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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

Know your JOA: top 10 tips for anxious partners in upstream oil and gas joint ventures

A year dominated by the story of low oil prices is drawing to a close amid predictions that the pressures on upstream oil and gas companies’ financial positions may well intensify through 2016.  For those who may be concerned about the financial health of their joint venture partners, we offer below a quick guide to taking stock of where you stand under your Joint Operating Agreements (JOAs) to put you in the best position to deal with any emerging problems.

Know what the JOA says about default

Most JOAs contain an unqualified and absolute obligation on a party to pay all cash calls, pre-funding and invoice requests.  But check if a partner is in trouble, it may try to dispute the validity of payment obligations – most JOAs depend on a ‘pay now argue later’ formulation – but it’s worth checking.

If the operator is in trouble

Check that the JOA allows a non-operator to issue a default notice and ask for all joint account statements. The JOA should require the operator to provide periodic information on funding the joint account to evidence that non-operators and the operator are funding their participating shares.

The operator is not responsible for a shortfall

Do not suppose the operator’s functions extend to funding any default – they will almost certainly not.  The non-defaulting parties will be liable for the defaulting party’s share in proportion to their respective shares and non-payment of the additional share will be a default event itself.  The operator may be able to borrow funds instead – this may be a more attractive means of funding any immediate work commitments, so talk to the operator.

Know the short-term remedies

The defaulting party will cease to have voting rights – and a non-defaulting party’s rights at OPCOM will increase proportionately.  Other entitlements will be lost as well: the right to information, the right to transfer an interest or withdraw.  Again, check the JOA.  The prohibition on transfer should be at the non-defaulting party’s discretion – there may be a willing buyer and the advantage of a quick sale.

What happens to the petroleum?

Rights over petroleum entitlements will be lost as well. Check what the operator’s obligations are – usually to sell the defaulting party’s petroleum on the best terms available to offset against the shortfall.  Non-defaulting parties will want transparency on this and no sweetheart deals with the operator’s affiliates.

What happens next?

Here’s where JOAs differ in approach, so it’s important to know the process. Options include compulsory withdrawal, interest sales, mortgage security enforcement and forfeiture. The process for enforcing additional remedies will be spelt out in the JOA.  Timing, and the role and exposure of the non-defaulting parties will differ depending on the form of the sequestration sanction.

Mortgage security enforcement

This avoids the uncertainties with forfeiture and is potentially attractive.  The non-defaulting parties have a secured interest – and can rank ahead of unsecured creditors.  But it can be problematic in some respects, multiple charges need to be registered and commercial lenders to the defaulting party may have some priority.

Interest sales … what needs to be passed over

Know what deductions can be made from the sale price beyond the amount in default. It is easy to justify all associated costs of the sale, marketing, legal and so on.  However, any deduction that cannot be easily justified (such as fixed percentage deduction) may look like a penalty – and that can be problematic.

A slippery slope

Forfeiture – i.e. distribution of the defaulting party’s interest to the others.  Fine in principle, but it only works if all the non-defaulting parties are willing to assume an additional burden.  If others won’t do this, the situation can rapidly worsen – with other parties withdrawing and the handback or surrender of the concession.  This can be off-putting to buyers – have the sellers got good title?

The ultimate sanction … perhaps not

Forfeiture comes with baggage – how effective is it?  Not commercially justifiable – so perhaps a penalty?  Or an unfair preference over unsecured creditors, such that a private contract defeats the law of insolvency?  Not straightforward and plenty of scope for mischief by those in default.

If you would like to discuss any of the issues raised above, please do not hesitate to get in touch with the author or any of your other regular contacts in the Dentons oil and gas team.

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Know your JOA: top 10 tips for anxious partners in upstream oil and gas joint ventures