Management of LNG project has been ‘tragic’, audit office says (Updated)

The audit office said on Friday it was going to report Cyprus’ long-delayed project for the creation of a liquefied natural gas arrival terminal at Vasiliko to the European Prosecutor’s Office as EU funding was involved in the debacle, now years delayed with no sign of completion.

The management of the whole project has been “tragic”, according to a 150-page report. The audit office said the project has so far cost the taxpayer €542 million due to the increased cost of delays in a process riddled with inaccuracies and serious violations of public contracting that could even involve criminal responsibility.

The fact that during the initial tendering, “a satisfactory breadth of participation was not ensured” also raised a number of red flags.

“It was also found that there was no development of sufficient competition with the exclusion of two of the three bidders at the stage of checking the participation conditions, which ultimately led to the evaluation stage of a single tenderer,” the report said.

The project promoter is Etyfa, a subsidiary of Defa, the natural gas public company. The audit office accuses the body of pandering to the contractor instead of claiming compensation for the delays endured.

“All the findings, which are recorded in this report, unfortunately confirm in the worst way, the concerns and reservations of our service, which we expressed from the first moment to all the competent bodies about a project of such large of scope and national importance whose costs, direct and indirect, exceed the amount of €542 million plus VAT,” the audit office said.

“The intention of our office is to inform the European Public Prosecutor’s Office (Eppo),” it added.

“Other serious findings emerged from the control carried out by our office, which may involve disciplinary or criminal responsibilities, including, irregularities on the part of the board of directors of Etyfa in the approval procedures…  as well as irregularities… in the approval procedures of subcontractors.”

The Chinese-led consortium with the contract to build the liquefied natural gas (LNG) terminal last year filed a new timetable, promising to deliver the project by July 2024. The contract was awarded in 2019 with a 24-month deadline for completion.

“A project whose design and construction should contractually be completed within 24 months, will theoretically be delivered 22 months after the contractual date of completion, i.e. in twice as long, although we express serious doubts as to whether this will be implemented in practice,” the audit office report said.

The LNG terminal is to include a floating, storage and regasification unit (Fsru), a jetty for mooring it, a jetty-borne gas pipeline and related infrastructure.

Since the signing of the contract in December 2019, the contractor has submitted four delivery timetables – September 2022, July 2023, October 2023 and now July 2024.

The €500 million project, now costing millions more, according to the audit office had received a €101 million grant from the EU under the Connecting Europe Facility (CEF) financial instrument. The rest of the financing came from the European Investment Bank and the European Bank for Reconstruction and Development.

The additional €42 million cited by the audit office covered €25 million to the contractors for the increased cost of steel and other costs relating to engineering and Defa legal expenditures.

“The contractor, presenting as a sole argument that if this amount [€25 million] was not given, the contractor would abandon the project and chaos would ensue,” the audit office said.

“And this, despite the, with admission by the contractor himself of his own non-compliance with his contractual obligations. Our office strongly disagreed with the payment of the amount in question as the contract did not provide for the payment of compensation to the contractor due to an increase in the prices of materials, since this was a risk that he assumed himself.”

The audit office said it had pointed out that the state should not be blackmailed or appear to be acting under a threat.

The Fsru – the purpose-built vessel earmarked to convert imported LNG into gaseous form so that it can be fed into the Vasilikos power station to generate electricity – had presented the biggest stumbling block.

Last year, Energy Minister George Papanastasiou had said the vessel was still in dry dock at Cosco’s shipyard in Shanghai. At the time, the ship vessel had been expected to arrive in Cyprus sometime in July 2023. That was then delayed until October 2023 with a four-week voyage. The ship is still not here. The audit office report said it had failed testing runs.

“We doubt, on the one hand, whether the ship will reach Cyprus, and whether this will be possible if it will not present any functionality and safety problems and, on the other hand, if the project as a whole will be delivered on the revised date stated by contractor,” the report said.

“And this, always under the condition that the contractor will not come back with new undocumented claims [of delays], which the involved agencies will take care of once again to satisfy under threat of abandoning the project.”

However, unconfirmed reports on Thursday on the website offshore.energy.biz said the ship, named the Etyfa-Prometheas was officially handed over to Cyprus by Cosco in Shanghai the same day. The ship is 296 metres long and 46 metres wide and can store 137,000 cubic metres of LNG.

From the official side, the ‘consensus’ view is that the first delay at least were down to supply-chain problems caused by the Covid lockdowns. Papanastasiou last year said things operate differently in China when it comes to timetables. He also acknowledged that the contractor’s choices of subcontractors had been challenging for the consortium and in some cases “sub-optimal”.

Under his watch, a team of Cypriots were dispatched last year to the shipyard in Shanghai to see for themselves the status of the Fsru there. He had also been to the site at Vasiliko many times, and said it was plain to see that things were lagging behind.

A great deal is riding on the LNG import project. Use of the cheaper fuel (power plants currently run on heavy fuel oil) should drive down electricity costs, while also cutting down the island’s emissions which translate into millions of euros a year in ‘fines’ (greenhouse gas allowances) from the European Commission.