By Elias Hazou
The Natural Gas Public Company (DEFA) has delayed announcing a new tender for interim gas supplies to be used for domestic electricity generation.
DEFA – by law the sole importer and distributor of natural gas in Cyprus – had been pressured by the government to finish drafting the tender documents by yesterday, after which the documents would have been sent for publication in the Official Journal of the European Union during the first week of January.
But DEFA – which together with the Electricity Authority of Cyprus worked on the documents throughout the weekend – has decided that more study is needed.
Whereas the invitation for expression of interest document is ready, the annexes to it are still being worked on. The Gas Sales Agreement forms part of the annexes.
Sources said the EAC – represented with four members on the DEFA board – has raised a series of points as to the viability of the natural gas tender.
DEFA will conclude a deal for LNG with the supplier, and will sell the fuel to the EAC. Any contract thus requires back-to-back agreements – one between DEFA and the supplier, the other between DEFA and the EAC – that are in sync with each other.
Given that DEFA is, as the sources put it, a “paper company” – it has no capital nor any prior contracts under its belt -at the end of the day it’s the EAC that provides the guarantees for payment.
The EAC people want to be certain that a new tender is “robust” without any loose ends. A key concern for them: any contract must contain a price renegotiation clause after a period of three years.
Conventional wisdom has it that natural gas prices are set to plateau or even drop in coming years, and the EAC doesn’t want to be stuck with a fixed price for the duration of the contract.
Apparently a renegotiation clause has not been included in the tender documents, but DEFA is willing to take another look at this.
Moreover, there’s the possibility of an electricity link between Cyprus and Israel, which if it materialises would decrease domestic demand for natural gas. The feasibility as well as the timing of such a project is unclear.
Another unknown factor, the EAC says, relates to the future penetration of renewable energy sources (RES) into the grid. As an EU member, Cyprus must formulate a national RES plan that gradually reduces dependence on conventional fossil fuels. The EAC is waiting on the government to complete that plan.
And under the tender documents drafted by DEFA, bidders are given just six weeks to prepare and submit a comprehensive proposal. The EAC thinks this is nowhere near enough – three months would be more appropriate.
“If we want this new tender to be taken seriously, we need to fix the flaws of the last one,” an industry source commented.
It’s understood that the new tender will have a duration of seven years (2016 to 2022), with an option for up to three one-year extensions – potentially 10 years in total.
The contract’s worth is estimated at anywhere from €4bn to €5bn. The quantities of natural gas will range from 0.6 billion cubic meters per annum (bcma) to 0.9 bcma.
The first tender, launched in September 2012, was terminated in October this year after DEFA failed to reach agreement with any of the bidders.