ECONOMYNEXT – Sri Lanka stands to lose hundreds of millions of dollars through a back-door liquefied natural gas (LNG) deal with a US firm which could be worth up to 6.0 billion US dollars but is coming in as the sale of share of a power plant, engineers of the state power utility have warned.
Energy security would also be undermined as the national grid would be dependent on a single company for the supply of LNG to the entire country and will also block state-run Ceylon Electricity Board from using cheapest energy source based on market prices, the CEB Engineers Union has said.
It is not clear how the unsolicited deal was suddenly struck without open tender for either the sale of a 40 percent Treasury stake in a power plant, LNG procurement for at least five years, or to operate floating liquefied natural gas terminal which is expected to charge fees from the state-run Ceylon Electricity Board.
US-based New Fortress Energy has announced it had struck a deal to supply state-run Ceylon Electricity Board to supply 1.2 million gallons of liquefied natural gas a day through a 310 MW combined cycle power plant and another 700 MW of plants to be built in Kerawalapitiya.
“As part of the transaction, New Fortress will have gas supply rights to the Kerawalapitya Power Complex, where 310 MW of power is operational today and an additional 700 MW scheduled to be built, of which 350 MW is scheduled to be operational by 2023,” the firm said.
“New Fortress will initially provide the equivalent of an estimated 1.2 million gallons of LNG (~35,000 MMBtu) per day to the GOSL, with the expectation of significant growth as new power plants become operational.”
The deal is bundled with a 250 million dollar sale of a 40 percent stake in the existing combined cycle plant held by the Finance Ministry, engineers of the Ceylon Electricity Board Engineers Union said.
The latest deal appeared to be an agreement for a term sheet for a final contract, the Union said.
Largest Ever Deal in History?
The complex deal involving committed energy purchase, a terminal and power plant could turn out to be the largest ever contract Sri Lanka had ever struck with a private company, the union said.
The deal for 5 years could be renewed for a further 10 years.
“The actual deal is in the fuel supply contract which can go up to 6,000 million US dollars and commit the CEB to unwanted LNG which may force renewable plants to be shut or pay the US company for unused gas,” CEBEU President Saumya Manawadu told reporters.
The commitment to pay the New Fortress Energy (NFE) for unused LNG comes through a ‘take-or-pay’ (TOP) commitment where the CEB is forced to operate the power plants 70 percent of the time (plant factor) or pay compensation to the company, the union said.
The deal committed Sri Lanka to “very high Take or Pay (TOP) gas volumes than the actual minimum requirement of the country with strict conditions that NFE should be paid irrespective of whether the contracted volumes are consumed or not,” the group said in statement.
A term sheet agreed with the government shows a price formula with a mark-up where the New Fortress Energy will make profits, union said.
New Fortress Energy is expected to also build a floating LNG terminal and charge fees on top of the gas mark-up for the terminal, while committing the country to purchase high volumes of LNG, the union said.
The firm had said it will charge 1.45 dollars per one million British thermal units (MMBTU) of LNG but a minimum commitment or capacity charge could push up it up to 5.50 dollars if the committed volumes are not used, the union said, in addition to compensation paid for unused gas.
The Ceylon Electricity Board operates a system where expensive thermal plants are shut when renewable energy, such as hydro output, goes up.
Under the New Fortress deal for “CEB should pay a minimum of 253 million dollars for FSRU separately as the capacity charge in addition to LNG payment,” the union said.
The terminal deal came after the CEB floated a tender to for a build operate own terminal.
CEBEUs Manawadu said the CEB worked with Asian Development Bank experts to formulate the floating terminal requirements and tender.
A related company to NFE had taken the bidding documents and the deal was transacted while the tender was ongoing, undermining the tender.
Serious bidders would be discouraged due to the unsolicited deal, he said.
He said President Gotabaya Rajapaksa was supportive of the tender going through and it was opened and several firms had bid for it.
Under the original plan a private investor would supply the floating terminal and operate it for competitive fee, a pipeline had been tendered by the state-run Ceylon Petroleum Corporation, which it would own at the end of the contract and LNG would be purchased separately.
A part of the LNG would be under long -term contract and the rest topped up through spot market.
The company that will run floating terminal under the CEB’s competitive tender has to pay Sri Lanka’s 24 percent corporate income tax, while the New Fortress is being promised tax free status the union said.
Manawadu said if the NFE deal went though the chance of another competitive floating unit being built was permanently terminated. The CEB was committed to a capacity charge under the unsolicited deal.
Once committed to a take-or-pay deal the CEB will lose its independence to operate the cheapest source of power under its least cost operating guide, he said.
CEB now operates or dispatches plants on a merit order based on generating cost while trying to operate cheaper renewable plants as much as possible.
The merit order of thermal plants may change depending on the fuel price.
“When we have committed to a take-or-pay contract we have to buy the LNG and allow hydro plants to spill or pay the cost of the unused LNG,” Manawadu said.
There was also a threat to energy security as the US firm would be the sole supplier of LNG which will make the bulk of the country’s energy through not only the 1,100 MW of Kerawalapitiya plants but the CEB’s own fuel oil plants which were expected to be converted to LNG after the competitive terminal was built he said.
For comparison Sri Lanka 900 Megawatt coal plant complex now produces about a third of the energy requirement.
The Union resisted take-or-pay deals of up to 20 years or more which came as ‘free’ floating terminal units under the last administration, promoted by different coalition partners, he said.
Meanwhile as the Federal Reserves printed money driving the so-called Powell Bubble, weakening the US dollar LNG prices have zoomed.
The Japan Korea Marker (JKM) for LNG has surged.
Coal prices have also been going up but LNG has spiked unusually. (Colombo/Sept24/2021)