By Kumar David –

Prof. Kumar David

There has been a news blackout on the liquid natural gas (LNG) deal that Basil Rajapaksa’s Ministry has entered into with the American company New Fortress Energy (NFE). The Sunday Island Editorial last week 26 September expressed concern about lack of transparency of facts and secrecy in negotiations. The deal is a response to an “unsolicited bid” is the official line but how much soliciting and wheeler-dealing went on between a US company and a US citizen no one will never know. The negotiations though commenced when Prime Minister Mahinda Rajapaksa was Finance Minister. I am not picking on the deal because it’s an American company, not at all. I am expressing disquiet about negotiating conduct, technical issues and potential long-term implications.

Before pitching into the topic I will define that ugly acronym FSRu&P (Floating Storage and Regasification unit & Pipelines). Natural gas globally is the fossil fuel of choice to replace King Coal. There is much disputation about whether one or two final coal-fired power stations will be built in Lanka in the next fifteen years, but natural gas will be the eventual successor. Once released from the bowels of the earth, gas can be piped across continents. When chilled to very low temperatures it liquefies, ready for confinement in strong containers that can be brought into your kitchen or transported thousands of miles in huge tankers. When a tanker arrives the FSRu&P game starts. Tankers can dock at a harbour designed for the purpose if you have one; if not a floating terminal is launched about five miles out at sea where LNG is stored. It can when needed be regasified – as in your kitchen gas cooker – and sent ashore via undersea pipelines. That’s the FSRU&P storyline and one of these is coming on the west coast, north of Colombo. The gas can be used in power-stations, industries and homes.

The plan is to convert the currently coal-fired 310MW West Coast Power Station (WCPS), Yugadhanavi, to gas, and to make the proposed Sobadhanavi 350MW station also gas fired. The gas-fired capacity will then be 660MW, but this is only the start. The CEB and the CPC (Petroleum Corporation) have reached an advanced stage in preparation and issue of documents calling for international bids for an FRSU and Pipelines, but not yet for the supply of LNG. Then suddenly and out of the blue the process was scuttled – it was infected by a bacillus. The Finance Ministry signed a Framework Agreement to proceed with the unsolicited or privately canvassed bid from NFE. A so-called Framework Agreement was inked in September in secrecy.

There are three harmful aspects. The first is unnecessary secrecy and unseemly sabotage of ongoing tender procedures. The second is a likely financial rip-off that may raise electricity prices and the third is a trap that will endanger Lanka’s long-term energy security and put the country’s neck into a hangman’s noose.

First things first. It is a violation of good practice to make an award to an unsolicited bid when tenders have been called; it rings alarm bells whether someone took 10%. International Competitive Tenders were called by GoSL for an FSRu&P and bid documents were issued but Basil’s Ministry inked a secret deal to sell 40% of WCPS to NFE in the midst of this. The deal was reported in New Fortress’s website but not in local media. When Sirasa TV asked Power & Energy Minister Dulles Alahapperuma, he denied any agreement. Something is fishy.

Basil’s defenders and the CEB Engineers Union have locked horns. A Sinhala video by CEBEU President Saumya Kumaravadu provides an excellent summary:

An English statement is can be read here

The second shock is that in terms of the Framework Agreement the government has entered into a Take-or- Pay (ToP) deal for LNG. ToP is a bad idea if the amount contracted is large or if the donkeys writing the contracts have little understanding of electricity generation or the complexities of manoeuvring in global LNG markets. Under the tender care of these goofs Lanka will be played for a sucker – recall the oil hedging fiasco a few years ago. Suppose a petrol company offers you a fleet of taxis free (the BAIT), but on condition you buy your petrol exclusively from it for five years (the TRAP). Suppose the value of the fleet is Rs25 million but the cost of the petrol to be consumed in the five year period is Rs500 million. Whether you need it or not you must buy an agreed quantum from the petrol company. The BAIT in LNG story is that NFE will buy 40% of WCPS for $250 million (investment) and the TRAP is compulsory purchase of LNG for both power stations and any others subsequently taking gas from this facility.

Pricing could also be a problem. LNG prices are volatile and swings have become mercurial in the aftermath of recent supply chain disruptions. Spot-prices vary widely between Henry Hub, Japan-Korea and the Netherlands TTF spot-markets. Bangladesh bought a cargo for delivery last month at $29.9 per million-Btu, the highest the country has paid for super-chilled fuel. The average LNG price for November 2021 delivery to Northeast Asia is $27 per million-Btu. A wise man surely will keep purchasing manoeuvrability in his own hands.

JKM: Japan-Korea-Marker,
Henry Hub: A clearing point in Louisiana, USA,
TTF: A spot-market in the Netherlands

Say the CEB incurs fuel supply expenditure of $500 million per annum – I am pricing natural gas at $14.5 per million-Btu; see Technical Note for quantity estimate.. If NFE makes, say 10% to 15% on the sale it will make a profit of $50 million to $75 million per year (example only). You might say “What’s the problem we have to buy LNG from somewhere?” But if in any year (lots of rainfall say) the CEB does not need that much, too bad; it will have to Take-or-Pay even if it does not use it, like alimony to an estranged wife. There will also be a fixed charge spread over the period by means of which NFE will recover its entire investment costs.

Finally the hangman’s noose. Sri Lanka has been trapped; it is infeasible to build a second FRSU and pipelines in a relatively small country since the investment is large. Once Lanka builds one, that’s it for a decade or more. We will neither need, nor be able to afford a second for a long time. India has only six 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. The implication of the deal with NFE is that country will be in the pocket of a foreign company for energy security for the foreseeable future. The government is doing more to jeopardise natural security than any youthful, slogan-intoning, racist or religious hothead!

Renewable energy will and should be encouraged though it’s not going to provide 70% of primary energy for electricity by 2030 except in Aesop’s Fables. The cynic will read a dangerous trick written into a shady contract. Remember how in the 1990s corrupt presidents, politicos and businessmen made a killing from oil-fired private power-plant construction and operation while the CEB, grossly unfairly, carried the flak? Something reminiscent is possible if corrupt politicos and greedy renewable energy (RE) investors act in consort. Today RE investors demand that they be paid at a rate corresponding to avoided-cost. Since one unit of RE electricity can displace one unit of fossil-fuel electricity they demand to be paid the avoided cost, which is the cost of the most expensive unit then on grid. But what if you play the following game: First jack up the price of fossil energy, then enact the drama of the brave saviour lopping off a bit at the top? It could be the game of unscrupulous politicians and RE investors to jack up the price of ‘going-to-be-avoided’ electricity first and after that play the drama of avoided-cost. I don’t need to explain; you can work out what the cynic is saying. And let’s not forget that corrupt politicos and market players impede, not assist, ecological goodness.

Technical Note

If 0.66 GW (660MW) were to run flat out, nonstop, every hour of the year the electrical energy output will be 0.66x24x365 = 5782 GWh. Since plant cannot run without maintenance and since full output is not maintained all the time the actual plant-factor is, say, 70%. The output is then reduced to 5782×0.7 = 4047 GWh. If the efficiency of generation is 40%, then the primary-source energy need at the input is 4047/0.4 = 10,118 GWh-equivalent of LNG energy. Now 1 GWh is the same as 3412×10⁶ Btu (British thermal unit). Therefore the input LNG energy that is needed for both power-stations is 10,118 x 3412×10^6.which works out at 34.5 million-million-Btu per year, or dividing by 365 we get an average of 94,520 million-Btu per day (44,420 for Yugadhanavi and 50,100 for Sobadhanavi). Someone younger than age-80 kindly check these sums.

However the New Fortress Website declares: “New Fortress 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-plant become operational.” There seems to be a cockup in NFE’s numbers, or maybe it’s meant to obfuscate Ministers and Administrators.

[MM stands for Metric-Million. The initial “Metric” is redundant and will be thrown out of the window in self-respecting scientific discourse. So MM simply stands for million].