GoSL-New Fortress agreement: Engineers frown on modus operandi, gas supply contract

By Ifham Nizam

The government had done the right thing when it came to attracting investment into the energy sector, but the methodology it adopted was questionable, especially in signing such an important deal so hastily at midnight, senior independent engineers said.

They told The Island that with regard to New Fortress (NF) buying shares in Yugadhanavi it boiled down to a foreign direct investment at a time the country badly needed foreign exchange.

The government has signed a share sales agreement with NF to sell 40% of shares held by GOSL in Yugadhanavi power plant for USD 250 million, which is in line with the government Chief Valuer’s valuation as stated by GOSL.

“After all, the investor has to take his return through dividends from operations over 15 years and convert it to repatriate. Dividend declaration would be decided by the majority of shareholders and depend on availability of cash. When considering Sri Lanka’s current rating (C grade) this single investment of USD 250 million is a substantial contribution in terms of boosting foreign reserves and builds confidence in other investors,” a senior engineer said.

With NFE’s investment in the Floating Storage Regasification Unit (FSRU) terminal, overall foreign exchange inflow would be nearly USD 300 million.

A senior engineer at the Kerawalapitiya Plant said that CEB’s concern should be the gas price which would have a direct impact on its operations.

The senior engineer expressed concern about allowing FSRU terminal project to NF while a tender called by the CEB for the FSRU was being evaluated.

“Sri Lankan government being able to sell 40% for a 10-year-old heavy fuel oil (HFO) fired power plant for USD 250 million was a good deal but the problem is that it was linked to the gas supply, the top engineer said.

As far the West Coast Power Ltd., the owner of Yugadhanavi power plant, GOSL has 50%, EPF has 27% and LECO has 18.2% and Lakdhanavi has 4.8%.

A senior engineers said, ” The value of 250 USD for 40% is a good price on an assets base and future income based. The CEB will pay all future capacity charges in Sri Lankan rupees. There will be no change in capacity or fixed charges because a foreign investor is coming in.  PPA and IA do not prevent change of shareholders. Similar changes in shareholding happens in the AES power plant, which is now owned by Sojitz Japan.

With the sale of shares the GOSL has allowed NF to supply Natural gas to Yugadanavi and the new power plant to be constructed. This could be a concern for the CEB.

Yugadhanavi now operates with Low Sulfur HFO, which is an imported product supplied through CPC; it is more expensive than normal HFO. However, at present, CPC refines and supplies low sulfur HFO.

When Yugadanavi operates on natural gas, the power capacity can be increased by 10% and fuel efficiency will be better. Therefore the overall tariff to the CEB will be lower than operating with HFO.

The new power plant to be built by NFcan run on natural gas or diesel only.

The issue may be how a US company has been selected to buy shares and supply gas. Selling shares is GOSL’s prerogative, which other shareholders or the CEB cannot challenge.