Vassiliko Terminal: An ongoing saga – The Chinese tricks and Cyprus’ options

The project to create Cyprus’ natural gas terminal in Vassiliko – a crucial element to the island’s energy transition – has been stalled for over four years now because of the weaknesses and constant delays of the contractor, the Chinese-led consortium CPP-METRON (CMC), since it was awarded the tender back in December 2019.

The project has turned into a drawn out saga, with the government now being forced to seek out ways to ensure a happy ending.

More than four years since the contract was awarded, it would not be an overstatement to say that CPP is essentially… terminating the terminal, having launched an unprecedented communication campaign aimed at laying the blame on the Republic of Cyprus for its inability to meet its contractual obligations and complete the project.

The saga’s timeline…

The Chinese state-owned company CPP put together a consortium in 2019 to compete for the tender to build and operate the natural gas terminal in Vassiliko.

The contract was the Natural Gas Public Company’s (DEFA / CyGas) last-ditch effort to ensure the arrival of natural gas to Cyprus, which was necessary to ensure the country’s transition from the low-quality heavy fuel oil mazut to natural gas; with all the benefits this would entail for the country’s economy.

A project that was expected to breathe life into the economy, and which Cyprus had based its entire energy upgrade and transition on.

The terms of the tender initially provided for an offshore regasification terminal, as the EU was offering around €100m towards the project if this solution was promoted.

However, it was clear from the start that the terms on the contract were not attractive enough to garner the interest of the big energy players, while those who did show an interest insisted on doing it on their own terms, which ultimately excluded them from the process.

The only candidate that didn’t push for its own terms was the Chinese consortium, which was enough to get the rumour mill going that the procedure was in some way flawed.

The problems began early on

Beyond CPP, the Chinese consortium comprised China’s state shipbuilding corporation Hudong, the Greek Aktor S.A., the Greek METRON as well as Norwegian Wilhemsen.

During the pre-selection stage, and before the contract was awarded to the consortium, the Audit Office of the Republic told DEFA that it had information Aktor had been blacklisted from European tenders, and warned that this meant the contract could not be awarded to the Chinese consortium.

And indeed, when DEFA investigated the information and found that Aktor had in fact been blacklisted in Greece, and while it also emerged that there was a conviction of a subsidiary of the Greek company in Cyprus, for reasons that were never explained, the committee in charge of the contract decided not to also blacklist Aktor.

In view of the above, DEFA had to decide whether to proceed with assigning the contract or not. The legal advice it was given was in line with the Audit Office’s warning that if the tender was awarded to the consortium, which included a blacklisted entity, it would be illegal.

This was relayed to the Chinese consortium, which decided to kick Aktor out of the consortium and seek to have the contract awarded under its new composition.

DEFA sought political guidance and in a meeting with the President of the Republic, in the presence of all the state agencies involved, the political decision was made to go ahead and award the contract to the consortium.

At this point, there was a bit of an uproar, especially from Brussels, who doubted whether the consortium in question would be able to bring the project to fruition. Cyprus, however, decided to go ahead anyway and trust that the consortium was capable of seeing it through.

The project’s execution – Delays from the start

The consortium’s shortcomings became evident from the start, both in terms of planning and executing the relevant procedures.

It is worth noting here that the Chinese do not have a very good reputation in the European market when it comes to comprehending or respecting the standards and procedures that are required for such projects in Europe. Accustomed to operating in their own way, which may work in Asian or African countries, they find it hard to adjust to European standards.

The project had two basic parameters:

One, to convert the Liquid Natural Gas Carrier (LNGC) ship into a Floating Storage and Regasification Unit (FSRU), which would be done at the Chinese shipyards.

And second, to build the offshore and land-based infrastructure in the Vassilko area.

According to the timeline of the contract, both were supposed to be delivered by September 2022. However, the consortium had made such little progress by September 2021 – two years after the contract was awarded – that DEFA decided to halt payments to the consortium, sending the message that the contract could be cancelled altogether.

The role of the Embassy – The first blackmail

At this point, the Chinese Embassy in Nicosia became involved. According to sources with knowledge of the Chinese state-owned corporations’ modus operandi, it is very common for them to submit low offers to secure major contracts and then use various excuses to claim more money.

China usually plays its own role in these methods, taking advantage of the country’s political clout to help the Chinese companies get what they want.

And this is exactly what has happened in Cyprus. Invoking various excuses and particularly the pandemic, the Chinese Ambassador more or less demanded an additional €100m to what the contract was worth.

Cyprus did not take this well and following negotiations, it decided that no more than €25m would be given on top of the initial sum for the impact of the pandemic.

The Audit Office, however, disagreed and the matter was brought anew to the government to be resolved. Essentially, Cyprus needed to decide whether to abandon the project altogether or give in to the Chinese blackmail, and give the consortium one last chance to implement the project. The political leadership went with the second option.

It is noted that following the Chinese demand for more money, DEFA sought and eventually achieved something in return, which in hindsight might save the Cypriot side. Namely, it demanded to have the ownership of the FSRU ship transferred to the DEFA subsidiary Natural Gas Infrastructure Company (ETYFA).

The new commitment, the disappointment and the arbitration

Once all this was resolved in June 2022, the consortium made a new commitment to deliver the project by July 2023. It promised that once the extra €25m was deposited, all the problems they had faced would be resolved.

Sadly, however, it proved unable to finish the project and the promises were not kept. The disappointing behaviour continued even after the June 2022 agreement. Even the FSRU, which was under the full control of the Chinese in their shipyards, was not completed in time.

And so, once the consortium realised that it would once again fail to deliver the project by the set deadline, it sought arbitration in London and launched a blame game, clearly in a bid to appease the bosses in Beijing.

Since October 2023, DEFA/ETYFA have exhausted all the liquidated damages and one would expect that the contract would be cancelled and compensation sought.

However, by promising the ship that would be turned into the FSRU would be delivered soon, the consortium managed to avoid this. At the same time, it has hardened its stance at the arbitration and is seeking huge amounts in compensation in an effort to blackmail DEFA/ETYFA.

The “Prometheus”

The most important part of the project is the “Prometheus” ship. According to the contract, the Liquefied Natural Gas Carrier was to be purchased by the contractor and converted into an FSRU.

The work would be carried out in China’s shipyards, which however were not accustomed to operating as CPP’s subcontractors. In other words, the company that owned the shipyard where the conversion was taking place, COSCO, was much more prominent than CPP, and so the latter was in no position to exert pressure to ensure the ship was converted on time, while it also faced other technical issues.

The contract provided that once the ship was converted, it would sail to Cyprus to be connected with the Vassiliko facilities, and more specifically the jetty which should have been built in the meantime.

However, the consortium had still not built the jetty. And this is where DEFA/ETYFA’s insistence on having the ship’s ownership transferred to ETYFA has benefited Cyprus.

The consortium, having no other choice, accepted and indeed transferred the ship’s ownership to ETYFA, a fact that drastically changed the facts and the balance in the relationship between the two sides. Before ownership was transferred, the consortium had the upper hand. However, once it was transferred, the Cypriot side had the ability to seek delivery of the ship even if it decided to terminate the contract.

And DEFA/ETYFA was fully aware of the progress being made – or not – in Shanghai, having placed a team of independent engineers on sight to keep it up to date.

In July 2023, the consortium started publishing videos and announcements in China claiming that the ship’s conversion had been completed and that it was going to be delivered to the contractor.

Similar celebrations took place last November, in a clear bid to show the Cypriot side that the ship was ready to sail off.

The aim was on the one hand to convince the big bosses in Beijing that all is going well, and on the other, to paint the picture that the Cypriot side was not cooperating in the event that the ship was delivered before the jetty was built.

That is, they wanted to claim that the ship was ready to sail, but due to the inability to install it in Vassiliko (where they claimed the Cypriot side was responsible for the delays), DEFA/ETYFA was refusing to receive the ship.

However, DEFA/ETYFA’s team had the full picture of the ship’s shortcomings. It had warned about these in good time and indeed, it emerged that the ship would not pass the Lloyd’s Register’s controls.

To date, the ship is not seaworthy as the consortium has not yet managed to finish it. And even though the contract provided for the entire project to be delivered and not in parts, the Republic of Cyprus would have been willing to discuss the possibility of receiving just the ship, as the ship is the most important and expensive part of the project.

The jetty and the works at Vassiliko

The terms of the contract stated that the jetty had to be “cryogenic”, in line with international standards.

However, it became clear very early on that the consortium was not aware of this when it submitted its offer. This perhaps explains why its offer was so low. So from the very beginning, it began to doubt whether the jetty should be built in line with these standards and this became a serious point of friction between the two sides.

Nonetheless, DEFA/ETYFA refused to change the standards despite the consortium’s blackmailing tactics.

Despite the refusal, the consortium still took the extra €25m in June 2022 and promised to deliver the project in July 2023.

However, by July 2023, work hadn’t even begun on the jetty, which shows the consortium either never intended to keep to its own deadline, or was not capable of comprehending the project’s technical aspects.

So if it knew from June of 2022, when the interim settlement was reached, that DEFA/ETYFA was insisting on the standards to be followed, why did the consortium accept the money and commit to completing the project by July 2023?

Given that it was aware that the cryogenic jetty was a non-negotiable demand of the contracting authority, why did it promise to deliver in 13 months? The answer is clear: the consortium wanted to secure the extra €25m and “cross bridges” when it came to them.

It appears the jetty and land-based infrastructure are the biggest problems, even though they were the easiest part of the contract.

And it seems that this is because after stalling initially, the consortium chose to assign this huge task to a company in 2021 that appeared to be established solely for the purpose of taking on the project.

The company had no history with similar projects; yet it is acting as an advisor on all matters pertaining to the Vassiliko project. The company is now being blamed for the failure of the Vassiliko project. Even the piles it secured to build the jetty were found to have cracks in them.

The situation today

Today, a full 20 months after the project was supposed to be delivered per the initial contract, 24 months after the interim settlement was reached and it received the extra €25m promising a swift delivery, and 10 months after its own delivery date has expired, the consortium has nothing to show.

It is still struggling to make the ship seaworthy. It is still struggling to build the jetty. It is still struggling to complete the land-based infrastructure at Vassilko. And what’s worse, it seems the consortium will never be able to deliver the Vassilko infrastructure either, as it terminated the services of the only good subcontractors it managed to select in recent months – a Cypriot and a Greek company that had shown great progress – even owing them significant sums.

The consortium’s recent announcement, seeking to bring the jetty’s standards to the forefront again when this had been exhausted during discussions back in 2022 when it received the extra €25m, show that it is trying to mislead public opinion in Cyprus as it feels its reputation is on the line.

China’s reputation in Europe

It is at the least unfortunate that a global superpower like China is allowing such inadequate companies to mar its reputation in Europe. The European market is nothing like the Asian or African markets. If China wants to build a good reputation in the European market, it needs to control those using its flag.

The impact from the collapse of the Vassiliko project will be very negative for Cyprus. But it could be even worse for the Chinese side, not just for the companies that comprise the consortium, which will be blacklisted from the European market, but also for the reputation of Beijing in Europe, as those who were opposing the assignment of such huge projects to the Chinese will be vindicated.

The Republic of Cyprus’ next steps and options

The major issue for Cyprus now is what its next steps will be. Regardless of everything that has happened and is still happening, the project is still crucial for the country’s energy future and strategy.

With all this in mind, Cyprus needs to look at its options and proceed without further delay with decisions that are in the Republic’s best interests.

Looking at the matter from a political viewpoint, it is clear that diplomacy will not bring the desired results and that Cyprus needs to seek the substantive involvement of the Chinese government in the discussions; as President Nikos Christodoulides’ meetings with the Chinese Ambassador in Nicosia are not enough.

So if Cyprus is insisting on taking the diplomatic route, then the President has a duty to seek to meet with his Chinese counterpart and try and resolve the dispute at the highest possible level.

As for the arbitration in London, the process will continue and once a ruling is issued later down the line, there will be winners and losers.

The Republic of Cyprus is being called to employ all the legal means it has at its disposal to disprove the consortium’s claims that the Greek Cypriot side is to blame for the delays, and more importantly, avoid having to pay the extra sums CMC is seeking in compensation.

It is anyone’s guess how the situation will pan out, but there are three main scenarios on the table:

First: the consortium changes its stance and completes the terminal as is its duty; which however going by the current situation, seems highly unlikely.

Second: a settlement is reached where the consortium fulfils one part of the project – that is deliver the FSRU – and then the jetty and land-based infrastructure is assigned to another contractor.

Third: The Republic of Cyprus denounces the contract, takes the necessary action to acquire the “Prometheus” as its legal owner, and sets in motion a plan B that it claims is already in place in the event that the deal falls through.

(Source: InBusinessNews)

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