Vasiliko Ltd. – George Papanastasiou, General Manager – Cyprus
The general manager of VTTV talks about the company’s oil storage and management facility, which is currently in the commissioning phase, and is the single largest infrastructural investment in the Cypriot oil and gas sector to date.
VTT Vasiliko Ltd was founded in 2010 as a subsidiary of VTTI B.V. and has since been establishing an oil storage and management facility worth approximately USD 375 million, which represents the single biggest infrastructural foreign investment in the energy sector in Cyprus at present. What is the status of the project today and the timetable for its completion?
Located in Cyprus, we can primarily support the region, the local niche market and compulsory stocks. At this point in time we are in the commissioning phase of the project: we are receiving the turnkey project from an EPC (Engineering, Procurement and Construction) contractor and we are waiting for the key. Piece by piece we receive it from the contractor, and then we test each component, for example the firefighting system at the loading gantry. The plan is to get the first vessels in by the end of November. We are now in the process of securing the last permits, namely for air emissions and waste disposal, and as soon as we have them, we will be free to open the terminal and start operating from it. The restriction is not only the two permits that we are missing at present, which we are due to receive in the next 15 days; but it also has to do with testing all the parts of the terminal to make sure everything is running as initially envisaged. This is where we are at the moment.
Why was Cyprus identified and ultimately selected as the optimum location for VTTI B.V’s investment?
When the project was initially conceived, it was actually the brainchild of one of the company’s shareholders, Vitol. VTTI did not yet exist at the time. Vitol identified that there were no oil storage facilities in the area and that there was insufficient capacity to support the product flows between east and west. Moreover, the Suez Canal is in close proximity to Cyprus. The motivation for the construction of a facility like this thus came direct from Vitol, but VTTI took over and operated as a company under Vitol dealing essentially with the logistics. The second reason for locating this project in Cyprus is the accessibility to deep-sea water, which is a huge advantage for attracting the big oil vessels. Thus Cyprus is ideally located both geographically and geologically.
The terminal represents a first-of-a-kind project for the Eastern Mediterranean with the potential to connect Europe and the Black Sea with markets in the Middle East and Asia. What is the project’s role as a ‘connector’ linking-up product flows of fuel oil, middle distillates and gasoline?
Well, since Europe is long in gasoline and the eastern Mediterranean is short in gasoline, and because of different developments of these two areas, you get greater quantities of diesel consumed in mature Europe and more gasoline in the developing eastern Mediterranean region. Again, it makes sense to construct a terminal in Cyprus to facilitate distribution. Next you see middle distillates—diesel, gas oil, jet fuel—coming to Europe from the Arab Gulf via Cyprus, because sometimes, though not always, a vessel needs to break bulk—meaning that big vessels come in and small vessels go out, due to the shallow draughts that the main facilities possess. For breaking bulk, one has to be in a location where there is ample deep-sea water, where cargo can be unloaded and loaded, essentially disassembling it down into smaller vessels. We can therefore say that Cyprus, along with a few other islands, sits at a crossroads of critical shipping routes and at the same time represents a deepwater location, which is doubly advantageous.
Also there are additional product flows emanating from the Black Sea, where there still remain the older style refineries that are no longer very efficient. These former generation refineries tend to produce a lot of black products, which inhibit the operating effectiveness of the refineries when held for long periods of time in storage. It is therefore in the interests of the refineries to move these products along as soon as possible to markets where consumption of fuel oil remains prevalent. These days, burning of fuel oil tends to be limited to emerging economies in the east such as India and China because of the pollutant by-products and harmful emissions which are simply deemed unacceptable within Europe. Therefore, Europe has transitioned to using natural gas and fuel oil consumption tends to be restricted to developing countries in the East. However, in order to transport it eastwards, one needs to make bulk as opposed to breaking it; and the only logical way and place to achieve this is through Cyprus. The Bosporus straights, for example, though equally strategically positioned would be much too shallow for vessels the size of Suez Max.
What is the timeline of the VTTV project?
VTTV does not currently have capacity for storage of fuel oil, and this is because we are still on the verge of operating phase one which focuses on white products – that is clean products such as gasoline, diesel, gas oil and jet fuel. Phase one will begin operation at the end of October or beginning of November with 543,000 cubic feet of capacity. Phase two, for which we are still negotiating the parenting license at the moment, will concern the construction of 13 fuel oil and crude oil tanks, with a capacity of 305,000 cubic feet. The total terminal will ultimately be close to 900,000 cubic feet of capacity.
We are expecting the second phase to be fully operational by the end of 2016. The long time frame is due to the fact we are going to place the new storage tanks on reclaimed land which needs to be constructed and allowed to settle prior to tank placement. Our economic calculations tell us that reclaimed land works out cheaper overall because of the rising price of land here in Vassilikos. There is also an added political obstacle impeding the acquisition of land in this area which is that most of it is actually Turkish Cypriot owned.
Because of the absence of flexible marine facilities in this part of the world, trading is still operating in a primitive context. In order to be able to do profitable trading you need decent quality logistics. Certainly, a terminal in this part of the world will help the supply chain greatly. Moreover, when we started developing this project, we saw some great opportunities because of the fact that the country had been suffering reliance on outmoded and obsolete refining facilities in Larnaca. There is currently a court decree that has been issued in Larnaca that demands full relocation of these facilities before 2016. We therefore amended the scope of this terminal from being exclusively a trading place to additionally covering the local oil stock storage if called upon. By changing the original configuration of the terminal from big tanks to smaller ones, we were then able to deliver the products that are consumed within this niche, but nonetheless profitable, market.
The VTTV Terminal also allows for the repatriation of the Cypriot Republic’s strategic stocks. How important is such repatriation in economic and political terms?
An important opportunity that we see locally is the compulsory stocks. Compulsory stocks are currently kept in Greece and in Cyprus. In Cyprus they are kept at the Cyprus Oil Storage Company, which belongs 100 percent to the state and benefits the public. This is the former refinery that was shut down in 2005. This refinery was converted into an oil storage place and most of the local physical stocks are maintained by this company, representing approximately 130,000 cubic feet. Another 140,000 to 150,000 cubes are installed in Greece, in part by Helennic Petroleum. Cyprus’ own obligation meanwhile is to maintain 450000 cubic feet in total which is based on local market consumption from the previous year and the rest is kept in paper stocks elsewhere, mostly in the Netherlands. What some of these trading companies can do with this terminal is to combine trading activities. Furthermore, here they can convert some of their physical stocks to tickets and sell them. Maintaining the stocks in Cyprus is, in this way, both politically and economically beneficial: they can be used for consumption in an emergency situation.
How, then, do you evaluate the economic, commercial and even political benefits of this project to Cyprus as a nation?
Product flow in particular, as we were discussing before, has the potential to make this place an oil-trading hub, which is the aspiration of the company. There are many benefits for a country if a hub is created and if it attracts international attention. Energy products in general always attract a lot of international attention and being a strategic location that has oil trading represents a benefit in and of itself. First of all, countries that do business via Cyprus are registered and taxed within Cyprus. Secondly, having the added physical stocks in Cyprus is an energy source that will change the world around Cyprus.
Although unrelated, offshore exploration will also be important for a terminal like VTTV. In other words, we see future synergies between the VTTV terminal and other developments related to the growth of Cyprus’ fledgling oil and gas industry such as LNG. It is a different product with different risks, however, we are a company that understand the risks and can act as facilitating a step into the future for Cyprus. We believe that our activities constitute a win-win situation for both the company and the country and I personally believe that we have the potential of being quicker than any other company in our field.
What challenges has VTTV been encountering in implementing an infrastructural project of this magnitude, and how easy has it been to source the requisite skilled labour?
We faced many challenges and not just in human resources and sourcing skilled labour and expertise. In order to develop knowledge in the country and different departments of government, and in order to be quicker in understanding projects like this, we had to first change the mentality of the bureaucracy which was not easy. Cyprus has been a place that is mostly tourist-oriented and there is a general belief that the business of tourism cannot be combined with heavy industry. Another challenge that we faced was that though the legislation was there, and with some creativity you could interpret it into what is needed for an oil terminal, it’s not always possible to make the legislation accommodate and benefit an oil terminal.
We overcame these challenges through education and demonstration exercises abroad in similar establishments. For example, we took customs people to witness oil terminals operating next to tourism facilities and residential zones; we shuttled environmental committees abroad to discover how other countries maintain environmentally friendly terminals; we accompanied the Port Authority to Fujairah in order to show them the possibilities of operating a small fleet and having commercial vessels come in and out; and we even exposed the local fire brigade to the latest practices in oil fire containment and firefighting. These are all examples of how we were able to overcome a multitude of local-level obstacles. It all takes time, but through education we believe that we can really change the mentality of the system here.
We feel we have already been of immense service to the island because future large-scale infrastructural activities of this ilk, such as the proposed LNG terminal, which is also intended to be based out of the Vassilikos area, will find much of the groundwork has already been put in place. Companies implementing future infrastructural projects like this will find it much easier because a precedent for work-around solutions will already have been established.
What value addition does the project contribute for ship-to-ship operations?
The facility here is brand new and has invested in the latest environmental standards and latest technology. Because of the high standards and quality that is maintained here, I do not believe that we will be the cheapest place in the world; but certainly in terms of value for money, we can be the very best place in the world.
Nor must we forget that this terminal is the centerpiece of other developments in the region and a real catalyst to cluster growth and local SME development. A good example of this is the local laboratory that is currently being created with a view to undertaking the task of certifying products that are being traded through the terminal. This is a third party investment via local Cypriot investors that we have been encouraging and promoting.
There will also be another company that is forming to provide the full package of services required at the jetty from pilotage to towage to mooring. We are naturally keen to avoid full reliance on the Cypriot port authority which, to date, has held a monopoly on these kinds of services. We will be shareholders in this new company alongside two other investors and have already acquired our own tugboats and skilled personnel to fulfil the function. Crucially this will also provide greater flexibility for the end users of the terminal because the Cypriot port authority doesn’t operate after daylight and charges double fees outside of normal office hours resulting from its own highly unionised environment. With the setting up of this new company, we will be able to ensure round-the-clock jetty services at affordable prices very much in line with international norms.
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