Cyprus Mail
Cyprus

Thumbs down for Russian gas offer

President Nicos Anastasiades meeting with CERA, DEFA and EAC representatives

By Elias Hazou

THE OFFER by Russian company Itera to provide interim gas supplies for electricity generation was officially rejected by state energy operators yesterday.

It was decided, however, that efforts geared at reducing the cost of electricity to consumers would continue.

Speaking to reporters later, Energy and Trade Minister George Lakkotrypis said the gathering at the presidential palace with President Nicos Anastasiades bore out the findings of the Natural Gas Public Company (DEFA), which deemed that Itera’s bid is not cost-effective.

The Cyprus Energy Regulatory Authority (CERA), which also took part in the meeting, said it had assessed DEFA’s assumptions and conclusions and found them to be ‘logical’.

Cyprus is looking to secure intermediate supplies of natural gas until it can bring ashore its own gas from its offshore prospects – possibly in late 2019 or early 2020.

DEFA’s board will be reconvening this week to determine the next steps to be taken. DEFA chairwoman Eleni Vasiliadou clarified that the current bidding process will not be scrapped.

Rather, she said, the organisation would continue deliberating with the bidders.

Asked whether there was a timeline for a final decision, Vasiliadou said it could be either a matter of weeks or days.

Despite rejecting the offer by preferred bidder Itera, it’s understood that negotiations with the Russian company are officially not over. Presumably progress is possible should Itera come up with an improved offer; if not, DEFA might start talking to Vitol, whose offer was ranked second-best.

Vasiliadou explained that the difficulty in agreeing an affordable price for Cyprus lies in two key factors: the relatively short duration of the contract (30 months, with an option for an additional 15); and the lack of gas-related infrastructures on the island, which would have to be built from scratch, thus raising the cost of the investment.

“If the natural gas providers can come with a price that is satisfactorily low, it could work. It depends on the bidders,” the official said.

The government wants a decrease of at least 10 per cent in the cost of electricity to the end-consumer in order to switch from heavy fuel oil to natural-gas driven power generation. Apparently, none of the bidders have been able to meet that target.

Industry sources say it’s doubtful whether any of the bidders can satisfy Cypriot demands. That’s because suppliers would buy the natural gas from the spot market, where the going rate is around $13 per million BTU. And building and operating the necessary infrastructures – such as floating storage and regasification units – would drive the final cost to consumers even higher.

Itera, for example, reportedly lowered its offer to $14.75 per million BTU from $16 initially – and even that was not good enough.

Another consideration is that the electricity utility anticipates a sharp drop in electricity demand this year – hence less fuel needs to be purchased. Initially the utility had projected spending €650m on fuel purchases for 2013; they are now projecting €480m.

Should DEFA’s tender come to nothing, other options outside the tender process are available: Noble’s proposal for a spar platform; a proposal by the Israeli Electricity Company to provide cheaper electricity to Cyprus through an underwater cable from Israel; and a ‘taxi service’ for compressed natural gas.

The cost of electricity to the end-consumer has dropped by around 13 per cent so far this year – through a combination of the scrapping of the Mari surcharge (5.75 per cent), an ad hoc reduction of 5 per cent, and a downward adjustment by 3 per cent to the fuel cost formula.

The cost of electricity generation is set to fall compared to 2011 and 2012 because the turbines at the main power plant of Vasilikos are now burning more heavy fuel oil (mazut) in relation to the expensive diesel.

Temporary power generators were used to supplement electricity production in the wake of the July 2011 explosion at a neighbouring Mari naval base, which caused extensive damage to Vasilikos. These generators were running on diesel, which costs some €700 per tonne.

Turbines 1,2 and 3 at the Vasilikos station have been repaired and are now fully operational. They burn mazut, costing around €500 per metric tonne.

But all this will come as little relief to Cypriot households, who continue to pay the most expensive electricity in the EU, both in terms of kilowatt-hours and in terms of purchasing power standards.

Meanwhile US energy firm Noble is likely today set to begin a drill stem test at the A-2 appraisal well in its Block 12 offshore concession south of the island.

The test is done to determine both the quantity and quality of the gas in the well, by measuring parameters such as flow, pressure and fuel content.

Testing is expected to take two to three weeks. More tests could conceivably be carried out in a second appraisal for more conclusive results.

The tests will confirm or disprove estimates that 5 to 8 trillion cubic feet of natural gas lie in the prospect – quantities that would make viable the construction of an LNG plant for natural gas exports.

 

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