Cyprus Mail
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The government is badly mishandling our gas imports

- Opening the sale of Aphrodite gas to Shell’s LNG liquefaction plant at Idku in Egypt will leave Cyprus with diminished profits
By not considering other import options the government is condemning us to even higher electricity prices.

By Charles Ellinas

The planned import of liquefied natural gas (LNG) to Cyprus is about to enter a new and worrying dimension which could stifle competition and likely lead to high gas prices and more expensive electricity than ever before.

During a public consultation organised by Cyprus Energy Regulatory Authority (Cera) between April 12 and May 13 regarding its draft ‘Statement of Regulatory Practice and Methodology of Natural Gas Tariffs’ it emerged that the government intends to declare the natural gas market in Cyprus as an emerging market for 10 years, giving monopoly rights to natural gas public company (Defa) and its subsidiary Etyfa, the Natural Gas Infrastructure Company – set up with 30 per cent participation by the EAC to manage the LNG reception, storage and regasification facilities. This is based on a view expressed by the Council of Ministers in 2007 that, under certain conditions, and taking advantage of EU regulations, it was then the government’s intention to declare the gas market in Cyprus as isolated and emerging.

Two companies responded to the consultation call: Greek company Energean and PEC Powerenergy Cyprus. The latter is in the process of building the first private gas-fired power generation plant in Cyprus. Not surprisingly both tabled multiple objections to the government’s intentions.

The fact that only two companies saw the need to take part in this consultation is by itself of concern. There could be many reasons for this lack of interest: lack of understanding, indifference and possibly a belief that the consultation is just a paper exercise that will not alter decisions already made. Whatever the reasons, it does not bode well. The end result could be higher energy costs for the already heavily burdened Cypriot consumer.

Objections

The objections, and the legal justifications for such objections, made by the two companies are summarised in a document published by Cera. Key among these, made by both companies, is that declaring Cyprus’ gas market as ‘emerging’ will lead to a monopoly, claiming also that the market conditions that led to this decision by the Council of Ministers in 2007 no longer exist.

Energean is asking Cera to apply competition rules, leaving the market free to decide, as provided for in the EU Directives and competition law.

Energean has valid grounds to be concerned that these proposals will make effective competition in Cyprus’ gas market impossible. They will affect adversely the rights and interests of any existing or new companies to operate competitively in the market and supply of gas in Cyprus.

PEC made similar objections and recommendations, stating that these proposals may seriously detract from the possibility of effective competition, solely for the benefit of Defa and Etyfa.

PEC, in its submission to Cera, stated that EU directives and national legislation provide that “member states and national regulatory authorities must take all necessary measures, which are notified to the European Commission, so that natural gas companies and their customers can access upstream pipeline networks such as what Energean intends to install.”

Proposal by Energean

Energean updated its offer to supply gas to Cyprus by pipeline by March 2021 from its gasfields Tanin and Karish in Israel, through a proposal made to Cera on 10 May. The company says that this is supplementary to the LNG import procedures launched by the government of Cyprus through Defa.

The company states that its proposal makes it possible for Cyprus to obtain gas at a very competitive price, without the burden of any infrastructure or upfront investment cost, with obvious benefits for the Cypriot economy and Cypriot energy consumers. It opens competition in the Cypriot energy market as a whole, through the supply of natural gas to private companies holding electricity licenses. It also enhances security of supply and strengthens Cyprus geopolitical role. It would certainly strengthen Cyprus relationship with Israel.

With the recent discovery of more gas in its Israeli gasfields, the company now has the necessary permits to export such gas.

Energean also announced that it has signed a letter of intent for supply of gas to private power generation licence holders in Cyprus, noting that there are “now options for the supply of natural gas to private electricity producers”, such as PEC.

Cost implications

Defa’s plan to import LNG will prove to be costly. By the time gas arrives at the EAC not only it will have to pay for the cost of imported LNG, but also for the recovery of the cost to build and operate the necessary installations – Floating Storage Regasification Unit (FSRU), gas storage and regasification, jetty, port facilities – and profit.

With the World Bank estimating the price of gas in Europe to average $7.50 in the period between 2020 and 2030, the final cost to EAC could rise well above $10/mmbtu, and likely to $11-12/mmbtu.

This will certainly lead to higher electricity costs for the Cypriot consumer. And this is after Cyprus registered the highest increase in annual electricity prices in Europe in the second half of 2018, reaching close to €0.22/kWh for household consumers – the seventh highest in Europe.

Cyprus is also in the unenviable position of having the highest electricity prices in Europe to non-household consumers, now at €0.18/kWh – a substantial burden on the island’s economy.

In contrast, Energean’s offer would deliver gas to the EAC at about $6.50-7.00/mmbtu, which would certainly lead to a substantial reduction in the price of electricity. This also explains PEC’s strong support for the project.

This is why I find it amazing that the Cyprus Consumers Association did not participate in Cera’s consultation and that it is not even investigating the impact of LNG imports to energy prices in Cyprus. It should be doing so and it should be taking a position in the debate over importing gas to the island.

I hope that before a final decision to import LNG is sanctioned, a detailed commercial viability study is carried out to determine its implications on the cost of energy over the proposed 10-year period, including comparisons with other options. Given the far-reaching implications for Cypriot energy consumers, it is imperative that the results of such a study should be made public.

The Aphrodite factor

Cyprus is close to signing a renegotiated production sharing agreement with Noble Energy and its partners. This will open the sale of Aphrodite gas to Shell’s LNG liquefaction plant at Idku in Egypt. It will, in effect, end isolation of Cyprus gas market.

This deal, ceding a higher profit share to the companies, will turn out to be a sell-out, leaving Cyprus with diminished profits. It will also close the door to the possibility of constructing an LNG plant on the island for years.

The much heralded concession that Cyprus’ share of profits will increase with high oil price oil prices will never materialise. With global oil demand expected to plateau during the next decade, average annual oil prices are not expected to rise to high levels in future.

Cyprus should have requested that in return for this concession, Noble Energy and its partners should construct a small diameter pipeline, as part of the project to export gas to Egypt, to bring gas to Cyprus – up to 1 billion cubic metres per year.

The cost of such a pipeline would be relatively low, of the order of $400 million, with the benefit that the price of gas delivered to the EAC could be as low as $6/mmbtu – even lower than Energean’s offer.

This option, however, was not taken up during the negotiations, making it that much harder to realise it in future.

Given all the above, it is very difficult to understand the fixation with importing LNG, much to the detriment of Cyprus’ economy and at a high cost to the Cypriot energy consumer.

 

Dr Charles Ellinas senior fellow Global Energy Centre at the Atlantic Council @CharlesEllinas

 

 

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