territorial waters neighbour those of Cyprus and Israel, is also concerned about protecting its potential to explore for resources in the region.

The problem for Cyprus is not just keeping its neighbours happy but also finding a way to bring the project to commercial viability as soon as possible so that it can generate income. It must also find the capital to invest in costly infrastructure, such as LNG storage plants.

Finance Minister Vassos Shiarly sidestepped suggestions that revenue from the gas fields could extract Cyprus from the financial hole created by liquidity problems in its banking sector, saying there was immediate work to be done and the island could not rely on as-yet unrealised income.

RUSSIAN HUG

Cyprus has taken a 2.5 billion euro ($3.1 billion) loan from Russia to help refinance expiring debt and cover its 2012 budget deficit and is now beginning talks with the EU and International Monetary Fund over a full bailout programme.

President Demetris Christofias said on Thursday he hoped Cyprus would be able to raise more from Russia while also negotiating a package from the EU/IMF, but EU officials have dismissed those suggestions, saying that Cyprus, a euro zone member, needs to decide where its priorities lie.

Asked if Cyprus could take more loans from Russia or China, which has also been suggested, the finance minister did not dismiss it but said no decisions had yet been taken.

"You mention Russia or China," he said in response to a question from Reuters.

"Even if we have a response from these two destinations that you have mentioned, it is something that we will take to our friends, peers, and discuss it with them, and then we will see how we deal with it.

"It is not an issue that has come about, and therefore if it comes, when it comes, we will discuss it with our partners in Europe and we will take decisions there."

Finance officials estimate Cyprus needs at least 10 billion euros just to recapitalise its banking and financial sector and may need more to prop up the wider economy.

A bailout of that size would equal nearly 60 percent of its gross domestic product of just 17.3 billion euros.

It would also come with strict conditions, including oversight of the financial sector and unpopular reforms to pension and labour markets, something Cyprus wants to avoid.

The 2.5 billion euro, 4.5-year loan from Russia came with much less apparent conditionality, but that could change.

Moscow remains keen to develop its energy footprint in Europe, including pipelines for its own gas, and is close to Syria, which continues to receive Russian arms, including shipments that Western diplomats believe have passed via Cyprus. ($1 = 0.8077 euros) (Writing by Luke Baker, editing by Jane Baird)