Charles Ellinas Cyprus quest for interim gas imports has come to an end

Cyprus quest for interim gas imports has come to an end

Two years after the latest attempt to import gas to Cyprus as an interim solution until Aphrodite comes on line the bid has come to a dead end. This was decided at a meeting at the Presidential Palace on Sunday. The key participants were the Minister of Energy, the regulator CERA, the gas company DEFA and the electricity company EAC.

The government decided yesterday to reject as unfavorable the proposal of the Dutch company Vitol. One of the reasons given is that Vitol demanded to close the deal with gas volumes increased by about 25% higher than the originally proposed quantities in their offer. It is understood that such increased volumes would generate increased revenue and profit for Vitol, but could increase Cyprus’ risk of being left with quantities of gas it could not use, in a ‘take-or-pay’ contract. Moreover, there could be a risk that other tenderers would argue that such a change violates the conditions of the tender in favor of Vitol.

In any case, it is understood that DEFA’s tender evaluation did not demonstrate any benefits to Cyprus. This is because the low oil price would negate any savings in the production of electricity from gas. As a result, at the meeting at the Presidential Palace the proposal by Vitol was deemed not to be sufficiently attractive to Cyprus.

There were views that the use of gas solution would allow faster adaptation of the Cypriot electricity generation and other sectors of the economy to a greener fuel, and facilitate compliance with COP21 commitments. However, the Vitol’s revised proposal led to the rejection of the intermediate solution.

Some believe that this is linked to the expectation that a submarine cable from Israel to transfer cheaper energy would materialize, given the commitment to this project during the recent Cyprus-Greece-Israel summit in Nicosia. There is also hope of greater penetration of renewable energy sources in the energy balance. The problem is that both the cable and renewables are still on the drawing table without clear plans for implementation. The commercial viability of the cable is still to be demonstrated.

The fall-back position is of course to wait for the future development of Aphrodite. However, with such plans still unclear it may be early 2020s before the switch from oil to gas for power generation in Cyprus happens. That would make compliance with COP21 commitments by 2020 that much more challenging.

The process to bring gas to Cyprus for power generation started in 2005 when Golar applied for a license to construct and operate a floating electricity power plant (FPGP) on a barge off the coast of Cyprus. Eleven years later and seven attempts Cyprus still does not have an answer to this ‘interim’ gas supply quest. In 2005 Golar noted that the delay was due to lack of overall LNG strategy. Eleven years later this is still the case.

The stark conclusion from this is the lack of overall strategy and planning and the reactive approach to the issue. It also left most companies responding to the various attempts to import LNG to Cyprus very unhappy with the process, with many deciding not to bid such projects in Cyprus again due to the lack of credibility. With plans for the development of Aphrodite still to be finalized, the timing of availability of gas to Cyprus for cheaper power generation is still unclear.

Dr Charles Ellinas

Nonresident Senior Fellow – Eurasian Energy Futures Initiative - Atlantic Council