Cyprus will struggle to make gas math work
By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Cyprusâ latest ideas for wiggling out of its financial fix include bundling future gas revenues into a national âsolidarity fundâ. But Breakingviews calculations suggest the gas discovered to date isnât worth enough to plug the countryâs 5.8 billon euro ($7.5 billion) funding gap.
Drillers operating off the Cyprus coast think theyâve found 196 billion cubic metres of the fuel lying under deep water. Itâs a big find, but the gas isnât worth anything stuck in the ground. Cyprus wants to build an LNG facility to extract it. The value of such a project depends on gas prices, the size and cost of the infrastructure that eventually gets built, the margins received on gas produced, and the discount rate applied to future cashflows.
On optimistic assumptions for project costs and gas prices, an 18 billion cubic metre per year LNG facility – big enough to supply about a quarter of Germanyâs current annual gas needs – might be worth about $7.8 billion today.
That would plug the gap, but assuming a project life of 25-30 years, Cyprus and its development partners would need to have access to at least 450 bcm of gas to justify building a project that big. Thatâs more than double the gas discovered to date, not all of which is likely to be recoverable.
Without big new discoveries, a smaller 5 bcm per year facility might be feasible, but it would be worth less than $2 billion on the same estimates for project costs and gas prices. But at todayâs implied medium-term European gas price of $10 per mbtu, and assuming construction costs in line with other recent offshore LNG projects, such a small project probably wouldnât be worth building.
Either way, gas may not be enough to save Cyprus.
Run the numbers