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Invoices ‘weaponised’ in ongoing LNG dispute

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A Mexican standoff: that probably best describes the ongoing escalating dispute between the government and the Chinese-led consortium with the contract the build the liquefied natural gas (LNG) terminal. And with construction work paused for the last two weeks, and no sign of when the contractor will resume work, sources familiar with the matter told the Cyprus Mail that the government is fast running out of patience.

Industry sources, who spoke on condition of anonymity, say they strongly suspect the CPP-Metron Consortium Ltd (CMC) may lack the financial wherewithal to complete the LNG project.

A week earlier, Energy Minister George Papanastasiou said in parliament that the infrastructures on land are just 45 to 50 per cent complete, while the floating, regasification and storage unit (Fsru) is 95 per cent ready.

Meanwhile the Fsru vessel is still in a port in China awaiting seaworthiness certification before Cyprus can take formal delivery of it.

Two weeks ago the contractor downed tools, citing the non-payment on time of the October 2023 invoice. The government refuted this, saying they did pay on time as stipulated by the terms of the contract.

In what appears to be a recent interpretation, the contractor argues that invoices must be fulfilled within 30 days of their date of issuance. The government counters that from the outset the practice has been for an invoice to be issued, next the owner’s engineer – the government’s advisors who exercise oversight on the contractor – affirms the contractor’s work performance, and from that date the 30 days apply.

In any event, non-payment of an invoice represents “a flimsy excuse” for halting work. Besides, in the event of delayed payments the contract specifies the remedy available to the contractor – the charging of interest.

As far as the government is concerned, this action by the consortium constitutes a breach of contract.

Meanwhile, the Cyprus Mail learns, for the past fortnight no work whatsoever has taken place on the land-based infrastructures at Vasiliko. We understand that a little more progress has been made on the Fsru vessel.

The Fsru – which will dock at a jetty at Vasiliko- will convert the liquefied gas on board into its gaseous form, which is then fed into pipelines connected to power stations within a 5km radius. These would include the EAC’s flagship power plant at Vasiliko as well as a private station owned by Power Energy Cyprus (PEC).

Now, our sources said, the contractor has made similar claims of non-payment of invoices for the months of November and December 2023.

“Since this is a new gimmick, it seems like they [the contractor] are panicked about collecting money. One suspects they may be short on cash,” one source said. “It does feel like extortion.”

When contacted, the energy minister declined to comment on what moves – legal or otherwise – the government is contemplating.

Asked if the LNG contract was awarded to the right company, the minister said he cannot opine as he is not aware of the conditions under which the contract was awarded at the time – in 2019.

But when asked if the company would have landed the contract were it awarded today, he was categorical: “Definitely no.”

The crux of the matter, our sources said is that “the contractor had underestimated the cost of the jetty, thinking it would cost them €40 million and incorporating that in their bid. It turns out they were off by about €70 million.”

The rising price of steel and other materials – with steel being a major component of the jetty – may partly explain how the €70 million gradually ballooned into the €200 million figure which the consortium is claiming from the Republic of Cyprus in arbitration proceedings in a London court.

“So they miscalculated their expenses, then they got unlucky with the Covid pandemic and the war in Ukraine driving up the cost of materials… and here we are,” the same source remarked.

“When you make a bid, you’ve got to estimate your costs at the time of completion, that’s how this business works. But they didn’t do that.”

Another source, said the Chinese operate very differently to Europeans when it comes to infrastructure projects.

“In Europe you set timetables and stick to them. In China this doesn’t really apply. And whenever they fall behind, they rely on a ready-to-go workforce to make up for lost time.”

Regarding the Fsru, the sources said the Chinese may be using it as a bargaining chip. “The message from the contractor might be: give us what we want, or we’ll keep the vessel stuck at 99 per cent, just short of delivery. You might say they’ve weaponised the alleged delayed payment of invoices.”

In short, it’s got ugly, with both sides playing the escalation game. Meanwhile the contractor has imposed a radio silence – no communication whatsoever with the Cypriot authorities.

Over the past few days the government has hinted it may have to take “painful decisions” on the LNG project. Earlier, the energy minister suggested in parliament that, because the project is part-funded by the European Commission, a possible EU blacklisting of the companies was an option.

But the Sunday Mail understands the government is willing to give a little more leeway before resorting to drastic action.

Papanastasiou said that, for all the problems, Cyprus “remains committed to the completion and delivery of the project”.

And another source said for example that the Cypriot side will wait for the New Year public holiday in China to wrap up on February 17 before upping the ante. After that, if the contractor still doesn’t communicate or amend their attitude, the government might “consider options”.

The same source also speculates that because the consortium may be facing sanctions back home in China, as a diversion they’ve taken to blaming Etyfa – the natural gas infrastructure company – for the delays.

It was way back in December 2019 when Cyprus signed the contract with the consortium. The contractor has since submitted four delivery timetables – September 2022, July 2023, October 2023 and lastly July 2024.

That last one now likewise looks unfeasible.

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