Sri Lanka approves key liquefied natural gas projects

In pursuit of greater energy security, Sri Lankan policymakers have signed three major liquefied natural gas (LNG) deals with the governments of China, India and Japan. Expected to add 1400 MW to installed capacity, the transnational agreements will play a key role in mitigating unreliability in hydropower supply while bolstering foreign capital inflows.

Plant Agreements

On the back of an anti-pollution drive, countries across the globe have begun switching their power plants to LNG. Sri Lanka is no exception, with a string of major projects set to transform the country’s energy market. Among them are two projects to build 500-MW LNG power plants in Kerawalapitiya on the west coast, which were agreed with the governments of India and Japan in 2017 and approved by the Sri Lanka’s Cabinet in April 2018. The first project will be carried out as a joint venture between India’s largest utilities company, National Thermal Power Corporation, and Sri Lanka’s Ceylon Electricity Board (CEB), which controls all major functions of electricity generation, transmission, distribution and retailing in the country. The second facility will be developed by Japan’s Sojitz Corporation, Mitsubishi Corporation and CEB.

Terminal

A trilateral memorandum of agreement has also been signed with Japan and India for Sri Lanka’s first LNG terminal, which will be built nearby. The Sri Lankan government and Sri Lanka Gas Terminal will hold a 15% shareholding in the project, while India’s largest gas importer Petronet LNG will own a 47.5% stake, and the remaining 37.5% will belong to Sijitz Corporation and Mitsubishi Corporation. According to international media reports, the new terminal will have a capacity of around 2.6m tonnes of LNG per year and cost $250m-300m.

Port Facility

Moreover, a 400-MW LNG power plant built by China Machinery Engineering Corporation is set to be established in Hambantota, where Chinese state interests assumed control of a strategic deep-sea port in a debt-for-equity swap in 2017. Following the recommendations of the Public Utilities Commission of Sri Lanka and the National Planning Department, Sri Lanka’s Board of Investment approved the investment of $500m in April 2018. Local media reports indicate that CEB will operate the 400-MW facility alongside China’s Hambantota Power Private Limited.

While the three projects will ultimately bolster energy capacity, the CEB Engineers’ Union (CEBEU) initially objected to the proposals because they bypassed standard competitive bidding procedures. The CEBEU raised concerns that the complexities of new LNG contracts had not been properly evaluated, and that they had been created without thorough consultation with the Ministry of Power and Renewable Energy (MPRE). However, under an amendment to Section 43 of the Electricity Act, enacted in 2013, government-to-government deals can be used to bypass competitive bidding procedures.

FSRU

In addition to the three plant projects and associated import terminal, the MPRE has also made a request for proposals from international investors for the development and installation of a floating storage and regasification unit (FSRU).

The move follows an unsolicited proposal submitted in late 2017 by South Korean firm SK E&S Company for the construction of FSRU infrastructure and a 20-year contract to supply LNG to CEB. Upon receiving the proposal, the MPRE decided to seek counter proposals under the Swiss challenge method, which allows the original proponent to match any subsequent bid. According to press reports, the deadline for counter offers, which was originally December 12, 2018, was extended to January 31, 2019. In addition to the FSRU, the successful bidder will also be required to design, construct and finance two subsea pipelines, which will link with power plants at Kelanitissa and Kerawalapitiya.