articles | 13 May 2014

DEFA examines technical proposals for natural gas supply

Cyprus Natural Gas Public Company DEFA is examining the technical proposals, after which it will open the sealed dossiers containing the second component of the bids – the financial offers for the supply of natural gas to Cyprus.

The Cypriot tender aims to secure so-called ‘interim’ supplies of gas for domestic power generation. The island nation is reliant on heavy fuel oil imports to power its grid, and is seeking to cut its energy bill by switching to the cheaper natural gas. The tender is for the supply of 0.7-0.95 billion cubic metres (bcm) of gas in 2017-25 (at the latest).

However, the Natural Gas Public Company (DEFA) said recently it had no connection to media reports claiming the partners in the Leviathan gas field have offered to sell Cyprus natural gas at a price that is 2.5 times higher than that in Israel.

In a statement, DEFA said it was “compelled to comment” on the reports, and stressed that the financial proposals submitted to it “have not been opened and remain closed in a secure place”.

A day earlier, Israeli website Globes wrote that Leviathan partners Delek and Ratio, bidding in the tender published by DEFA, are offering gas at $15 per million thermal units (BTU), compared with $6 per million BTU in current Israeli gas supply contracts.

Citing its sources, Globes said there are two main reasons for the high price: the cost of laying a pipeline to Cyprus and because Cyprus is paying $20 or more per million BTU for alternative fuels.

The website named also three other bidders in the Cypriot tender: the Dutch Vitol Group; State Oil Company of Azerbaijan Republic (SOCAR); and Greek M&M Gas Co SA.

Sources told Globes that Vitol Group was the only bidder currently able to promise supplying LNG during the relevant period, but at a higher cost than Israeli natural gas. However, it also said that Delek and Ratio’s offer was the “favourite” bid.

The Leviathan partners announced last month on the Tel Aviv Stock Exchange that they put in a bid to sell gas to Cyprus via a pipeline.

Due to confidentiality agreements, DEFA will not name the bidders or disclose any other details. It’s understood that at this time DEFA is examining the technical proposals, after which it will open the sealed dossiers containing the second component of the bids – the financial offers.

Assuming the Globes report is accurate, the financial bid from Delek and Ratio is very close to that made by Itera during a previous tender last year. Itera’s final, all-in price was understood to be $15.5 per million BTU. Despite being the lowest bid, DEFA had rejected Itera’s offer on the grounds that it did not lower electricity generation costs and shortly later terminated that tender.

Under the current tender, DEFA is not bound to accept any proposal made to it. As DEFA itself states, the evaluation “will assess the likelihood of a reduction in overall generation costs”.

Reports in the local press have suggested that Cyprus would accept a price of between $11 and $12 per million BTU – far off from the $15 supposedly now being offered by the Leviathan partners.

Gas expert Charles Ellinas said the Israeli companies may be quoting $15 as a starting point, but that the price could drop subsequently during the course of final negotiations with DEFA. “Being shrewd operators, Delek will of course be looking to maximise their profits,” said Ellinas.

Other sources tell the Mail that Delek have a better lock than anyone else on what price range the Cypriots would go for. First, the Israelis are aware of Itera’s price in the last tender. Secondly, Delek was involved in a proposal last year for a spar platform to pipegas ashore from the Aphrodite well at $12 per million BTU, which is considered the breakeven point from the Cypriot standpoint.

Moreover, the Israelis are more than likely aware they have a leg up over the competition. If the price of Israeli gas is $6, and the cost of a pipeline to Cyprus adds another $3 or $4 per million BTU, then Delek’s final cost would be in the region of $9 to $11. This figure does not include the profit margin.

Speaking at an energy conference in Cyprus last week, an independent Israeli consultant estimated that laying a pipeline to Cyprus would boost the price of natural gas by $2.50 per million BTU, and that the final price would be $10-18 per million BTU. Under their offer, Delek would pipe the gas straight to the electricity utility’s flange at Vasilikos, and do not need to built infrastructures other than the pipeline.

By contrast, the other bidders have to buy liquefied natural gas (LNG) from the market. LNG in southwest Europe is currently going for around $14 per million BTU. Already that would give Delek the edge. On top of that, the other bidders would need to build an FSRU (floating storage and regasification unit), further increasing their expenditures and thus the price they would quote to DEFA.

However Globes also reports that the Leviathan gas field, from which gas would be piped to Cyprus, is now not expected to start deliveries before late 2017 or early 2018 – later than the delivery deadline of June 30, 2017 set by DEFA.

Initially Leviathan was expected to start deliveries in general in 2016, but the field’s operators Noble Energy have pushed back the date by a year to late 2017.

Noble Energy said recently their objective was and remains to develop the gas field in the fourth quarter of 2017.

Source: Cyprus Mail

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