TURMOIL IN THE CYPRUS ENERGY SECTOR

UNCLAS NICOSIA 000827

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EPET ETRD PREL EINV ECON CY
SUBJECT: TURMOIL IN THE CYPRUS ENERGY SECTOR


1. (SBU) Summary: In the midst of a heated Presidential campaign,
the Government of Cyprus (GOC) through the Ministry of Commerce
(Energy Department) is preparing tender specifications for
consulting and project management energy projects. The Government's
insistence on constructing a temporary off-shore (floating)
Liquefied Natural Gas (LNG) unit and the apparent involvement of the
President's son and other political figures behind this push is
politicizing the issue of how Cyprus will meet its energy generation
and CO2 emission targets. The issue is further muddled by the desire
of the current electricity monopoly (and its union) to limit
increased competition. End Summary.

Tenders To Be Issued Soon
--------------


2. (U) According to information received from senior officials of
the Ministry of Commerce, Energy Department and the Cyprus Energy
Regulatory Authority (CERA),the GOC is currently preparing tender
specifications for a Front-End Engineering Design (FEED) consulting
tender. The preferred bidder for this project will draft the Terms
of Reference for both an onshore (land-based) LNG unit as well as
for a temporary offshore (floating) LNG unit at the Vasilikos Power
Station area for utilization until the onshore facility is
operational. The estimated release date of the tender documents is
late October 2007. The GOC may also release a separate Consulting
tender for an oil terminal FEED project and one for Natural Gas (NG)
that will involve importing and storing both oil and NG. Project
Management tenders will follow any Consulting tender released and
awarded.


3. (U) There is a 45-day span from the date of tender release for
the Consulting project until bid submissions are due. After that,
the GOC will need approximately two to three months for evaluations
and contract award. This timeframe runs up to the February
Presidential elections. Because historically most major government
contract award decisions have been questioned by the remaining
bidders (usually the runner-up) through the Tenders Review
Authority, an additional month or two for this process should be
expected. As per the Director of Energy at the Ministry of
Commerce, the GOC hopes to finalize the tender and hire a Consultant
by March or April of 2008 - right after the Presidential elections.



4. (SBU) Experts here believe that under the most optimistic
scenario, the GOC will have the tender documents for a land-based
LNG unit ready for release by the end of 2008 with final delivery by

2013. This timeline is a significant lag from the initial GOC plan
(formulated in 2003),which forecast an integrated LNG terminal and
gas-fired turbine to be operational by 2009. Due to the need to
increase energy generation capacity and meet EU-mandated reductions
in CO2 emissions, the GOC says it will need a temporary (five-year)
floating LNG unit although our contacts advise that such a unit
would probably not be available until 2011. There is also no
indication of where the GOC would source its natural gas supply on a
long-term basis given current tight market conditions.

A Gas Import Monopoly?
--------------


5. (SBU) A key question is whether importation of LNG will be an
open market. One plan calls for the establishment of a new " Public
Company of Natural Gas"(PCNG) which would have a 10-year monopoly on
the supply of NG in the ROC under the "emerging market" provision of
the relevant EC Directives (2003/55/EC, articles 22 and 28). The
equity of PCNG would reportedly be divided between the GOC with 51
percent, the Electricity Authority of Cyprus (EAC - a
quasi-governmental body owning most generating capacity and the
transmission and distribution systems) with 39 percent, and private
owners 10 percent. The arguments for state control is the need to
negotiate government-to-government agreements for NG supply and, as
an island, the lack of possible interconnects with other grids
creating a natural monopoly.

Too Much Competition "Would Bankrupt Us"
--------------


6. (SBU) The General Manager of the EAC also told us that, since his
organization is mandated to provide uninterrupted power throughout
the country, it must make investments in peak-load capacity (such as
the tenders mentioned in paragraphs 2-3) whose cost can only be
covered if competition is limited for a certain number of years. His
biggest competitive concern is the entry of independent power
producers into the market, especially if they have access to "below
market" gas. A Norwegian consortium, "Golar," has already received
CERA approval to operate an offshore vessel that would receive LNG
as fuel and generate up to 240MW of electricity. Total current
installed capacity in Cyprus is around 1100MW. Golar is waiting to
see if they have approval to import gas themselves before proceeding
with their project. The EAC is furiously fighting this, arguing that
Golar's Norwegian partners would provide "below market price" gas,
rendering the EAC's new generating capacity uncompetitive. To
further hinder Golar's ability to proceed, EAC is arguing that
floating LNG terminals are untested technology not operating
anywhere else in the world. The powerful EAC union has said that
they are adamantly opposed to any floating LNG options. When asked
why the unions are so opposed to this technology, the EAC official
told us "because they know it would eventually bankrupt their
company."

Politics
--------------


7. (SBU) Democratic Rally Party president, Nicos Anastasiades, held
a press conference on October 3, 2007 claiming that the long delay
in initiating a land-based LNG terminal was a deliberate ploy by
President Papadopoulos or his associates in order to necessitate a
floating LNG solution. The evidence Anastasiades presented to the
press included information that involves President Papadopoulos's
law firm and an attorney with that firm (son, Nicolas Papadopoulos)
in SBM, the company that, according to Anastasiades, would have
constructed and operated the unit. Anastasiades stated that George
Lillikas, who was Minister of Commerce at the time, promised SBM he
would look favorably at its bid. Note: Under Cypriot law, all major
government / semi-government projects must go through a tendering
procedure and contract awards are made after technical and financial
evaluations are completed.


8. (SBU) Comment: In the current election campaign climate,
accusations, purported copies of incriminating e-mails, and shouts
of libel are common and may be expected to continue. Nerves are
further frayed by the high stakes of the energy infrastructure game.
Unfortunately, the short-term result may be further delay, until
after the February elections, in proceeding with a variety of energy
projects (including renewables with U.S. interests) that all parties
agree are sorely needed to meet Cyprus' energy needs (growing 6-7
percent yearly)and reduce the nation's reliance on heavily polluting
Heavy Fuel Oil (HFO) for electricity production.

SCHLICHER