Radical new choices may be needed for LNG imports
This is further to my article in the Cyprus Mail on January 30. Since then, the debate over the LNG import project imbroglio has been heating-up. All choices regarding the way forward are difficult. But it may now be the time to make the difficult choices before we dig ourselves in so deep that not only we be unable to extract ourselves out of this quagmire later, but we end-up paying for the consequences of cost and schedule overruns over the next decade.
Nothing I have heard so far gives me confidence that the problems I raised last Sunday will be overcome. Generalised, optimistic, statements – not substantiated by fact – that all is going well and to plan, and temporary fixes, are not the solution.
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With work on site at Vasilikos not even really started and the engineering design not yet completed – let alone delays with the FSRU conversion – completion by July 2023 can only be considered as optimistic, with 2024 being more than likely. Defa and its contractor, CPPE, do not appear to have a real handle on the project completion and costs.
The reported €100 million cost overrun is likely to be real, due to the schedule overrun, the rising materials and equipment costs, as well as supply problems. Somebody will have to pay this. I doubt that the contractor will absorb all, or ever a large part, of it.
CPPE appears to blame Etyfa and the pandemic for most delays, refusing responsibility for the additional costs. Any rushed settlement reached now is unlikely to be final until the full extent of the problem becomes clearer, probably much later in the year, by which time claims are likely to escalate but it will be too late – time and control of the situation will no longer be in our hands.
As a result, eventually, the EAC may find itself in the unenviable position of having no option but to purchase expensive natural gas from Defa, leading to higher electricity prices, while – if the electricity market really opens-up to competition in October – having to compete against lower-cost renewable energy with its hands tied behind its back. Under such circumstances not only its market share will decline, but its future may be undermined by, uncompetitive, high electricity prices. Especially, if it is not allowed to compete for a share of the renewables and electricity storage market.
The expected 25 per cent reduction in emissions, by switching electricity production to natural gas, is not a panacea if the unit cost of this gas increases substantially as a result of having to recover the high, final, cost of the LNG import project – despite the €101.5 million grant from the European Commission. On top of this, given the project delays, the cost of purchasing emission allowances – expected to exceed €100/tonne this year – will be that much higher, eroding any likely benefits from this project. Statements that this project will bring €1.5 billion annual benefits to the state are, to say the least, misleading, not based on tangible fact.
These are unpalatable developments. Radical new choices must now be considered.
As a first step, the government must appoint an international expert, or experts, in FSRU conversions and LNG import terminals, to carry out a swift independent review of the project and to advise on project recovery and on the actions needed to achieve it.
Possible choices on the way forward include the following.
The first, and preferable, step should be to reach a firm agreement with the contractor on a revised, but fixed, project schedule and budget – if possible – without compromising the interests of the state. Any further slip-ups or additional costs should then be for the contractor to remedy at its cost. However, despite assurances being given that “efforts will be made to deliver the project even earlier than July 2023”, it is doubtful that CPPE would agree to such undertaking.
There is talk that the government is considering changing, and perhaps weakening, contract terms and conditions in favour of the contractor, but this will likely compromise its position – especially when it comes to dealing with claims at the end of the project – and should be rejected. Another reason is that such a move could be contested legally by the disqualified consortia – who were not given the same opportunity at tendering stage – seeking compensation.
Another option, depending on the contract between Defa and CPPE, is to force the contractor to bring on board a project management team with proven experience in delivering such projects on the basis of the revised schedule and budget.
As a final resort – if nothing else works – the government should consider ‘cutting its losses’ by abandoning this project altogether, opting for leasing an FSRU, much the same way as Egypt did quite successfully in 2015 to overcome its gas shortage problems.
If a decision to proceed with such an option is taken during the first quarter of this year, LNG deliveries could start by the end of the year. The leasing arrangement could be for a ten-year period, renewable annually. Such a deal could also leave the door open for Aphrodite’s development for regional markets, including cheap, direct, gas supplies to Cyprus.
A comparative assessment of the total costs of abandoning the project now – before additional costs are incurred – in comparison to the FSRU leasing option will show that the latter is a sensible way forward.
Unsubstantiated, rushed-through, decisions driven by political expediency and not backed-up by techno-economic fact, risk ending-up being costly and, at the end, without the perceived benefits.
This project has a long, and likely tortuous, way to go. Rushed compromises at this stage could leave the state exposed to future mounting problems that will be less able to control, if the 2023 date and costs slip further. We all hope the project progresses well, but experience so far suggests caution. We cannot just leave it to hope.
Dr Charles Ellinas is a Senior Fellow at the Global Energy Centre, Atlantic Council
This article was originally published in the Cyprus Mail
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