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Greece's $600bn gas reserves to fuel recovery?

If there was ever a flicker of hope that Greece could tackle its colossal public debt and return to some form of financial stability then perhaps the country’s estimated $600 billion of natural gas reserves is it.


Greece narrowly avoided a chaotic default earlier this week after thrashing out yet another agreement with eurozone finance ministers about cutting its public debt, but should these reserves be proven, this could obviously enhance the country's debt sustainability. 
According to reports and based on evidence provided to Greek prime minister Antonis Samaras, there could be up to 3.5 trillion cubic metres of natural gas in Greek waters off Crete, equivalent to six years of aggregate EU gas consumption. 
That is a staggering volume of gas, if proven, and would inevitably help reduce Greece’s large energy import bill (c.5% of GDP). Moreover, if the $600 billion valuation is to be believed, this could be a boon for Greece’s finances too. 
Mark Wall, economist at Deutsche Bank in London, said in a report: “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 €11 billion, about 5% of GDP."
He added: “In light of the sovereign debt crisis, discovery of a significant natural resource asset could be a fortuitous counterbalance to Greece’s sovereign debts ... If proven, natural resource reserves could enhance Greek debt sustainability.” 
However, Wall urges caution on the actual volume of reserves, and the difficult and drawn out exploration and extraction process.
“We stress both the uncertainties inherent in natural resource exploration as well as the inevitably lengthy timescale for development of any proven reserves,” he noted. “Even if reserves are found and proven, they are unlikely to be relevant to the resolution of the Greece crisis for several years at least.”
The Greek government has reportedly sponsored preliminary seismology on the area in question, and a report is expected mid-2013. 
What is fact is that Greece has sizeable undersea terrain in the Mediterranean, and several Mediterranean countries have discovered and are exploiting undersea natural resources. 
For example, geologists suggest Greece could have reserves that might be as significant as those in the Levantine Basin in the eastern Mediterranean, which the US Geological Survey estimates has reserves of 3.45 trillion cubic metres. It is this figure that forms the basis of the statistics being quoted in the press on the potential size of Greece’s reserves. 

So, at today’s gas price and exchange rates, and assuming the reserve estimate is 100% recoverable, Wall calculates a reserve would be worth €427 billion ($555 billion) – 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 €214 billion or 107% of GDP,” according to Wall. 
To put the 107% of GDP value estimate into context, Greek gross public debt was 170.6% of GDP in 2011. The troika’s objective is to get this down to 120% of GDP in 2020, about the time when reserves might be starting to be exploited. 
Greece is still some way off proving and extracting any economic value from the reserves, but Wall says the country could derive two benefits should this happen. 
On one hand it could make the sovereign debt burden more manageable and therefore secure euro membership. And on the other, it might provide a cushion to the economy should the country exit the eurozone.  
“From this perspective, the optimal size of natural resource reserves would be large enough to contribute to the stabilization of debt and the economy but not so large as to afford Greece a go-it-alone strategy,” Wall concluded.