Cyprus mulls sovereign fund for potential gas riches

Πηγή: Reuters

Oct 19 2011

LIMASSOL, Cyprus, Oct 19 (Reuters) - Cyprus has not even confirmed the existence of natural gas off its shores, but it is already thinking about setting up a sovereign wealth fund to manage the riches it hopes will come its way.

 Gas has the potential to transform the east Mediterranean island, but assuming the first results from exploratory drilling due in December are positive, it will be a long time before the euro zone's third-smallest economy is able to export gas, Energy Minister Praxoula Antoniadou told Reuters. 

 "We are talking about the medium and long term -- a very minimum of three years before anything can materialise with reference to supplying the local market, and many more years before we could be exporting," she said in an interview on the sidelines of an economic conference. Texas-based Noble Energy started drilling last month in a bloc abutting a prospect controlled by Israel that is the largest natural gas find of the last decade. 

 If Noble finds gas, two more appraisal wells will be sunk and Cyprus will have a clearer idea six or eight months later just how much hydrocarbon it is sitting on. The prospecting has angered Turkey, which says the status of divided Cyprus must be resolved first.

The island has been divided since Turkish troops invaded the north in 1974 in the aftermath of a brief, Greek-inspired coup in Nicosia. Cyprus is finalising plans to launch a second offshore licensing round for oil and gas before the end of the year, and Antoniadou said a "significant" number of companies had purchased preliminary geophysical data that point to extensive deposits ranging from 4 trillion cubic feet to 10 trillion. 

She declined to go into detail about which companies had expressed an interest, citing commercial confidentiality. NORWAY AND QATAR AS MODELS Gas is so new for Cyprus that energy is not part of Antoniadou's title -- she is minister for commerce, industry and tourism -- but how to spend the yet-to-be-confirmed windfall is the talk of the island. 

 While cautioning against euphoria, Antoniadou said the government was looking ahead to the possible need for a sovereign wealth fund one day to invest its gas wealth. Norway's fund, which invests a maximum of 4 percent of its revenues at home, was a "respectable" model being studied; that of natgas major Qatar, which ploughs more money into infrastructure investment at home, was another. 

 "Certainly it is something that we are considering, but we have to take things in steps," she said. "It has to be a model that guarantees the future of generations to come but also respects current generations as well." Cyprus must be wishing it had discovered gas a decade ago. The island's economy faces strong headwinds and substantial downside risks that are likely to persist, the International Monetary Fund warned last week. Cyprus has suffered more than some from the turbulence in the euro zone because its banks are heavily exposed to Greece. Making matters worse, the country's largest power station was destroyed in an accident in July. 

 The government, which is raising taxes and pushing through unpopular spending cuts to reduce its budget deficit, is forecasting next to no growth this year and in 2012. Antoniadou insisted that the fundamentals of the economy remained strong but said the deficit was being cut partly in case Cyprus's banks have to record bigger losses on Greek debt. "We are taking measures to contain the deficit to be able to be in a position to face whatever may be coming," she said. 

With a budget deficit this year projected at close to 7 percent of gross domestic product, Cyprus has been effectively shut out of the international capital markets. Russia, an important trading partner, is lending the island 2.5 billion euros at an interest rate of 4.5 percent to cover maturing debt and other medium-term needs of the economy.