Sri Lanka warned against LNG ‘take-or-pay’ deal; call for competitive bidding
ECONOMYNEXT – Sri Lanka’s power engineers warned that a government-to-government deal for a ‘free LNG terminal’ was a ploy by developers to eliminate competitive bidding and secure a long-term liquefied natural gas procurement deal.
Sri Lanka’s cabinet has already approved a controversial unsolicited proposal brought forward by the Ministry of Development Strategies and International Trade for Indian and Japanese companies to set up an LNG terminal by giving the firm the right to buy fuel for up to 20 years.
The unsolicited terminals were to be built on the basis of ‘take-or-pay’ where the Ceylon Electricity Board would be committed to buy LNG or pay for unused volumes, even when rains come.
Engineers at the Ceylon Electricity Board said in a letter to the government and members of the parliament that the unsolicited deal appeared to have been done without consulting the Ministry of Power and Energy.
The two coalition partners of the current administration strengthened the case for LNG soon after coming to power with President Maithripala Sirisena cancelling a planned coal power plant which was close to being built.
The regulator also pushed up costs of coal by coupling a pump storage plant to claim that LNG was cheaper, as critics cried foul.
Several unsolicited LNG plants were then pushed by interested parties, on a ‘government-to-government’ basis though only one party was chosen.
Around the time there was greater acrimony inside the coalition and charges against an economic committee that gave the nod to the deal were ratcheted up, according to observers.
By-passing competitive procurement
An amendment to the electricity act brought to section 43 of the electricity act in 2013 which permitted ‘government-to-government’ deals is being used to by-pass competitive bidding, critics say.
The CEB engineers said there were enough private investors ready to set up LNG terminals and competitive bidding should be used to procure the terminal.
"In an occasion where there are a lot of investors keen on investing in LNG power plants and supply of LNG, most appropriate way of implementing such proposals is through competitive bidding," the engineers union wrote in a letter to the President, Prime Minister and members of parliament.
"If there are concessionary government to government loan commitments, it is the responsibility of the government to channel those funds to other sectors which cannot attract investments."
The deal approved by the cabinet as reported publicly involves a terminal with 2.7 million tonnes per annum (MTPA), where the developer will have be paid a penalty for any unused capacity by the CEB.
CEB engineers warn that the penalties from the ‘take-or-pay’ LNG deal may dwarf those of oil-hedges that went wrong in 2008 forcing state-run Ceylon Petroleum Corporation to buy oil at high prices.
"When there are unfavorable terms like this in a twenty year contact, it is very difficult to avoid the country being pushed into an economic crisis," the CEBEU warned.
"The loss incurred by a contract like this can be thousand times higher than that of the recent hedging deal signed by the CPC for fuel purchase."
The CEBEU said the LNG requirement will not exceed 0.6 MTPA
LNG requirement of the country won’t exceed 0.6 MTPA for next ten years with planned new LNG plants and conversion of exiting thermal plants to LNG.
"This LNG demand can vary from 0.3 MTPA under very wet condition to 0.8MTPA under extreme dry conditions in the country," the Union said.
"Under these circumstances, we also wish to know about the experts who recommended purchasing such a huge volume of LNG like 2.7 MPTA for a period of twenty years."
Current LNG prices however are much lower than before the commodities bubble broke in 2008/2009 and the gap with coal has also narrowed.
There is also speculation that the attempt to push Sri Lanka to import LNG through take-or-pay deals with LNG importing countries may also be triggered by a need to pass on losses from long term contracts made before LNG prices fell.
CEB engineers wrote that all unsolicited ‘take-or-pay’ deals involved the following characteristics.
1.Great reluctance for competitive bidding.
2. Bringing in investment proposals so that they get the maximum benefits (to the promoters) ignoring the requirements of the country.
3. Investment proposals being brought forward by private companies under the label of government to government concessionary contracts.
4. Establishment of joint venture companies allocating of a meagre share for Sri Lanka in those companies, in order to escape from competitive bidding procedures and other relevant laws & regulations.
Analysts say even Power and Energy Ministry lacks the capacity to properly evaluate the complexity of the proposals and contracts involved. (Colombo/Mar10/2018)