Cyprus running out of time to get gas imports right

DEFA has received the green light to proceed with the retention of consultants to finalise plans for LNG imports.

It is aiming to be ready early 2018, perhaps after the presidential elections, to go out for tenders. The plan is to award two contracts by next year, one for gas supply and another for construction of the required infrastructure. LNG imports will be through a floating storage and regasification unit (FSRU) to be based at Vasilikos. The estimated investment is €340million.

This is the eighth such attempt in 12 years, since Golar proposed to import LNG and construct and operate floating electricity power plant (FPGP) on a barge off the coast of Cyprus in 2005. Past failures have undermined Cyprus’ credibility.

The urgency to proceed with this project is dictated by the threat of EU carbon emission penalties, if Cyprus continues burning heavy fuel oil (HFO) and diesel for power generation after 2020.

What is being proposed

The plan is that the FSRU will start operations in January 2020 and will continue until the end of 2039.

This qualifies as a project of common interest, under PCI 7.3.2 Cyprus – Gas2EU, which provides for ‘Removing internal bottlenecks in Cyprus to end isolation and to allow for the transmission of gas from the Eastern Mediterranean region.’

A grant application will be submitted as part of the upcoming call for funding for the 2017‘Connecting Europe Facility-Energy’ program. It is hoped that EU support may reach 75%, the maximum possible for this project, but this is not guaranteed.

The use of FSRUs for LNG import is now widespread and successful. But in most new projects FSRUs are being leased to minimize costs and allow future flexibility, in cases conditions change, such as high LNG prices.

Given the current status of the global LNG market, with a persistent glut of LNG supply, such a project should attract considerable interest.

Timing

DEFA’s plan is to be able to import LNG by the end of 2019 so that electricity production in Cyprus can switch to gas-fired power generation early 2020.

The plan is to invite tenders early next year, presumably after the presidential elections. Timing may be dictated by the result of the elections. If the current government is returned, there should not be a need for a transition period or change.

A new government, though, may need time to settle-in, establish its own energy strategy and review the proposed LNG import scheme before it proceeds. If it decides to alter the proposals then there would be inevitable delays.

What is the urgency

Most important is that, after 2020, Cyprus will incur serious carbon emission penalties, to be imposed by the European Commission, if it continues burning HFO and diesel for power generation. This would, of course, be passed to EAC and its customers, and may create a backlash.

Another is that, by 2018, EU member states must make climate change commitments in support of new, more ambitious, EU targets of at least 40% cuts in greenhouse gas emissions (from 1990 levels), at least 27% share for renewable energy and at least 27% improvement in energy efficiency, to be implemented in 2020 and to be achieved by 2030. These targets have already been agreed to by EU member states.

Cyprus is nowhere near these targets and will not be able to achieve them without switching to gas and liberalising renewables for power generation. The latter cannot progress seriously without the former.

Despite being aware of this for a long time now, unfortunately Cyprus’ response has again been left late, with very little time to achieve the switch from HFO to gas, and no margin for errors or delays.

An expensive scheme

In theory, there may be other potential benefits in importing LNG for power generation. Global LNG prices are low, and will probably stay low for the longer term, and importing LNG may also offer cost advantages and enable other potential uses.

However, what is being proposed is a rather rigid, inflexible and likely to be an expensive, scheme. Given the small quantities of gas that will be needed by Cyprus during the 20-year duration of the project, 0.7-1.0 bcm/yr, such a scheme is likely to be quite expensive in terms of cost per mmBTU.

Egypt, with about 12 bcm/yr LNG imports, opted for leased FSRUs. The first one started operations in 2015. It also opted to buy its LNG by placing periodically short-term supply tenders in the open market. In a buyers’ market this is a sensible approach.

This flexibility is paying-off. Now that Egypt is about to become self-sufficient in gas, it has reduced its LNG imports by 30% and plans to phase them out by 2019. It also plans to terminate one FSRU lease by next year and the other by 2019.

Most other countries that are now entering the LNG market are opting for similar schemes, offering them flexibility to benefit from low LNG prices while these last and potential switch to other fuels, including renewables.

The scheme that appears to be proposed by Cyprus will commit it to fixed costs for at least 10-years.

According to the plan the potential investor will be safeguarded for the first 10 years of the project, through guaranteed income derived from a fixed annual charge regardless of the quantities of LNG delivered and re-gasified.

Such a scheme and guarantees are bound to add cost to the project, which inevitably will be passed to the Cypriot consumers of electricity.

Nothing has yet been disclosed about the likely unit cost (per mmBTU) of such gas imports and the likely impact on the cost of electricity. Ordinarily, the expectation would be that it will lead to a significant reduction. But would this be the case?

Risks and implications

Given the past history of failed attempts to import gas for power generation, the risks to encounter problems and delays can only be high. This latest attempt has been left very late and if the forthcoming presidential elections bring a change of government, the risk is that it may be derailed or at least delayed yet again.

Its 20-year duration is, in effect, an admission that Cyprus does not expect to benefit from its own gas, should discoveries be made that allow commercial exploitation.

Adopting a scheme similar to Egypt could have given Cyprus the flexibility to respond to such developments or to changes in the global LNG market and potential penetration of renewables.

This is a contract of immense public interest. It requires transparency and disclosure of information to demonstrate what Cypriots will be paying for electricity between 2020 and 2039, in relation to the cost of delivered gas, how these prices compare without this contract, and clearly demonstrate its benefits.

Source: In-Cyprus