By Kumar David –
Suppose a Petrol Company (PC) offers you a fleet of taxis free, but on condition you buy your petrol from PC for 5 years. Suppose that the value of the taxi fleet is Rs 25 million but the cost of the petrol you will consume in the five year period is Rs 500 million. Whether you like it or not you must buy an agreed quantum of petrol from PC. This is a simple way to explain the conflict between Basil’s Finance Ministry and CEB Engineers. A Sinhala video by CEBEU President Saumya Kumaravadu provides an excellent summary:
An English statement can be read here
A US company called New Fortress Energy (NFE) will be the supplier of equipment, which consists of a floating regasification unit 5 miles out at sea and pipelines to bring gas ashore for the currently coal-fired 310MW West Coast power station (WCPS) Yuadhani which will be converted to gas and the diesel/gas fired proposed Sobadhanavi 350MW station; a total capacity of 660MW. Liquefied Natural Gas (LNG) has to be stored at extremely low (sub-zero) temperatures, transported in special tankers, stored at the floating terminal, re-‘gasified’ as needed and sent ashore. The BAIT is that NFE will buy 40% of WCPS for $250 million (investment), the TRAP is the compulsory purchase of LNG for both power stations and others taking gas from this facility. Sri Lanka has been trapped; it is infeasible to build a second FRSU and pipelines in a relatively small country.
The CEBEU says the CEB will incur fuel supply expenditure of $6 billion per annum. If NFE makes, say 10% to 15% profit on the sale of LNG, it will make a gross profit of $900 billion over the period. The deal stipulates that Sri Lanka must buy its LNG from NFE. You might say “What’s the problem we will have to buy it from somewhere?” And that’s the catch. Basil has entered into a Take-or-Pay contract for a certain amount of LNG. If CEB in any year (lots of rainfall say) does not need that much, too bad; it will have to Take-or-Pay even if it does not use it, like paying alimony to an estranged wife. The amount contracted is more than what the two power stations need. If the plants run at a likely 70% plant-factor their combined LNG-energy requirement averages about 34.5 MMBtu per annum according to my back of the envelope calculations. But the New Fortress website says it “will initially provide the equivalent of an estimated 1.2 million gallons of LNG (35,000 MMBtu) per day to GOSL, with the expectation of significant growth as new power plants become operational.” This is absurd as I will explain in next Sunday’s column. There will also be a fixed charge spread over the period by means of which NFE will recover its full investment costs.
Pricing could also be a problem. The price is Henry Hub, a famous LNG shipping point in Texas plus a nominal extra. Henry Hub price is ok, but often buyers shop around on the LNG spot-market and make good spot-deals ex-Singapore, the Middle East and from Japanese dealers. No more doing this in future except when we need more than contracted amount. Buying from Henry Hub is no problem, anyone can buy there anytime
This is not the worst, the next two points are worse. A floating storage and regasification terminal and the associated pipelines are a huge investment. Once Lanka builds one, that’s it for a decade or more. These terminals are expensive and Lanka will neither need, nor be able to afford a second for a long time. Even India has only six such terminals in operation. In the meantime the CEB long-term generation expansion plan envisages the addition of about 3GW (3000 MW) of gas-fired generation in the period from now to 2037. LNG will become the bedrock of electricity production in the period to 2040 displacing coal (70% renewables by 2030 talk is just for a honk). The implication is that this country will be in the pocket of a US company for its energy security for the foreseeable future. The government is doing more to jeopardise natural security than Koran-intoning youthful hotheads!
My final point is that the September 2021 decisions of the Finance Minister and Cabinet are violations of proper conduct since alternative tenders were have been called. It rings alarm bells whether someone is making 10% on the deal. International Competitive Tenders were called by GoSL for an FSRU terminal and pipelines and bid documents for competitive bidding have been issued. Basil’s Ministry signed a secret agreement to sell 40% of WCPS New Fortress terminating all this in an unsolicited agreement that lacks transparency. The signing was reported in the New Fortress own website but not in local media. When SIRASA TV asked Power & Energy Minister Dulles Alahapperuma, he denied any agreement. Something is very fishy.