Cyprus will get debt relief because it has gas

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When I was in Cyprus in March, as the country's banking crisis escalated, I could not get the chorus of a Warren Zevon song out of my head – "send lawyers, guns and money." Cyprus was crawling with European Union and International Monetary Fund officials, and seething with other opportunists who seemed to have other things on their minds than keeping a Mediterranean island solvent.

There were Russians and Ukrainians trying to get their loot out, British military officers darting here and there, and – presumably – arms dealers. (In 2011, a cache of weapons that had been seized from a Cypriot-flagged ship en route from Iran to Syria exploded, killing 12.) There were oil and gas types, too – lots of them. I met an Egyptian executive who lives in Switzerland and is involved in energy infrastructure, as in pipelines and liquefied natural gas plants. "This bailout is not about banks," he said, asking me not to quote him by name. "It's about gas."

By the time I left Cyprus late in the month, I understood what he was talking about. The EU can't afford to let Cyprus fail because the country is sitting on vast amounts of gas – so vast that it could reshape the entire European energy market, making the EU far less dependent on Russian gas.

Cyprus has always been coveted by European and Middle Eastern powers, even though it lacked natural resources other than copper – the gas discoveries are recent – and was never a military or cultural force. What it had was geography; it's located near Turkey, Syria, Lebanon and Israel, and not far from Greece, one of its traditional sponsors. Cyprus has almost invariably found itself at or near the centre of East-West geopolitical upheaval, from the Crusades to the Cold War. It has been ruled, or conquered by, Alexander the Great, the Romans, the Byzantines, Richard the Lionheart, the Venetians, the Ottomans, the British and the Turks, who seized the northern third of the island in 1974.

Today, Cyprus is one of the most cosmopolitan bits of the planet. It's stuffed with wealthy Russians, who made it their offshore banking centre of choice after the Soviet Union collapsed. The British military has two bases on the island. Add to that mix hordes of Lebanese money men and American, Israeli, Russian and Egyptian energy executives.

The big prize lies offshore. The Levantine Basin, in the eastern Mediterranean, could hold 122 trillion cubic feet (tcf) of natural gas, according to the U.S. Geological Survey. This is roughly equivalent to what the United States consumes every five years. If the figure is accurate, the region will emerge as an energy powerhouse. The first big find in Cypriot waters was made by Noble Energy of Texas in 2011. Cyprus's government says that the island's offshore reserves could total 60 tcf. Two nearby fields claimed by Israel are also potentially massive.

Western Europe is delighted that Cyprus – a member of the euro zone since 2008 – is gassed up. The EU imports about 25 per cent of its gas from Russia, specifically from Kremlin-controlled Gazprom, which has an export monopoly. Gazprom is fond of freeze-in-the-dark negotiating tactics. It has slashed supplies to Ukraine and other countries when payment became an issue. So what better than an EU competitor, especially if the gas windfall will help lift Cyprus out of debt trouble?

This is where things get complicated. In 2011, Turkey sent gunboats into gas exploration areas near Cyprus. It doesn't recognize Cyprus's claim to the gas because it doesn't recognize the Cypriot government, which controls the predominantly Greek southern part of the island. In March, Cyprus floated the idea of using future gas production income to pay for its bailout. Turkey virtually went on war footing, saying the Cypriot government is under the "illusion of being the sole owner of the island, which may lead to a new crisis in the region." Until Greek Cypriots and Turkey become friends, the idea of shipping the Cypriot gas to a Turkish pipeline, then on to Europe, is a non-starter.

As Turkey was making its threats, Russia was bargaining to get a piece of the Cypriot gas action. In 2011, the Russians loaned Cyprus €2.5-billion. They were reportedly ready to write another cheque on the condition of gaining offshore exploration rights. That deal did not happen. The reasons were never made clear, but you can bet the EU had a hand in it.

Cyprus is effectively bankrupt. In March, it agreed to a €10-billion bailout loan from the EU and the IMF, and the government is trying to seize billions in bank deposits to finance the rescue and consolidation of its banking system. The survivor banks could yet fail as the island's economic heart – financial services – gets gutted. But you can be sure that the country that should never have been invited into the euro zone will never be allowed to leave it. Cyprus is a reminder that resources still shape geopolitics. Send lawyers, guns and money.