Cyprus LNG import project in trouble
Following a highly controversial tendering process, Cyprus' €290mn LNG project was handed in December 2019 to a consortium led by China Petroleum Pipeline Engineering Company (CPPE), a pipeline construction company with no prior experience in such projects.
Ever since, it has been facing problems and delays that culminated in the replacement of DEFA’s entire Board in November and a meeting at the Presidential Palace on January 21, at the end of which the President could not hide his concerns, calling for the project to be expedited.
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Problems
The project has been beset by problems ever since the tendering process in 2019. Three consortia were short-listed, led by CPPE, Samsung and the European Consortium.
Following disqualification of the Samsung and European Consortium tenders at the technical stage, the project was handed to the CPPE consortium in August 2019. There was concern expressed at the time that such a major tender was in effect awarded to a single bidder, on the basis of a single financial offer, without price competition. But this was dismissed.
But it does not stop there. CPPE has no real LNG import and regasification terminal experience, while the two unsuccessful consortia included well known experienced companies in the global LNG industry such as Samsung, Mitsui, Osaka Gas, ENAGAS, GasLog LNG, SNAM.
The Auditor General also raised many irregularities regarding the tender evaluation process, but these remained unanswered.
And on top, DEFA was handed a ten-year monopoly over gas distribution and trading in Cyprus, stifling any competition.
The project
The project kicked-off in December 2019 with the signing of the contract between DEFA and CPPE, “marking a new era for Cyprus energy plans”. The target completion date was end of 2021. Subsequently, due to various delays, including Covid-19 and getting approvals from the European Commission (EC), completion was re-scheduled to mid-2022. By March 2021 the end-date was moved to the end of 2022 and by November last year DEFA moved it to “within the first few months of 2023.”
The meeting at the Presidential Palace on January 21 confirmed problems and set a new completion date of “July 2023.” But not many in the industry believe this.
Following the meeting, the President recognised that “the delays that have been created regarding the progress of the project have corresponding financial cost for the citizens and the economy of the country in general.”
Admittedly, Covid-19 had an impact delaying start of construction to September 2020. But putting all the blame on Covid-19 is rather convenient. This alone does not justify the continuous slippages – neither does it bode well nor convey any confidence that DEFA and its contractor have a real handle over project completion and costs.
Based on informal, unofficial information, the project is unlikely to be completed before the end of 2024. CPPE’s lack of experience in such projects appears to be a contributing factor.
But it is not only that. It is also the cost implications, with an estimated cost-overrun of about €100million – due to the schedule overrun, but also due to rising materials and equipment costs, as well as supply problems – bringing the total capital cost of the project nearer €400million.
In addition to the final cost-overrun, there appear to be problems and differences with CPPE over project execution. CPPE admitted this in a recent interview. But the main contractor has not, so far, given a firm project end-date undertaking.
In addition to problems with conversion of the LNG Carrier Galea to an FSRU, re-named ETYFA-Prometheus, construction of the jetty at Vasiliko, and other facilities, has not even started – putting into doubt the 2023 end-date. In fact, there is talk that even the engineering design of the jetty is facing problems, with CPPE having had to change design contractors more than once.
The lack of transparency continues. At the end of November DEFA’s entire Board was replaced without any explanation provided. Given the claimed importance of this project, and DEFA’s role in it – as well as DEFA’s role in the future of gas distribution and trading on the island – this can only be of major concern. What are the reasons, and what confidence is there that these will be overcome?
If the contractor is facing such challenging problems, how are these going to be resolved while maintaining control over the project’s schedule and costs? And who will bear responsibility?
It is not the first-time concerns have been raised about this project, but so far neither DEFA nor CPPE have reacted. Despite the importance of the project to Cyprus, project progress lacks transparency.
Implications
Until late last year DEFA was claiming that this project will result in significant reductions in the cost of energy in Cyprus, with significant benefits to the environment and the economy. But this was never substantiated by a commercial viability study, and developments so far contradict it.
When asked in November whether import of LNG will still bring electricity prices down by 25 per cent – as was claimed by DEFA in 2019 – DEFA changed its tune. Its response was that as a result of the high oil and emission allowance prices “we are not in a position to make such assessments in the midst of such instability” – a far-cry from the 25 per cent electricity price reduction claim.
It has also been claimed that import of LNG will facilitate increased uptake of renewables, but this is questionable. The more renewables the less gas EAC will need, with the LNG project costs still having to be recovered – but on smaller volumes of gas. As a result, the unit cost of gas to EAC will increase. This would act against increasing renewables significantly. Adding to that the €100million potential project cost-overrun, EAC will end-up paying dearly for this gas, impacting the price of electricity.
The need to recover these costs will also act as a deterrent to bringing gas from Aphrodite to the island by pipeline, even if that were to become commercially viable.
In the absence of transparent information, only time will tell how serious these problems are. But, unfortunately, time is not on our side and, in the meanwhile, the price of energy is soaring to the detriment of Cypriot consumers that have little choice but to foot the bill. As I said in 2019, “Cyprus runs the risk of being trapped into an expensive undertaking for at least the next ten years. Not only this may not boost industry, but may also become a long-term burden to Cyprus’ economy” – sadly, even more so now.
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