Tuesday, 4 December 2012 - 12:05
Deutsche Bank: Greek gas reserves are a long term story, if proven
Geologists have argued that Greece may possess undersea natural gas reserves and the government has commissioned preliminary seismology studies, due in mid 2013, says Deutsche Bank in a report published on November.
The exploration uncertainties are considerable and the timeframe for development (8-10 yrs) is long. Moreover, the scale and valuation figures mentioned in the press (‘3.5 Tcm’ of natural gas worth ‘USD599bn’) are tenuous, based merely on the gas finds in the Levantine Basin in the Eastern Mediterranean.
If proven on this scale and fully exploited, according to the reports, natural resource reserves would enhance Greek debt sustainability. But the revenues are so uncertain and distant that it is unlikely to have any practical solvency benefit for years.
Assuming positive preliminary seismology, the first step will be incentivising the exploration companies to enter. These companies are used to operating in less stable political environments, though redenomination risk could be an additional risk factor.
How big? What is it worth?
At the heart of this story is the fact that Greece has sizeable undersea terrain in the Mediterranean and several Mediterranean countries have already discovered and are exploiting undersea natural resources. Geologists are suggesting that Greece could have natural gas reserves around Crete that may be as significant as those in the Levantine Basin between Cyprus and Israel in the Eastern Mediterranean. The latter was estimated by the US Geological Survey (USGS) to be 3.45 trillion cubic meters 14. It is merely the potential for a similarly sized find that forms the basis of the statistics on the size of reserves and the value to Greece that appear in the press reports. As such, one should hold these estimates at a considerable arm’s length. At today’s gas price and exchange rates and assuming the reserve estimate is 100% recoverable, such a reserve would be worth EUR427bn, equivalent to 213% of Greek GDP.
Assuming a reasonable industry rule of thumb that a quarter of this economic value is absorbed by the cost of production, another quarter is the profit margin for the production company and half is the beneficial government’s tax take, this reserve, if proven and fully exploited, could yield the Greek government EUR214bn or 107% of GDP. Note, this is not a net present value, merely the value of this quantum of natural gas today, and we stress again this is on a tenuous basis that these unproven natural gas reserves rival those found in the Eastern Mediterranean.
What would proven energy reserves mean for Greece?
Being one of the European economies with the largest energy import bills, proving a natural resource reserve could be especially significant for Greece. In 2011, energy imports (in aggregate, that is, mineral fuels, lubricants and related materials) cost EUR11bn, about 5% of GDP. The geology experts talk of oil reserves in addition to the gas reserves, but it may still take some investment in infrastructure to increase absorption of gas as a source of energy within Greece (see accompanying article in this issue of Focus Europe on attracting FDIs via a guarantee against redenomination risk). In any case, given the long timeframe for extraction of reserves, it is premature to talk of displacing energy imports. In light of the sovereign debt crisis, discovery of a significant natural resource asset could be a fortuitous counterbalance to Greece’s sovereign debts. To put the above 107% of GDP value estimate into context, Greek gross public debt was 170.6% of GDP in 2011. The Troika objective is to get this down to 120% of GDP in 2020, about the time when reserves might be starting to be exploited. If proven, natural resource reserves could enhance Greek debt sustainability. Ghana may make for an interesting comparison.
In 2008 the sub-Saharan African state discovered commercially exploitable oil reserves while under an IMF extended credit facility. The natural resource reserves have not fundamentally altered the official sector support. First, although oil production began in 2011, the discovery has not hastened the country’s exit from the IMF funding umbrella. Second, the main impact on the programme was to redefine the fiscal conditions in non-oil terms to ensure that the underlying fiscal imbalances are sustainably corrected despite oil revenues. Third, to counter the risks of the ’Dutch Disease’/‘resource curse’ 30% of the Ghanaian oil revenues go into a stabilization fund and a heritage fund to better manage the short term and long term ramifications of resource wealth (the former aims to stabilize the impact on fiscal revenues from oil price volatility and the latter is to invest in longer term growth projects and plan for the economy post-oil).