By Elias Hazou
The Natural Gas Public Company (DEFA) has until the end of the month to conclude a deal for the purchase of natural gas to be used for generating electricity.
The validity of the tender expires on July 31, although DEFA could extend it further. Three extensions have been granted since the tender was issued.
Local reports said DEFA has officially informed Dutch energy firm Vitol that it is the first-ranked bidder, for a contract believed to be worth upwards of €3bn.
Vitol is said to have narrowly edged out rival bidders M&M, a Greek conglomerate comprising the Mytilineos and Vardinoyiannis (Motor Oil) groups in cooperation with Dutch giant Trafigura.
DEFA will now reportedly engage in end-stage negotiations with Vitol, chiefly focusing on getting the bidder to improve its price. In theory, should talks with Vitol hit a snag, DEFA could bring M&M back to the table.
DEFA head Eleni Vasiliadou neither confirmed nor denied the reports, saying she is bound by strict confidentiality agreements signed with all the bidders.
“We are at a critical stage in the tender, that’s all I can tell you,” she told the Mail.
The final decision rests with the government, as DEFA is 100 per cent state-owned.
It’s understood that the solution now on the table involves liquefied natural gas (LNG), be it through a land-based or floating facility.
The floating facility under consideration is a Floating Storage and Re-gasification Unit (FSRU).
Tankers transporting LNG dock with an FSRU and load the liquid gas onto it. A vaporizer on board the FSRU – sitting out at sea, at a short distance off the coast – turns the liquid into gas, which is piped ashore. The gas is then burned to generate electricity.
Delek was the only bidder proposing to pipe the gas directly from the source – Israel’s Leviathan gas field. But in February Delek dropped out of the tender – or its bid was nixed – leaving LNG the only technical option.
Cyprus is reliant on heavy fuel oil imports for electricity generation, and wants to switch to the cheaper natural gas.
Under the tender, the first date of supply of gas falls between January 2016 to June 30, 2017. The supply is for seven years, with an option to extend it by another three. DEFA is not obligated to accept any bid.
Given the huge price tag, DEFA’s – and the government’s – top criterion in assessing the bids relates to the cost of electricity generation from natural gas as compared to generation from heavy fuel oil (mazut).
Citing its sources, daily Politis said Vitol’s quoted price is just under $14 per mmbtu.
The call for the tender was issued in January 2014. It is the second tender in a row, the first having been scrapped in October 2013.
Approximately two years ago DEFA broke off talks with Russian company Itera, at the time the top-ranked bidder. Itera’s final, all-in price was understood to be $15.5 per mmbtu.
Even though – and assuming the reports are accurate – Vitol’s price in absolute terms is lower than Itera’s, one has to consider that fuel prices globally have declined sharply since 2013. LNG contracts are linked to crude oil prices.
At any rate, a potential supply deal also needs the nod from the Electricity Authority of Cyprus (EAC). DEFA is by law the sole importer and distributor of natural gas in Cyprus. Once DEFA concludes an agreement with the supplier, it would then sell the fuel to the power utility. Any contract therefore 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.