* of Charalambos Greek
The debate this week on the intricacies of the liquefied natural gas (LNG) import project is heating up. All the choices regarding the way forward are difficult. But perhaps now is the time to make the difficult choices before we go so deep that not only will we not be able to get out of this mess later, but we will end up paying for the consequences of cost and schedule overruns in the next decade.
None of what I have heard so far gives me confidence that the problems I have already posed will be overcome. Generalized, optimistic, unsubstantiated statements that everything is going well, and temporary corrections, are not the solution.
With the on-site work at Vasilikos not even really started and the engineering design not yet completed – let alone delays with the conversion of the LNG floating regeneration unit (FSRU) – completion by July 2023 can only be considered optimistic , with 2024 being more than possible. DEFA and its contractor, CPPE, do not appear to have real control over the completion and cost of the project.
The reported cost overrun of € 100 million is likely to be real, due to schedule overruns, rising costs of materials and equipment, as well as supply problems. Someone will pay for them. I doubt the contractor will absorb all or even a large part of it.
CPPE appears to be blaming ETYFA and the pandemic for most of the delays, denying responsibility for the additional costs. Any hasty settlement that may be reached now is unlikely to be final until the full extent of the problem is clarified, probably much later in 2022, when the claims are likely to escalate but it will be too late – time and control will not be forthcoming. to be in our hands now.
As a result, in the end, the EAC may find itself in the awkward position of having no choice but to buy expensive natural gas from DEFA, leading to high electricity prices, while – if the electricity market really opens up to competition in October – it will must compete with low-cost renewable energy sources (RES) with its hands tied behind its back. Under these conditions, not only will its market share decline, but its future may be undermined by uncompetitive, high electricity prices. Even more so if the company is not allowed to compete for a market share of RES and electricity storage.
The expected 25% reduction in emissions, by converting electricity generation to natural gas, is not a panacea if the cost per unit of this natural gas increases significantly as a result of the need to recover the high, final cost of the LNG import project – despite the € 101.5 million grant from the European Commission. In addition, given the project delays, the cost of purchasing emission allowances – which is expected to exceed € 100 / tonne this year – will be much higher, eroding any potential benefits from this project. Statements that this project will bring annual benefits of € 1.5 billion to the state are, to say the least, misleading and not based on substantiated facts.
These are unpleasant developments. Radical new options must now be considered.
As a first step, the government should appoint an international expert, or experts, to FSRU conversions and LNG import terminals, to conduct a rapid independent project review and advise on project recovery and schedule and actions required to achieve them.
Possible options on the way forward include the following.
The first, and preferably, step should be to reach a firm agreement with the contractor on a revised but consistent project schedule and budget – if possible – without compromising state interests. Any further delays, omissions or additional costs should then the contractor undertake to make up for at his own expense. However, despite assurances that “efforts will be made to deliver the project even earlier than July 2023”, it is doubtful whether CPPE would agree to such a contractual commitment.
There is talk that the government is considering changing, and possibly weakening, the terms and conditions of the contract in favor of the contractor, but this is likely to jeopardize its position – especially when it comes to dealing with claims at the end of the project – and must be rejected. Another reason is that such a decision could be legally challenged by the excluded consortia – which were not given the same opportunity at the tender stage – seeking compensation.
Another option, depending on the contract between DEFA and CPPE, is to force the contractor to engage a project management team with proven experience in delivering such projects based on the revised schedule and budget.
As a last resort – if all else fails – the government should consider “reducing its losses” by abandoning the project altogether, opting to lease an FSRU, in the same way that Egypt did with great success in 2015. to overcome the problems of gas shortage.
If such a choice is made in the first quarter of this year, LNG deliveries could begin before the end of 2022. The lease agreement could be for a period of ten years, with the possibility of annual renewal. Such an agreement could also leave the door open for Aphrodite to grow in regional markets, including cheap, direct, gas supplies to Cyprus.
A comparative assessment of the total cost of abandoning the project now – before additional costs arise – compared to the FSRU lease option will show that the latter is a sensible solution.
Unfounded, hasty, decisions driven by political expediency and not supported by techno-economic data, risk ending up costly and, in the end, without the expected benefits.
This project has a long and probably labyrinthine path. Hasty compromises at this stage could leave the state exposed to future growing problems that it will be less able to control if July 2023 is not reached and costs rise further. We hope that the project will go well, but the experience so far shows attention. We can not leave it to hope.
* Dr. Charalambos Ellinas is a Senior Fellow of the Atlantic Council Global Energy Center.