The rejection of Vitol’s bid to supply the island with natural gas for electricity generation was “hardly surprising”, a source has told the Cyprus Mail.
At a Sunday meeting at the presidential palace, chaired by President Nicos Anastasiades and attended by the Natural Gas Public Company (DEFA), EAC and energy ministry officials, it was deemed that Vitol’s final offer was not economically beneficial and would be rejected.
A formal decision by DEFA, and then the Cabinet, to scrap the tender was expected soon.
DEFA, which initiated the tender, is by law the sole importer and distributor of natural gas in Cyprus. It could not immediately be reached for comment.
A media-relations officer at Vitol responded to a query via email, saying: “We don’t discuss client business as a matter of policy.”
But according to a source knowledgeable about the meeting, the reasons for declining the preferred bidder’s offer were “essentially the same” as in the past.
“Namely, the relatively small quantities of gas which DEFA would purchase, which did not justify economies of scale for the supplier given the massive investment needed.
“I don’t think the outcome should come as a major surprise…we’ve see this movie before,” the source added.
He confirmed press reports that the deal-breaker was Vitol’s latest proposal to substantially increase the volume of gas supplied to Cyprus.
Media reports said Vitol proposed a 25 per cent increase in the gas volume, in order to recoup its investment.
But this contravened the terms of the tender and if accepted would have landed the government in hot water with the other bidders who would likely sue in court.
Even without the increased-volume proposal, Vitol’s offer did not substantially lower the cost of electricity generation through natural gas, which was the professed purpose of the so-called ‘interim solution.’
The difference in the cost of electricity generation, compared to the current cost using heavy fuel oil, was “borderline”, the same source said.
It’s understood similar considerations led to the scrapping of the previous tender, in September of 2013. According to a Cyprus Mail report at the time, the final, all-in price by Russia’s Itera would then have yielded cash savings of around 6 per cent.
This fell short of the target then set by the government – a reduction of at least 10 per cent in electricity bills.
This time, Vitol’s offer is said to be about only 1 to 2 per cent ‘better’ than the current cost of generating electricity.
However, it’s understood that this relates to the generation cost for the state power company, and not necessarily on the consumer end.
“Naturally, this is primarily due to the fact that global fuel prices have dropped sharply since 2013,” said the source.
Whereas he was unable to confirm what another source told the Business Mail – that the government has now abandoned the ‘interim solution’ – he said that “this makes sense.”
“Any more delays, and time-wise importing natural gas via the tender would overlap significantly with the projected production of natural gas from our own offshore reserves, that is to say, the Aphrodite field.”
The DEFA tender is being scrapped some two years after it was issued in January 2014. The current tender validity period, extended for the ninth time, is set to expire on February 12.
The tender called for the supply of between 0.7 and 0.95 billion cubic metres of natural gas annually to the Cypriot market, for a minimum of five years, through two delivery routes. One route would begin supplying gas in early 2016 and the other no later than the second half of 2017.
Cyprus is reliant on heavy fuel oil imports for electricity generation, and had wanted to switch to the cheaper natural gas until its own offshore reserves come on tap.
The political decision to transition to natural gas was taken back in 2002.
Energy Minister Giorgos Lakkotrypis has cited 2020 as the earliest date for production of Cypriot natural gas – a part of which would be diverted to the domestic market – however 2022 appears to be a more realistic date.
In a statement, main opposition AKEL said the latest impasse meant the country would remain without natural gas for the next six years at least.
While noting the bidding companies’ “excessive demands”, the party laid the blame for the development on the government, which it urged to “abandon its policy of inaction, inertia and improvisation and to work systematically and with determination toward developing the [Aphrodite] reservoir.”
