This week the leader of the Democratic Party (Diko), Nicholas Papadopoulos, said on Twitter that the import of mazut instead of natural gas has cost the Cyprus economy €1 billion over four years.
This was followed by news that the government was considering another tender for the import of natural gas. I believe that would make it the fourth attempt by the authorities to import gas to the island.
There are several reasons why Papadopoulos is probably right. At the moment, Cyprus depends for well over 90% of its electricity production on mazut and diesel. Mazut is the dirtiest form of fossil fuel and Cyprus is already paying extra charges for its use, which are, of course, passed onto consumers.
Those charges are likely to increase sharply in 2020 as a result of changes in the EU’s emissions trading system. The increase in costs creates one incentive for the long overdue switch to gas.
Oil-price effect
The second incentive to switch to gas is the negative impact of these dirty fuels on the economy. Mazut and diesel prices are more closely tied to the international oil price than natural gas. Every time oil prices go up, consumers and businesses see a big hike in their electricity costs.
In 2011, when oil prices averaged $111/barrel and Cypriot businesses were already feeling the pinch from recession, this had devastating consequences, especially with the additional hikes to pay for the rebuilding of the power station after the Mari explosion.
International oil prices are now on the rise again. From a low of $30.70/barrel in January 2016, Brent crude oil prices had climbed to $51.59 by March 2017.
This has had an immediate impact on inflation in Cyprus. Prices rose by 1.2% in the first quarter, compared with a decline of 1.2% in 2016. Much of that is coming from electricity: prices in the category of housing, water, electricity and gas rose by 6% in January-March, compared with a fall of 6.6% in the whole of 2016.
Suddenly, that small increase in pay or business revenues which some people saw this year has been eaten away by their electricity bills.
There are bound to be calls (perhaps from those who benefit most from the mazut trade) for Cyprus to put off importing gas, in the hope that enough Cyprus gas can be found both to export it and to pipe it to the island for domestic use.
This would be a mistake. If Total and ENI find a lot of gas when they drill in Block 11 in July, their first priority will be to turn it into liquefied natural gas (LNG) at the under-used Egyptian Damietta plant, in which ENI has a stake.
The economics of gas production are so challenging right now that laying two pipelines—one to Egypt and one to Cyprus—could render the whole project unviable. Moreover, with renewables catching up fast, gas export opportunities have to be grabbed before they disappear forever.
There is no reason why Cyprus cannot use the LNG produced in Egypt to supply itself.