IS THE government’s decision to award four offshore gas exploration licences in the best interests of the island? It seems not. A lot of eyebrows have been raised after the Cabinet’s decision to change the order of ranking of the companies that bid in the second licensing round. The awarding of the Block 9 licence to a French-Russian consortium that was actually ranked fourth has causes people to question whether that decision had been a foregone conclusion, and quite how much the decision will cost the island.
Technocrats are both outraged and disappointed with the government – which seems to have employed non-transparent procedures – for overriding their assessment in a rush to sign contracts on terms that are financially detrimental to the public interest. When the second licensing round was launched back in February, Commerce Minister Neoclis Sylikiotis had said in no uncertain terms that negotiations with the bidding companies would take several months, and that “the whole process, up to and including the signing of the contracts, is expected to be completed in the second half of 2013.”
But last Sunday, he said “the contracts must be completed in the first months of 2013,” that is, a few weeks from now.
What the technocrats are reacting to are the changes in the assessment for offshore Block 9 – the most sought-after prospect contested by nine companies or consortia. It turns out that Block 9 may have been given or promised in advance to the consortium consisting of Total, Novatec and GPB, regardless of the results of the competition.
It’s clear from the assessment of the bids submitted for offshore gas exploration that the scores simply do not match the licences eventually awarded by the government.
We should back up a little here. The government has decided to award, at this stage, prospecting licences for four blocks: 2, 3, 9 and 11. The assessment of the bids was done on the basis of the terms of competition, as published in the government gazette. Under the established procedure, two separate assessments were made. One was carried out by the French consultancy Beicip, the other by the Energy Service of the Commerce Ministry.
The bids were rated based on two key criteria: technical capability, and the economic benefit to the state from exploiting hydrocarbons.
The scores awarded show that out of the four available prospects for three of these (blocks 2, 3 and 9) the top score went to the ENI/KOGAS consortium. The top score, by a large margin, in the Block 11 bids went to the French company TOTAL.
Based on these scores, the four available prospects should have been awarded thus: blocks 2, 3 and 9 to ENI/KOGAS, and Block 11 to TOTAL.
But things were complicated due to the government’s political decision to ignore the bids and to award the popular Block 9 prospect to the TOTAL/NOVATEC/GPB consortium.
The companies who bid on Block 9, and their respective scores (the mean score derived from the points awarded separately by the Energy Service and Beicip) were as follows:
1. ENI (Italy)/ KOGAS (South Korea): 278
2. Premier Oil (Britain ) Vitol (Britain): 234.5
3. Capricorn (Britain)/ Marathon (USA)/ Orange Nassau (Netherlands) CC (Lebanon): 233.4.
4. Total (France) Novatec (Russia) GPB (Russia): 220
5. Edison (Italy) Delek (Israel) Enel (Italy) Woodside Energy (Australia): 217.35
As the above scores show, the best bid by far belonged to ENI/KOGAS; its bid scored 58 points more than that submitted by TOTAL/NOVATEC/GPB.
It should be noted that, in all the cases involved, the separate assessments by Beicip and the Energy Service had a difference of between 0.5 and 2.0 points. However, in the case of the Block 9 bids, the Energy Service’s score for the French-Russian consortium was on average 10 points greater than the score awarded by the consultancy.
It is this significant deviation in the score patterns which suggests a certain bias. Moreover, according to the French consultancy’s score alone, the TOTAL/NOVATEC/GPB consortium was ranked fifth.
Meanwhile the average scores awarded on the financial offer alone of the bids showed that ENI/KOGAS got 271 points, and fourth-placed TOTAL/NOVATEC/GPB received 160 points. That’s a difference of around 25 per cent.
Though it’s not easy to estimate the cash value of this difference, we are talking about billions of euros, depending also on the – still to be proven – gas reserves.
So why did the government “give away” these billions to the French-Russian consortium? According to a report in daily Alithia, the government was trying to curry favour not with the French company – which anyway was awarded Block 11 licence – but rather with the Russians, and more specifically Russian banking organisations that were part of the TOTAL/NOVATEC/GPB consortium.
Reliable sources say the government has asked private Russian organisations for a €1 billion loan, in the hope of securing at least half of that amount, which would keep the state afloat until the February presidential elections without a bailout from the EU/IMF.
The same sources said this decision was sanctioned by AKEL’s Central Committee on October 6, when the ruling party rubberstamped a government document concerning broader economic policy. AKEL has categorically denied this.
The government’s decision to alter the rankings of the technocrats had an impact on Block 2. ENI/KOGAS was awarded Block 3 without serious competition, and TOTAL got Block 11. But Block 9, which ENI/KOGAS deserved, seems to have been gifted to the French-Russian consortium.
This left Block 2, which was contested by six companies in total. But according to the average scores of the bid assessments, only three consortia were in the running for it:
1. ENI /KOGAS: 268.5
2. Premier Oil, Vitol, Petronas: 265.5
3. Capricorn / Marathon: 258
In the end, Block 2 was awarded to ENI/KOGAS consortium, which was ranked first. But had Block 9 been given to ENI/KOGAS, as it should have been, and had the government not wished to award a third block to the same consortium, it could have awarded Block 2 to any of the two other contenders, and without any financial loss, since the difference in the scores were insignificant.
In short, based on the scores awarded, the offshore blocks should have been awarded as follows: 2, 9 and 3 to ENI/KOGAS; and 11 to Total.
And if the decision was to give just two blocks to ENI/KOGAS in order to leave more options open for the rest, then Block 3 should have been awarded to the Premier Oil/Vitol/Petronas consortium, or alternatively to Capricorn/ Marathon.
In all these permutations, the government would have gained more financial benefit. Such a distribution would have ensured the maximum possible financial outcome, no questions asked.
Once it emerged in the press that the bid assessment process had been bypassed, the commerce minister countered that three other criteria were taken into account: national security, a company’s financial scope; and the consistency exhibited in prior licensing procedures.
It is true that the Hydrocarbons Law lists these criteria as well. But the criteria relating to financial scope and consistency should not have been an issue for any of the companies that placed a bid. And citing national security can only be used in order not to award a licence to a company (for example a Turkish company); this criterion cannot be used to give one eligible company the edge over another. Besides, does it stand to reason that EMI/KOGAS met the criteria for blocks 2 and 3, but it did not meet the same criteria for Block 9?
The government is currently negotiating a bailout with the troika; and a loan agreement would still have to be approved by the parliaments of individual EU nations. Already European media are criticising the economic ties between Cyprus and Russia. One wonders: how will Cyprus’ national interests be served should the Dutch parliament oppose an international loan for Cyprus in protest at the discrimination demonstrated against Vitol, a Dutch company?

Published by: www.cyprus-mail.com