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From catastrophe to salvation for Cyprus electricity users

comment ellinas cpp still has possession of the fsru (floating storage regasification unit)
CPP still has possession of the FSRU (floating storage regasification unit)
Leaving aside the issues of how the doomed LNG project was awarded, the key issue is to recover and complete it

Much has been said and written about the debacle of the Vasilikos LNG import and regasification project and the malpractices that led to it. The auditor-general’s reports in 2019 and last month detail these and must be followed up and investigated. We need to know about the wrongdoings that led to it, deal with them and learn from them.

This should not be repeated again, even though our history tells us otherwise. At the root of it all is an opaque, malfunctioning tendering process that breeds corruption. It must be overhauled and made transparent. But that’s another story.

In this article I will delve into how to recover the project. What can be done to turn it round and, in the process, go from catastrophe to salvation for Cyprus electricity users.

To do that we need a systematic approach. What is the purpose of the project? It is not just to build a terminal at Vasilikos for the import of LNG (liquefied natural gas). The ultimate aim is to switch power generation from ‘oil to natural gas’. The project will be completed the moment EAC and the two independent power producers, PEC and Paramount Energy, start burning natural gas to produce electricity. That requires:

  1. The Vasilikos LNG import terminal and the FSRU (floating storage regasification unit)
  2. LNG purchase contracts to be in place
  3. The gas pipelines to connect the LNG terminal to the power plants
  4. Readiness by EAC to switch power generation to gas

The ‘oil-to-gas’ project will be completed only when all these steps are completed and become fully operational. Step 3 has become the critical link.

Gas pipelines to connect the LNG terminal to the power plants

These are the responsibility of the Natural Gas Public Company (Defa) and it is another debacle. So far neither the pipeline design/consulting services contract nor the construction contract have been awarded. The second, of course, is contingent on the first. The design contractor is also responsible for the preparation of the terms of the tender for the construction of the gas pipelines.

The tendering process for the design contract has stalled due to protracted disputes, and there is an increasing likelihood that it may have to be cancelled and repeated. This is yet another case where the tendering process is failing.

What is also called into question is why we have ended up in this situation, given that the criticality of the pipelines was known since the ‘oil-to-gas’ project was conceived.

Even if the tender-award disputes are somehow resolved and the contract is awarded during the next few months, it is now unlikely that the gas pipelines will be in place, fully commissioned and ready to deliver gas to EAC before the end of 2025.

This, in effect, is the new, and earliest possible, end-date of the ‘oil-to-gas’ project, even if the LNG terminal is up and running earlier. It is imperative that steps 1, 2 and 4 are completed before this date.

The cost implications, of course, are horrendous. The original ‘oil-to-gas’ project completion date was September 2022. That means over three years delay, burning costly oil for power generation and paying for higher emission allowances, that could cost €300million. And if we add the cost of the LNG project overrun, the total cost could exceed €0,5billion, all to be paid by the Cypriot electricity consumers.

The Vasilikos LNG import terminal and FSRU

Leaving aside the issues of how this project was awarded and the contractor’s lack of LNG project experience – that should be investigated separately – the key issue is to recover and complete it. We are where we are and we need to follow the least damaging way forward.

The project is not progressing and the dispute between Defa, its subsidiary Etyfa and the contractor, CPP-Metron Consortium Ltd (CMC), has escalated, with CCP launching a €200million claim at an arbitration court in London on 17.2.2023 – the original construction contract was €289million.

Astonishingly, while, until recently, Defa and the ministry of energy were reassuring the public that the project was scheduled for completion by July 2024, it has actually been in dispute since February 2023. This was admitted only when rumours of a claim led to questions being asked by the media.

Once it became public, Defa/Etyfa were quick to dismiss CPP’s claim. However, how valid this is will not be decided in Cyprus but by the arbitration court in London.

Given that the credibility of all those involved in the project so far, including Etyfa’s project management consultants, is very low, it will be foolish to rely solely on their views.

A question that begs to be asked is: what have Etyfa’s consultants been doing? Their role should have been to manage the project on behalf of Etyfa and advise Etyfa on any problems and how to ensure that the project is proceeding to plan. Given where we are, either they did not do a good job or Defa/Etyfa did not heed their advice, or both.

Before deciding on what action to take, the energy minister should immediately appoint independent experts – with the required technical knowledge – to advise him on the actual state of the project, on how serious CCP’s claim is, how likely it is to succeed – even in part – in London, and how to proceed to ensure the earliest possible completion of the ‘oil-to-gas’ project.

In its press release earlier this month, CCP referred to delays and costs incurred because of Etyfa not fulfilling its obligations and due to Covid-19, that Etyfa changed the nature and scope of the project and continuously interfered with key design and procurement activities, and repeated failures of Etyfa to meet its contractual obligations to make correct or timely payments.

The minister should seek independent expert advice, as a matter of priority, on the validity or otherwise of all these claims. In addition, the experts should talk to CCP directly to ascertain their views. They should then make recommendations on ways out of this morass and how best to complete the project.

Depending on the outcome and the experts’ advice, it should then be possible to make informed decisions on the way forward, including staying with the same contractor.

Confrontation and dismissal of the contractor is fraught with risks: CCP may not depart willingly and it still has possession of the FSRU and the Vasilikos site. Taking possession of these, selecting and putting in place a new contractor will delay the project even further and add more costs. Also, how willing will a new contractor be to accept CCP’s work? What are the certification/insurance implications? It may also lead to further claims by CCP and will make an amicable resolution of the claims unlikely.

Our priority should be to achieve a least-cost solution and make sure that all four steps above are completed before the end of 2025. With gas prices expected to start coming down by next year, due to large amounts of new LNG entering the market, that’s where salvation for Cyprus electricity users will come from.

 

Dr Charles Ellinas, @CharlesEllinas, is a senior fellow at the Global Energy Centre of the Atlantic Council

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