Energy experts have urged the Government to introduce a legal and regulatory framework and choose open, transparent bidding for Sri Lanka’s first ever Liquefied Natural Gas (LNG) tender. Proposals for both LNG supply and LNG terminals are now actively being considered in a bid to diversify the energy sector. However, there is no Request for [...]


Transparent bidding, legal framework must before considering LNG terminal here, say energy experts


Energy experts have urged the Government to introduce a legal and regulatory framework and choose open, transparent bidding for Sri Lanka’s first ever Liquefied Natural Gas (LNG) tender.

Proposals for both LNG supply and LNG terminals are now actively being considered in a bid to diversify the energy sector. However, there is no Request for Proposals (RFP) document. There is also no legal framework or regulator. The subject of downstream gas has not been assigned to any authority. And no competitive bids have called encompassing liquidated damages for non-performance.

“We have to very clearly define what we need,” said Tilak Siyambalapitiya, an energy consultant with three decades of experience in the sector. He called for an RFP, legal framework and competitive bids.

“The Government–meaning the Ceylon Petroleum Corporation (CPC), the Ceylon Electricity Board (CEB), independent power producers (IPPs) or a new gas authority–must purchase gas internationally, pass it through the terminal and pay a fixed fee for the terminal plus a variable fee for the amount throughput. No other nonsense will work. It may work, but at an exorbitant cost to the country.”

On the table now is a bid from SK E&S–a reputed global gas and power company –supported by the Korean Government for a free-of-charge floating terminal tied to an annual order of LNG for two decades at international market prices. Also in progress is a government-to-government initiative involving India, Japan and Sri Lanka for another floating storage re-gasification unit (FSRU) with LNG supply at a future date. A third LNG terminal and power station is coming up with Chinese participation in Hambantota.

Cabinet has called for the Korean proposal to be subjected to a Swiss Challenge. This is a system by which a party makes an unsolicited proposal to the Government. It is then opened out for third parties to make better offers (challenges) for the same project during a designated period. The original proponent finally gets the right to counter-match any superior offers given by a third party.

The Board of Investment has “bleated” about four proposals received to build gas terminals and accepted all of them, Dr Siyambalapitiya said. “Without specifying what the country needs, these proposals brought in by friends or friend of friends of various politicians or officials cannot be anything more than a few pieces of paper plus a load of brochures.”

But after two years of going round in circles, nothing has materialized yet. “What was the error?” he asked. “Not issuing a proper RFP, not anchoring the project under a law, existing or new and not anchoring the project with an institution. The BOI forgets, conveniently, that a gas terminal is not a garment factory. The investment is large, the customers are all local.”

There has to be a gas authority, Dr Siyambalapitiya reiterated, or responsibility for the subject must be assigned to an existing institution. “International agencies or companies building a gas terminal cannot sign contracts with committees run by political appointees,” he said.

Since about early 2016, the Government has tried to establish a marriage between India, Japan and Sri Lanka on Sri Lankan soil to build the first gas terminal. “Why Japan and India?” he asked. “They are the aggrieved parties of the President and Prime Minister’s rash decision in 2015 to cancel the two power plants in Sampur. So Sri Lanka–having lost money on work done in Sampur and after years and years of using loads of oil to replace lost electricity from Sampur–now has to give the project to Japan and India but, before that, cause a marriage between the two.”

The whole of India has just four operational terminals: Dabhol, Hazira, Dahej, Cochi. None of them are fully loaded and some use only up to 15% of capacity because of problems with gas costs and with laying pipelines, he said.

He also cautioned against take-or-pay contracts as it would mean paying for gas even when it was not needed (for instance, when high rainfall leads to higher hydropower generation, when there is lower demand or when solar and wind conditions were optimum).

Saliya Wickramasuriya, former Director General of Petroleum Resources and trained upstream regulator, said Sri Lanka must also factor into its plans the “very real prospect” of producing its own gas in the future. The possibility, he said, has existed since October 2011.

“The Government must build up a diversified energy portfolio and energy mix with a view to building up the demand,” he explained. “It’s a matter of creating enough economies of scale to make commercially viable the production of our offshore gas resources.”

Mr Wickramasuriya said there was presently an oversupply of gas in the global marketplace. And technology such as fracking has created access to large reserves. “That is why there is so much interest in selling gas to even a small customer like Sri Lanka,” he said, adding that he knew of at least six credible international proposals “all purporting to sell, competitively, LNG to Sri Lanka.”

But the proposals were not entirely “unsolicited”. They come, first, from a change in the global marketplace where substantial oversupply is causing sellers to look to place parcels of LNG in new markets. Secondly, Sri Lanka has made public statements on its commitment to clean energy, including, explicitly, a move away from coal.
While Sri Lanka’s economy is relatively small, natural gas consumption is currently at zero level. This left huge room to grow. The country could be a significant purchaser of natural gas a decade or two from now, as well as a growing producer.

“We have created our own ‘unsolicited’ proposal by actually announcing to the world our changing policy,” Mr Wickramasuriya explained. “So these should not be viewed with suspicion. They are bona fide proposals of people wanting to establish a footprint in Sri Lanka.”

Whatever commitment Sri Lanka entered into, however, must have the necessary flexibility to accommodate the country’s circumstances. For instance, if the stated intention is to reduce the cost of energy, there needs to be some form of volume or time benefit in the supply or ceilings imposed on the pricings of gas. “We need to structure our demand,” he said. “Our demand definition is going to help us meet our economic objectives.”

Sri Lanka must also not lose of the fact that it would want to produce its own gas. “In our own gas, the extraction cost will be amortised over the first few years, maybe four to six years,” he pointed out. “Therefore, there will only be the operational cost because the resource is free. It is ours to extract and consume. No matter what Sri Lanka does today in terms of LNG, we should be making plans to use our gas because that is where the end game should be.”

SLGTC to enter into joint venture with Inida and Japan to build terminal 
The Treasury has set up a subsidiary called Sri Lanka Gas Terminal Company (SLGTC) with a view to entering into a joint venture (JV) with India and Japan to build an LNG terminal.The SLGTC will have the Sri Lankan shareholding in the joint venture, sources from the Ministry of Development Strategies and International Trade said. India’s Petronet (which was nominated by the Indian Government) will hold a 47.5 percent stake while the Japanese consortium of Mitsubishi and Sojitz Corp will have 37.5 percent and SLGTC will control 15 percent.The Sri Lanka Ports Authority has, in principle, approved the site of the LNG receiving terminal to be the western breakwater. However, the finer details of the JV agreement–the structure, time period and business model as well as LNG supply and prices–are yet to be finalised. Cabinet appointed negotiating committee (CANC) is to be set up for the purpose.

Sri Lanka has emphasised at discussions, however, that there should be international competitive pricing. Supply will have to be done through a single credible agency, which is the Ceylon Petroleum Corporation. The terminal, meanwhile, is to be constructed before 2019. The investment amount has not been specified yet. “The JV has to decide on investment,” the sources said.

Before the JV agreement is signed, there will be a memorandum of understanding among the three companies. The MoU was to have been signed by now but has been delayed as the Sri Lanka Ports Authority is going through some of its provisions. The MoU was drafted by a joint working group.

Meanwhile, the Korean SK E&S proposal suggests the starting date for the LNG sale and purchase agreement (SPA) as the second half of 2020, ending on March 31, 2040. The annual contract quantity is specified as either 500,000mt per annum or one million mt per annum. The primary sources of LNG will be the seller’s global LNG sourcing portfolio.

The floating storage regasification unit (FSRU) will provided free-of-charge; the LNG pipeline will be funded by the Sri Lanka Government and, if necessary, SK E&S will provide technology for pipeline engineering, construction and operation. The LNG price is to be at competitive level, “considering that FSRU is free of charge”.

The terms of the contract will be “Take or Pay”: The buyer either takes the product from the supplier or pays the supplier a penalty. The SK E&S proposal says, “If Buyer fails to take any scheduled cargo, Buyer shall pay Seller an amount equal to the Contract Price multiplied by the quantity which Buyer failed to take”.


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