Importing of liquefied natural gas – Past efforts and future prospects

By Dr Janaka Ratnasiri

The Island of 29.12.2020 carried a write up by Eng. Parakrama Jayasinghe in which he queried about the “very severe uncertainty of the source and the means of supplying the LNG necessary to operate the 300 MW LNG plant and the necessity for pursuing options for more LNG plants with India and Japan and now with the USA”? Though the term “LNG” appears here, it is something new to people in the country. Hence this write-up is published to apprise the readers what LNG is and highlight the progress made so far in procuring the gas, based on information available in the public domain.

GLOBAL PRODUCTION AND TRANSPORT OF NATURAL GAS

Natural gas (NG), though a new energy source yet to be introduced in Sri Lanka, has been in use world-wide since the middle of the last century. NG has been used in a variety of applications such as power generation, space heating, household cooking, thermal energy generation in industries, running motor vehicles and as a feedstock for a wide range of industries including fertilizers. Today, natural gas has a share of about 27% in the overall global energy supply and 23% in the generation of electricity.

Natural gas is the preferred fuel today for generating heat and power because of its many benefits. It does not produce any ash or particulates or smoke or toxic gases such as Sulphur Dioxide or toxic heavy metals like Mercury, Arsenic, Cobalt, Chromium or radionuclides, on combustion like in the case of coal or oil. Even the Oxides of Nitrogen produced is minimal and Carbon Dioxide produced is no more than 50% of what a similar capacity coal power plant produces. Hence many countries switch from coal to NG with the objective of reducing the emission of Carbon Dioxide which the countries have committed to under the Paris Agreement on Climate Change.

Though nearly 100 countries have been producing NG world-wide, amounting to about 4,000 Billion cubic metres in 2019, only about 65 countries have produced more than 1 Billion cm each annually. Among the Indian Ocean rim countries, NG is produced in Qatar, Malaysia, Brunei, Tanzania, Myanmar, Indonesia and Australia. Natural gas is transported across continents in pipelines extending thousands of kilometres. For transporting across oceans, the gas is first converted into liquefied natural gas (LNG) by cooling down to -162 oC when its volume reduces to 1/600 of the original value.

Transportation of LNG across oceans is done in purposely built carriers with capacity between 150,000 and 250,000 cubic metres (cm) of LNG. Loading and unloading of LNG require special terminals having deep jetties which are costly to build. Once imported, LNG is converted into gas and stored under pressure for distribution among consumers in pipelines or as compressed natural gas (CNG) in cylinders. For distant consumers, LNG itself is transported in insulated containers by road trucks to consumer points.

PAST EFFORTS FOR IMPORTING LNG

During the past 20 years, there were several unsolicited proposals received for importing LNG, some through the Board of Investment (BOI) and others through political entities. Most of them were either rejected or withdrawn for various reasons, one being lack of transparency, but a few are still awaiting the green light from the Government. Though the Ministry of Petroleum had the authority to consider these proposals, they appeared to be rather reluctant to venture into a new area unknown hitherto, and took no action.

In the meantime, a representative of an Indian Gas Company visited Sri Lanka in mid-2016 and offered to bring LNG from their terminal in Kochin, Kerala. The terminal was being operated below capacity and the Company wanted to sell their surplus gas to Sri Lanka at the same rate they are paying for the imported gas with a slight mark up. They too did not receive any positive response.

When Sri Lanka PM met Indian PM in New Delhi in April 2017, the two heads of states entered into a Memorandum of Understanding (MOU) for collaboration in several sectors including the power sector, under which importing of LNG and building a 500 MW gas power plant were included. The same Indian Company who offered to bring LNG was named as the Indian counterpart.

In 2016, Japan also had offered to build a 500 MW coal power plant which the Sri Lanka Government had accepted. However, with the government’s change of policy to shift from coal to gas for power generation, the government requested Japan to change its offer to a gas power plant of same capacity which Japan agreed to. The Cabinet of Ministers (COM) on 11.07.2017 accepted the two proposals to build gas power plants each with capacity 500 MW offered by India and Japan.

This was followed up by a decision taken by the COM on 27.02.2018 to grant approval for Sri Lanka to establish a tripartite joint venture (TJV) comprising 15% equity held by Sri Lanka, 47.5% by nominee of India and 37.5% by nominee of Japan for the purpose of implementing the project.

The COM also decided to vest authority with the newly established Sri Lanka Gas Terminal Company Ltd. (SLGTC), a fully-owned subsidiary of Sri Lanka Ports Authority (SLPA), to enter into Agreements with the Indian and Japanese parties. The SLGTC was also nominated as the Developer for the Project. It is surprising why SLPA was authorized by the Government to import LNG when it has no mandate for it.

A MOU was signed among foreign members of the TJV and the SLGTC on 09.04.2018 probably confirming the responsibilities and commitments of each partner, which are still not made public. It is not known whether India and Japan would share the cost of the project and if so, in what ratio or jointly undertake its operation and maintenance or make in-kind contribution of transferring technology.

PRE-FEASIBILITY AND EIA REPORT ON THE PROJECT

A pre-feasibility study (PFS) was undertaken in 2017 by one of the Japanese partners of the TJV, which had recommended setting up a floating storage and regasification unit (FSRU) moored initially in the South Port breakwater of Colombo Port. According to the PFS, the FSRU will have a draught of 12.5 m. The cost is expected to be around USD 225 Million and can be set up in 2.5 years.

A report by ADB on the proposed National Port Master Plan– Volume 2 (Part 5) released in February 2020, includes a section on FSRU to be located within the Port premises and gives details of its design and operation. (https://www.adb.org/sites/default/files/project-documents/50184/50184-001-tacr-en_10.pdf). According to this study, the gas pipelines will connect the FSRU to the existing power plants at Kelanitissa and Kerawalapitiya laid part under water and part over land through the city and that the maximum send-out capacity of the of the terminal will be around 3.8 Mt LNG annually, which is on the high side.

Having found the project feasible, the TJV engaged the Environmental Resources Management (ERM) of Japan, to undertake an EIA study for the project which was completed in August 2019. The EIA Report was open for public scrutiny during December 2019. It is the general practice and a legal requirement to conduct a public hearing on the EIA report based on public comments received on it. However, there was neither a public hearing nor any announcement made as to whether the EIA Report was accepted or not, though almost one year has lapsed since closing of public comments.

The Writer responded highlighting shortcomings in many areas including discrepancies in capacity estimates, alternative supplies, exclusion zones, impact on Port operation, lack of mechanism for issuing operator licences and monitoring, issues with the site, safety aspects, lack of fire-fighting facilities, issues on routing the pipeline along city streets and issues on procurement of LNG, but received not even an acknowledgement or an invitation for a hearing.

FEASIBILITY STUDY OF THE PROJECT

In March 2019, the GoSL requested ADB for technical and financial assistance to conduct a detailed feasibility study on establishing the FSRU. The proposal named the CEB as the implementing agency and wanted the Technical Assistance Package (TAP) to include building the capacity of CEB to undertake the assignment. The ADB, in June 2009 approved an allocation of USD 225,000 as a grant to implement the feasibility study, including training of the CEB staff. The ADB study is expected to be completed by May 2020. (https://www.adb.org/sites/default/files/project-documents/53193/53193-001-tam-en.pdf).

The package envisaged hiring on short-term basis experts on LNG Infrastructure Design; Marine Engineering; NG Pipeline Planning & Design and Financial & Commercial aspects to work out the optimal capacity for meeting the demand for using the gas for operating the existing and proposed new gas turbine power plants. The package also included holding training workshops to build the capacity of CEB engineers to handle the operation of the gas supply to the power plants.

Though the consultancy requires initial assessment of capacity of CEB staff to handle LNG import, being electrical engineers, one may safely assume that their capacity to undertake this assignment is almost nil. It is expected that the operation of the FSRU itself will be the responsibility of the supplier. It is surprising why ADB agreed to train a set of electrical engineers who are not qualified to work with LNG when LNG importing is outside the mandate of CEB.

CALLING PROPOSALS AND IMPLEMENTING THE PROJECT

The findings of the feasibility study are not available in the public domain yet, though supposed to have been completed more than six months ago. The ADB report is expected to include draft of request for proposals (RFP) from prospective suppliers for establishing the FSRU. This needs Cabinet approval before announcing, appointment of Technical Evaluation Committee (TEC) and Cabinet appointed Negotiation Committee (CANC). Once bids are received, it is necessary to have them evaluated by the TEC and approval by the CNC and finally by the Cabinet before the award of the contract is made. All these will take a minimum of two years going by the past experience.

Once the contractor is selected, CEB will have to negotiate the financial package with the contractor and considering the country’s poor credit rating internationally, it will be difficult to raise the finances through commercial banks, unless a multi-lateral financial institute like IMF or World Bank comes to Sri Lanka’s rescue or the TJV partners will contribute and this process itself will take more than a year.

These negotiations including signing contracts and the lead time in securing a FSRU and setting it up will take a minimum of another 3 years. This means that the country cannot expect to have the benefit of LNG this side of 6 years.

AUTHORITY FOR IMPORTING LNG AND DISTRIBUTING THE GAS

During the Yahapalana regime, the function of importing LNG and its distribution was vested in the Ministry of Petroleum through a gazette notification announced on 15.09.2015. However, during the subsequent regime, this function was entrusted to CEB by a decision of the COM. In the interim Cabinet appointed under the current regime, the function of “importing, refining, storage, distribution and marketing, coordination and implementation of petroleum-based products and natural gas” was assigned to the Ministry of Power and Energy by the Gazette Notification No. 2153/12 of 10.12.2019. Subsequently, with the appointment of the new Cabinet after the general election in August 2020, the Ministry of Energy was assigned the above functions related to natural gas.

A separate ADB publication on “Sri Lanka Energy Sector Assessment, Strategy, and Road Map” released in December 2019 says with regard to building LNG delivery infrastructure that “Since the LNG terminal may be used by many stakeholders for importation and storage, the terminal need not be under the CEB or power sector utilities and a more suitable arrangement would be a multiuser terminal facilitated by petroleum sector institutions”.

Surprisingly, the recommendation of this ADB report contradicts what is included in the ADB’s TAP referred to earlier where ADB has agreed to build capacity of CEB staff to handle operation of the proposed LNG terminal. As a matter of fact, the establishment of SLGTC has already been authorized by the COM on 27.02.2018 to handle matters related to LNG and NG matters. Further, the CEB Act does not give CEB any mandate to import fuel.

It is therefore surprising that the Government has sought assistance from the ADB to build the capacity of CEB to import LNG for power plant operation, as described in the previous section. Regrettably, the two Government institutions, SLPA and CEB are moving in different paths to achieve the same objective.

While the Government has given clear directive that matters pertaining to natural gas should be handled by the Ministry of Energy, it is not prudent to allow the CEB to handle it on grounds that it is CEB who will be consuming natural gas. If this is allowed, next time CEB will want to import petroleum oil as well for use in power plants.

REGULATORY BODY FOR THE LNG/NG INDUSTRY

With the closure of the Public Utilities Commission, it is now necessary to have a separate body under the purview of the Ministry of Energy to serve as the regulator and monitor for the gas sub-sector in the country. This body should be responsible for granting approval for all LNG/NG projects, monitor their operation and ensure all safety aspects are complied with according to international classified society standards, grant licenses for LNG/NG system operators, maintenance and installation technicians and safety officers.

It should be granted authority to determine prices levied for selling LNG/NG for different purposes; power generation, industrial heating, commercial and domestic application and as industrial feedstock, and should have powers similar to what the PUCSL was granted. In order to make this body effective, it is necessary to recruit staff with good academic background and experience working in the petroleum field and given further training enabling them to undertake the expected assignments efficiently. However, if CEB is permitted to import LNG, it is doubtful whether CEB will want another body to regulate and monitor them, as happening currently.

CONCLUSION

The Government had received several proposals for importing LNG during the past 20 years, but none were considered seriously. Interventions by foreign governments in 2017 prompted commencement of negotiations with them for importing LNG through a Tripartite Joint Venture set up three years ago. During this period, a pre-feasibility study including environment impact studies was undertaken which has recommended setting up a floating terminal within the Colombo Port premises. Subsequently, a detailed feasibility study was also undertaken findings of which are yet to be published.

There is lack of clarity as to who should import LNG and distribute the gas. Calling for proposals from prospective suppliers, their selection, signing of contracts, raising finances, getting Cabinet approvals and actual construction of the terminal will take at least another six years going by the past experience, unless the President directs the relevant officials to fast tract the process, enabling early realization of the objectives given in the Saubhagye Dekma Policy Framework.

There are however, faster ways of getting LNG into the country at least to operate the first 300 MW gas fired power plant bypassing all these procedures, but their discussion will be kept for a later article to save space here.