Natural Gas Public Company of Cyprus (DEFA) issues request for proposals for €500m LNG import facility

Cyprus’ long standing plans to import gas to the island have taken a big step forward with the release on 5 October 2018 of a request for proposals to design, construct, procure, commission, operate and maintain an LNG import facility at Vasilikos Bay, Cyprus (the Project).

It is interesting to note that (unlike previous tenders for LNG imports to Cyprus) the infrastructure is being tendered for separately to the LNG supply. DEFA expects to issue a request for expressions of interest for LNG supply to the market later this year, with a full RfP to follow in early 2019.

Overview of Project

The RfP divides the Project into three distinct elements:

• “The engineering, procurement and construction of the offshore and onshore infrastructure, including the gas transmission pipeline and associated facilities;
• The procurement and commissioning of a floating storage and regasification unit (FSRU), through the purchase of an existing FSRU, design and construction of a new-build FSRU, or conversion of an LNG Carrier and, if applicable, provision of a floating storage unit (FSU); and
  
• The Operations and Maintenance (O&M) of the infrastructure and FSRU for a period of 20 years.”

The following points are worth drawing out:

1. the Project must be completed by 30 November 2020;
2. initially, all gas imported through the facility will be sold on by DEFA to the Electricity Authority of Cyprus (EAC, the state owned electricity company, which owns and operates the Vasilikos power station adjacent to the proposed site of the facility). The Vasilikos plant is currently running on heavy fuel oil, but will burn gas once the Project is complete.
3. DEFA has incorporated a special purpose vehicle, Natural Gas Infrastructure Company of Cyprus, for the Project. The SPV will contract with the successful bidder for the construction and O&M services; and will own the LNG import facility once constructed;
4. DEFA will contract directly with suppliers for the LNG supply; and will acquire capacity in the facility from the SPV. The risk allocation between the various agreements that will need to be entered into between DEFA, the SPV, the LNG supplier and EAC will be a critical issue for the success of the project.
5. DEFA will have an option to take over certain elements of the offshore and onshore O&M services at different stages of the Project;
6. as part of the onshore infrastructure, the contractor will be required to install a “natural gas buffer solution”. The design of this piece of infrastructure is left for the contractor to propose, but could for example include a pipeline array. The intention behind this requirement is to ensure that the FSRU and pipeline infrastructure is capable of achieving the flexibility of gas supply required to meet the operational requirements of the Vasilikos plant.

Funding

The Project has an approved budget of €300m for the initial capex, and €200m for O&M costs over the 20 year term. The initial capex will be part funded by an EU grant under the Connecting Europe Facility, with the remainder expected to be funded wholly or in part by debt finance. It is not yet clear whether EAC will invest equity into the Project – reference is made to EAC taking up to a 30% interest in the SPV at a later date.

Key issues

From our team’s experience of working on similar projects in Cyprus, key issues for the success of the Project may include:

1. credit support to be provided by Cyprus stakeholders (DEFA / EAC / the government) and the successful bidder. It is interesting to note that the government of Cyprus will be issuing a government guarantee to support the debt financing;
2. the possibility (and timing) of DEFA selling gas to other buyers in the future, and the implications for EAC’s gas take from the facility;
3. EAC’s ability to pass through the costs it incurs by generating electricity from gas to electricity consumers under the Cypriot regulatory regime;
4. the flexibility of gas supply required to meet the operational requirements of the Vasilikos plant (see the previous comments regarding the buffer solution). This will be particularly important given the expected trend towards increased levels of renewable generation and consequential impact on required flexibility of thermal plants on the system;
5. the impact of additional delivery points for piped gas to other buyers/plants;
6. the expected timeframe for the conversion of the Vasilikos plant’s turbines to gas, and commissioning of the gas-firing equipment;
7. impact of any electricity system operator requirements – e.g. regarding new electricity market rules in Cyprus.

Dentons: Cyprus / LNG experience

Dentons has unparalleled experience of working on LNG projects in Cyprus, having advised DEFA for a number of years on the potential long term import of LNG to Cyprus, and subsequently on shorter term interim gas supply arrangements; and MECIT on the commercialisation of the Aphrodite Field in the Cyprus EEZ through the development of a proposed onshore LNG liquefaction and export project at Vasilikos.

The team has a particular focus in advising on international LNG import projects. Team members are advising, or have advised on, LNG import projects in Ghana, the Caribbean, Jamaica, Pakistan, Jordan and Malta.