Cyprus is in financial trouble and its situation was described by Paul de Grauwe, professor at the London School of Economics as a systemic crisis just like what happened in Greece. According to him, the problem was due to the ineptitude of policy makers.
The current situation of the country is unfortunate; however the country could get lucky and might be able to resolve its financial problem. Cyprus has a large natural gas field located on the southern coast of the country. Noble Energy, Inc. (NYSE:NBL) discovered the natural gas reserve of the country in 2011.
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Based on international standards, the size of the natural gas field in Cyprus is modest. Qatar is producing 900 trillion cubic feet. The natural gas reserve being developed in the coast of Israel is four times bigger than the natural gas field in Cyprus ,which could produce 5 trillion to 8 trillion cubic feet of gas, according to the estimate of Noble Energy, Inc. (NYSE:NBL).
Cyprus is a small country and its population about the same as Manhattan. Considering the size of its population, its natural gas reserve is abundant. According to Micahel Stoppard, chief strategist for global gas at HIS, “It was the third largest conventional discovery in 2011. It dwarfs local demand for the next 50 years.”
At present, Cyprus is asking the European Union (EU) and the International Monetary Fund (IMF) to provide €10 billion or $13 billion bailout cover its budget deficits and bad bank holdings. The EU gave the country a deadline until Monday to raise the required €5.8 billion to secure an international bailout or else its financial system will collapse. Cyprus decided to close its banks until Tuesday to pass a bailout deal.
Many believe that Cyprus could raise money by using its natural gas reserve. Some energy company might be interested and would offer to provide upfront cash in exchange for rights to drill its gas reserves.
Laszlo Varro, the head of gas, coal and power at the International Energy Agency estimated that the natural gas in Cyprus will be able to contribute $3 billion per year to the country’s economy, and addition $1 billion annually in tax revenues by 2020. Currently, the annual economic output of Cyprus is $24 billion. The government spending is $11 billion.
According to Varro, the revenue projection from Cyrpus’ natural gas is optimistic, but the country cannot rely on it alone. He said, “It will be a great help. But can Cyprus sit back and rely on this? No. This isn’t Qatar.”
A report from the New York Times said that Russia’s energy giant Gazprom offered to provide financial assistance to Cyprus in exchange for gas rights. The offer might tempt the country to accept, considering the fact that its financial system is in the verge of collapse. Hedge funds are betting the Cyprus will not default despite the country’s financial troubles.