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India firm says setting up Sri Lanka LNG terminal amid take-or-pay controversy

ECONOMYNEXT – India’s Petronet is planning to sign a deal with Sri Lanka to build a floating liquefied natural gas terminal, a media report said amid a growing controversy over excessively large facilities proposed to be built on a take-or-pay basis.

India’s Economic Times newspaper said Petronet, the country’s largest LNG importer has teamed up with Japan’s Sojitz and Mitsubishi to build a terminal in Sri Lanka.

"We are in the process of signing a MoU (memorandum of understanding) with the Sri Lankan government for setting up of the LNG terminal," Petronet Chief Executive Prabath Singh was quoted as saying,

"Once the MoU is signed this month, some project related studies will be done before beginning work on the terminal."
Petronet will hold 47.5 per cent stake while Japan’s Mitsubishi and Sojitz Corp will take 37.5 per cent stake. An un-named Sri Lanka firm would take up the balance 15 percent, the report said.

The capacity of the terminal had now been raised to 2.6-2.7 million tonnes a year, from the earlier plan of 1.5 to 2.0 million a year, the report said.

Several proposals had been submitted to build terminals on a so-called ‘take-or-pay’ basis where Sri Lanka will be compelled to buy a large volumes of LNG a year or pay damages, instead of being charged per tonne for gas imported (a throughput charge). The proposals are pushed by different power bases within the administration, according to persons familiar with the deals.

Under a take-or-pay deal gas procurement will be outsourced to the terminal company for decades, and the firm makes profits on the margin and any penalties paid.

The government has said the proposals will be subject to a ‘Swiss Challenge’ process.  Earlier, India was to be given preference after a planned coal power plant with the country was cancelled.

For example a proposal by Korea which involves 1 million metric tonnes of LNG a year which is equivalent to about 1.23 million metric tonnes of oil. The firm will get a 20-year right to supply LNG.

Sri Lanka imports about 5 million metric tonnes of oil a year especially when there is a drought, which is growing each year. However it is for all requirements including vehicles.





A 2.6 million tonne terminal would involve about the equivalent of 3.0 million metric tonnes of oil a year.

There have been fears that the take-or-pay deals will tie the Ceylon Electricity Board to buy gas when it does not need it.

Sri Lanka is expected to build a 300MW combined cycle power plant and there are existing power plants which can be potentially converted. (Colombo/Feb14/2018)

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