With shocks following shocks of an unprecedented scale and gravity, and with the European Commission (EC) withdrawing its support for the LNG import project at Vasilikos and asking for its money back, it is time for radical rethinking about the way forward.
Rush decisions in response to the current project fiasco are in danger of sending us in the wrong direction and possibly into future costly adventures.
That Cyprus must start importing natural gas as soon as possible is not under question. As I have repeatedly explained, this is key to bringing the price of electricity down. As long as the current restrictive practices, including pricing, continue, renewables are unlikely to do the trick and the interconnector, as and when approved, will become operational only around 2030.
Current LNG import project
Sadly, but not unexpectedly, this has come to an ignominious end, mired in corruption accusations that may reach all the way to the top. And this is despite my warnings of wrongdoings as early as August 2019, soon after the tenders were opened, followed by a detailed, critical, report by the auditor general and a strong warning letter to the Natural Gas Public Corporation (Defa) by the accountant general, long before the project was awarded in December 2019. These were completely ignored, including by those that attended the pernicious meeting at the presidential palace, chaired by the then President, that ratified the project award to the CMC consortium.
The minister of energy is right to consider all those involved in that process and decision and the project tainted and wanting to continue afresh.
But I suggest caution and a pause for thought. Wanting to appear decisive and reacting in the heat of the moment may expose him to future pitfalls.
With the Chinese contractor CPP formally withdrawing from the project and the EC withdrawing its €101.5 million grant, the current phase of the LNG import project has come to an end.
The key deliverable from this is the FSRU Prometheus and the ministry should do all it can to regain possession, including coming to a compromise agreement with CPP. Recent reports suggested that there was potential in this. It would be beneficial to both sides to agree, despite the recent decision by the Arbitration Tribunal in London to stop the pulling of bonds by the state’s Natural Gas Infrastructure Company (Etyfa).
The rest of the project needs rethinking. First is the project scope. Cyprus should not continue with the current design basis, unless there are strong reasons supporting the requirement that the terminal should be capable of being used both for LNG regasification as well as LNG exports. Redesigning the facility to only handle regasification, necessitating a new tender, will bring completion costs down.
But before committing to this, the ministry should carry out a cost-benefit analysis that considers all options, especially if possession of Prometheus is delayed until completion of the arbitration process, something that is likely to take two to four years. In addition to the option of completing the current project, this analysis should reconsider, among others, the alternative offers made in 2019 by Energean and Hoegh.
Offer by Energean
In May 2019 Energean submitted a proposal to the energy ministry and the Cyprus Energy Regulatory Authority (Cera) offering to supply gas to Cyprus by pipeline by March 2021 from its gasfields in Israel, at a cost estimated to be around $7/mmbtu.
The company said its proposal would “make it possible for Cyprus to obtain gas at a very competitive price, without the burden of any infrastructure or upfront investment cost.”
The state would not be required to invest in the project, with the investor recovering all costs through the agreed price of gas.
At the time, this proposal was rejected outright by the then minister of energy, without consideration, as unsolicited.
I understand that, under the right framework, this offer may still stand.
Offer by Hoegh
Also in 2019, the Norwegian company Hoegh, with the required proven experience and access to FSRUs, made an offer for the supply of an FSRU for the import of LNG.
Hoegh is the company that successfully provided an FSRU to Egypt for LNG import during 2015-2018 and it is doing the same now, helping Egypt out of its gas shortages and resulting power cuts.
In addition to the FSRU, the company offered to undertake the design, construction and installation of the necessary facilities, using an existing jetty, such as VTTI’s, with the project to be completed within six months at low cost. The required investment could be provided by Hoegh and recovered through the price of gas.
Once again, Hoegh’s offer was rejected by the energy ministry, which appeared bent on proceeding with its own ill-fated LNG import project.
Hoegh has expressed interest in participating in the ministry’s plans to import LNG.
As and when Prometheus becomes available, it could replace Hoegh’s FSRU. As in Egypt, the contract could then be terminated within a short period without additional costs to Cyprus.
Where-to from here
It is imperative to get to the bottom of the fiasco that led to the current state of affairs, from the bidding process, to project award and execution. EC’s Public Prosecutor EPPO is only considering corruption allegations. Cyprus should investigate the sheer incompetence during project execution. Apart from the FSRU that was handled by the competent COSCO Shipyards, all other aspects of the project leave much to be desired. We must make sure none of these is repeated in future.
A short pause to take stock and consider all viable options to bring natural gas to the island is essential. It would also allow time for the future of the FSRU Prometheus to become clearer.
Should Prometheus be released in the near future, then completing the Vasilikos terminal, refocused on regasification, would be the way forward.
Should it not be released, depending on the option, the cost-benefit analysis should include the potential of leasing or selling Prometheus. It has a value. With the global LNG market expected to carry on growing, FSRUs are in demand.
State entities lack the experience and competence to undertake such projects. Among the options to be considered should be the possibility of the construction and operation of the required facilities to be undertaken by competent investors.
My strong recommendation is to opt for the option that leads to the lowest price of gas and its fastest delivery to Defa.
But whichever way the project to import natural gas goes, this time round it should be done transparently and on a professional basis. As I wrote recently, there are serious problems in the way major public projects are tendered and awarded. It is time for change – radical change.
Dr Charles Ellinas is a Senior Fellow, Global Energy Center, Atlantic Council
