LNG … FSRU: The Way forward to Cheaper and Cleaner Electricity for Cyprus

Author: Abboud Zahr

The Government has recently approved a plan for importing natural gas for the power stations of the Electricity Authority of Cyprus (EAC). The plan would involve buying liquefied natural gas (LNG) through state-owned Natural Gas Public Company (DEFA). The LNG will be re-gasified on a floating storage and re-gasification unit (FSRU). The LNG will come in tankers to Cyprus and will be pumped into the FSRU moored in Vasilikos. The floating unit will transform the liquid into gas, which in turn will be pumped via pipeline to the power stations for power generation.

Plans to import natural gas to Cyprus go back to almost 20 years and were first drawn up during the Clerides presidency. The natural gas as feedstock for power generation is ecologically friendlier than fuel oil used presently for power generation. All three governments that followed, including the current one, drew up plans and subsequently abandoned them. The last plan, labelled the ‘interim solution’ because it was based on a short-term contract – until Cyprus would produce its own gas – fell through last year when the successful bidders failed to agree to the terms of DEFA.

Had the import of LNG succeeded during the last two decades, electricity bills would have been much lower nowadays as well as Cyprus’ carbon dioxide (CO2) emissions. It would be advisable to increase the involvement of the private sector in such projects to render them swifter and more efficient.

It remains to be seen whether this latest attempt to secure a supply of natural gas will work. As Cyprus is continuing to use polluting fuel oil to feed its power plants, from 2020 the EU fines that Cyprus would have to pay for high CO2 emissions will increase substantially and this cost will be passed on to the consumer in the form of higher electricity bills.

The specialized UK Consulting firm advising DEFA on the import of the LNG, recommended an offshore FSRU that would process the LNG instead of an onshore one.

FSRUs have been a great game changer permitting countries to become LNG importers far faster and at a much lower cost than via conventional onshore terminals.

Floating solutions provide both a cost effective and quick solution to importing LNG versus building an onshore terminal. A conversion of an existing LNG carrier to an FSRU costs in the range of US$75 to 100 million, a newbuilt US$250 million. While building an onshore terminal costs $800m upwards to develop. FSRUs are attractive because of various advantages they have over land-based terminals, such as low cost, quick commencement and flexibility. The general public also often prefer floating solutions versus having a liquefaction plant as their neighbor.

FSRUs have helped open up new markets to LNG and lower the barriers to entry for countries importing LNG.

It typically takes about two years to convert an LNG tanker into an FSRU, whereas building a totally new one would take around three years.

The first FSRU went into service in 2005. Today there are 26 floating terminals operating in 20 countries in several regions of the world including the East Med. In Israel, one unit has been moored on stand-by basis for several years and in Egypt two units have been in operation for two years. Jordan a similar small country like Cyprus joined the LNG importing club in 2015. Lebanon is in the process of launching a new tender for the same.

Since the beginning of 2016 there has been an upsurge in floating terminal proposals, particularly in Africa, Indonesia, India and Pakistan. There are now another 60 proposals at various stages of development, from early concept to implementation. Of these, 43 expect to be operating by 2020 and 12 of these projects have already chartered the FSRU.

The global FSRU fleet has grown at an annual rate of 21% over the last five years, and currently, the operational FSRUs have an aggregate LNG import capacity of 82 million ton per annum (mtpa). An additional 74 mtpa FSRU import capacity is under construction or in the planning stage.

The daily rental rates for FSRUs have come under pressure and are currently around USD 100,000, significantly lower than USD 120,000-130,000 per day in 2013-15.

There are several reasons for this:

First, the number of players in the FSRU segment is growing, which is creating competition for the business. Secondly, falling asset prices of FSRUs is making it possible to charter out vessels at lower rates. Third, several old LNG vessels are looking to get an FSRU conversion contract, which adds to the pressure on charter rates.

According to Drewry, a London based independent maritime research consultancy, the charter rates for FSRUs will not significantly change because of increasing competition and a growing understanding of FSRU technology. They expect charter rates for FSRUs to stay in the range of USD 90,000 – 100,000 per day for the next three to four years.

On the other hand, the FSRU market is set for further growth in the next few years. With the demand for clean energy growing, resulting in a decline for oil and coal, LNG is moving to fill the gap with the global LNG trade growing by four times in the last 20 years.

Cyprus has to move swiftly with its plan to import LNG to feed its power plants and move away from expensive fuel oil. This would ultimately result in cheaper electricity for the consumer, private and public.

Source: In-Cyprus. http://in-cyprus.com/cheaper-cleaner-electricity/