A Simple Solution to LNG Bind
A VERY interesting offer to supply Cyprus with LNG was made by the Norwegian firm Höegh LNG at the ‘Cyprus: The Next Steps in East Med’s Energy Chessboard’ conference, organised by FMW and IENE in Nicosia on December 5.
Höegh LNG’s business is the construction, ownership and operation of FSRUs on long-term charters. The company owns the largest, most modern FSRU fleet in the market, with 10 FSRUs currently in operation.
This is the company that provided one of the FSRUs to Egypt during 2015-2018, when the country needed to import LNG – the Höegh Gallant FSRU, built in 2014, with capacity of 170.000 cubic metres of LNG.
It took only five months from the signing of the contract to the commencement of commercial operations. The project was very successful. During 2017 the average, all-inclusive, cost of gas delivered to Egypt is estimated to have been about $7/mmbtu. The FSRU left Egypt in 2018 when the country started producing its own gas and no longer needed LNG imports.
I first wrote about this in an article in Cyprus Mail in 2016, suggesting that what Egypt did should also be adopted by Cyprus, as a fast-track, low-cost, solution to the many failed attempts to import LNG.
The chartering of an FSRU offers a fast and flexible solution to the import of LNG. As in Egypt, it could be an interim solution until a longer-term supply of gas is secured, for example from Aphrodite.
This is what Höegh LNG is offering Cyprus. Implementation of such a project could be fast. With appropriate modifications, which Höegh would undertake, the FSRU could use VTTI’s jetty at Vasilikos, thus avoiding the need for any permanent facilities. As for Egypt, Höegh’s FSRU could start operations within five months from signature of the contract. And, again as Egypt did so successfully, LNG could be sourced from the global ‘spot-LNG’ market by periodically floating competitive tenders. This could also offer flexibility in the quantity of LNG to be bought at any time, responding to Cyprus market requirements. At current prices, the total cost of gas delivered to EAC could be as low as $7/mmbtu.
This is substantially lower than Defa’s proposal to build permanent facilities and buy an FSRU, leading to a likely cost of gas delivered to EAC in excess of $10/mmbtu.
And if Aphrodite starts production and brings Cyprus its own gas by 2025, as currently proposed, how will Defa’s project costs be recovered and what will happen to the permanent facilities and the FSRU? Höegh’s offer overcomes these problems.
In addition, Defa’s project would enable LNG imports to commence the beginning of 2022 at the earliest. As a result, during the next two years, Cyprus is likely to incur penalties from the EU due to excessive carbon emissions, estimated to be about €85million/year, ie €170million in total.
Höegh’s FSRU could be in place importing LNG by the start of June of next year, thus saving Cyprus as much as €135 million in penalties it will not have to pay. This more than compensates possible loss of the €101.5million grant Defa would have received from the EU for its project. Other advantages include the fact that it would not require any capital investment by Cyprus, could bring electricity costs down by as much as 15-20 per cent, and could accommodate and support a rapid increase in the uptake of renewables.
Another offer, reiterated at the conference, was by Energean to provide gas to Cyprus by pipeline from its Karish gas-field in Israel by the end of 2021. The pipeline would be 12-inch diameter, thus capable of supplying gas from 0.6bcm/yr (billion cubic meters), up to 1.35bcm/yr. The cost to EAC would be less than $7/mmbtu, and possibly lower depending on gas quantities.
This range of gas supply also offers flexibility and could accommodate and support a rapid increase in the uptake of renewables. As renewable electricity capacity increases, pipeline gas imports could be reduced.
The two offers, Höegh’s and Energean’s, are not mutually exclusive – one is a short-term bridging-solution, while the other could be longer-term. The FSRU could be used between 2020 and 2022, while Energean’s pipeline becomes available and ramps-up to full capacity.
Ultimately, in compliance with the new clean energy policies the new European Commission is in the process of proposing through its European Green Deal, Cyprus will need to reduce carbon emissions even more, by 24 per cent by 2030, and substantially increase renewable energy.
Cyprus must adopt longer-term energy solutions that comply with these requirements and eliminate the likelihood of, again, incurring hefty penalties as a result of not complying with carbon emission reduction targets.
Indications so far are alarming. Without major new measures, Cyprus will achieve a maximum of 14 per cent reduction in carbon dioxide emissions by 2030 – even with gas – with the likelihood of incurring as much as €157million/yr in penalties. Only wider electrification and wider adoption of renewables can overcome this.
I find it incredible that Cyprus is rejecting eminently feasible, cheaper, options that will lead to substantial reductions in the already too high electricity costs its consumers and industry pay and is opting for an expensive ‘white elephant’ that will lead to increased electricity costs and would still leave Cyprus vulnerable to emission penalties.
Let’s hope that sense prevails.
Dr Charles Ellinas is Senior Fellow, Global Energy Centre, Atlantic Council and Assistant Editor Natural Gas World Magazine. Editors Note: The author has no affiliation with Höegh LNG or Energean. First published in the Cyprus Mail
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