Greek LNG as a Strategic Priority, Not a Conditional One

“A well-connected EU energy market where energy flows freely across borders and no Member State remains isolated from the EU energy networks is a pre-condition for creating a resilient Energy Union with a forward-looking climate policy.”

These were the words used by the European Commission in the opening statement of the press release published following the meeting of the Central Eastern and South-Eastern European Gas Connectivity High Level Working Group (CESEC) meeting which took place in Dubrovnik on the 10th of July.

Energy ministers and officials from 15 EU Member States and members of the European Energy Community came together for what was the second meeting of the CESEC. The objective: to propose next steps for the development of South East Europe’s energy market and agree on a concrete list of priority projects. The key outcomes of this milestone meeting were: the signing of a Memorandum of Understanding, the outlining of Terms of Reference for CESEC, a List of 21 Projects, as well as a clearly defined Action Plan with specific steps to be taken by the Governments, National Regulatory Authorities (NRAs), Project Promoters and Transmission System Operators (TSOs).

The 21 projects listed in the Appendix have been assessed and – to varying degrees – are considered to provide benefit to the region, particularly in terms of contributing to security of supply and facilitating price alignment between markets and, with it, establishing competitive wholesale prices and affordable prices for end users. These are achieved – fully respecting EU legislation – via the development of reverse flows in existing pipelines and the establishment of new interconnectors, the development of new indigenous resources, the development of LNG regasification capabilities and storage capacity, as well as the introduction of the Southern Gas Corridor.

The build-up to the Dubrovnik meeting

The CESEC meeting has been eagerly anticipated both by the energy industry, as well as policymakers eager to strengthen their countries positions on the evolving energy chessboard of South East Europe. In light of the Ukraine crisis and the EU’s stressed relations with Russia, the dealings of the CESEC have become crucial for transatlantic energy cooperation – both US Assistant Secretary of State, Victoria Nuland and the US Special Envoy and Coordinator for International Energy Affairs, Amos Hochstein, were present in Dubrovnik. From a Greek perspective, the CESEC meeting was also the battle ground for discussions concerning the future of LNG development in Northern Greece, as it had been rumoured in past weeks that Greece’s LNG projects would be side-lined by the European Commission.

Initially, Greece had submitted two LNG projects for EU funding, one backed by Greece’s state-owned natural gas company (DEPA) in Kavala, and one by Gastrade S.A in Alexandroupoli – both cities are coastal and strategically located near the existing DESFA pipeline network with close proximity to neighbouring countries. Both LNG projects featured in the EU’s Projects of Common Interest (PCI) list of 2013, which sparked a head to head competition.

The project proposed by DEPA for the Aegean LNG import terminal had figured in the 2013 PCI list to receive funding of 252,500 EUR for a study relating to the permitting procedure. Similarly, the project proposed by Gastrade S.A was recognised as a PCI with funding of 1,755,000 EUR for a FEED study, preparation of the engineering procurement and construction process, as well as an invitation to tender. These projects remained in the spotlight when they featured in the European Commission’s Energy Security Strategy Communication of May 2014, where they received further political support from the EU, by being listed as a key security of supply infrastructure projects in the medium term.

However, driven by the current economic situation and market environment in Greece, and considering DEPA’s difficulties in accessing financing, a suggestion was made for the two project sponsors to pool resources and jointly propose the construction of a single facility, taking the form of a Public-Private Partnership (PPP).

Such an endeavour would make economic sense, and would overcome a number of challenges that the two projects would struggle with if maintaining an individual approach. First of all, the PPP would see the project built in Alexandroupoli and not Kavala - a city with intense environmental sensitivities. Secondly, financing hurdles would be surpassed with the support of both DEPA as well as private capital and EU funds. This suggestion, however, has not managed to secure the support of the Greek Ministry, mainly due to the fact that the concept of PPP’s is not aligned with the political ideology of its current leadership.

It is now clear following the outcomes of the CESEC meeting that the European Commission has shifted its focus away from the prospect of LNG in Northern Greece. Croatian LNG on Krk Island, which has been discussed for the past two decades, has been rubber stamped as a priority project. Responding to Greek dismay at the labelling of LNG in Northern Greece as ‘conditional’, the European Commission has on the one hand stressed that the upgrading of the existing Revithousa LNG terminal – located close to Athens – will cover the capacity requirements of Greece. On the other hand, the European Commission’s hesitation to give clear support to a new LNG facility could be interpreted as another signal of the growing disparities between the energy strategies of Brussels and Athens. It would appear that the mistrust characterising Eurozone discussions has spilled over to the energy world.

Do not ignore Greece’s role in LNG

In spite of this; exploring scenarios for the development of the natural gas market in South East Europe and the East Mediterranean region, Greece – at a minimum – is going to have an important role in the the transit of natural gas. When coupled with the involvement of the Greek shipping industry in the LNG market, one can immediately see the potential not only from an energy security perspective, but also in terms of economic growth, job creation and competitiveness. In particular, a lot of discussion has taken place regarding the functioning and commercialisation of East Mediterranean natural gas sources, and whether a trading hub, be it virtual of physical, will be established in one or more countries of the region.

Greece’s role in this equation is secured due to its comparative advantage in the region when it comes to LNG. Its geographic location makes it a preferential location for minimising the high LNG shipping costs for cargoes originating from North Africa, the East Mediterranean and the Middle East; it already has a functioning terminal that receives both contract and spot cargoes, while it also enjoys a dominant role in the LNG shipping industry.

From the outset, the LNG capacity of Greece provided by the Revithousa will be enough to cover the domestic demand for the years to come. However, there are significant complications with regards to the transmission network and regulatory framework that govern the gas flows from Revithousa. Specifically, gas molecules from Revithousa cannot travel north in the absence of a new compressor station. The Revithousa terminal is also linked to the Koula-Sidirokastro pipeline, which pumps Russian gas towards the South. As long as regulatory hurdles and Bulgaria’s position on the issue of the Koula-Sidirokastro pipeline remain unclear, LNG from Revithousa cannot contribute towards the goals of CESEC and the broader scope of the Energy Union.

On the flipside, the joint project of DEPA and Gastrade offers strategic advantages for Greece and the region, and fits perfectly into the timeline of upcoming regional and mega projects as well as existing infrastructure. Unlike Croatia, Greece already has a network of pipelines and planned interconnectors that can be utilised for gas transmission and facilitating cross border gas trade, thus minimising total costs needed to improve the interconnectivity of the region. Croatia on the other hand is severely lacking sufficient infrastructure to link LNG to other markets and will require substantial investment to develop a new energy network. The Greek LNG terminal in Alexandroupoli will facilitate flexible LNG supplies which could join the existing DESFA pipeline network and also TAP – with whom completion dates are aligned. TAPs capacity can be extended from 10bcm to 20bcm after 2020, so theoretically, it could transport gas from Greek LNG in Alexandroupoli. Furthermore, TAPs cooperation with the Interconnector Greece-Bulgaria (IGB) - long identified as a priority project of transatlantic interest- could enable direct access of new gas supplies to Bulgaria and the rest of the Balkans. The possibilities for synergies between these projects are immense, and LNG can be the key to balancing the supply of natural gas in these markets, thus contributing to security and diversification of supplies.

There is a significant strategic opportunity that could potentially be missed if support for this project were to evaporate. LNG is a game changer for the global energy market and Europe is a sellers market. Knowing that LNG volumes will be flooding the markets fully by 2020 when US LNG will be added on top of supplies from North Africa, the Middle East, and Australia, the European Commission should consider all the variables before selecting the LNG projects which it is going to support in the EU LNG strategy expected to be published in the beginning of 2016.

A pragmatic and strategic approach has to be applied in considering which projects are branded as priority and which conditional projects. While the construction of a wider regional network may be the long term objective, it’s impossible to neglect that these projects are to be financed mainly by the industry based on their commercial viability and potential. Thus, issues such as feasibility, financing, inter-connectivity, flexibility and profitability are all critical factors that should not be overlooked.

Constantine Levoyannis is Head of Greek Energy Forum in Brussels and Dr. Angelos Gkanoutas-Leventis is Vice President of the Greek Energy Forum. The opinions expressed in the article are personal and do not reflect the views of the entire Forum or the companies that currently employ the authors.