Croatia's LNG Terminal Delayed Again?

By 17 September 2017

It does not seem likely that the terminal will open before 2020, if ever.

When then Energy Minister Slaven Dobrović announced in February that a 102 million euros grant for the floating LNG terminal on the island of Krk had been approved from European funds, that was interpreted as the major breakthrough, after which nothing could stop the terminal for actually being constructed, reports Jutarnji List on September 17, 2017.

Dobrović reiterated his earlier forecast that the terminal with a capacity of about two billion cubic meters of gas a year should become operational by 2019. Now, full eight months later, Dobrović is no longer a minister, but – at least on paper – his goals for the terminal project are still with us.

A few days ago, LNG Croatia, the company which is formally developing the project, has published a tender for businesses interested in delivering a floating storage regasification unit (FSRU), which is the essential part of the project. This competition, as well as a number of other circumstances surrounding the project, show that the European grant was just the beginning of the road, that the project’s fate – despite its declared strategic importance – remains uncertain, and that there is very little chance that the first shipments of liquefied gas will reach the northern coast of Krk in 2019. Such a scenario would derogate all the benefits which Croatia should have received by deciding to abandon the development of the land terminal and turn towards a floating one.

By making this decision, under the obvious US influence, the government has opted for a faster, cheaper and more flexible solution, rather than for greater economic effects through the involvement of the domestic construction industry which could take part in the building of a land terminal. Nevertheless, such a decision – reasonable when it was made – has lost its purpose with the slow implementation of the project, but also with some of the conditions imposed on Croatia by the European Union.

The prerequisite for the funds to be used it that they must be spent exclusively for the purchase of the FSRU. In this way, LNG Croatia has lost the possibility of leasing the terminal, which is the usual model for developing similar projects in the world, which has been used, for example, in the development of a floating terminal in Klaipeda, Lithuania. The advantage of leasing the model is that, despite larger short-term operating costs, it reduces the investment risk and enables the initial stage of the market development without the risk of so-called sunk costs.

The global market for floating gas terminals is extremely centralised, and just three companies – Excelerate Energy, Golar and Hogeg LNG – own 23 of 26 terminals currently operating in the world. These companies also have most of the orders in a tiny number of shipyards able to build such sophisticated vessels.

Still, LNG Croatia could, theoretically, buy one of FSRUs current being built. But there is now another problem – capacity. Namely, four out of five floating terminals which will be constructed by 2020 have an annual capacity of just under 5 billion cubic meters of gas. That is a huge capacity, much larger than even the previously planned capacity of a land terminal on Krk. Since the price of such terminals is around 250 million dollars, the Croatian investors would have to spend – in addition to European subsidies – more than 100 million euros.

But on the other hand, due to constraints on the capacity of the gas pipeline infrastructure – at least during the first few years until new gas pipelines are built – the terminal's output capacity would be limited to a maximum of one billion cubic meters of gas. Therefore, such a massive floating terminal would be used with less than 20 percent of possible capacity. It is difficult to imagine a business model that could operate profitably under such circumstances.

Developers of the Croatian LNG terminal would have to either buy one of the already existing floating terminals which are no longer needed to their owners or order the construction of a new terminal according to specifications. However, since global shipyards are full and the building of a terminal lasts for about two years, so it would appear that – even if the construction were to begin today – the initial goal of the terminal being operational in 2019 could no longer be met.

The most realistic option remains to buy a “second-hand terminal”, such as Golar Spirit, a terminal in a Brazilian port which has not been used in the past few years. However, in the case of such transaction – apart from the limited supply – there is also a limiting factor of acceptable technology. Finally, such an option to procure an existing terminal would likely cause very negative reactions from the domestic shipbuilding and electrical engineering industry, which would lobby against a solution that prevent them from taking part in the project.

All in all, a lot of serious questions lie ahead of those responsible for the realisation of the LNG project on Krk, without easy answers. The dream about a liquefied gas terminal on Krk in 2019 may have already faded.

Translated from Jutarnji List.