Frančić: There is a strong interest from the EU to realize the floating LNG terminal as soon as possible

All activities regarding the floating LNG terminal on the island of Krk are proceeding according to the schedule, in accordance with the deadlines set by the European Union, which is participating in co-financing this project, emphasizes the director of LNG Croatia, Goran Frančić, in an interview with Hina.

Binding offers for capacity leasing are expected by the end of April, and by the end of the second quarter, the final investment decision.

“In the non-binding phase of the Open Season procedure, around twenty companies expressed interest in leasing capacity at the floating LNG terminal, and twelve submitted offers for leasing capacity totaling more than the initially offered capacity of 2.6 billion cubic meters of gas, which is currently allowed by the capacity of the transport gas network,” says Frančić.

He adds that the binding phase of the Open Season procedure is confidential in nature since confidentiality agreements have been signed.

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“Therefore, I cannot disclose details about the interest. In addition to the companies that have already expressed their interest in the non-binding phase of the Open Season, binding offers can also be submitted by companies that have not yet expressed interest, but after a prior registration procedure. The planned deadline for submitting binding offers is the end of April 2018,” says Frančić.

Activities in accordance with the schedule

By the end of the first quarter of this year, it was planned to conduct binding leasing of terminal capacity, have a contract with partners for the construction of the pier and pipeline, as well as the procurement and management of the FSRU ship, and financing of the entire project.

When asked whether these deadlines will be met, Frančić responds that activities on the technical and commercial development of the project are currently being carried out in parallel with those involving the procurement of the FSRU ship and the selection of the EPC (engineering, procurement, and construction) contractor on a turnkey basis.

“All these activities are being carried out in accordance with the schedule and deadlines defined by the EU, considering that it finances 28 percent of the procurement of the FSRU ship, the construction of the pier with auxiliary facilities, and the connecting pipeline to the point of connection to the Plinacro transport system. Contracts will be signed subject to the final investment decision, which will be made during the second quarter of 2018,” states the head of LNG Croatia.

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Regarding the selection of the supplier for the ship – the floating terminal and the pier and other infrastructure, he says that the pre-qualification round in both tenders has been completed. Currently, negotiations are underway to define contractual conditions, which will result in the submission of final offers, and contract signing is expected in the second quarter of 2018.

As for the environmental impact assessment procedure for the floating LNG terminal, Frančić reminds that the public discussion on the floating LNG terminal ended on November 28 of last year. He expects that by the end of March they could receive a decision on the environmental acceptability of the floating LNG terminal with the application of prescribed environmental protection measures, monitoring of the environmental state, and reporting.

When asked when the issuance of the location permit is expected, which was previously anticipated at the end of February, he explained that it is an amendment to the already issued location permit for the land LNG terminal, which became final in September 2015, and that the expected deadline for issuing the amendment to the location permit is mid-April 2018. Frančić expects the construction permit by the end of May this year.

Project financing

When asked about the phase of work related to the financial structure and whether there are interested parties for the recapitalization of LNG Croatia and entry into a strategic partnership in the realization of the project, he notes that the financing will be project-based – 28 percent is secured through funds approved by the European Connecting Facility (CEF) for works and procurement of the FSRU ship, while the remaining part will be secured through project financing, which is a common way of financing such projects.

A part amounting to 30 percent will be secured by the owner, and the remaining part of the funds is intended to be secured by a loan.

Defining the ownership structure is underway, says Frančić, reminding that a public call for investment in the company LNG Croatia was conducted in 2015 and that three preferred partners were selected, which were confirmed by the Government in July last year.

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“We are now in the negotiation phase with the current owners, HEP and Plinacro, and the preferred partners regarding their entry into the ownership structure of LNG Croatia,” states Frančić.

The government made a conclusion regarding the LNG terminal project in July last year, and the media subsequently mentioned three potential investors in LNG Croatia: the Spanish Enagas, Klaipedos Nafta from Lithuania, and the Marguerite investment fund.

Regarding reports that a proposal from the Lithuanian company Klaipedos Nafta has arrived at LNG Croatia for its services related to accelerating the construction of the LNG terminal on Krk, he says he can only confirm that a Technical Cooperation Agreement was signed in April 2017 between LNG Croatia and the companies Klaipedos Nafta and Enagas as service providers.

“Under this agreement, they provide us with technical consulting services in the development of the floating LNG terminal, and we are very satisfied with the cooperation so far,” says Frančić.

“Lex LNG” would accelerate construction

Regarding the price competitiveness of the floating LNG terminal compared to natural gas transported to surrounding markets via conventional pipelines, he says that the interest shown so far for leasing capacity, based on the indicative tariff, indicates that potential users of the floating LNG terminal have found their calculation.

Frančić believes that a special law on LNG, the so-called ‘lex LNG’, should simplify and accelerate the construction of the LNG terminal.

“It confirms the strategic nature of the project in all its phases of development and realization and regulates issues such as the infrastructure of the LNG terminal and accompanying infrastructure, rules and measures during the realization of the LNG terminal with the aim of preserving the security of natural gas supply, issuing concessions on maritime property, as well as property-legal relations. It is being drafted by the Ministry of Environment and Energy and should be adopted by the end of April 2018,” says Frančić.

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When asked for a comment on the opposition to the construction of the floating terminal and what its advantages are compared to the land terminal, he emphasizes that the FSRU ship, the central part of the floating LNG terminal, is standardly equipped with the most modern safety systems.

“In addition to being subject to the SAVESO directive, FSRU ships with all facilities must meet all safety conditions prescribed by the registry of ships of the country whose flag the ship flies, including in Croatia, and recognized organizations for safety protection. Additionally, the FSRU ship, as a vessel for the transport and storage of liquefied natural gas, must comply with all safety conditions prescribed by The International Code for the Construction and Equipment of Ships Carrying Liquefied Gases in Bulk (IGC Code).”

Moreover, the FSRU ship on the island of Krk must also meet strictly prescribed maritime conditions defined by the Maritime Study certified by the Port Authority of Rijeka.

Comparing the floating terminal with the land terminal, he says it is “well known” that the realization of floating terminals requires far less capital investment and operational costs and requires significantly shorter time for realization.

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“In market conditions after the major financial crisis of 2008, many companies and countries turned to the FSRU ship as a far more flexible and faster solution to the issue of gas supply security. According to data from July 2017, out of a total of 26 such ships, 23 are in operation as floating LNG terminals, and 3 function as LNG tankers,” says Frančić.

He adds that, compared to the land LNG terminal, the floating one requires significantly less capital investment and has significantly lower operational costs.

“Given the limitation of the transport system, which currently allows leasing up to 2.6 billion cubic meters of capacity annually, the floating terminal is at this moment the only viable LNG terminal option. The land terminal will begin realization after the full development of the transport system and the completion of the interconnection construction to Slovenia, along with that to Hungary. Then, with the possibility of entering the transport system with 7 billion cubic meters of LNG annually, the land terminal will justify far greater capital investments, as well as operational costs,” says Frančić.

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He emphasizes that he understands the skepticism and distrust of the local community in part based on the fact that the LNG terminal project, both land and now floating, has been discussed for the last ten years or more.

“What is different now is the co-financing of the project with EU funds as well as the strong interest from the EU to realize it as soon as possible. In the second part, regarding the impacts on the environment, tourism, and the local community, we can agree that the floating LNG terminal will have a significant visual impact and will bring fewer immediate benefits to the local community compared to the land terminal. That is why we initiated an initiative to amend the Gas Market Act to allow the Municipality of Omišalj to achieve additional revenues by being paid 3 lipa for each MWh of energy delivered from the floating terminal to the gas network,” says Frančić.

“However, I do not agree with claims that the FSRU ship will have a negative impact on the environment, especially with the rigorous application of environmental monitoring measures and prescribed environmental protection measures,” concludes Frančić.

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The total costs of constructing the LNG terminal on Krk are estimated at 383.6 million euros, while the EU will invest 101.4 million euros in this project. The grant agreement was signed in mid-December last year. The first quantities of gas from the terminal are expected to be released into the system at the beginning of 2020.