Cyprus Mail

DEFA sticks to its guns, moving to next bidder

By Elias Hazou

THE NATURAL Gas Public Company DEFA has stuck to its recent decision to end talks with preferred bidder Itera.

In a statement yesterday, DEFA said it was inviting second-ranked bidder, Vitol, to submit an improved proposal on interim supplies of natural gas for power generation.

DEFA’s board of directors met to decide their next move after making the call last week to terminate negotiations with Russia’s Itera.

But in the interim, public remarks made by the President had led to speculation that DEFA might rethink that decision – and risk eating humble pie.

Speaking on the sidelines of an event this weekend, Nicos Anastasiades told newsmen that the government was keeping all its options open.

“We are not ruling out any of the proposals submitted [for natural gas] aimed at reducing the cost of electricity until such time as we are able to use our own resources to supply the EAC with the cheapest possible fuel,” Anastasiades said.

“And that [fuel] can be none other than natural gas,” he added.

The President went on to say that the government wished to avert any ill-feeling and “political problems with friendly countries” – a comment taken to allude to Russia.

Anastasiades has called for an independent assessment of the tender goings-on after having met a senior Itera official last week.

He has officially asked the auditor-general to look into the electricity utility’s fuel cost formula in order to ascertain the profitability – or not – of Itera’s offer.

It’s understood that at the moment the auditor-general’s office is awaiting more precise instructions on what it is it will be scrutinizing.

But it’s not clear what happens if the auditor-general were to determine that Itera’s offer should have been accepted.

It’s also unlikely that Vitol, who was ranked behind Itera, can now come back with a new offer that beats the Russians.

Both Itera’s and Vitol’s bids involve procuring liquefied natural gas (LNG) and re-gasifying it aboard Floating Storage and Regasification Units. The gas would be used to generate electricity at Vassilikos, the island’s main power plant.

The DEFA tender, launched a year ago, aimed at securing intermediate supplies of the cleaner natural gas to fire power stations until Cyprus’ own offshore hydrocarbon reserves come on tap. Currently, the island is reliant on costly heavy fuel oil (mazut) and the even more expensive diesel.

Itera reportedly first offered just under $16 per million BTU(mmbtu), later agreeing to drop to about $15. DEFA and the electricity utility determined that this will still too expensive, and wanted the Russians to go even lower. Itera declined.

Itera’s latest offer is slightly higher than the current spot market rate for natural gas ($12.5 to $13).

The price they quoted covers fuel costs (LNG), delivery and capital investments.

Under the terms of the tender, DEFA is not obliged to pick a supplier if it deems that the price of electricity does not drop significantly through the use of natural gas.

But a leaked confidential report, compiled by the EAC and forwarded to DEFA, shows that, under Itera’s offer, between 2015 and 2021 the electricity utility would save some €800m by running its plants almost exclusively on natural gas instead of mazut and diesel.

Documents seen by the Mail show that, through the continuing use of liquid fuels, the electricity utility would pay €3.278bn in this time period, compared to €2.453bn under Itera’s natural gas proposal. Itera’s bid represents a benefit of 25 per cent.

That data was based on Itera’s prior offer of $15.9 per mmbtu.

While acknowledging the report’s authenticity, the EAC counters that the report’s findings were founded on initial assumptions and parameters that are no longer valid.

For example the electricity utility now claims that, due to the financial crisis, it anticipates a sharp drop in electricity demand over the coming years – hence less fuel needs to be purchased.

It’s understood also that this confidential report, dated August 2, was not shown to the President at a meeting held at the Palace earlier this month, where state energy operators advised that Itera’s offer was not beneficial.

Instead DEFA, the EAC and the energy regulatory authority advised the President on the basis of a new report, compiled days after the first one and with very different findings.
The initial report was leaked within hours of the meeting at the Palace.

Eurostat figures show that household electricity prices in Cyprus are the highest in the EU-27, both in terms of kilowatt-hours and in terms of living costs.

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