Europe is on the verge of making a historic mistake, one that would compound the growing sense of European decay and collapse. The issue involves Cyprus, but it has nothing to do with the divisive politics of the country’s bailout terms – though Europe’s approach to that problem will play a key role in determining the outcome.
What is at stake for Europe is the energy deal of the century. No one can yet say how much oil and gas lies within Cyprus’s territorial waters, but there are strong indications that it could make a huge contribution to the European Union’s energy needs. According to recent news reports, the Aphrodite field alone could eventually supply 40% of the EU’s current natural-gas consumption.
Clearly, the wrong bankers are addressing the Cypriot debt problem. A team of investment bankers who know how to structure long-term deals would be far better than the bean-counting officials of the European Central Bank and the International Monetary Fund, who know the price of everything but the value of nothing.
Cyprus is the island of the ancient Greek goddess Aphrodite, and the offshore block named after her is just the first of 12 earmarked for exploration. It lies close to Israel’s Leviathan gas field, whose name gives an idea of how much energy lies beneath the eastern Mediterranean Sea, and it is also not very far from the Egyptian coastline, where Shell already has three major projects.
The Aphrodite field’s known oil and gas reserves are reckoned to be worth €300 billion ($390 billion). But realizing that value is a long-term proposition. More immediately, to get the gas to market in Europe and elsewhere, a gas liquefaction plant costing about €10 billion needs to be built, and Israeli investors have already expressed interest.
The sheer size of Cyprus’s likely energy wealth, and the funding needed to develop it, dwarfs the country’s current financial woes. Yes, Cyprus needs €17 billion to remain in the eurozone, whereas its annual GDP is just €23 billion. But these figures have to be placed in the context of the EU’s gloomy overall energy picture – something that the ongoing debt negotiations have failed to do.
If Russia’s Gazprom eventually strikes a bargain with the Cypriot government in exchange for €6 billion in emergency bailout funds, Europe’s dependence on Russia for its energy will increase substantially. As it is, half of EU countries’ energy supplies are imported, and that share will probably rise to 70% by 2030, giving Russia even more power to turn off the tap at will.
Europe also has the double problem of striving to green its economies (making gas a favorite industrial and domestic energy source) while improving its economic competitiveness in a world where shale gas promises to cut North American electricity costs by half relative to Europe. And, to put Cyprus’s current debt problems in broader perspective, the costs of modernizing and streamlining Europe’s aging energy infrastructure over the next 30 years or so are estimated at around €20 trillion.
The recriminations now flying between Nicosia and Berlin – with contributions from the EU in Brussels, the ECB in Frankfurt, and the IMF in Washington – are obscuring the big picture. Of course the Cypriot authorities have been operating a dubious banking sector for many years, with the clear intention of drawing in Russian and other depositors whose funds would not bear closer scrutiny elsewhere. And, yes, the German-backed haircut for holders of Greek government bonds unintentionally – and therefore carelessly – hit vulnerable Cypriot banks very hard. The lesson to be drawn is one that everyone now knows : the eurozone’s financial regulation and supervision has been lamentable.
The question that Europe’s policymakers must quickly address is how to extend the deadlines on Cypriot debt to gain enough time to formulate a more strategic approach. Even if Cyprus were to come up empty in the 11 unexplored blocks off its southern coast, the Aphrodite field contains more than enough energy reserves to cover the country’s short-term indebtedness.
More broadly, with global energy demand set to rise by roughly one-third between now and 2030, investing in Cyprus looks a lot more attractive than what is on offer elsewhere in Europe. The EU must not allow this opportunity to slip away.