NOBODY was surprised when the government announced that it had failed to reach agreement with Vitol over the supply of natural gas for the Electricity Authority’s power stations. It was the third attempt in five years that failed to produce a supply contract, in each case the government and the state-owned Public Company for Natural Gas (DEFA) deciding that the deal being offered would not be financially beneficial. Attempts to persuade the winning bidder to improve its terms failed.
In the latest case, Vitol had argued that the total supply should be increased by 25 per cent in volume, to make the project viable and allow the company to recoup the big investment it would have to make. The Cyprus side claimed it could not do this because the other bidders could take legal action against DEFA for violating the specifications of the tenders’ procedure. This begs the question of why a limit was placed on the volume of gas to be supplied, considering the risk that a small quantity would have made the project unviable.
It is obvious that DEFA and the government did not want to commit to a relatively big quantity, because they were hoping that by 2020, or 2022 at the latest, natural gas from the Aphrodite plot would arrive in Cyprus. But this is far from certain for two reasons. First, the operators might decide it is not profitable to start extracting gas at that time, because the world prices are too low. Second, the operators might decide it would be more profitable to sell the gas to another market, one that could absorb the quantities to be produced in a much shorter period than Cyprus. This appears to be the thinking in Israel, which is looking for a bigger market for its natural gas than its own domestic market, which is considered too small.
In Cyprus, the decision makers are under the impression that by 2020/22 natural gas will come to the island from the Aphrodite field, come what may. They do not consider the possibility that the demand for natural gas might be too small to justify the investment in a pipeline, as nobody knows what the world price will be at the time. They assume it will be high enough to justify the investment, yet they did not make the same assumption when it came to what has come to be known as the ‘interim solution’. One of the reasons for turning down the Vitol offer was that there would be no saving from switching from heavy fuels to natural gas by our power stations. This is correct at today’s oil prices, but do they know for how much longer they will stay so low?
And the use of natural gas should not have been viewed solely in economic terms. There is a vital value in causing less pollution? Even if there were no saving from using natural gas at current prices, it still has the advantage of being a much cleaner fuel. Didn’t this count for anything?