Energy Minister Udaya Gammanpila left for Dubai this week for meetings with officials of Exxon Mobil, one of the world’s largest publicly traded oil and gas companies, and two other international oil and gas firms. The minister is actively promoting the exploitation of resources in the Mannar Basin which he claims will help Sri Lanka [...]

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Mannar Basin resources: Energy Minister in Dubai for talks with global oil giants

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Energy Minister Udaya Gammanpila left for Dubai this week for meetings with officials of Exxon Mobil, one of the world’s largest publicly traded oil and gas companies, and two other international oil and gas firms.

The minister is actively promoting the exploitation of resources in the Mannar Basin which he claims will help Sri Lanka pay off billions of dollars in foreign debt. The Ceylon Petroleum Corporation (CPC) recently entered into long-term contracts with international suppliers to maintain a steady fuel supply amidst stock depletion. It owes US$ 3.3bn to two state banks which, with dwindling foreign reserves, are unable to allocate US dollars for letters of credit opened on behalf of the CPC.

However, Finance Ministry moves to push through an unsolicited proposal from US-based New Fortress Energy (NFE) to meet all of Sri Lanka’s liquefied natural gas (LNG) needs counters plans by the Energy Ministry to exploit oil and gas resources in the Mannar Basin.

There are fears that domestically-produced natural gas will have no market in view of the NFE deal to supply all of Sri Lanka’s LNG needs for the next ten years. The contract includes a floating storage regasification unit. A Cabinet paper has been draw up to this effect. The price of LNG will be tied to global market prices and it will be a take-or-pay contract.

“Any legal obligation to enter into LNG import and infrastructure will delay the switch to domestic resources, that are now close to production, for up to ten years,” warned Saliya Wickramasuriya, Member of the Petroleum Resources Development Committee (PRDC). “By that time, the investors currently interested will be producing someone else’s gas.”

The Energy Ministry and associated institutions spent the last year bringing about sweeping changes to Sri Lanka’s upstream petroleum laws to increase offshore activity–including a new policy, a new law, a new regulatory authority, new data being acquired and reprocessed, and the opening of an offshore acreage on a joint study or exploration licensing basis.

“This has caused international oil and gas majors of different nationalities to take note and make contact with the PRDS or directly with the Energy Ministry to scope out new opportunities,” Mr Wickramasuriya said. “The last piece of the complex challenge of attracting green-field investment into deep-water oil and gas is the actual market available to commercialise gas.”

“It is, therefore, alarming to observe discourse on LNG by various actors leading to international tenders for molecule supply contracts, pipelines, FSRUs and other expensive infrastructure that really add no value to the process of conveying natural gas from the reservoir offshore, which we have, to the demand centres we are preparing which are the new and existing power plants to run on natural gas,” he said.

“If Sri Lanka had no proven gas reserves, or faced some other problem that precluded us from producing it indefinitely, it might make sense,” he said. “But in a situation that the offshore blocks–two awarded and several other groups under discussion–may be just two to three years away from gas production, we must have some essential conversations with the various project proponents and challenge them as to the actual economic benefit of going ahead as it is, taking all factors into account.”

The Ceylon Electricity Board Engineers’ Union (CEBEU) has already raised objections regarding the Finance Ministry’s appointment of a technical committee to negotiate NFE’s unsolicited proposal–a move which is at odds with the Power Ministry and the CEB. The two institutions have initiated a separate competitive bidding process to procure LNG for existing and future power plants around Colombo.

However, independent analysts familiar with the NFE offer and price details of the CEB’s tender say the former appears more beneficial to the Government and the utility. The quantities proposed by NFE are for three power plants–only one exists at present while the second must be operational by year I and the third by year II.

CEB sources opposed to the NFE deal pointed out that, under the Government’s policy of meeting 70 percent of Sri Lanka’s power needs via renewable energy by 2030, the utility dropped eight LNG plants from its next long-term generation plan.

“When a lot of renewable energy is connected to the system, the plant factor of the remaining LNG plants will be in the range of 20 to 30 percent, which is low usage,” they said. “But the Finance Ministry is going to sign a take-or-pay contract for a large quantity of LNG disregarding the fact that the requirement will be much less with more renewables. Hence, Sri Lanka will have to pay for the total quantity for the next five to ten years.”

The deal also includes the purchase of 40 percent of shares of West Coast Power by NFE for a sum of US$ 250mn. The Kerawalapitiya-based company is owned by Lanka Transformers Limited (LTL), a subsidiary of the Ceylon Electricity Board (CEB), and manages the Yugadhanvi diesel plant. The Finance Ministry–which floated the proposal to sell the shares–is keen to finalise this to ease depleted foreign reserves and the dollar crisis.

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