Last night I attended a book launch by Vassilis Kikilias at the Athens Concert Hall. Mr. Kikilas, a former basketball player turned New Democracy (ND) politician, presented a book he edited entitled “Exclusive Economic Zone: from Strategic Movement to Economic Solution.” The book is based on extensive contributions by three experts in the field, one of whom is Solon Kassinis, the Director of Energy at the Cyprus Ministry of Commerce, Energy and Tourism. Mr. Kassinis is at the forefront of Cyprus’ exploration programme, and someone well placed to advise Greece on how to proceed.
The launch was attended by several political figures, including Andreas Loverdos, Minister for Health (PASOK) and Stavros Dimas, Minister for Foreign Affairs (ND). Many of comments made during the introductory speeches can only be described as a very premature triumphalism. Others were dreary political canards. These included:
· Cyprus, like Greece, was sitting on trillions of Euro of hydrocarbon reserves
· Greece could only develop these reserves as a member of the Eurozone
· Greece needed a strong military in order to develop these reserves
· Turkey had been outwitted and outmanoeuvred
· A new era of politico-economic supremacy was at hand.
It was disenheartening to see hydrocarbon development linked to Eurozone membership. The idea that Greece could only develop hydrocarbons as a member of the Eurozone is absurd. Countries such as the UK, Norway, the United States, Russia, Saudi Arabia, and many others have somehow managed to develop oil and gas using their own currencies.
It was also disappointing to see that familiar argument that a strong military was the only guarantor of security, and therefore required for the development of oil and gas. I don't want to get into this debate extensively in this post, but whenever politicians start talking up the military as a guarantor of economic development, I think we have objectively left the sphere of rational discussion. Particularly when we know how Greek military procurement has been used in the past 30 years, and what the current state of the military is.
None of these comments is meant to underestimate the positive steps made by the Greek government in the past 3 months. An international invitation for non-binding seismic exploration has been issued, and several bidders have responded. According to Kathimerini, these include ION Geophysical, TGS-NOPEC, Dolphin Geoservices, CGG Veritas, Spec Partners, Spectrum Geo and Fugro Multiclient Services. This will be the first large-scale, state-of-the-art seismic exploration in approximately 30 years, and I have high, informed hopes that it will be successful.
But as everyone should know, the fact that exploration is starting, and the fact that gas reserves have been discovered in Cyprus’ Block 12, does not mean that it is a foregone conclusion that billions of Euro are going to flow into Greek government coffers. There is a lot of work to do first:
a. First and foremost, the seismic programme needs to be implemented and then followed by exploratory drilling. This will likely take 2 years to complete in any detail, and will depend on the terms offered by Greece in the licensing process, as well as on the future credibility and negotiating ability of the Greek government.
b. The technical complexity of recovery, particularly south of Crete, should not be underestimated. These are likely to be both deepwater and deeplevel deposits, which will require expensive extraction.
c. Once extraction takes place, the hydrocarbons will need to be transferred onshore, either by pipeline or vessel, and then refined and distributed. This calls for billions in investment up front.
Moreover, it is going to take a very rational and sustainable government policy to ensure that any hydrocarbon income is spent well rather than squandered on white elephant public sector projects of the kind seen in the past. In most countries, large-scale hydrocarbon discovery and extraction inevitably leads to higher inflation and misspent resources. The term “Dutch Disease” has been coined to illustrate this phenomenon.
To put it bluntly, it would be a tragedy if oil and gas income were to replace cheap foreign credit as a driver of over-borrowing, over-consumption and political corruption in Greece. Why does this not sound like such a remote possibility?
Finally, we cannot discount further political turmoil between Greece, Cyprus and Turkey. It is irrational to expect the current zero-sum interpretation expressed last night of the exclusive economic zone to be implemented in full. It may be far better to resolve the EEZ issue around Kastellorizo, and between Turkey, Greece and Cyprus through some form of operating consortium which includes Turkey rather than excludes it. This would provide real leverage for solving the Cyprus issue, and would open up other opportunities for cooperation between the three countries. These opportunities are far higher than the potential costs of excluding Turkey and if handled properly would radically transform the political and economic climate in the Eastern Mediterranean.
This assumes, of course, that Turkey will follow a rational policy and negotiate in good faith, not the militaristic, zero-sum maximalist policy which it has followed in the past. It also assumes the same of Greece and Cyprus. These assumptions may be too much to hope for. I was struck, however, that none of the speeches last night focussed on precisely how Cyprus had dealt with precisely this issue.
I have for several years been in favour of a rational oil and gas exploration programme in Greece--see my proposals for Greek recovery as an example, slide 37. I have communicated this urgency to members of the Papademos government. I also believe that domestic energy exploration and eventual exploitation will in fact be far more important in the energy mix than renewable energy. If we count lignite use, this is in fact already the case.
But what is extremely disturbing is the eerie fin de siècle triumphalism that pervaded yesterday’s speeches by politicians. These are people with no experience in oil or gas, who bear no personal responsibility for the decision to start exploration, and who’s two political parties have been responsible for bankrupting and corrupting the country. There was not one iota of self-reflection and sensitivity at this. If a chequebook were available, I have no doubt they would have already spent the hypothetical oil & gas money before it was even available.
None of this bodes well for Greece, its economy, its people or its environment. Many readers will no doubt dislike what I write next even more than what I have written until now.
Without the guarantee of a non-political, professional and long-term approach to oil and gas development in Greece, perhaps the best thing that could happen is that 100% of any theoretical hydrocarbon income is ring-fenced for debt service.
Although definitely unpalatable, if we look at the record of the use of EU subsidies since accession in 1981 or the massive public sector loans of the 1990s and 2000s, there is absolutely no confidence that any Greek political party, driven by the familiar temptations of patronage and corruption, will be able to manage this income properly.
Greece should therefore start work immediately on an integrated strategy for oil and gas development, and how this will affect the broader energy mix and economic development. It should develop risk assessments and contingency planning for a range of occurrences, ranging from oil rig fires to oil spills or industrial accidents. It needs to allocate authority for emergency responses, and ensure that proper budgets, authority and accountability are in place.
It should set out a plan for how it will prevent corruption and unintended consequences of oil and gas development. It should sign up for the World Bank’s Extractive Industries Transparency Initiative.
It should consider tendering for a long-term management consortium led by a foreign national oil company such as Norway’s Statoil or a services company such as Schlumberger to manage the entire development process. And it should clearly state how the oil and gas income will be used, and how the entire development will be financed.
Without such safeguards, it remains to be seen whether oil and gas development will be used for the objective good of the country, or whether it will be only the latest of a long series of credit bubbles that will inflate the economy and the irrational expectations of voters and politicians along with it.
© Philip Ammerman, 2012
Navigator Consulting Group