For years, public debate in Cyprus has focused almost entirely on the international price of LNG. Every discussion about importing natural gas eventually arrives at the same question: what will LNG cost?
It is an understandable question – but increasingly the wrong one.
The price Cyprus pays for LNG is only one component of the cost of supplying gas to its power stations. Once the cost of financing the import infrastructure, settling the arbitration, operating the terminal, recovering capital investment, transporting and regasifying LNG is included, the economics change dramatically.
In addition to when, the real question is therefore not whether LNG costs $8/MMBtu, but what the gas will cost by the time it reaches EAC and PEC power stations.
Following the reassessment of the Vasiliko LNG import project presented in the previous article [see below], this question deserves careful examination.
LNG is only the starting point
An LNG cargo arriving in Cyprus does not go directly to a power station. It passes through an entire value chain.
The LNG must first be purchased on the international market and delivered to Cyprus. It is then unloaded into the floating storage and regasification unit (FSRU) Prometheas, stored, regasified, transferred ashore through high-pressure pipelines, metered, compressed where necessary and finally delivered to power stations.
Each step adds cost. The commodity price of LNG is therefore only the beginning.
The full cost chain
Assuming an international LNG price of $8/MMBtu, recovery of project capital would be between $5.5–6.5/MMBtu, operations and maintenance between $1.0–1.2/MMBtu, financing and insurance between $0.5–0.8/MMBtu and cargo logistics and operational inefficiencies, $0.5–1.0/MMBtu. This brings the cost of delivering gas to power stations to between $15.5–17.0/MMBtu.
This means that the infrastructure costs are almost as large as the cost of the LNG itself. This is highly unusual by international standards. The reason lies in the economics of the project rather than the technology.
The utilisation problem
The Vasiliko terminal was designed around an FSRU capable of regasifying approximately 5 billion cubic metres of gas (bcm) annually. Cyprus, however, is expected to consume only about 0.7bcm/yr for electricity generation in the foreseeable future.
That means the terminal would operate at roughly 15 per cent of its technical capacity.
From an engineering perspective this presents no serious difficulty. From an economic perspective it is a major problem.
Whether the terminal processes 0.7bcm or 5bcm each year, it still requires: operators, maintenance, inspections, safety systems, insurance, management and financing.
These costs are largely fixed. They do not reduce simply because less gas passes through the terminal.
Consequently, every MMBtu delivered to consumers carries a disproportionately high share of the project’s capital and operating costs.
This is the single biggest factor affecting the economics of imported LNG.
Why throughput matters
Annual throughput terminal add-on is estimated at $7-8/MMBtu for 0.7 bcm/year and $5-6/MMBtu for 1.0 bcm/year.
The infrastructure itself changes very little. Only the volume of gas increases. As throughput rises, the fixed costs are spread over more gas and the cost per unit falls rapidly.
Unfortunately, Cyprus is simply too small a market to utilise the terminal efficiently.
The Prometheas issue
The FSRU Prometheas is another factor affecting operating costs.
Although technically suitable for Cyprus, it has an LNG storage capacity of about 137,000 cubic metres, smaller than many of today’s LNG carriers, which increasingly carry 170,000–174,000 cubic metres or more.
This does not prevent operation. However, it reduces commercial flexibility.
Cyprus may need to purchase smaller cargoes or arrange partial deliveries. Such cargoes generally attract higher shipping costs per unit of gas than those delivered to large import terminals handling continuous volumes.
Because Cyprus would import only eight to ten cargoes annually under a 0.7 bcm market, it would also have less purchasing power than larger LNG importers.
These operational penalties are relatively modest – perhaps $0.5-1/MMBtu – but they reinforce the effect of low utilisation.
The hidden cost of capital
Perhaps the biggest change since the project was approved is the level of capital that now needs to be recovered.
The original business case was based on an investment of around €300 million.
As discussed in the previous article, a realistic risk-adjusted assessment now suggests that total project costs could approach €1.0-1.2 billion once completion costs, arbitration, financing, commissioning and contingency are taken into account.
That increase fundamentally changes the economics.
Instead of recovering €300 million over the life of the project, consumers may ultimately need to recover three or four times that amount through the gas tariff.
The consequences become particularly severe when annual throughput remains below one billion cubic metres.
Clearly what matters as far as the electricity price is concerned, is not the price of imported LNG, but the price of gas as delivered to the EAC and PEC. I am not sure this has ever been calculated using realistic risk-adjusted project costs.
Part Three in this series of articles will convert these gas costs into electricity generation costs, compare them with oil-fired generation at Brent $70/barrel, assess the implications for consumers, and explain why the original expectation of significantly lower electricity prices may no longer hold.
This is Part Two in a series of three articles on LNG imports. Article 1 below
CAN VASILIKO LNG IMPORT PROJECT STILL ACHIEVE ITS ORIGINAL OBJECTIVE?
When Cyprus approved the Vasiliko LNG import project in 2019, the rationale appeared compelling. Importing natural gas promised to reduce electricity prices, lower carbon emissions, improve security of energy supply, diversify the country’s fuel mix and enable compliance with increasingly stringent European environmental legislation. It was also expected to facilitate the liberalisation of the electricity market by providing a cleaner and more competitive fuel for power generation.
Seven years later, however, the question facing policymakers is no longer whether Cyprus needs natural gas. It almost certainly does. The more fundamental question is whether the Vasiliko LNG import project, as it now stands, can still deliver the benefits that originally justified its construction.
This is no longer simply an engineering project. It has become a complex combination of construction, legal disputes, financing challenges and commercial risk. More importantly, the project that Cyprus is trying to complete today is very different from the one approved in 2019.
It is therefore time to assess the project not on the basis of what has already been spent, but on whether completing it today still represents the most economic and strategic decision for Cyprus. This is what I will do in a series of three articles.
Cyprus still relies almost entirely on imported oil products for electricity generation. This leaves consumers exposed to volatile international oil prices and rising EU carbon costs. Introducing natural gas would reduce CO₂ emissions by around 30 per cent compared with heavy fuel oil and significantly improve the efficiency of electricity generation through combined-cycle gas turbines already installed at Vasiliko and by the private power producer PEC.
Security of supply also remains a legitimate concern. An LNG import terminal would diversify fuel sources and reduce dependence on imported oil while providing flexibility to purchase LNG from different suppliers.
The original project envisaged completion within about two years at a total cost of approximately €300 million.
Today, following the termination of the contract with the Chinese-led CPP consortium, the project is effectively being restarted under a different contractual framework.
The floating storage and regasification unit (FSRU) Prometheas has been completed and remains in Malaysia awaiting deployment. The onshore facilities at Vasiliko are only partially completed. The project consultant, Technip Energies, has been carrying out a detailed assessment of the existing works to determine what can be retained, what must be modified and what remains to be constructed.
At the same time, arbitration proceedings continue in London between the Natural Gas Infrastructure Company (Etyfa) and CPP. The latter maintains that delays resulted largely from owner-related issues, while Etyfa has argued that the contractor failed to meet its obligations. The outcome of these proceedings remains uncertain and represents one of the largest financial risks facing the project.
But, the more important issue for Cyprus is understanding how these developments affect the future economics of the project.
Contrary to some public perceptions, the engineering challenge itself is probably not the project’s greatest problem.
Based on information currently available, no evidence has emerged of fundamental defects in the overall concept or major structural failures requiring wholesale reconstruction. Much of the remaining work involves completing the jetty, mechanical and electrical systems, pipelines, instrumentation, safety systems and integrated commissioning.
Although technically complex, these are standard engineering activities carried out routinely on LNG import terminals worldwide.
The greater risks lie elsewhere.
Replacing the original EPC contractor requires new procurement procedures, detailed technical verification of partially completed works, interface management between multiple contractors and the resolution of contractual responsibilities for existing installations.
Each of these activities introduces uncertainty, additional costs and, most importantly, delays.
The government has repeatedly expressed confidence that the project can be completed well before the end of the decade.
While this remains possible, the official timetable appears optimistic.
The preparation of new tender documents has already taken considerably longer than originally expected. Once tenders are issued, contractor selection, evaluation and contract award are likely to take many months. Cyprus’ procurement system also allows unsuccessful bidders to challenge decisions before the Tenders Review Authority, with further appeals potentially reaching the courts.
Experience with major public infrastructure projects suggests that such challenges can delay mobilisation by many months and, in some cases, considerably longer.
Following contract award, new contractors will still need to mobilise, verify the condition of existing works, complete construction and undertake extensive commissioning before commercial operation can begin.
Allowing for these risks, a more realistic planning assumption places first gas towards the end of the decade or around 2030, rather than significantly earlier.
More significant than the timetable is the project’s changing economics. A realistic assessment of the project cost today must include not only the cost of completing the physical works but also arbitration, financing during prolonged delays, commissioning, interface management and contingency.
Using risk-based planning assumptions rather than optimistic targets, the likely financial exposure appears substantially higher, and the total project cost could realistically approach €1-1.2 billion, more than three times the original estimate.
This figure is not a forecast. It is a risk-based planning estimate derived from the current project status, comparable infrastructure projects and the remaining legal and commercial uncertainties. Hopefully it will cost less, but the purpose here is not to be unduly optimistic.
The project should no longer be judged by how much has already been spent, but by whether completing it today still represents the best economic decision for Cyprus.
If Cyprus were making this investment decision today, knowing everything we know now, would it still choose the same solution?
