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Natural Gas Public Company of Cyprus (DEFA) issues request for proposals for €500m LNG import facility

Cyprus’ long standing plans to import gas to the island have taken a big step forward with the release on 5 October 2018 of a request for proposals to design, construct, procure, commission, operate and maintain an LNG import facility at Vasilikos Bay, Cyprus (the Project).

It is interesting to note that (unlike previous tenders for LNG imports to Cyprus) the infrastructure is being tendered for separately to the LNG supply. DEFA expects to issue a request for expressions of interest for LNG supply to the market later this year, with a full RfP to follow in early 2019.

Overview of Project

The RfP divides the Project into three distinct elements:

  • The engineering, procurement and construction of the offshore and onshore infrastructure, including the gas transmission pipeline and associated facilities;
  • The procurement and commissioning of a floating storage and regasification unit (FSRU), through the purchase of an existing FSRU, design and construction of a new-build FSRU, or conversion of an LNG Carrier and, if applicable, provision of a floating storage unit (FSU); and
  • The Operations and Maintenance (O&M) of the infrastructure and FSRU for a period of 20 years.”

The following points are worth drawing out:

  1. the Project must be completed by 30 November 2020;
  2. initially, all gas imported through the facility will be sold on by DEFA to the Electricity Authority of Cyprus (EAC, the state owned electricity company, which owns and operates the Vasilikos power station adjacent to the proposed site of the facility). The Vasilikos plant is currently running on heavy fuel oil, but will burn gas once the Project is complete.
  3. DEFA has incorporated a special purpose vehicle, Natural Gas Infrastructure Company of Cyprus, for the Project. The SPV will contract with the successful bidder for the construction and O&M services; and will own the LNG import facility once constructed;
  4. DEFA will contract directly with suppliers for the LNG supply; and will acquire capacity in the facility from the SPV. The risk allocation between the various agreements that will need to be entered into between DEFA, the SPV, the LNG supplier and EAC will be a critical issue for the success of the project.
  5. DEFA will have an option to take over certain elements of the offshore and onshore O&M services at different stages of the Project;
  6. as part of the onshore infrastructure, the contractor will be required to install a “natural gas buffer solution”. The design of this piece of infrastructure is left for the contractor to propose, but could for example include a pipeline array. The intention behind this requirement is to ensure that the FSRU and pipeline infrastructure is capable of achieving the flexibility of gas supply required to meet the operational requirements of the Vasilikos plant.

Funding

The Project has an approved budget of €300m for the initial capex, and €200m for O&M costs over the 20 year term. The initial capex will be part funded by an EU grant under the Connecting Europe Facility, with the remainder expected to be funded wholly or in part by debt finance. It is not yet clear whether EAC will invest equity into the Project – reference is made to EAC taking up to a 30% interest in the SPV at a later date.

Key issues

From our team’s experience of working on similar projects in Cyprus, key issues for the success of the Project may include:

  1. credit support to be provided by Cyprus stakeholders (DEFA / EAC / the government) and the successful bidder. It is interesting to note that the government of Cyprus will be issuing a government guarantee to support the debt financing;
  2. the possibility (and timing) of DEFA selling gas to other buyers in the future, and the implications for EAC’s gas take from the facility;
  3. EAC’s ability to pass through the costs it incurs by generating electricity from gas to electricity consumers under the Cypriot regulatory regime;
  4. the flexibility of gas supply required to meet the operational requirements of the Vasilikos plant (see the previous comments regarding the buffer solution). This will be particularly important given the expected trend towards increased levels of renewable generation and consequential impact on required flexibility of thermal plants on the system;
  5. the impact of additional delivery points for piped gas to other buyers/plants;
  6. the expected timeframe for the conversion of the Vasilikos plant’s turbines to gas, and commissioning of the gas-firing equipment;
  7. impact of any electricity system operator requirements – e.g. regarding new electricity market rules in Cyprus.

Dentons: Cyprus / LNG experience

Dentons has unparalleled experience of working on LNG projects in Cyprus, having advised DEFA for a number of years on the potential long term import of LNG to Cyprus, and subsequently on shorter term interim gas supply arrangements; and MECIT on the commercialisation of the Aphrodite Field in the Cyprus EEZ through the development of a proposed onshore LNG liquefaction and export project at Vasilikos.

The team has a particular focus in advising on international LNG import projects. Team members are advising, or have advised on, LNG import projects in Ghana, the Caribbean, Jamaica, Pakistan, Jordan and Malta.

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Natural Gas Public Company of Cyprus (DEFA) issues request for proposals for €500m LNG import facility

Talking points in the solar market

A Dentons team from the UK, Germany, the Netherlands and Turkey had a good day at Intersolar Europe towards the end of June, which is a great conference for meeting old friends and making new connections.

For those who didn’t make the trip to Munich, here are a few thoughts on the key talking points.

  • Solar PV is clearly a very healthy industry – there were over 850 exhibitors, spread over 6 exhibition halls. The panel manufacturers were particularly impressive, with Canadian Solar, SMA and others having large stands.

 

  • Key new target markets in Europe include Ireland (with a subsidy policy decision expected to be announced imminently); Spain (driven by merchant sales and PPAs, rather then Government tenders); and France (where the industry is increasingly being seen as a Government priority with its #PlaceAuSoleil plan).

 

  • Competition remains fierce, with Q-Cells (Hanwha) announcing its new half-cell technology (winning the conference award for innovation), and a number of suppliers (e.g. Jinko and First Solar) marketing panels with increased efficiency.

 

  • Storage attracts attention, but is still not part of the mainstream – the focus was much more towards smart vehicle charging (with the conference running alongside the Smarter-E convention), than having batteries within the home itself (or indeed on a commercial scale).

 

  • There is continued uncertainty regarding the future of solar panel anti-dumping – the current EU measures expire in September, though there is the possibility of a further review (extending existing minimum import prices for at least a year). The EU restrictions also have potential to be part of a global trend, with the US currently reviewing its position on solar cells and modules with the possibility of a 25% tariff.

 

  • There is quite a bit of concern about the recent sudden withdrawal of Chinese subsidies. Given the huge growth in new domestic projects in recent years this perhaps points towards greater exports and falling prices (together with the possibility of a limited number of panel supplier insolvencies). There may be some local government subsidies available, though many projects will be put on hold.

We have been seeing a number of these issues first-hand on our current projects. Do get in touch if you would like to discuss any of them.

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Talking points in the solar market

Bankability issues with Solar PV leases in emerging markets

In any solar PV development in emerging markets (whether in Africa, Latin America or elsewhere) attention is immediately drawn to project revenues. Government or utility tender packages focus on mark-ups to power purchase agreements with the offtaker, the strength of any government support agreement, and the terms of any other credit support. It is not uncommon for a project to be well advanced before the developer turns to the “less exciting” project agreements, with land rights frequently one of the most problematic. The site may be split over dozens of parcels of land (many of which are either stuck in probate or not properly registered), the model form of lease may be unintelligible, or the land sporadically crossed by grazing animals.

Most project stakeholders are either invested and actively interested in the success of the project (e.g. the offtaker), or experienced and sophisticated counterparties (e.g. EPC contractors) – the lessor(s) of land rights may be less equipped to quickly agree the required documents.

Recently we have been working on a number of solar PV projects across Africa in jurisdictions with a limited track record of international project finance. Key areas in which we often find that a landowner’s model form of lease does not provide sufficient protection for the project are listed below. Although we have used terminology that will be familiar to lawyers used to common law systems, the same issues arise – and should ultimately be capable of being resolved – in any legal system.

Term 

The term of the lease should be sufficient to cover the asset life of the project, the term of key approvals (e.g. the generation licence, planning permission) and any decommissioning period (whether after an early termination or expiry of the term).  If asset life is extended then ideally the lessee will also have the option to extend the term of the lease.

Pre-conditions/early obligations 

The lease rental payments are ideally structured in such a manner that they are not payable until all government authorisations and permits and third party consents required for the development and operation of the project have been obtained. If early works are required (e.g. an environmental impact assessment) in order to be granted the necessary permits then the lease will need to cater for this or such works will need to be authorised under a separate lease, lease option or licence.

Easements  

If the route of the cable connecting the project to the grid is not included in the site and the Lessor has rights over the relevant land, the Lessor should grant the Lessee and any third party nominated by it easements over the land as required for the connection of the solar PV plant to the relevant electricity transmission lines. Similar rights may also be needed to allow a route from the site to the public highway for construction and maintenance. For these purposes it is critical to confirm that all local land which may be required for an easement is in the control of the Lessor.

Permitted Use  

The Lessee should be allowed to carry out activities related to, in connection with, or for the purpose of, the design (including site appraisal), construction, operation (including export of power), maintenance and decommissioning (and handover, if applicable) of the solar PV plant.

The site subject to the lease should also be sufficient for project use, i.e. it should cover the solar PV panels, ancillary equipment (including e.g. inverters, CCTV and substations).

Lessor’s covenant  

The Lessor should not do or permit to be done any act which has or may have the effect of reducing or interfering with the capability of the power station to generate its maximum potential of electricity. This may extend to limiting rights to cross the site, including prohibiting the grazing of livestock (to the extent not needed by the Lessee to avoid grass cutting), and providing assurances that neighboring land will not shadow the site (e.g. with new buildings or trees).

To the extent that the Lessor is a government agency it may also be reasonable for it to provide assurances that third parties (e.g. local farmers) will not attempt to access the site, possibly alongside local content and/or community benefit provision to ensure local support.

Pre-existing liabilities 

The Lessor should be liable for, and should indemnify the Lessee against, any pre-existing liabilities associated with the site (e.g. environment liabilities). Where possible the Lessor may also need to do its own property searches and title checks (e.g. to check there is no compulsory purchase order affecting the site).

Termination 

Ideally the Lessor shall either have no right to terminate the lease, or its termination rights should be restricted to failure to pay rents (if not cured within a reasonable period upon notice) – remedies for other breaches by the Lessee should be compensation rather than termination.

Direct Agreement

The Lessor will need to covenant that it will at the request and reasonable cost of the Lessee enter into a direct agreement with any lender providing financing for the project such that the lender has a right to step in and novate before the Lessor exercises its rights under the lease, including any right to terminate the lease (if any) or re-enter the site.

The authors are grateful to Gillian Goldsworthy, Senior Associate in the Real Estate team of Dentons’ London office, for her assistance with this piece

 

 

 

 

 

 

 

 

Bankability issues with Solar PV leases in emerging markets