Can Vasilikos LNG import project still achieve its original objective?

When Cyprus approved the Vasilikos 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 Vasilikos 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 Vasilikos 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 Vasilikos 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? Dr Charles Ellinas, @CharlesEllinas, is Councilor, Atlantic Council