The LNG Saga – Some unanswered questions! Urgent responses needed

By Eng. Parakrama Jayasinghe

E Mail: parajayasighe@gmail.com

There is euphoria in the government circles about the deal with New Fortress Energy of USA, (NFE) for the sale of 40% share of the West Coast Power Ltd., which currently operates the 300 MW power plant in Kerawalapitiya for a princely sum of US $ 250,000,000. The present ownership of this company stands as

Treasury 50%

Employers Provident Fund 27%

Lanka Electricity Company 18%

Lanka Transformers Ltd 05%

The plant is operated by Lanka Transformers Ltd.

At a time when Sri Lanka is scraping the bottom of the barrel to pay for the imported essentials including fuel, this would appear to be manna from heaven, even though it is not clear when this money will be received. Looking at the share ownership, there does not seem to be any impediment to the Treasury’s right to sell the 40% share although this may be considered as the sale of a national asset, which the current leaders vowed not to do.

Has anyone taken the trouble to check on the financial strength of NFE? Can the company raise not only this $ 250 million but what might also be another $ 150 million required for the setting up of the FSRU and the pipelines?

However, the icing on the cake seems to go sour when the conditions attached to this sale are looked at in detail. The only source of information is the copies of the Cabinet papers submitted by the Ministry of Finance, which are reported to have been approved by the Cabinet without any division. Considering the complex nature of the NG supply market and, moreover, the most convoluted presentation as seen in this Cabinet paper, the rest of the Cabinet may be excused for taking the easy path of just raising hands instead of courting a massive headache by trying to wade through this document to get some sense.

But the Cabinet decisions, if implemented, will affect every citizen adversely and, as explained below, and it could be a disaster for Sri Lanka. It is very unfortunate that none of the government ministers or MPs or those in the Opposition commenting on this deal has gone beyond the mere sale of shares and the fact that the agreement has been signed at midnight, which is the least of our problems.

I would like to pose some questions that are not answered clearly in the Cabinet memo:

1. Cabinet approval is sought to enter into a Share Sale and Purchase Agreement and to amend the conditions of the already signed Frame Work Agreement signed in July 2021. But no details of this FA and the proposed amendments are known.

2. Approval is also sought to enter into a Gas Supply Term Sheet (GSTS) as per paragraph 5.3 to be a part of the SSPA. This is where the hidden problems lie as described later.

3. Providing extensive tax relief which was not given for the open tender called for by the CEB and is under evaluation

There has been an attempt to compare the numbers quoted for the eventual cost of gas from NFE, with the current tender under evaluation. But as pointed out by the engineers of the CEB, this is comparing oranges with apples and the ethic of using such data for this comparison is also being questioned. The fact that there is a difference between the two does not qualify for either to be accepted without due consideration of the realities and their impact on Sri Lanka.

However, to come to the crux of the matter, the government of Sri Lanka, which approved the construction of a 350 MW LNG powered power plant, without a clue as to how the gas is to be supplied, has painted itself in to a corner. The lack of foresight in approving this project which was tendered for as far back as 2016, without many changes in the parameters applicable being taken into consideration, the cost of LNG being the primary issue, is a matter for a separate discussion. The NFE offer was apparent ly pounced upon to get out of such an embarrassing situation, with scant attention to the underlying dangers.

But the most worrisome element of the proposed gas supply agreement is the acceptance of the Take or Pay (TOP) condition without due consideration of its implications which are horrendous as explained below. However, it is the duty of the buyer or the lessee to carefully evaluate the ability or the need for the purchase of such agreed amounts.

The condition stipulates that the buyer should pay for the entire agreed amount of gas even if it is not needed or not possible to be used. This is exactly what would happen to us with a massive financial loss if this agreement goes through.

However, Sri Lanka is in a disadvantageous position in that our need for LNG falls far below the amounts considered viable by the reputed companies in the field thus limiting the possibility of reliable competitive tender. Even though less than what would be expected by the big players, the amount claimed as TOP by NFE is well beyond our ability to purchase and we will be falling into a trap from which there is no means of extracting ourselves.

The numbers tell the story

The NFE demands a TOP amount of 175 MMBTU over five years. The standard unit of supply is a Million British Thermal Unit). Although the documents available have not specifically stated amounts, let us assume this amounts to 35 MMBTU per year.

What are our consumption needs? The only use possible in the short term is the conversion of the 300 MW WCPL plant currently operating on Furnace Oil. As such, we can expect it to be converted as soon as the FSRU and the pipelines are installed and operational. But how much can we consume? An expert in the field has quoted a figure of only 13 MMBTU per year. So, until the Sobhadhanavi aplant of 350 MW is completed, we will have to pay for the balance 22 MMBTU of gas even if it is not supplied.

Once the Sobhahdhnavi plant is operational hopefully in two years, it will require a further 12 MMBTU according to the expert, totaling the demand only to 25 MMBTU, and Sri Lanka having to continue to pay for 10 MMBTU for the duration of the five-year project period currently agreed upon with NFE. There are proposals to covert the units at Kerawalapitiya, too. But this would take years and until such time we will be paying out millions of dollars every year with no benefits.

What does it mean in monetary terms, as this proposal provided monopoly rights of supply of gas also to NEF? The numbers here are even more dubious and couched in conflicting statements.

Three different modes of pricing the Gas supplies are stated:

= Henry Hub price times 115% + 5.01 $ per MMBTU

= JKM Price + 1.15 $ per MMBTU

= Any other mode of supply to be selected by the buyer

There is no firm statement anywhere in the Cabinet Memo as to which system is applicable and when.

These are highly divergent prices with a differential of over 100%. So, let us be optimistic that the Henry Hub Formula will be adopted.

The Henry Hum is the trading exchange for natural gas in the US and is currently running at about $ 5.00 per MMBTU. The JKM price is the Asian market price, which is currently ranging in the order of US$ 27 per MBTU. These numbers can be seen daily on the Internet. The recent predictions of HH prices are illustrated below. (See the graph.) It is on a steep rising trend.

Let us use an optimistic value of US $ 5.00 per MBTU as the HH price

As such the option using HH would yield a supply price of 5 x 115% + 5.01 = $ 10.76 per MBTU

It is not clear if we are to pay the regasification cost of $ 1.45 per MBTU even for the gas we don’t , which will take this up to $ 12.21 per MBTU

As stated above, until the Sobhadhanavi plant is commissioned, we will have to pay for 22 Million M BTU gas, not supplied at a price of $ 10.76 amounting to a staggering $ 236.72 Million in the first year of operation itself and at US $ 109.6 Million for the balance four years, assuming that the HH gas prices do not change.

When these numbers are considered, the offer of US $ 250 Million loses its lustre. It is a case of the Greeks bearing gifts.

I would love to be proven wrong at least on this count, ignoring the many other reasons given below as to why a very serious look has to be taken on the whole equation of the use of LNG.

Impact on the 70% RE target

President Gotabaya Rajapaksa has told the whole world, in his recent address to the UN, that Sri Lanka will achieve a 70% contribution from renewable energy sources by 2030. Let us hope that at least now there will be no further attempts to say that this is not the government policy.

What does this mean on the ground? The Table 1 spells it out:

Therefore, allowing for the retirement of some plants which are reaching the end of their economic life, the only feasible addition of fossil fuel would be the 350 MW Sobhadhanavi LNG plant currently under construction. So, there is no possibility of adding any more LNG plants or even converting the plants at Kelanitissa to LNG to bridge the gap of oversupply, without grossly violating the target of 70 % contribution of renewable energy by 2030.

The CEB has been directed by the Ministry of Power to submit its corrected Long-Term Generation Plan, which meets the 70% RE target. It would be interesting to see what they come out with, and their commitments to national policy, not to mention a genuine effort to get out of the financial mess that it is in. Maximizing the renewables even beyond the 70% target is their only hope.

Barriers to the development of Mannar Gas and Oil resource

This is a matter that cannot be ignored. When there are attempts to attract investors to develop this proven resource, handing over the monopoly of supply of LNG to NFE even for five years is most foolhardy. A developer would first look at the guaranteed offtake of the extracted gas as the greatest incentive and mitigation of risk of the investment. When we are blocking that very option by this ill-conceived deal, we are foreclosing the possibility of developing this valuable resource for ever.

It is heartening to hear that Minister of Energy Udaya Gammanpila has already objected to the proposal to give monopoly on gas imports to NFE even for five years. We hope that his views will be taken on board.

This is an appeal to all politicians on both sides as well as the professionals to evaluate the validity of the above concerns and prevent the impending disaster.