The Ceylon Electricity Board (CEB) is opposing Power and Energy Ministry moves to award a 20-year take-or-pay contract for Liquefied Natural Gas (LNG) to a single entity, saying the high possibility of the Mannar Basin gas reserves being developed made it prudent to sign for just 10 years, and on a different business model.

The Ministry, in October, advertised a Swiss Challenge for an offshore Floating Storage and Re-gasification Unit (FSRU), pipeline and 20-year supply of LNG. The original bid came from the Korean SK E&S company, but was redesigned as a Request for Proposals (RFP). For nearly 2 years, its terms and conditions were negotiated by a team that included CEB representatives.

The closing date for the RFP was extended from December 12 last year to January 31 this year. Nine parties have taken applications, said Power and Energy Ministry Secretary Dr Suren Batagoda.

But the CEB’s General Manager has now written to Dr Batagoda proposing that the bid be “unbundled” into 2 contracts: an LNG supply contract and an LNG infrastructure development contract. Engineer A. K. Samarasinghe also maintained that the RFP under the Swiss Challenge procedure needed extensive changes “to harness the requirement benefits of the deployment of LNG for power generation in Sri Lanka”.

Earlier this month, the Ministry of Petroleum Resources Development also called for international competitive bids for exploration and development activities in Block M2, Mannar Basin, which has 2 gas discoveries–Dorado and Barracuda–and a number of undrilled prospects. Bidders are expected to consider both development of the discoveries and exploration of the rest of the block. The closing date is in May.

The CEB General Manager said a committee set up by the utility had discussed the Power and Energy Ministry’s proposal and RFP in December. They had understood “the associated financial, technical, legal and other risks embedded in the process and are of the opinion that necessary initiatives should be taken to minimise the possible risks, in order to achieve the required benefit to the country”.

“As a matter of fact, the value of the Swiss Challenge tender is about US$ 7 billion and it will be the largest tender ever in this country,” Mr Samarasinghe wrote to Power and Energy Ministry Secretary Suren Batagoda on January 2.

He said: “In that context, it is appropriate to extensively deliberate the risks and benefits, and also legal and commercial aspects of the deployment methodology of the LNG for power generation in the country, while establishing the transparency and competition in the process to harness the required benefits of LNG deployment to the country.”

The CEB committee has called, rather belatedly, for an LNG policy for power generation in Sri Lanka. The utility agrees with the Government’s intention to deploy gas, but observes that a Joint Cabinet Memorandum on the matter dated August 2017, envisages the establishment of a gas receiving terminal and procurement of LNG as 2 separate projects.

Cabinet subsequently opted for one investor for both due to the urgency of LNG requirement. The first consignments were initially expected this year. However, there is a delay in building two new LNG power plants. Without them, the usage of LNG for existing Colombo-based power plants would be just 300,000 MTPA (million tonnes per annum)–half the quantity envisaged in the proposed SK E&S tender.

The CEB says the terms of the LNG supply contract should be carefully decided, as it is governed by take-or-pay principles. This is a provision under which Sri Lanka will be obliged to take delivery of the goods or pay a specified amount. The RFP places LNG demand at 0.6 MTPA (or 600,000), increasing to a million MTPA in 2 years.

But the CEB demand forecast is only 0.6 MTPA and includes the 2 (now delayed) power plants in Kerawalapitiya. If these are not built in time, the envisaged quantity of LNG will be reduced by 50%, “and will cause huge financial losses to the country due to the ‘take-or-pay’ nature of the contract”, Mr Samarasinghe writes.

If the CEB fails to buy at least 50% of the annual contract quantity for 2 consecutive years, the seller can terminate the contract, claiming huge termination fees including debt, equity, financial cost and equity returns.

The Koreans put forward their original bid on Sri Lanka’s request, made during President Maithripala Sirisena’s official visit to Seoul in 2017. While it came as a bilateral, Government-to-Government project, the Power and Energy Ministry insisted on having it redrafted as an RFP and floating it as a Swiss Challenge, said Dr Batagoda. WorleyParsons, an Australian energy consulting company, was hired along with Allen & Overy, an international Law firm. Sri Lanka’s interests were represented by a local Law firm.

The consultants were paid by SK E&S but should the contract be awarded to another bidder, the winner will have to meet these fees. “The Swiss Challenge procedure is that, the development cost and RFP preparation cost has to be borne by whoever wins,” Dr Batagoda said.

SK E&S were nominated by the Korean Government, the Secretary said. Their proposal was negotiated and vetted over a period of nearly 2 years by a Joint Working Group that included all stakeholders, including the Ceylon Petroleum Corporation (CPC) and CEB.

“Every single point was negotiated,” he said. “Every term was debated and fought over till this was converted into an international RFP. It was not biased towards Korea. The idea was to have an open tender.”

Days after the RFP was advertised, Dr Batagoda said, a pre-bid meeting was called, which was attended by, among others, American and Norwegian entities. “We asked the prospective bidders to tell us anything which might be biased towards the Koreans,” he said.

One objection was that the financial capacity required of the bidder was too high. It was agreed to lower this. It was also accepted to change the requirement from a “new” FSRU to any other, provided the vessel was certified by a body such as Lloyds Register as having a minimum, 20-year lifespan.

Dr Batagoda said it was coincidental that the Swiss Challenge was advertised just days after President Sirisena sacked Prime Minister Ranil Wickremesinghe. Negotiations had just ended, so the Ministry went ahead. Also, when parties at the pre-bid meeting requested a one-month extension, it was granted.

Meanwhile, the Petroleum Resources Development Ministry was separately engaging with Indian and Japanese parties for another FSRU and LNG supply contract. Dr Batagoda contradicted widespread industry views that the country does not need two FSRUs. The India-Japan one would feed gas to 2 LNG power plants they were building.

“We need 2 terminals,” he insisted. “Why? If one terminal breaks down, what do you do? If 1 terminal is under maintenance or service, what do you do? Do you close the power plants? No. Who cares about 2 terminals, 3 terminals? They’re invested by a private company. We don’t invest. We are not worried about 1 terminal or 2 terminals. We are worried about the rate levied on turning LNG to gas. We have said we will not pay more than what India or Pakistan or Bangladesh pays for it.”

The Swiss Challenge was being opposed by “businessmen who want to get a monopoly,” Dr Batagoda insisted. He also said takeor-pay contracts were common in the Power and Energy industry. The CPC ordered 6 shipments of diesel for power plants last year. “Then we got enough rain and were using hydro, so we didn’t need the diesel,” he said. “But we had to pay. We didn’t buy the diesel, but we had to pay. If you order, you have to pay.”

If the CEB was not taking some of the LNG that is being ordered, the joint venture company being set up under the contract could choose to re-sell it “or do something to make sure nobody pays money for nothing,” Dr Batagoda said.