LNG hot potato on Sri Lanka’s lap

The hottest potato now on the lap of the Government of Sri Lanka (GOSL) is an unsolicited proposal from a giant U.S. corporation, New Fortress Energy (NFE), a NASDAQ quoted company on the New York Stock Exchange, to build a new offshore LNG (liquefied natural gas) receiving, storage and regasification terminal in Colombo. A framework agreement to go ahead with this proposal has already been allegedly signed but very little of this was known to the wider public. Unsurprisingly, allegations that this was done in secret is being widely bandied about. Lesser constituents of the government are unhappy about this proposal and Finance Minister Basil Rajapaksa who is pushing it on the grounds that it will enable cheaper long-term electricity generation benefiting hard-pressed consumers had a discussion with party leaders of the ruling coalition on this subject last Thursday. What finally emerged there has not been revealed but it is clear that the government is determined to push ahead with the proposal.

Unsolicited proposals are by their very nature suspect. The recent discussions on the project did not reveal who NFE’s local agent is, or if there is any. It is unlikely, if not impossible, that a U.S. based company would make such a far reaching proposal with widespread ramifications without an extensive knowledge of the ground situation. For this a lot of domestic input would have been necessary; and the total picture, obviously, was at the fingertips of the offeror. But there has not been the slightest hint or whiff of a rumour of who the local participant might be. We all know that big projects, the Accelerated Mahaweli Development Project is one good example and the Norochcholai coal fired power plant is another, enabled massive commission incomes, probably disproportionate to the work and effort expended in winning the contract for an overseas principal, was earned locally. In the case of most projects, local agents are known by and large. This is as it should be because that is what transparency is all about.

Well documented allegations have been made that the proposal under consideration is a threat to the country’s energy security and would potentially cause enormous losses to Sri Lanka. We do have a National Energy Policy gazetted in August 2019. This is intended to ensure energy security through the supply of reliable, cost effective and competitively priced energy services from diverse sources. Nobody would, or could, quarrel about the push towards renewable energy in place of fossil fuels that are finite and environment degrading. This is the global trend. We in Sri Lanka, having now largely exhausted our hydropower resources that once upon a time gave us very cheap electricity, is now looking at renewables including solar and wind power. But these targets are not achievable in the short term although tight deadlines have been set. It is not possible to immediately dispense with expensive thermal power for which we have, and will continue to pay, a heavy price. That is why the National Energy Policy has identified LNG as the next fossil fuel option for us. But it has made clear that LNG procurement shall be kept under state control in the context of its impact on national energy security.

This policy further establishes that procurement of plant, equipment, crude oil and other fuels as well as power purchase agreements and similar concessions will be made through a streamlined competitive bidding process ensuring transparency and accountability. Critics of the NFE proposal are hammering home the point that all these safeguards will go down the river if the government goes ahead with its plans to sell-off 40 percent of the shares of the state-controlled West Coast Power Private Ltd. (WCPL) to NFE at a price of USD 250 million. The wide-ranging proposal made by the U.S. corporation includes an LNG terminal project together with what’s call a “Floating Storage Regasification Unit” and associated mooring systems and pipelines. There is a high possibility that NFE will supply most of the LNG consumed in the country in the future if this deal goes through. What is most disturbing is the ‘Take or Pay’ (TOP) clause in the proposal that ensures that NFE should be paid irrespective of whether contracted volumes are consumed or not. This is not altogether unusual in Power Purchase Agreements, several of which are already in force between the CEB and small scale independent power producers in business here. Under these arrangements what’s called ‘capacity charges’ are paid. But in the case of a TOP arrangement for future LNG supplies, the costs would be mind-boggling.

Within the last three months there have been two cabinet memoranda pushing the NFE proposal which is strongly supported by the Finance Ministry on the basis that it will enable much cheaper power generation than at present with the foreign investor carrying the capital component of the investment which will benefit the already hard-pressed consumer fearful of having to pay more for his electricity. We are not aware whether there is a cabinet decision to press on with the project although information presently available strongly implies that a virtual fait accomplii has been presented with the framework agreement allegedly already signed in the dead of night. Meanwhile the Energy Ministry is fast tracking the exploration for natural gas in the Mannar basin. What use would any possible strike be if the country’s future LNG needs have already been contracted out?