Cyprus finance ministry to publish SWF framework this year

Cyprus took a step closer to establishing a sovereign wealth fund (SWF) today, after finance minister Harris Georgiades told this year's Mediterranean Oil and Gas Conference that he would submit a framework for the institution by the end of the year.

The Cypriot authorities pledged to set up a ‘resource fund' in a memorandum of understanding (MoU) with the International Monetary Fund (IMF) last year – one of many reforms deemed necessary to "rearrange" the country's energy sector.

There are significant untapped gas deposits below the Levantine Sea, and Cyprus is preparing for a windfall if they can be exploited. Noble Energy, a Texan company exploring the region, estimates there are five trillion cubic feet of gas in one particular field, known as ‘Block 12'.

A resource fund would collect and manage the public revenues generated through the sale of these gas deposits. "To ensure transparency, accountability and effectiveness, the resource fund should benefit from a solid legal base and governance structure," the IMF said in the MoU.

The thought of generating hundreds of billions of dollars through natural resource exploitation is an exciting prospect for a country dealing with a difficult austerity programme, but a number of obstacles remain.

The reality is that five trillion cubic feet may not be enough to warrant a liquefied natural gas (LNG) plant. The energy minister, Yiorgos Lakkotrypis, initially wanted to build a plant that could liquefy and purify five million tons per annum, but this now looks unlikely.

Noble Energy notes on its website that it is planning to conduct "additional exploration" in Block 12, while Eni, Total and Kogas – other oil and gas companies – are exploring another five blocks surrounding Cyprus.

Lakkotrypis said the exploration was "well under way" at a conference last week, and that he expected the first drilling to take place in the third quarter of 2014. "We are, in fact, cautiously optimistic for further discoveries, since the preliminary evaluations indicate promising hydrocarbon potential," he said.

Even if further deposits are found, extracting the gas is a difficult process that requires capital-intensive infrastructure, and observers expect gas exports will not start before 2024 – 10 years from now.