Two Vital Energy Projects Stalled

Challenges Facing Cyprus' Energy Projects

Cyprus has experienced a difficult week in the energy sector, with two of its most significant projects—LNG imports at Vasilikos and the GSI electrical interconnector—facing intense scrutiny. These projects, which have the potential to reduce energy costs, are now under investigation by the European Public Prosecutor’s Office (EPPO) for suspected fraud and corruption. The ongoing issues have left both initiatives in a state of uncertainty, raising concerns about their future viability.

GSI Electrical Interconnector Under Scrutiny

The GSI project, designed to connect Cyprus’ electricity grid with Greece, has been a focal point of controversy. The finance minister has refused to release the first €25 million payment to Admie, the project operator, pending certain unspecified progress. This decision prompted a strong reaction from the Greek government, which demanded clarification on Cypriot intentions. A statement from the energy minister, likely endorsed by the president, was interpreted as a sign that the Cypriot government still sees the project as viable. However, the dispute over the payment remains unresolved, creating tension between the two nations.

Despite this, the energy minister's comments appear to have temporarily eased the situation. Nevertheless, the issue of the €25 million payment continues to be a point of contention, highlighting the need for clear communication and defined milestones.

LNG Import Project Faces Political Pressure

The LNG import project has also been the subject of parliamentary hearings, where the energy minister and the government faced criticism from all political parties. These groups accused the government of lacking a clear plan for completing the project, which could result in continued high electricity prices for Cypriot consumers. Currently, Cyprus has the second-highest electricity prices in Europe and the highest when adjusted for purchasing power parity.

Political parties have called for accountability and a definitive timeline for the project’s completion. While the pressure is mounting, there are some positive developments. Egypt’s petroleum minister recently confirmed that commercial exploitation of the Kronos gas field is expected to begin before the end of 2027. Some of this gas will be exported as LNG to Europe, marking a significant milestone for Cyprus.

However, the financial benefits for Cyprus are limited. The profits from the gas field are projected to be minimal, not exceeding 0.1-0.2% of annual government revenues. Most of the gas is expected to be used domestically, reducing reliance on expensive LNG imports. Only a small portion may be exported to Europe, covering a fraction of the continent’s annual gas needs.

Competitive Electricity Market Launches

Another development is the upcoming commercial operation of the Competitive Electricity Market, set to begin on October 1. However, there are concerns that it may not live up to its name. Conventional power generation using diesel and heavy fuel oil is still setting electricity prices, while renewable energy producers (RES) are expected to continue selling electricity at a 10% discount to the Energy Authority of Cyprus (EAC) prices. This practice could lead to super-profits, even within the framework of the new market.

EPPO Investigation into LNG Project

The EPPO’s investigation into the LNG import project began in March 2024, following reports from the then-auditor-general. Last week, the EPPO confirmed it is investigating the bank accounts of politicians, current and former state officials, and civil servants. However, no details have been released at this stage. The findings are expected to have far-reaching implications.

In response to negative media coverage, the Chinese contractor CPP broke its silence and provided its side of the story. According to CPP, the project did not start until September 2020, due to delays in funding and the appointment of the project manager. These issues led to a 10-month delay in the project, which was originally scheduled to take two years.

Project Management Issues

CPP claims that Etyfa, the project operator, lacked experienced personnel and relied heavily on its project manager. The contract required prompt reviews of documents and procurement, but these were often delayed. Additionally, Etyfa requested changes to the project scope without formalizing them in the contract. All project documents, drawings, and deliverables were reviewed and signed off by Etyfa and Hills International before proceeding to the next phase.

Regarding the FSRU (Floating Storage and Regasification Unit), Lloyd’s Register issued an LNGC certificate upon delivery, identifying 12 outstanding works that could only be completed once the jetty at Vasilikos was finished and LNG became available. Etyfa provided a quality guarantee for the FSRU after its transfer.

Ongoing Project Status

If CPP’s claims are verified, they paint a concerning picture of the project management capabilities of the Etyfa team. The project remains stalled, with the new project manager, Technip, currently assessing the situation. Technip plans to issue a report to Etyfa and the energy minister within days, outlining recommendations for moving forward.

Given the revelations from CPP, it is crucial for Technip to engage in dialogue to understand what went wrong and explore potential solutions. The priority remains importing LNG to lower electricity prices, but the timeline for achieving this remains unclear. All possible options should be considered, including CPP’s offer to cooperate.