LNG import blues

This is becoming the recurring theme of all major projects in Cyprus. Almost invariably they all run into problems, run out of time and costs sky-rocket. The antiquated methods employed for launching, conducting and awarding major tenders, combined with rampant corruption, are the main culprits. These need urgent overhaul. What led to the debacle of the LNG import project at Vasilikos, and those responsible for it, must be investigated and we should draw lessons for future tenders.

But in this article, I want concentrate on the recurring, and deepening, problems of the project. Market research published earlier in the week by Phileleftheros Oikonomia brought this home. Not surprisingly, it found that the cost of energy is the second most worrying problem for Cypriot consumers.

And yet this could be resolved at a stroke. The moment EAC is able to switch power generation from oil to natural gas, electricity prices will be reduced by at least one-third, with annual cost savings close to €300-€400 million, as I showed in a recent article in Cyprus Mail. With every year of the project remaining unfinished, Cyprus loses this amount. You might think that this would spur the government into immediate action. After all it would an easy tick in what so far has been an intractable problem.

But, instead, Cyprus and the Chinese contractor CPP have embarked on a public tit-for-tat, with claims and counter-claims and leaks to the press, with each side claiming to be contractually right and the other to be wrong, with no solution in sight.

The latest was the meeting at the presidential palace on Tuesday that ended-up with hardened positions, with the Chinese ambassador seemingly in full support of CPP’s position. This should raise concerns. But the problem is not diplomatic or political. It is techno-economic.

A badly conducted tender with unclear terms of reference and supporting data, handed-over without competition to a contractor with no experience of such projects, has led to the current situation where the project is not progressing. Moreover, last year the contractor took Cyprus to an arbitration court in London claiming €200million additional costs.

Conversion of the ship to a floating, storage and regasification unit (FSRU) at the COSCO shipyards in China, working in cooperation with Lloyds Register, is almost complete. But the jetty and LNG import infrastructure at Vasilikos has some way to go, with CPP claiming that it is 50 per cent complete.

I am glad to hear the President say that the project is not ‘shipwrecked’ and that “we have a plan that must be implemented.” It is far too important to Cypriot energy consumers to let it falter. But this may require thinking and acting ‘outside-the-box’.

A frenzy of public announcements

Stung by news that Etyfa may be scheming to terminate the contractor, CPP has gone into a frenzy of public announcements, claiming that “the project has reached a crisis point.” The company claims that Etyfa has made major changes to the terms of reference -especially involving the addition of cryogenic technology to support LNG exports- that “it has been persistently violating its payment obligations under the contract” and that this “remains the root-cause of the project’s problems.” CPP called the situation unsustainable.

CPP has been making proposals and counter-proposals on ways, it says, “to de-escalate the situation, unlock the impasse and resolve all outstanding issues,” warning that “the choice of a successful or failed project is entirely in the hands of Cyprus.” Strong words that have taken the confrontation between CPP and Etyfa to a new level.

CPP says it has been forced to react in order to defend itself against ‘trial-by-media’ in response to “numerous articles in the press and other media that have hosted statements by Etyfa and the government regarding the situation and delays in its work.”

Etyfa expressed astonishment at CPP’s claims and rejected these as “completely untrue,” with the government declaring that “we will not be blackmailed” and the energy minister stating that “our silence should not be considered as weakness.”

It is not clear who is right or who is wrong. In all likelihood there are rights and wrongs on both sides. The concern is that if this situation goes unchecked, it does not bode well. It will certainly not contribute to completion of the project.

The priority must be completion of the project

Even though the company could struggle to finish the project, it must be completed because we don’t have many other options to bring the cost of electricity down. If we sever the contract with CPP, the arbitration issue will not go away and the risk for the €200 million claimed by the company will remain. At the same time, finding another experienced contractor, ready to take the risk of finishing a half-finished project is not easy, and if such a company is found, it will take time and it will be costly.

However, all options must be considered. The first -and preferred- is to find a way to move forward with the present contractor. That will require a degree of compromise from both sides. But with positions now being aired publicly and becoming increasingly entrenched is this still possible?

The retention of an independent expert company to review where the project is and assess what needs to be done to complete it, and capable of giving authoritative and credible advice to the government, could point the way to get out of the present morass. That expertise does not lie with those currently involved in the project.

If public procurement constraints in Cyprus cannot handle this, it may require intervention by the President and the council of ministers to circumvent them.

If this fails, then all other options must be considered.

The government says it has a Plan B, probably based on stretching the provisions of the current contractual arrangements, relying on use of CPP’s subcontractors to complete the project without CPP. But is this really viable?

There could also be a Plan C, giving-up on the current contractor, severing the arrangements, and taking us in a different direction but still ending-up with facilities to import LNG at Vasilikos. 

But these additional options require getting possession of the FSRU and are fraught with difficulties. Whichever way Cyprus chooses to go, the arbitration proceedings in London will continue, with Cyprus likely to incur additional costs and more delays.

Nevertheless, all possible options must be considered no matter how difficult they could be and for this we need independent, authoritative, technical advice. The mess into which the project has descended will be difficult to resolve, whichever way we go. However, based on cost-benefits, the priority must be to find a way to continue and complete the project, as soon as possible.