Streetwise Professor

Last week it looked like the Obama administration had decided to be sensible on at least one energy issue-the export of LNG.  It approved a new license (for Freeport LNG) for export to countries with which the US has no free trade agreement.  But the WSJ reports that new Energy Secretary Ernest Moniz is thinking of putting on the brakes again.  Because we need more studies.  No.  Seriously:

Mr. Moniz showed caution about the existing studies. Speaking to reporters after a speech to an energy-efficiency conference here, he said he was “committed to doing a review of what’s out there in terms of impact analyses” before approving more applications to export U.S. natural gas. Critics have said last year’s study didn’t rely on the best data available.

“Right now we have no plans of commissioning new studies, but everything is on the table until I have done my analysis,” Mr. Moniz told reporters after his first public remarks as energy secretary

Sorry.  We don’t need no steenkin’ studies.  The whole idea smacks of central planning.  The presumption should be that if firms are willing to risk their private capital, the benefits exceed the costs.  Any analysis should be restricted to potential externalities.  Real externalities.  Not pecuniary ones.

But these “impact studies” are all about pecuniary externalities.  Namely, they focus on the effects of exports on prices of natural gas, and the effects of natural gas prices on consuming industries (like petrochemicals).  But these price effects are not true externalities that lead to inefficient allocation of resources.   Indeed, restricting exports because of these effects would cause a misallocation of resources.

Pecuniary effects do have distributive effects.  In the case of LNG exports, they affect the distribution of rents between gas producers in the US and foreign consumers on the one hand, and domestic gas consumers on the other.

And that’s what the need to get an export permit does: it permits the government to affect the distribution of rents.  That, in turn, gives rise to rent seeking.  And corruption.

In this context John Cochrane mentions the Indian “permit raj”: there you need to get a permit for everything.  This gives those with the authority to grant permits incredible power.  Power they use to enrich themselves and secure political support.

That is exactly what can go on here.  Those hoping to get a permit have an incentive to exert influence, through lobbying, campaign contributions, and supporting public campaigns on issues favored by the administration.  They also realize that they face substantial risks if they oppose the administration on other issues: “Nice little LNG terminal proposal you have here.  Would be a tragedy if something happened to it.”

The government has no business being in this business, beyond perhaps-perhaps-addressing real externality issues.  But even there, other mechanisms (e.g., liability for pollution) may be preferable to a permitting process.  (Look at how Russia used environmental regulations to drive Shell out of Sakhalin II: any power to permit can be used to expropriate of hold up the party seeking the permit.)

In the US, energy, and particularly the international trade of energy, is particularly raj-like: Keystone II is another example.  This destroys value in myriad ways.  Beneficial investments are delayed, or not made at all, either because the government stops them directly, or the risks and costs of getting approval undermine the economics.  Real resources are used to influence policy.  Since energy investments involve big dollars, the losses can be big too.

People often lament the lack of an American energy policy.  I disagree.  We do have an energy policy, and the Energy Raj is a big part of that policy.  A better policy, by far, would be no policy at all.  Would that the DOE adopt the motto: “Don’t just do something! Stand there!”

I’m not holding my breath, though.  The benefits of the raj to the rajahs are far too great.

My main beef with Tesla Motors is that it is a major beneficiary of government largesse masquerading as a free market success story.  The company received a $450 million loan from the Federal government to set up operations.  It has just paid back that loan, but does not justify granting the loan in the first place: indeed, it illustrates the heads-Musk-makes-a-lot-of-money-tails-the-taxpayers-eat-it aspect of the loan.  It socialized the risk of loss, and privatized the gains.  That’s bad, on principle.  (Things might have been ameliorated had the warrant the government received allowed it to participate in the upside, but the exact opposite happened: the warrant went away precisely when the stock price went parabolic.)

But the loan isn’t the biggest source of government support. The $7500/vehicle federal subsidy to purchasers and California’s Zero Emissions Vehicle (ZEV) credit program are.  When you look at the value of these subsidies, they dwarf the much ballyhooed profit Tesla reported for the first quarter (and those profits were driven by the write-down of the warrant and non-repeatable gains on yen exposure).

I’ve done some back of the envelope calculations to estimate just how much these subsidies benefited Tesla’s shareholders.  The basic idea is to calculate profits with and without the subsidies based two assumptions about the demand for Teslas: a constant elasticity demand curve and a linear demand curve.

The linear case is easiest to explain.  The equation is P=A-bQ, where P is price and Q is quantity sold.  A and b are constants that need to be solved for.  P and Q are known for the first quarter: I’ll use $75K for P (the average price of a Model S) and Q is 4750.  If Tesla was maximizing profits, it would set its marginal revenue equal to marginal cost, where the marginal cost nets out the subsidies.  The relevant equation is C-S=A-2bQ.  I derive C from the cost of generating revenue reported in the 10Q.  I divide this sum by Q, and then multiply by .6 because the cost number includes some fixed costs (e.g., tooling) and I want marginal cost: it turns out that the results I derive aren’t that sensitive to the multiple.  For S I add $7500 and Tesla’s ZEV credit revenues (reported in the 10Q) divided by the number of vehicles sold.  I now have 2 equations, and can solve for the unknown constants A and b.

I now have all I need to know to figure out revenues (including subsidy payments) net of variable costs.  This totals $206 million.  I can also figure out the price and quantity of Teslas sold without the subsidy.  Absent subsidy, Tesla would choose Q to satisfy: C=A-2bQ, which gives Q=(A-C)/2.  This can be plugged back into the price equation.

Doing this gives a no-subsidy quantity of 3558 (about 70 percent of the with-subsidy sales) and a price of $91K.  Using these numbers, and the assumed unit cost gives a no-subsidy profit (before fixed costs, etc.) of $116 million.

In other words, in this specification, Tesla pocketed about $90 million due to subsidies in one quarter alone.  That represents about 18 percent of its auto sales revenues, and dwarfs its profit even including the one-time boosters.

In the constant elasticity specification, I need to solve for the demand elasticity and the constant multiplying the Q raised to the elasticity.  Given the price, quantity, cost, and subsidy numbers, I can solve for these two constants using the demand equation and the marginal revenue equals marginal cost equation.  Given these constants, I can figure out profits with and without subsidies.

In the constant elasticity case, profit with subsidies (before fixed charges) is again $206 million, and profit without the subsidies is estimated to be $139 million.  So in the constant elasticity specification, subsidies pad Tesla’s profits by $67 million.

These are numbers for one quarter, folks.  This is money out of your pockets, or the pockets of shareholders of Ford, Toyota, etc., who have to buy ZEV credits.  Tesla would still be drowning in red ink absent the fat subsidies.

I sure hope you are enjoying Mr. Musk’s Wild Ride at your expense.  Your enjoyment being completely vicarious, of course, expect for the paying for it part.  That’s something you experience personally.

I would hope that these figures put the hype in perspective.  Tesla cars are fueled by electricity.  Telsa Motors is fueled by government money.  Your money.

One more thing.  Tesla and Musk are neck deep in a relationship with Goldman-Sachs, aka Government Sachs.  Think that it’s just maybe possible that Goldman will deploy its notorious political heft to keep the rain of government manna going?  If you doubt that, can I interest you in a bridge connecting two boroughs in NYC?  Which makes it doubly ironic-and nauseating-that many of the Tesla Kool Aid Gang also declaim against crony capitalism.  Well, so do I, except I at least do so with a modicum of consistency.

This story is very bizarre, and I can’t figure out what is going on, exactly.  Or put differently, what has put a bee in the CFTC’s bonnet about CME Clearport’s Exchange of Futures for Swaps (EFS) facility after all these years.

The Commodity Futures Trading Commission has issued a “special call” asking Wall Street banks and other traders to provide documents that would prove recent derivatives transactions known as “exchanges of futures for swaps” were legal. Lawyers at the CFTC enforcement division are also scrutinising the trades for possible violations.

. . . .

The new inquiry centres on whether large traders and market-makers used unregulated over-the-counter swaps markets to trade what were in fact futures, strictly regulated contracts that are economically identical to swaps.

Trading futures off an exchange is illegal, and regulators are concerned that traders may have used these deals, known as EFSs, to agree prices that did not reflect the market.

“They’ve made information requests to everybody that’s ever traded an EFS. They’re saying, ‘prove to us that the swap was legitimate’,” said a recipient of a CFTC document request

The only thing that makes sense is that the CFTC believes that market participants engaged in EFS transactions without having a legally binding swap agreement in place first, meaning that the parties would have engaged in futures trades off-exchange.  Or something.

Note that even if the parties had entered a swap, it may have been in effect a very short period of time-just as long as it took to execute the deal and submit it to Clearport for clearing.

I also find it curious that the article mentions that the CFTC is looking only at deals done post-Frankendodd, even though deals have been done this way since the 2002 time frame, if memory serves.  One explanation is that CFTC believes the alleged conduct was permissible under CFMA, but not under DFA.  Another guess on my part.

If there is a violation here, it seems to be a highly technical one.  The end result is pretty much the same if they did or they didn’t execute a binding swap first: each party has futures positions obtained at a privately negotiated price.

CFTC has a lot on its plate already: is this really a priority? Really?

Moreover, the party that usually screams the loudest about off-exchange trading of futures is the futures exchange.  But Clearport is a CME system, and EFS is a CME procedure, and it seems that CME is totally fine with this.  Actually, if the following quote relates to the EFS issue (and it’s not clear that that’s the case from the article), CME is actually hacked at this:

Terry Duffy, CME executive chairman, said in a letter to CFTC last week: “In our view, nothing is served by piling on duplicative reporting mandates.”

For certain, though, CME was perfectly satisfied with the way market participants were doing EFS deals.

So who is the victim here?

It’s actually ironic that EFS was the CME’s way of implementing clearing for energy and metals.  And the CFTC is rah-rah about clearing.  But it is looking askance at the CME’s way of implementing clearing.  I guess it’s a case of that was then, this is now.

CFTC also effectively killed EFS as a mechanism for facilitating OTC clearing by determining that a swap, no longer how short its existence before conversion into futures, counted towards a firm’s annual $8 billion (to be reduced to $3 billion) de minimus swap volume for the purpose of determining whether it is a swap dealer.  As a result, market participants are moving to block futures trades rather than EFS to clear energy transactions: block futures trades that are negotiated away from the central market, just as the allegedly phantom swaps were. So this is last year’s war.  If traders weren’t doing papering officially a swap deal, they were effectively engaging in block futures trades, which is what they are doing now.  If it’s OK now, other than the technical violation, was it so horrible then that it requires a full blown investigation?

So what’s up?  A burdensome, intrusive “Special Call” to investigate a possible technical violation that the exchange that would be hurt by a violation doesn’t seem to care about, and which is of little relevance going forward.

Wow.  That seems like a totally reasonable use of scare resources-resources Gensler claims he doesn’t have nearly enough of.

Javier Blas of the FT just posted an article about a report “written by a leading academic on commodity markets” on whether commodity trading firms (like Cargill or Vitol) are sources of systemic risk.

What, haven’t heard about that report?  Well, that’s the main point of the story.  The report was spiked by the GFMA, a banking trade association, which commissioned it.  According to Javier:

However, the report was never completed and remained in a “draft” status, after its conclusions went against the interest of the lobby group, three people familiar with the matter said.

So yes, perhaps you’ve guessed by now that the academic in question is me (though you have to read 2/3s of the way through the story to get to my name).  And yes, that’s pretty much what I understood to have happened, though I was never told that in so many words.  It’s nice to have it confirmed by “three people familiar with the matter”, even though it was blindingly obvious to me at the time. *

I call them like I see them.  GFMA didn’t like that.  I wouldn’t change the call, so they sat on the report.  So it goes.

I think GFMA handled this badly even from the perspective of its own interests, though I guess I am not really surprised: this is the way organizations like this tend to behave.  I am sure this has given the report more visibility than it ever would have achieved otherwise, and makes GFMA look bad in the bargain, at least in my (probably biased) opinion.  The regulatory body they were trying to influence-the FSB-was briefed on the findings, and had a draft of the report, so deep-sixing the report only signaled to the FSB that GFMA didn’t like the results, which it probably knew anyways.  Spiking the report also serves to validate the independence of the findings-and of the finder of the findings.  That’s definitely an upside for me.

Working on the report helped me learn a good deal more about the global commodity trading firms, so that’s also a good thing.  I look forward to learning and writing more in the future.

*For the record, the copy of the report “seen by the Financial Times” didn’t come from me.

My most recent contributions to the WSJ energy experts have been posted.

What is the most promising renewable? (This is the don’t-sweat-too-much-for-a-fat-girl piece.)

What should governments do to encourage conservation?

Putin caused a minor kerfuffle when he ostentatiously order Gazprom’s Alexi Miller to re-start the Yamal 2 gas pipeline through Poland.  Except Poland says, er, we’re not interested.

There’s no viable economic case for the pipeline.  South Stream is not commercially viable.  Nord Stream is operating at 27 percent capacity.   Gazprom’s European sales are stagnant (which is charitably putting it, because they fell 10 percent in 2012), because demand in Europe is stagnant and there are new supplies from Norway.  The potential for new supplies over the longer term means that Gazprom may soon pine for mere stagnation.

No.  This is about trying to squeeze Ukraine even more: Russian and Ukraine are in negotiations over control of Ukraine’s transmission network (Gazprom demands at least 50 percent) and the two sides are battling over billions in payments for gas that Ukraine contracted for under take-or-pay deals but didn’t take.

Poland refuses to play politics:

“Poland won’t participate in these political contexts,” Mr. Tusk [Poland's prime minister] said. “For us, gas isn’t a tool to conduct politics and we very much want, in agreement with European Union laws, to keep gas issues free of politics.”

But Gazprom is Shocked! Shocked! at the very suggestion that Russia is playing politics:

Gazprom rejected any political overtones. “What politics?” said Gazprom spokesman Sergei Kuprianov, when asked to respond to Mr. Tusk’s statement. “It’s not aimed against anyone.”

And if you believe that . . .

Obama is on a roll.  A roll of idiocy.

I can hear you say: “Uhm, so what else is news?”

Let me tell you.

Item 1: in a political rally in Colorado, Obama offered us this disquisition in political theory:

“You hear some of these quotes: ‘I need a gun to protect myself from the government.’ ‘We can’t do background checks because the government is going to come take my guns away,’ Obama said. “Well, the government is us. These officials are elected by you. They are elected by you. I am elected by you. I am constrained, as they are constrained, by a system that our Founders put in place. It’s a government of and by and for the people.”

This, mind you, was from an alleged Constitutional Law professor.  For one thing, Constitutional Law is frequently abbreviated to “Con Law.”  Well, with Obama, that formulation fits, with an emphasis on the “Con”.  For another, he wasn’t a professor.  A lecturer.  (Read what Richard Epstein has written about Obama’s lack of intellectual engagement at Chicago.  Not a surprise.  He knew-knew-he was a pretender who had no chance of prevailing in an actual intellectual interchange at a Chicago workshop or lunch table.  No chance.  So he distanced himself from it. My ex-boss Dan Fischel offered Obama a professorship.  Which Obama declined.  Fischel obviously made the offer for political and AA reasons.  And by AA I don’t mean “alcoholics anonymous.”)

Where to begin?  This seems to presume that “us” is some monolithic, reified thing.  That there is some “will of the people.”

What about the tyranny of the majority? What about the tyranny of minorities that can occur in any democratic or representative system?

The whole freakin’ reason behind a bill of rights is that even in a democratic (or, more properly, republican) system, individual rights can be trampled and abused by a government responsive to the whims of a majority, or an empowered minority.  That’s why we have a Bill of Rights.

In Obama’s formulation, not only would the 2d Amendment be superfluous, but so would the 1st and 5th (and 3d and 4th etc. etc.) No one need fear the denial of their freedom of speech or worship or assembly or right to a fair trial, because hey, the government is just us, and we would never harm us, would we?

It is hard to overstate the cluelessness-or, more accurately, disingenuousness-of Obama’s formulation.  ”We’re from the government, and here to help you, ‘cuz we would never ever hurt us, right?”

So I would ask Obama point blank: OK, Mr. Con Law Poser “Prof”, are you advocating the abolition of amendments 1-10 of the Constitution (or perhaps 1-27)?  Because under your “the government is us” theory, they are completely superfluous.  QED.

Let me state clearly: Too often, the government is not us.  The government is too often the anti-us.  Which is precisely why elections are an insufficient constraint on its predations, and why Constitutional constraints on the legislative and executive branches are imperative.

Obama traveled from Colorado to California to raise money from the Bay Area elite.  Mr. I’m Fighting For the Middle Class sucked up to the very, very small fraction of the 1 percent in order to raise money for the campaign to regain the House in 2014.

Put aside the truly risible things he said, like his remark that Nancy Pelosi never let ideology cloud her judgment: that would presume that she had judgment to begin with, and there is incontrovertible empirical evidence that she has no judgment-or brain-to speak of.

No, let’s look at the spectacle of his abasing himself before the execrable hedge fund billionaire Thomas Steyer, a hard core green, and opponent to the Keystone pipeline:

Appearing at the home of an outspoken critic of the Keystone XL pipeline, President Obama on Wednesday night told a group of high-dollar donors that the politics of the environment “are tough.”

. . . .

In the face of those pressures, at the fund-raiser on Wednesday — and at a second one at the home of the billionaire philanthropists Ann and Gordon Getty — the president sought to reassure his supporters that he would continue to fight for environmentally friendly policies.

Excuse me while I wipe away the tears.

The Steyers and the Gettys have theirs.  (The Gettys acquired their wealth by oil, ironically.  Not that Gordon actually did jack to create it.) They will live large regardless of whether energy is cheap of expensive.  Large, hell: they’ll live huge.

But I wonder.  Are they “us”?

So indulging enviro fantasies costs them nothing.  They are the very non-apocryphal modern embodiment of the apocryphal Marie “let them eat cake” Antoinette.  ”They can’t buy gas?  Let them drive Teslas.”

But this is who Obama panders to, and who lionizes Obama.  They are ones who consider it only natural that they lord over “us”, and who quite openly attempt to buy influence.

Which is exactly why there needs to be constraints-hard, binding limits-on government power.  Contrary to Obama’s Schoolhouse Rock political theorizing, unconstrained democratic institutions are a threat to individual rights and liberties.  Not least because they are vulnerable to the manipulations of oligarchs.  Like Thomas Steyer, and Getty and Goldman spawn.

Gazprom claims that the Ukrainian proposal to import gas from Europe “smack[s] of corrupt schemes”:

Plans by Ukraine to import natural gas from the European Union “smack of fraudulent schemes,” said the chief executive of Gazprom, Russia’s largest gas producer.

“Now as regards the reverse supplies of gas from the territory of the European Union to Ukraine – we know about these plans very well, but we have suspicion that it isn’t about any reverse supplies. De facto, there would physically be no gas involved – the plan is to use Gazprom gas in a kind of virtual reverse direction,” Alexei Miller said in the “News on Saturday with Sergei Brilyov” television program.

“In other words, Gazprom gas moves into Europe and immediately turns back and goes to Ukraine,” Miller said. “It doesn’t just get pumped across,” he said, claiming that Ukraine would transmit gas provided by Gazprom to the border, where a measuring station would show that a certain amount of gas had gone to Europe, but then the gas would return to Ukraine.

“These schemes smack of fraudulent schemes of some kind,” Miller said.

On matters of fraudulent gas schemes, I defer to Gazprom.  Indeed, since Ukraine is as Sovok as Gazprom, on matters of fraud, it’s hard to choose between either on a priori grounds.

In other news, the Russian government is hardly trusting of Russian energy firms, and natural resource firms generally.  Case in point.  The Finance Ministry is opposing replacement of extraction taxes and export taxes on energy with a profits (income) tax:

Industry experts say profits-based taxation would allow companies to cut their tax base by artificially reducing their profits.

The tax authorities calculate MET based on Reuters pricing, and export duties from the Argus agency’s average price for Russian Urals blend.

“The Finance Ministry does not trust oil companies; it would not believe them should the tax be based on their profits. Mineral extraction tax based on a certain oil price, which is impossible to change,” said one industry expert.

Quantities and revenues are harder to manipulate than profits.  This is a testament to the limitations of the Russian tax system, especially  when the energy/oil industry is involved.

This story also speaks to the fiscal stresses on Russia, especially in light of the many promises that he made to get reelected:

The Finance Ministry cited guidelines set by Russian President Vladimir Putin, who before his return to the Kremlin last year promised to increase state salaries and other social spending.

“Our task is to increase the tax burden on the commodity sector,” Trunin said.

Brent and Urals Blend are currently hovering at the levels at which the Russian budget balances.  Putin cannot afford any slippage in tax collection on oil sales.

Finally, if you need further convincing that the prospects for making Russia a major financial center are delusional, consider how Rosneft is totally hosing the minority shareholders in TNK-BP.  Why? Because they can:

Prosperity Capital Management is looking to team up with fellow investors in the TNK’s traded unit, OAO TNK-BP Holding (TNBP), and seek redress after Rosneft’s plan to borrow money from the company rather than paying dividends sent the shares to a record low this week. Rosneft said its move was standard practice.

The biggest takeover in Russian history strengthens the state’s hold over oil and gas production, the source of half its budget revenue. The government is trying to turn Moscow into a global financial hub to attract investors and shift the economy away from resource dependence.

“The whole country’s reputation will suffer if a big company like Rosneft can behave like this,” Prosperity CEO Mattias Westman, who helps oversee about $4 billion in Russian assets, said by phone from Texas. “We will be talking to other investors and communicating directly with Rosneft on this.”

TNK-BP Holding fell the most since trading began on the Micex, retreating 26 percent to a record low on March 26. The biggest previous one-day decline came in October when Igor Sechin, Rosneft’s chief executive officer, warned that the company may end TNK-BP’s dividend policy and had no plans to buy them out.

This is classic short-termism.  Although legally permissible, the refusal to buy out the minority interests in TNK-BP, and the draining of its cash makes it abundantly clear to foreign investors that they can expect the worst.  Hardly calculated to make Russia a serious contender as an international financial center, even if its climate were indistinguishable from Cyprus’s or the BVI.

This also illustrates Rosneft’s limitations.  It is the biggest publicly traded oil company in the world by production, but is straining every nerve to finance its acquisition of TNK-BP.  A real supermajor would not face such difficulties, or find it necessary to engage in prepay transactions with oil trading firms or China to raise the funds for the acquisition.  Which is why the long-term consequences of hammering minority shareholders are rather irrelevant to Rosneft, and to Russia.  The financial pressures of the present are all important.  The future will just have to take care of itself.  Whether it will is highly uncertain, and outside of Russia’s control.  It depends on many contingencies, which likely accounts for the obvious nervousness at Gazprom, Rosneft, and the MiFi.

Rosneft closed the TNK-BP deal today, and is crowing that it is now the world’s largest publicly traded oil company.  Measured by production and reserves that’s true.  By market capitalization-not even close.  And that disparity between size measured by production and size measured by market cap is very, very telling.

Per its press release announcing the original deal, Rosneft compares itself to ExxonMobil (XOM).  It notes that Rosneft’s production will be nearly double XOM’s, which is in turn substantially larger than the production of Chevron, Shell, Total, etc.  Its reserves will also outstrip XOM’s and all the other non-NOCs.

Market cap? Totally different story:

Rosneft market cap: $82 billion.

XOM Market cap: $397 billion.

Chevron Market cap: $233 billion.

Shell Market cap: $210 billion.

BP Market cap: $129 billion.

Total Market cap: $112 billion.

So Rosneft produces more than XOM, and has more reserves, and has about 1/5th of the market cap.  It has a smaller capitalization than other firms that it dwarfs in terms of production and reserves.

And that’s Russia in a nutshell.  It is grossly inefficient at creating value.  Think of what ExxonMobil or Chevron or ConocoPhillips could do with access to Rosneft’s reserves-in a world where property rights and the rule of law were respected.  Think of what their market caps would be if Rosneft’s reserves were in North America, rather than Russia.

In other words, the yawning gap between Rosneft’s standing in the production table, and its placement in the market cap table is a damning indictment of Russia.

And, believe it or not, as bad as Rosneft is, it’s not the worst Russian energy behemoth.  That dubious distinction goes to my fave, Gazprom.  Check out this article from the Economist that provides the gory details.  But this shouldn’t be news if you’ve been hanging out here at all over the past 7 years.

One Cyprus scenario that has received considerable hype is that Gazprom will bail out the country in exchange for rights to develop its offshore gas resources.  IMO, this reflects a fundamental misunderstanding of Gazprom’s interests.  If anything, Gazprom has an incentive to pay to ensure that Cyprus’s gas reserves are not developed.

That is, Gazprom has every reason to want the gas to remain under the sea.  Eastern Med gas would compete with Gazprom’s Russian production: if Gazprom controlled Cyprus’s gas, sales from these fields would cannibalize sales of Russian gas.  Meaning that Gazprom has no real interest in developing Cypriot gas-to the contrary.

Obtaining exclusive development rights would give Gazprom the right to not develop, and to prevent anyone else from doing so.  This would suit it quite well, and it might be willing to pay something for that right.  But as desperate as Cyprus is, it has to realize that giving Gazprom control over its gas destiny would deprive it of the future revenue its resources could generate.  It is highly doubtful that Cyprus could negotiate a deal that would effectively compel Gazprom to develop the country’s gas.  Therefore, by dealing with Gazprom it would essentially be writing off any prospect of enjoying the benefits of future gas production.

This means that Gazprom’s interests and Cyprus’s are not aligned: the latter wants to maximize the commercial development of its gas fields, the former has no such interest.  Cyprus’s horizon might be very short, given its pressing financial needs, but it would have to discount the future extremely heavily to make a deal with Gazprom remotely rational.  I consequently deem it very unlikely that Cyprus and Gazprom could reach a mutually beneficial deal.

Development rights to Cyprus’s gas might be valuable collateral for loans that ease the country’s current financial straits.  But Cyprus should look energy firms whose interest is to maximize the commercial prospects of its gas resources, rather than Gazprom, which would like nothing better than to sabotage their development.