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Cypriot Gas Revenue Seen as Scant Return for Deposits

(Corrects value of reserves in ninth paragraph of story published yesterday.)

Cyprus, which is seeking to impose a levy on bank deposits to fund part of a euro area bailout, plans to compensate depositors with future gas income from foreign sales of the fuel that may never materialize.

“Potential gas exports from Cyprus will compete in an international market of multiple other gas suppliers,” Noel Tomnay, head of global gas research for Wood Mackenzie Ltd. in Edinburgh, Scotland, said today by e-mail. “This comes with risk and uncertainty. At this time, there are no guarantees that exports will be commercially achieved.”

People who keep their deposits in Cyprus for two years would receive securities linked to future revenue from the country’s natural gas reserves, Cyprus President Nicos Anastasiades said yesterday as people lined up at cash machines to withdraw their money. The east Mediterranean island nation says it has reserves of 60 trillion cubic feet. That’s about 21 years of U.K. demand, according to BP Plc (BP/)’s statistical review.

The Parliament postponed until tomorrow a vote to impose losses on the nation’s depositors to finance a 10 billion-euro ($13 billion) bailout aimed at preventing a financial collapse and possible departure from the euro area.

Cypriots woke up on March 16 to find bank funds frozen as the country’s authorities prepared to remove the tax from accounts before banks reopen.

‘Very Early’

“Holders of these securities may not see any return for years,” Tony Regan, a consultant with Tri-Zen International Inc. in Singapore and a former Royal Dutch Shell Plc (RDSA) trading executive, said today in an e-mail. “With the fairest of winds I can’t see significant production within five years.”

Cyprus, which first discovered gas in 2011, won’t start exporting the fuel before 2020 at the earliest, Andy Flower, an independent consultant and a former BP Plc executive, said today by phone from Surrey, England.

The offer to depositors “can’t be a good deal,” he said. “You are asking people to invest in something that is in a very early stage.”

Cyprus may hold offshore gas reserves of as much as 60 trillion cubic feet, Charalambos Ellinas, head of Kretyk, the country’s state hydrocarbons company, said on March 15. That would be worth about 475 billion euros at today’s price for month-ahead gas on the Title Transfer Facility in the Netherlands, mainland Europe’s biggest market, according to broker data compiled by Bloomberg.

Turkey Dispute

Some of the rights to offshore reserves are disputed by Turkey, which invaded the northern part of the island in 1974 after a coup aimed at uniting it with Greece. Turkey sent an exploration vessel accompanied by warships and jets to stop Cyprus drilling for oil and gas in 2011.

The country has granted licenses for exploratory drilling in six blocks that may contain as much as 40 trillion cubic feet of gas, Ellinas said. Noble Energy Inc. (NBL), based in Houston, will in the third quarter begin exploratory drilling in block 12 of the Economic Exclusion Zone, which has reserves of as much as 8 trillion cubic feet, Commerce and Industry Minister George Lakkotrypis said on March 13.

“The security holders will probably have to be paid from the government’s share” of gas revenue, Regan said. “Will there be enough money to pay them? We could be talking about billions of dollars.”

Cyprus has so far given gas-exploration licenses to Noble, Total SA and a venture of Eni SpA (ENI) and Korea Gas Corp. (036460)

To contact the reporter on this story: Robert Tuttle in Doha at rtuttle@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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