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Cyprus LNG supply deal clouded by uncertainties

13 Jan 2011 21:30:51 | glm

The government of Cyprus has reached a preliminary agreement with Shell for the supply of LNG for the proposed Vasiliko terminal on the southern coast of the island, a source close to the deal told ICIS Heren this week. The deal, however, has yet to receive final government approval, and has been criticised by opposition parties and critics within the government who are pushing for Cyprus to reduce the duration of any supply award.

"A preliminary agreement has been signed, but it is tentative and can very well fall apart," the source said.

"There is plenty of political pressure coming from within Cyprus to dismantle this deal, and we could possibly see amendments to the time span of the agreement before a formal sales and purchase agreement [SPA] is signed," the source added.

Cyprus' state natural gas company (DEFA), which invited expressions of interest for an LNG supplier in November 2009, wanted to contract for a 20-year period on an ex-ship basis starting from 2014 (see GLM 13 November 2009).

Under the terms of the tender document, the volumes would be flexible, but generally rise from a base of 770,000 tonnes per annum of LNG in 2014 to 1.37mtpa by 2035.

Cyprus' changing fortunes

Since the Cypriot parliament sanctioned the Electricity Authority of Cyprus (EAC) - which will jointly operate the terminal - to move ahead with the land-based terminal in late 2007, the East Mediterranean region has been home to a series of natural gas discoveries.

The discoveries include the Leviathan and Tamar fields offshore Israel, which together are estimated to hold nearly 25 trillion cubic feet of gross recoverable reserves.

The Israeli fields are close to Cypriot waters while Noble Energy, the US-based exploration and production company leading the development of Tamar and Leviathan also holds the licence to explore a block located in Cypriot waters, about 65 km away from Tamar.

The improvement in Cyprus' gas prospects has added to speculation that the deal may be modified before a formal SPA is signed.

One such option may include reducing the duration of the SPA from 20 years down to 10, or even five years, the source said.

The land-based terminal, which is expected to have a regasification capacity of 1.0-1.5Gm³/year and cost around €600m ($800m) has been criticised as being too expensive by several opposition politicians. And a number of critics, including Cyprus' former commerce minister Antonis Michaelides, have suggested in the local media that a floating LNG terminal or even compressed natural gas would be considerably less costly and allow the country to have greater flexibility as far as gas imports are concerned.

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