THE GOVERNMENT must abandon negotiations for the supply of natural gas immediately and adopt a “bridging solution” instead, allowing for the speedy supply of gas for a short period until Cyprus can exploit its own “massive” reserves of hydrocarbons, said former commerce minister Antonis Michaelides yesterday.
Failure to do so will delay the supply of natural gas for at least four years, possibly leading to electricity prices “sky-rocketing” in the future while “enslaving” the state to the long-term purchase of gas from third parties despite obtaining access to its own deposits.
Michaelides, who was commerce minister between 2006 and 2008 when the procedure for bringing natural gas to the island was formulated, told the Sunday Mail yesterday that parliament’s decision to interfere in the process in 2007 was a big mistake which needs to be rectified.
In December 2007, parliament with the vocal support of DISY and the three coalition partners in the Tassos Papadopoulos government, DIKO, AKEL and EDEK, passed a legal amendment tying the state to importing Liquified Natural Gas (LNG) to a land-based terminal while giving the Electricity Authority of Cyprus (EAC) exclusive rights to import that gas.
The bill effectively excluded other options such as the supply of compressed natural gas (CNG) which does not require a costly land terminal, or LNG via a floating terminal.
Only DISY’s Averof Neophytou and EDEK’s Marinos Sizopoulos abstained from voting.
Ironically, this bill reversed the coalition government’s earlier decision in June to launch an open tender process without any specifications on what technology to use in bringing natural gas to Cyprus.
“The three basic criteria in the cabinet decision to launch an open tender involved the date of supply, the price, and guarantees on uninterrupted supply. Why should we be interested in anything other than these three criteria, whether they bring it on a floating unit, land terminal or from the heavens?” said Michaelides.
“This solution was not in the EAC’s interest because it knew that other companies would win the bid, not those offering a land facility, which had two serious weaknesses. First, the date of supply was much more prolonged – they need four, five years after taking a decision to finish the facility – and second, the cost,” he added.
The bill passed by parliament gave the EAC monopolistic rights on the import of natural gas and
led to the public natural gas company, DEFA, to conclude negotiations with three main companies for the supply of LNG to a land terminal to be built on the Limassol coastline for 20 years. The estimated cost of the terminal is €800 million, with the burden being shared by a strategic investor to be chosen by the EAC.
DEFA is part-owned by the state (54 per cent) and part-owned by the EAC (46 per cent).
The conclusion of DEFA’s negotiations with the three candidates has dominated the news day in day out this last week with some of the same parties that voted for the 2007 law now calling for the government to examine other options before it.
According to Michaelides, the open tender process approved by the cabinet would have attracted bids for floating units that could have provided offshore re-gasification and storage facilities within two years of signing the contract.
Instead, this open process hit a snag when DISY accused Papadopoulos of the “scandal of the century”, suggesting that his family members had links to one specific French company bidding for a floating unit. AKEL, meanwhile, also supported the EAC’s preference for a land terminal, given its general philosophy in favour of state monopolies. Even the president’s party DIKO and coalition partner EDEK backed the “unconstitutional” – according to Michaelides – bill to bind the state to the supply of LNG through a costly land terminal.
Michaelides argued that with presidential elections coming up in February 2008, all parties factored into the equation the EAC employees (and their votes), who were dead against a floating unit.
The former trade minister said the EAC felt threatened that with liberalisation of the energy market under EU rules, it would lose its advantage in the market.
“All those who want to secure state monopolies, regardless of the result on the cost of electricity production, favoured the construction of a land terminal at any cost using the argument that it’s the safest option,” he said.
Michaelides further argued the EAC had to guarantee a return on its investment in a land terminal, which could cost up to one billion euros. In other words, it has to be able to tell its strategic investor that it can secure 20-years supply of natural gas.
The recent public debate has centred on the fact that such a contract ignores Cyprus’ own hydrocarbon reserves which could be available within five years. Hence, the calls for DEFA to halve the duration of the contract with the preferred supplier, Royal Dutch Shell.
“And I laugh when I hear people being clever, saying they will reduce the contract’s duration to ten years, without referring to the land terminal, which they consider a given. It’s nonsense.
“If Shell accepts such a reduction, it will increase its price and bid to such a level that for the EAC to make a return on its investment in the land terminal, electricity prices will rocket sky high. And they know this,” he said.
Asked to comment, EAC spokesman Costas Gavrielides said yesterday: “We have not examined this scenario. The EAC did what the state instructed us to do. We did our part and await instructions on how to proceed.”
Michaelides argued it was not too late to change the process as the government has no obligation to any company.
“Are you going to bankrupt the state because you don’t want to upset Shell when you’ve found your own gas? Is there a reason to build a land terminal by 2015 for one billion euro and enter into a 20-year contract?
“We’re talking about buying gas from third parties until 2035 while in five years, before the terminal is probably even built, we’ll have our own reserves available,” he said.
He called on the government to scrap the current process and introduce a “bridging solution” as Israel has done.
Israel launched a state tender in 2009, seeking the supply of gas for five years through an offshore terminal until it could exploit its own hydrocarbon reserves. “Because it knows that this is the only way to get gas quickly,” he said.
“We need to stop this nonsense where a few people are negotiating a multi-billion euro project and immediately launch an open, transparent tender process which does not specify how the gas will come to Cyprus.”
The cabinet is expected to make a decision on DEFA’s conclusions regarding the long-term supplier of natural gas in the coming weeks.
