March 14, 2022 [CyprusMail] – KODAP released its 2022 budget in early February. Out of €119million, over €34 million is allocated to the construction of a strategic oil reserve storage at Vasiliko, with another €23million budgeted to be spent in 2023.

In addition, over €28million was earmarked for spending in 2021, but presumably, with the project still to start, this has not actually been spent.

At a time when Cyprus is committed to the replacement of oil with natural gas for power generation, as well as to increase significantly use of renewables in transport, this project raises a whole lot of questions.

According to the latest Ministry of Energy announcements, the import of LNG will commence in July 2023. It is reasonable to assume that by 2024 EAC will no longer be importing oil, other than keeping some reserves to ensure the security of supplies should there be any problems with the import of LNG.

By law, the amount of stock that KODAP must maintain must correspond to 90 days of average daily oil product imports. According to its own estimates, with the import of LNG, this should drop to about 415,000 tonnes by 2024. However, no allowance appears to have been made for the increasing use of electric cars and renewables in transport.

According to the details provided in the 2022 budget, KODAP’s project will involve the construction of 11 storage tanks with 430,000 cubic metres total capacity, mainly to store petrol, diesel and jet fuel, and appropriate support facilities. It will be constructed in two phases, with the first proposed to start this year. It will include six storage tanks with 210,000 cubic metres capacity to be constructed at Vasiliko and budgeted to cost €58million. Out of this, €35million will be provided through a loan from EIB and the remainder from other loans.

KODAP estimates that the savings from building and using its own storage facilities will lead to €70million savings over time, presumably by not having to pay others to store its strategic oil reserves on its behalf. But it has not given any details or indicated over what time period this will be achieved.

The decision to proceed with the project was taken in 2015, with the first phase confirmed in August 2017. The EIB loan was secured in May 2018. But since then the key parameters that led to this decision have changed, meriting consideration.

Currently, 180,000 tonnes of oil products are stored on behalf of KODAP at Vasiliko and 61,000 tonnes in Greece. EAC has 125,000 tonnes reserves, with another 70,000 tonnes reserves of various oil products kept by oil marketing companies. KODAP is also hiring an additional 80,000 tonnes reserves.

Switch of power generation to natural gas

EAC has 6 storage tanks at Vasiliko, each with 32,000 cubic metres capacity. With the switch to natural gas, scheduled in 2023, EAC will retain two of these tanks to store mazut and diesel as a backup. This will leave 4 tanks, with 128,000 cubic metres capacity, unused and idle.

In addition, EAC has 8 storage tanks, each with 12,500 cubic metres capacity, at Dhekelia. With DEFA planning to extend the supply of natural gas to Dhekelia in future, this could release 6 tanks with 75,000 cubic metres capacity for future strategic oil storage use.

Renewables in transport

As part of the EU’s drive for clean energy, Cyprus is committed to achieving a 10 per cent share of renewable fuels in transport by 2020. But it only achieved 7.4 per cent, ranked 22nd in Europe. The EU target for 2030 is 14 per cent, but with the ‘Fit-for-55’ package reinforcing the role of electrification in transport, expectations are that it will be increased substantially, likely to 26 per cent.

This can be achieved through a combination of increased use of renewable fuels and electric cars. With regards to the latter, Cyprus occupies the bottom position in Europe, with only 0.5 per cent of newly registered cars being electric by 2020.

In addition, in response to the Ukraine crisis, Europe is considering adopting a new energy target: to reduce consumption of fossil fuels within the EU by 40 per cent by 2030. This is bound to have an impact on Cyprus over and above existing commitments.

Cyprus is already committed to achieving the 14 per cent target, but it will almost certainly have to increase this to match the new EU targets when these come.

As a result, it is not unreasonable to assume that this will impact KODAP’s strategic fuel storage requirements, likely to be reduced to less than 350,000 cubic metres by 2030. This reduction will of course have to be effected gradually between now and 2030.

Such a development will also impact private oil storage, such as VTTV, Petrolina and oil marketers, reducing their storage requirements possibly by over 20 per cent, creating additional idle oil storage capacity on the island.

Impact on KODAP’s plans for strategic oil reserves storage

With all these actual and more than likely developments, KODAP should reconsider its plans to build fully owned facilities for strategic oil reserve storage.

On a small island like Cyprus, it does not make sense to build new storage capacity at a time when so much of the existing capacity is about to become idle.

Let’s look at the numbers. The first phase of KODAP’s plans involves building a new storage tank farm at Vasiliko with 210,000 cubic metres storage capacity, scheduled to start operations start of 2024.

As we saw earlier on, with the switch to natural gas, EAC will release 128,000 cubic metres of storage. In addition, EAC will be retaining another 64,000 cubic metres capacity storing oil products as a backup.

EAC is fully owned by the state. So, it is not unreasonable to assume that this storage capacity should be deemed to form part of the strategic reserves Cyprus is obliged to hold.

With another 70,000 tonnes reserves of various oil products kept by oil marketing companies, the total exceeds KODAP’s planned phase one capacity of 210,000 cubic metres, making such a plan obsolete.
It also allows time to re-evaluate more accurately the impact of EU’s climate targets on oil product consumption in Cyprus and the availability of spare storage capacity these will create in other tank farms on the island.

Such re-evaluation is likely to show that KODAP’s needs can be provided through the use of idle storage capacity on the island, without the need for more loans and more investments that are likely to leave Cyprus with more white elephants.

And there is another potential challenge. The land on which the proposed storage facilities will be built may be contaminated, requiring additional costs for remedial works.

Having made massive mistakes in the way the LNG import project was planned, awarded and now being constructed (or not), we should pause and reconsider. Let’s make better use of existing infrastructure before embarking on new, questionable, projects and expenditure, that in the end the Cypriot consumer will yet again be called to pay for.

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