Spanish quakes lift lid on risks to natural gas project
* Spain may shut 1.7 billion euro plant
* Seismic study launched after quakes
* Potential risks for EU project bondholders
* Need for gas storage has diminished
By Tracy Rucinski and Jose Elías Rodríguez
VINAROS, Spain, Oct 17 (Reuters) - Hundreds of small earthquakes off Spain's Mediterranean coast triggered by work at the Castor offshore gas facility could spell trouble for taxpayers and investors in the European Union's debut project bond.
The 1.7 billion euro ($2.3 billion) plant risks joining airports, cultural centres and toll roads commissioned during Spain's economic boom times and now unfinished or under utilised.
Residents reported tremors following injections of natural gas to prepare Castor for use, the biggest registering a magnitude of 4.2.
In response, work has been halted pending seismic studies to determine the safety of the project, which sits atop an oil reservoir and a fault line some 22 kilometres from the small town of Vinaros.
Should it be halted for good, the fate of some 1.4 billion euros worth of the EU's new project bonds, which were issued in conjunction with the European Investment Bank (EIB), is unclear.
Holders of the bonds, which carry a BBB+ credit rating and 5.756 percent coupon, were due to be paid using revenues guaranteed under Spain's regulated gas system once the plant began operating.
Marking the debut of the EU's 2020 project bond initiative, they were subscribed by the EIB and 27 institutional investors throughout Europe.
Fitch Ratings put the bonds on negative watch on October 1, saying it could downgrade the bonds if the project was delayed beyond May 2014.
"In a worst case scenario the project may be terminated by the government authorities on the risk of repeated seismic occurrences of high magnitude," Fitch said.
The contract calls for the government to reimburse operator Escal UGS, which is owned by Spain's ACS and Canada's Dundee Energy, but Fitch said such provisions lack precedent and the payment mechanism and timing are unclear.
The Castor bonds were trading at 98.570 euros on Thursday, having been issued at 100 and trading at 104-105 euros before the tremors.
"We are following developments closely and understand that additional technical studies are being performed," the EIB said following the earthquakes.
"These developments do not influence European Investment Bank support for the project. At present we cannot speculate on financial scenarios."
Industry Minister Jose Manuel Soria challenged terms of the compensation contract with the Supreme Court, calling them "damaging to public interest", but the court rejected the appeal in a ruling published on Thursday.
Castor is built on a former oil reservoir once operated by Shell and on a 51-kilometre-long fault line called Amposta. Its future could now hinge on the National Geographic Institute's assessment of the seismic situation which the government has commissioned.
The town of Alcanar, which complained to the EU about the dangers of Castor as far back as 2009, is plush with orange groves in a hilly and fertile region that relies on farming and tourism.
"What's significant here is not the magnitude of the quakes, but the fact that it is completely out of the ordinary for this area," said Alcanar Mayor Alfons Montserrat. "I can't see any geologist ever giving the green light to this plant opening."
Residents of Alcanar, Vinaros and two other towns affected by the tremors have taken to the streets to call for Castor's permanent closure.
Operator Escal UGS maintains that it rigorously followed all protocols while building the plant and injecting gas.
"Our studies focused on everything we needed to do to be absolutely sure that fault line didn't move," Escal Chief Executive Jose Luis Martinez told Reuters.
Escal Chairman Recaredo del Potro said initial studies on Castor show that one or more small fault lines, rather than Amposta, triggered the quakes.
"Small faults are unpredictable," del Potro said. There are thousands of subterranean and subsea fault lines, making studies on each one almost impossible.
Designed to store 1.3 billion cubic metres of gas and pump it into the national grid when needed, Castor is also now a project facing changed times.
Five years of stop-and-go economic recession have lowered Spain's energy demand and left it with excess storage, diminishing the need for Castor in a power system already struggling to cover costs.
Spain passes infrastructure costs on to consumers through regulated fees in gas bills. That means consumers will foot the bill for Castor, one of the country's biggest investments in its gas system, regardless of whether it opens.
However, suspending the project would save an annual 100 million to 150 million euros related to depreciation and operating costs, brokerage Kepler Cheuvreux estimates.
"The indefinite suspension of Castor would relieve the gas sector of some costs, which is good news from the regulatory risk-tariff deficit angle," said Kepler analyst Jose Porta.
Plans for two gas storage plants in Britain were scrapped last month after the government refused to help build storage sites, saying that subsidising projects would be too expensive for taxpayers.
($1 = 0.7373 euros) (Additional reporting by Andres Gonzalez in Madrid and Oleg Vukmanovic in London; editing by Julien Toyer and Jason Neely)
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