The Energy Angle of the Cyprus Crisis

 | Mar 18, 2013 | 4:28 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

nbl

,

apa

,

apc

Cyprus could be a test. Lessons learned from Cyprus could frame the options considered for other troubled states. The leverage is energy.

Cyprus sits near one of the world's newest discoveries of oil and natural gas. The U.S. Geological Survey estimated that the newly discovered oil and gas basins shared by Egypt, Israel, Cyprus, Lebanon, Syria, Turkey and Greece contain at least 122 trillion cubic feet of natural gas and 1.7 billion barrels of oil.

Actually, these discoveries are not so new. Geologists have been aware of untapped oil and gas throughout the Mediterranean. Until new drilling technologies appeared, most of the region's deposits were considered inaccessible. No more.

As new technology appeared, so did vast amounts of new oil and gas reserves. Unsurprisingly, most Eastern Mediterranean nations began arguing about sovereign rights over those resources. In the middle of those arguments are the U.S. and Russian oil and gas companies, including Houston-based Noble Energy (NBL) and Russia-based Gazprom.

Bankers are stepping in and engaging in dispute resolution. Their solution is to require defaulting debtor nations to relinquish their control over their sovereign oil and gas assets, including exclusive economic zones (EEZs). The blueprint for this plan first appeared during the Greek debt crisis.

Greece could have solved its public debt crisis through the development of its sovereign gas and oil reserves. The value of Greek reserves could bring the country over $250 billion. Instead, the Greek government was forced by the International Monetary Fund and European Union to sell off its ports and public companies in order to reduce state debt. Among them were Greek state oil and gas companies.

The Republic of Cyprus could also solve its public debt crisis through the development of its sovereign gas and oil reserves. Like Greece, Cyprus seeks help from the IMF and EU.

This time, Gazprom wants to join in on the bailout-for-oil party. Burned by Cyprus' proposed bank tax, the Russians want to protect assets and seize new opportunities.

Last weekend, Gazprom offered the Republic of Cyprus a plan whereby the company would restructure the country's banks in exchange for Cyprus granting Gazprom natural gas exploration rights in nation's EEZ. Unlike the IMF, Gazprom can back up its refi offer with warships.

It turns out that Russia recently dispatched a permanent group of combat ships to the Mediterranean Sea. EEZ disputes between Cyprus, Turkey, Greece and Syria can be resolved with encouraging help from an interested and well-armed third party: Russia.

The Mediterranean story seems familiar. We have an island nation in financial trouble. Economic offers and threats are lobbied against that nation's sovereignty. The government is left to do one thing: Find the least bad option.

Jump to the other side of the world, and we find a similar story. There is another island nation in financial trouble, which finds itself in a troubling dispute with China. It is engaged in a territorial dispute about tiny and uninhabited islands in the East China Sea (the Senkaku/Diaoyu Islands). The issue is not really about culture, fish or timber; it is about EEZ, oil and natural gas.

According to National Geographic, the oil sitting under the South China waters is over 200 billion barrels. That is about five times more than the Gulf of Mexico reserves.

China believes the East China Sea is also home to one of the world's largest natural gas deposits. China believes it contains about 250 trillion cubic feet. While this is unconfirmed, analysts believe the natural gas reserves in the disputed region are "considerable."

Unlike Greece or Cyprus, Japan has not requested a bailout, at least not yet. But like its Mediterranean counterparts, Japan finances are a mess, and its economy desperately needs energy. Worse, a well-armed predator is lurking off its shores.

While Japan and other sovereign governments may struggle, drillers and producers could become winners. Noble Energy, Apache (APA), Anadarko (APC) and similar companies will be granted access to new fields. Israeli companies such as Delek Group will partner with the majors to develop Levant, Plio-Pleistocene and other reservoirs. Competing with these firms will be Russian and Chinese producers.

Oil and natural gas assets can provide a bridge loan to failing economies. Unfortunately, for many policymakers, that option is discovered late in the game. As a result, Cyprus and Greece are forced to take a haircut by handing over valuable assets for what amounts to pennies on the dollar.

California has yet to learn that lesson. Today, the state sits on vast and untapped reserve of oil that rivals Texas and North Dakota. Yet California drowns in debt and taxes while the oil remains untouched.

Columnist Conversations

United Parcel Services is ramping today. Shares are up over 2.5% after opening the session with a upside...
1300 could be the next level to watch.
Busy day in the VIX pit on the last day to trade the October contract. 725,000 puts and calls traded on the in...
Here are the hurdles GS needs to clear if the rally is going to continue from the time/price support. (180.43-...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.