Just one binding offer has been received for the lease of capacity of the future (?) LNG terminal on the island of Krk.
In the same week when the long-awaited “Lex LNG” - a special law intended to facilitate the construction of an LNG terminal on the island of Krk - has been forwarded to legislative procedure, the project has received a substantial blow, reports Jutarnji List on April 14, 2018.
On Monday, the final deadline for the first round of tenders for the submission of binding bids for the lease of the future terminal capacity expired. According to several sources, the result of the competition has been a disaster. According to unofficial information, LNG Croatia (the company which is developing the project) has received just one binding offer for modest capacity, reportedly only 100 million cubic metres of natural gas a year.
According to the same sources, the sole offer was sent by the Croatian national oil company INA, which has confirmed that it had indeed submitted an offer. The director of LNG Croatia Goran Frančić has refused to comment on this information.
Given that the planned capacity is about 2.4 billion cubic metres of gas per year, the potential customers have “bought” just over four percent of the total capacity – the amount significantly below the threshold which would make the investment financially viable. This is a new proof for the position that - contrary to the general public's opinion - the most significant obstacles to the realisation of this strategically important energy project are neither ecological, geopolitical or legal, but business.
Simply put, the critical missing piece of information in the current development of the LNG terminal project was whether there were enough companies ready to use the terminal in the next twenty or more years. The outcome of the first round of the tender offers a very disappointing answer and significantly lowers the likelihood that the project will be realised.
The project has been designed in a way to cover roughly a third of costs with the European Union's money, a third with investments and a third with a loan to be paid by the future terminal’s income. Since the total estimated value of the project is approximately 383 million euro, it is expected that about 282 million euro will need to be provided. It is logical to assume that neither the investors nor the banks will be ready to provide such a significant amount of money without assurances that the money will ever be returned.
The LNG terminal project is, together with the Pelješac Bridge, the most important infrastructure project in Croatia. The European Union has approved a grant in the amount of 102 million euro, and even US President Donald Trump spoke about the importance of the Krk terminal. The potential collapse of the project due to lack of interest is, therefore, a political embarrassment for Andrej Plenković and his government. Still, not everything is lost.
“This was just the first round. We have always known that we would need more time to fill our capacity. True, this result is disappointing since we expected at least one billion cubic metres to be sold in the first stage. The competition will have three rounds, everything must be concluded by the end of May, and it is obvious that the state will have to get involved. For large gas traders, it is obviously unacceptable at this point to assume the financial obligation for such a long period,” say sources.
Although it is theoretically possible that the situation will change over the next few weeks, such a scenario is unlikely for many reasons. According to one high-ranking manager in a prominent gas company, the LNG terminal project carries too much risk. “We are being asked to agree that we will pay for the terminal 20 years at a fixed price, whether we use it or not, and, on the other hand, the state assumes no obligation.”
It is indicative that no US company has sent its bid to the competition. “We hear all the time that this is a project pushed by Americans to sell their gas to Central Europe. So why haven’t American companies come forward? People claim that this project will enable certain countries to no longer depend on Russian gas, so how come these countries are not interested? Ukraine should be interested in gaining a new gas supply direction. Where is its offer? Something is obviously very wrong with the project, either terms or prices,” said a source.
The current model implies the purchase of a new floating terminal (FSRU) which would have an ultimate capacity of more than six billion cubic meters of gas. There is a possibility that a smaller vessel might be bought, which would enable profitable operations with lower gas quantities. Still, it is questionable whether such a floating terminal can be found. And, the government would have to restart negotiations with the European Commission so that it would not reduce its grant.
Given all the unknowns, there is just one thing certain. The promised start of operations in late 2019 will again have to be postponed, perhaps indefinitely.
Translated from Jutarnji List (reported by Marko Biočina).
