The Cypriot LNG debacle continues [Global Gas Perspectives]

The Chinese consortium tasked with building Cyprus’ first LNG import terminal has withdrawn from its contract with the island’s government, in the latest in a great many setbacks for what has been dubbed the country’s costliest ever energy project.

The CPP-Metron consortium cited the Cypriot government’s failure to pay for work finished this year, despite assurances given during a March meeting chaired by President Nikos Christodoulides, the Associated Press (AP) reported on July 18. “No contractor can be expected to work indefinitely on credit,” the consortium said. “That was not the deal CMC signed up to.”

Cypriot President Nikos Christodoulides responded to the development on July 22, implying that the Chinese consortium was to blame for the project’s problems.

“The first thing I want to state with absolute certainty is that this particular project should have never been given to this company,” he told journalists at an event in Nicosia. Yet he insisted that “the project will be implemented.”

Cyprus has been planning an LNG import terminal since the 2010s, and the partnership with CPP-Metron is no less than the fourth attempt to get the project off the ground.  As an island, Cyprus is isolated from other regional power systems and is the only member of the EU not to have a connection with other bloc states. The country generates electricity using heavily fuel oil, resulting in Cypriot consumers paying some of the highest prices for power in Europe, as well as significant emissions, which increase bills for consumers further because of EU carbon fines. The government has estimated the LNG imports could reduce  power generation costs by 15-25%, and curb Cyprus’ carbon footprint by 30%.

So, the project makes clear economic and environmental sense. The question therefore is why it seemingly cannot reach completion.

Concerns from the start

Cyprus’ state-owned Natural Gas Public Company (DEFA) and its subsidiary Natural Gas Infrastructure Company (ETYFA) awarded a contract worth €300mn ($326mn) with the CPP-Metron joint venture in December 2019 for the Vasiliko terminal. In a report released this January, Cyprus’ Audit Office noted irregularities in the tendering process that led to this award, and led to delays and greatly inflated costs. Specifically, it pointed to a lack of transparency, serious breaches of public procurement legislation including alleged favouritism – two of the three consortia that bid for the contract were excluded for compliance reasons. There were also quality and safety issues regarding the floating regasification and storage unit (FSRU) design, according to the audit office.

Under the original contract, the project was to take 22 months to complete. But there were numerous delays – in part because of the COVID-19 pandemic – and the main infrastructure work did not start until 2023. Since 2019, consortium leader CPP – which had no previous experience in LNG projects, has submitted four delivery dates for the terminal: September 2022, July 2023, October 2023 and July 2024 – all of which were missed. What is more, the consortium demanded a further €200mn to finish the job last year, a sum that Cyprus has refused to pay. This led the consortium to take the matter to an arbitration court in London.

There is also the issue of the Prometheus FSRU that is to be deployed for the terminal. The unit is currently waiting in COSCO’s shipyard in Shanghai. Its conversion from an LNG carrier and subsequent sea trials were completed last year.

According to media reports, CMC is demanding a further €32mn to hand the vessel over. What happens next is unclear. Certainly, Cyprus will want to avoid a costly arbitration settlement without even getting the FSRU that it paid for. In this case, the government would essentially have to start the project all the way from the beginning again, at even greater cost and delays. If the FSRU is received, other parts of the terminal will still need to be finished.

It is not only Cypriot taxpayers on the line for the project’s expense. The EU provided the project with a €101mn grant through its Connecting Europe Facility (CEF), while the European Investment Bank approved a €150mn loan. The European Commission told Cypriot media on July 24 that it did not usually comment on business decisions, but said it was reviewing the potential impacts on project funding from CPP-Metron’s exit.

“The Commission is committed to ending the energy isolation of Cyprus and has supported this project politically and financially,” a spokesperson said.

If the project fails and these EU funds are squandered paying for the arbitration settlement and other sunk costs, Cyprus will struggle to receive such support a second time. There will be much greater scrutiny not only because of the project's mismanagement, but also because of the EU’s now less favourable position on natural gas investments.

Glacial pace offshore

Delays and setbacks at the LNG import project mirror Cyprus’ glacial pace in developing its own offshore natural gas resources. A number of moderate-to-large sized gas discoveries have been made off the island’s coast, the first of which was the 4.5 trillion ft3 (127bn m3) Aphrodite field in 2011. But bringing these resources on stream has been stymied by difficulties finding a suitable route to market, and disagreements between operators and the government over development concepts. Building a pipeline from any of these discoveries to Cyprus has long been dismissed as unfeasible because of the low level of potential demand on the island.

Aphrodite’s operator Chevron and the Cypriot government reached a tentative agreement on Aphrodite’s development in December last year, but that deal soon broke down, and negotiations grind on. The original concept devised by former operator Noble, which was bought by Chevron in 2020, called for a floating production unit (FPU) to enable the export of liquids via tanker, with gas delivered to Shell’s West Delta Deep Marine processing facilities offshore Egypt. From there, the gas could be delivered to Egypt’s domestic market to Shell’s Idku LNG export terminal. Chevron later suggested having only three production wells instead of the earlier planned five. 

Chevron then submitted another optimised development plan earlier this year, the details of which have not been divulged, but that was deemed unacceptable by the Cypriot government.

The government is also leaning towards exports to Israel, where the gas could also be liquefied if Chevron, the operator of the country’s Leviathan and Tamar field, goes ahead with a plan to build a floating LNG terminal. That would require the construction of a 300-km pipeline. This is an option considered for other fields beyond Aphrodite, including Eni’s Cronos discovery.

At the very soonest, though, Cypriot gas is not expected to reach the market until at least 2027 – and that is according to the optimistic expectations of the government.