What Ails Kerawalapitiya LNG Supply Project?
By Sulochana Ramiah Mohan
The energy sector in Sri Lanka is subjected to lengthy conversations because it is vital for the development of the country with every nook and corner in power and energy supply becoming colossally important in the current context, where liquefied natural gas (LNG) is considered cheaper than coal power.
The Kerawalapitiya LNG supply project is an offshore Floating Storage and Regasification Unit (FSRU) that successive Governments for 10 years were aiming to build but failed. It has been subjected to twists, turns, scandals, local politics, and lately geopolitics. There were many investors but they were shown their way out in the last five years.
India/Japan JV for Kerawalapitiya LNG project cancelled
India wanted the Sampur Coal Power Plant project but had to call it off due to protests and later agreed to convert the proposed 500 MW Sampur Coal Power Plant (SCPP) to LNG in 2016. But the former Government suggested that the Indian-funded LNG plant be relocated to Kerawalapitiya, which had been identified as the best location for its construction.
In this regard, former President Maithripala Sirisena requested Indian Prime Minister Modi to convert the coal power plant to a liquid gas power plant when the President met him during his official visit to India in 2017. It was designed to be an India-Japan joint venture with Sri Lanka to set up an LNG import terminal at Kerawalapitiya.
The Sri Lankan Government issued a Letter of Intent to the Government of India as well. Currently, the Kerawalapitiya plant is powered by oil and will be converted to LNG once the terminal is set up and gas is imported by the State, the then Government noted. It was a USD 250 million LNG import terminal and was the first of its kind signed in 2017 between India and Japan.
The politicians tried to balance the geopolitical situation and give each country their ‘share’ but it was cancelled in the end. The Ceylon Electricity Board (CEB) engineers feel that a whole lot of geopolitics is shaping up the energy sector, where the Government has to violate policies and handover projects under a volatile situation.
Canadians said project was not feasible
A Canadian team arrived in 2016. Greenlink Global Consulting Inc introduced US-based Sithe Global Power to a Cabinet-approved project in Kerawalapitiya in 2009. It was also a proposal for a 500MW LNG terminal FSRU LNG storage and pipeline. But after doing the pre-feasibility study, they decided to abandon the project. The company quoted various reasons such as the shallow water conditions off the coast of Colombo, space limitations, security at the port and the nonexistence of an on-shore LNG terminal.
Furthermore, the Sri Lanka's west coast is known for its challenging sea conditions during the monsoon season so it had to incur significant additional capital costs to accommodate operations during times, making deliveries impossible. They also concluded that the FSRU would not be able to accept full loads, while rough sea conditions pose a serious impact on the supply of natural gas on shore.
Another point made by them was that the synergies and increased efficiencies that can be realised from joint development of LNG regasification and power generation facilities will be lost and that expensive undersea cables will also significantly increase the OM costs of the power plant. Also, the environment and fisheries will be impacted by the developing LNG facility at Kerawalapitiya, they noted.
S. Koreans were rejected due to an unsolicited proposal
In 2018 a proposal from the Korean company SK E&S to establish an FSRU at Kerawalapitiya to supply one million tonnes of LNG for 20 years showed promise. In this contract, the CEB would be contractually bound to pay for LNG and a penalty if the agreed quantity is not consumed. The company will build its own terminal ‘free of charge’, to provide LNG to existing power plants at Kerawalapitiya and Kelanitissa.
The Korean proposal came under a Swiss Challenge, that is, if the original proponent is unable to match the counter proposal, the tender will be awarded to the prospective bidder provided the challenger agrees to pay the development cost of the original proponent, quoted as USD 10,074 million.
The Swiss Challenge carried terms such as the FSRU would be newly built, whereas SK E&S offered a renovated LNG transporter and under-sea and overland pipelines to Kerawalapitiya and Kolonnawa. According to Ceylon Electricity Board Engineers Union (CEBEU) President Saumya Kumarawadu, the last regime invited the Koreans under an unsolicited proposal which was cancelled in the end. "The single bidder, South Korea, was brought in under a Swiss Challenge where the proposal was tabled and challenged by other top countries.
The Ministry of Power, Energy and Business Development in 2018 launched its own Swiss Challenge tender for a Floating Storage Regasification Unit (FSRU)-based import decision in response to South Korean contractor SK E&S submitting an unsolicited proposal to supply a converted FSRU, but the tender collapsed after the bid submission deadline was pushed back at least six times," he added.
Chinese bid comes under scrutiny
In 2018, a fundamental rights petition was filed against giving the tender for power plant's construction to the Chinese company consortium, GCL China, without giving it to a domestic company, which was taken for consideration in 2020. The fundamental rights petition filed by the Chairman of the National Movement for Consumer Rights Protection in Sri Lanka, Ranjith Withanage, sought an Interim Order directing the respondents to stay all further proceedings in respect to the tender for the construction of a 300MW HFO/NG fired power plant at Kerawalapitiya.
The then Power and Energy Minister Ranjith Siyambalapitiya, the Secretary to the Ministry, Suren Batagoda, and several others have been cited as respondents. President's Counsel Ali Sabry, appearing on behalf of the petitioner, said according to the Electricity Act the tender should be given to the lowest bidder when awarding tenders.
The petitioner's attorney told the Court that by awarding the tender to a Chinese company while a local company has offered the lowest bid, there would be a loss of Rs 40 billion and with the depreciation of the rupee, the loss could go up to Rs 80 billion. It is unclear whether it was the same Chinese company’s technical evaluation when the New Fortress barged in, which, according to the CEBEU, was an ‘unsolicited’ proposal.
On 15 February 2021, the Public Utilities Commission of Sri Lanka (PUCSL), the electricity sector regulator, approved the power purchase agreement to build the 300 MW Kerawalapitiya LNG plant. The power purchase agreement will be signed by the Ceylon Electricity Board (CEB) and Lakdhanavi (Pvt Ltd) on that day.
American proposal on the fence
The CEBEU last week said that while a competitive bidding process is underway for the Kerawalapitiya LNG project, the Finance Ministry has encamped the US New Fortress Energy Co for the same project through a Cabinet proposal.
It was nothing unexpected given the fact that Sri Lanka has been in the midst of a geopolitical impasse and hasn’t balanced its strategy to welcome all its traditional bilateral partners in the last ten years, prompting the Government to select countries and offer projects on the platter with less priority given to a policy framework that each institution follows.
Also, to the utmost surprise, one of the bidders is a Chinese company and the Government is on the hot seat about how to let the Chinese have it when the US are requesting the project for one of their private energy firms.
While Sri Lanka looks to attract foreign investment, the outgoing US Ambassador Alaina Teplitz routinely discussed potential opportunities for US companies to bring their innovative practices that meet the highest environmental and labour standards. "Commercial advocacy is an important part of the US Embassy’s work in Sri Lanka, and we’ve helped strengthen the commercial rule of law through the Commercial Law Development Programme for years. A fair, clear, and consistent legal framework helps reduce corruption," she maintained.
Throughout her tenure, Ambassador Teplitz has consistently encouraged the Government of Sri Lanka to award tenders in a transparent manner that maximises the benefits for Sri Lankans and ensures projects are sustainable, high quality, and cost-effective. This was mainly hinting at the Chinese projects that aren’t transparent to anyone. New Fortress on 8 July 2021, signed a framework agreement with the Government of Sri Lanka to construct a new offshore LNG receiving, storage and regasification terminal.
The terminal will be located off the coast of Colombo to supply gas to the country’s power plants, primarily located in the Kerawalapitiya Power Complex. The Kerawalapitiya Power Complex consists of 300 MW in operation and is ultimately expected to grow to over 1,000 MW by 2025.
As part of the agreement, New Fortress will supply natural gas to the existing 300 MW Yugadanavi Power Plant and is negotiating the purchase of the Government’s 40 per cent stake in the company that owns the power plant. This power plant is currently under a long-term power purchase agreement (PPA) to provide electricity to the national grid that extends through 2035.
The plant consists of General Electric turbines and was configured to run on natural gas in a combined cycle.Chairman and CEO of New Fortress Energy Wes Edens said, "We are excited to support the transition of Sri Lanka to clean, reliable and affordable energy and this investment in Sri Lanka’s first LNG terminal will advance the country’s clean energy transition and support sustainable development for this vibrant economy".
According to the Sri Lankan authorities, NFE’s investments are in line with the Government's policy of accelerating the transition to cleaner and cheaper energy sources and they signify that the country is open to investment and business. As part of the agreement, the Government will facilitate the obtainment of necessary permits and entitlements by New Fortress to construct the LNG terminal.
The terminal is expected to begin operations by the second half of 2022 and this is the first LNG Terminal in Asia by New Fortress. Then on 31 July, the Memorandum of Understanding (MOU) with Lakdhanavi Limited (LTL), a private Sri Lankan company, to jointly develop a 350 MW gas-fired power plant in the Kerawalapitiya Power Complex was signed by New Fortress. LTL was previously awarded a 20-year PPA with the Government through a competitive tender to provide electricity to the national grid. The MOU is non-binding on the parties and the actual terms of any future definitive agreements may differ from the terms of the MOU, the US Company said.
CEBEU finds faults
In this background, the Government once again finds itself in a geopolitical dilemma that led the Cabinet to approve the New Fortress' deal for the Kerawalapitiya while a technical evaluation for the tender by a Chinese company that had bid for the same project is currently underway. Sri Lanka has flagged its LNG ambitions on several occasions, but with little success, and this time is caught in a new cycle of turmoil in selecting the investor. The CEBEU raised concerns about the Finance Minister's' ‘unsolicited ’ proposal to bring in the New Fortress Energy Inc.
to hand over a 40 per cent stake in the Yugadanavi Power Station in Kerawalapitiya, as it did not go through a tender process. According to CEBEU President, a technical team is evaluating the Chinese bidder’s proposal in parallel to the Cabinet approval for the US Company. He said there was no clear policy by the State on giving away national assets.
The CEBEU said they have protested and sent a letter of explanation to the Ministry of Finance. The CEBEU letter dated 6 September, to the Secretary of the Ministry of Finance, Dr. P.B. Jayasundara, noted that the Ministry of Power and the CEB have already initiated a competitive bidding process to procure LNG for all the existing and future power plants around Colombo, including the West Coast Power Plant (WCPP - a subsidiary of Lanka Transformers Limited) and it's in the final stage.
"We have already communicated to the Minister of Power with a copy to you in our letter dated 26 April 2021; any unsolicited procurement which might badly affect the ongoing bidding process should not be encouraged." They also questioned the three CEB officers in the committee and whether they represent the CEB and if yes, what is the scope given to them by the CEB. The CEBEU also demanded an explanation of the rationale behind the inclusion of a member from LTL Holdings, the OM contractor for the plant, in the committee.
Further, it pointed out that the two retired officers who cannot be held responsible for their actions are also on the committee. The chairman of the committee is also a retired officer and is currently functioning on a contract basis for a period of six months in the Ministry.
"Are you in agreement to appoint officers who do not hold any responsible permanent post in the public service to a committee which is supported to take vital decisions with regard to transactions amounting to billions of rupees?" the CEBU questioned. They said the condition of least cost can only be fulfilled by procuring LNG for the WCPP through a competitive bidding process. However, it is not clear as to how the CEB and the PUSCSL will justify the low cost of this plant if LNG is procured through an unsolicited source.
CEB’s steering committee’s stance
The Government had long lost interest in introducing LNG initially to meet the needs of the power sector under suitable contractual arrangements. With that intention, several agencies have initiated preliminary work for the deployment of LNG for the existing and future power plants. However, most of the time, the CEB has not been adequately consulted in the initiatives about which it has complained. They said it has led to ambiguities in the approach to the deployment of LNG for power generation. The steering committee in 2018 said that the technical assistance was received from the Asian Development Bank (ADB) as a grant by providing consultants for this study.
The pre-feasibility study on the deployment of LNG for Colombo based on existing and future power plants has been incomplete with the assistance of the ADB, and actions are being taken to carry out a feasibility study and prepare a request for proposals to deploy LNG to power plants by following a competitive tender procedure.
The West is focusing on the South Asian region and as Sri Lanka is positioned in a strategic East-West maritime gateway, it has constantly come under pressure to play a safer geopolitical game. In this context, the Government should espouse a policy framework to be a game changer in the region. Firstly, the Government should be transparent to its reputed authorities and officials about the strategic move, without inconveniencing them and working in parallel generating a dubious environment. – [email protected]