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The 50-day Government, formed by joining SLFP with Mahinda Rajapaksa’s alliance with blessings of President Sirisena, during the first Cabinet meeting approved the setting up of a Floating LNG Terminal north of Colombo Harbour to supply Liquid Natural Gas to the country for 20 years, a controversial unsolicited proposal brought forward by a Korean company, supposed to be under Government-to-Government basis.
The tender
Mahinda Rajapaksa took oaths as Prime Minister on 26 October evening and assumed prime ministerial duties on 29 October. The new Minister for Power and Renewable Energy, presumably with Cabinet approval, on 5
November 2018 (seven days after MR assumed duties as PM) published an International Competitive Bidding Tender requesting counter proposals under Swiss Challenge Procedure, for the establishment of an offshore floating storage and regasification unit (FSRU) and pipeline infrastructure and supply of Liquefied Natural Gas (LNG) for the Ceylon Electricity Board for 20 years. Deadline for submission of Proposals was 12 December 2018 (five weeks from tender announcement).
According to tender, SK E&S Company Ltd. of Republic of Korea has submitted an investment proposal for the supply of offshore Floating Storage and Regasification Unit (FSRU) and pipeline infrastructure and supply of Liquefied Natural Gas (LNG) for the Ceylon Electricity Board of Sri Lanka.
The Government of Sri Lanka has decided to call for counter proposals for this unsolicited proposal, in order to allow this proposal to compete with other possible investors. According to Swiss Challenge Procedure of the GOSL, Supplement – 30 to the Government Tender Procedure – Part II (Private Sector Infrastructure Projects), Reference 237 – Dealing with Unsolicited Project Proposals.
Introduction of ‘Swiss Challenge’ procedure dated 26 December 2016, any interested potential investor can challenge the proposal submitted by SK E&S Company Ltd. by submitting counter proposals which can be matched by the original proponent. If the original proponent is unable to match the counter proposal the tender will be awarded to the prospective bidder provided the agreement to pay the development cost of the original proponent.
The Ministry of Power and Renewable Energy, on behalf of the Special Committee appointed under Swiss Challenge Procurement Procedure (SC), call Request for Proposals (RFP) from prospective developers for the development of an offshore Floating Storage and Regasification Unit (FSRU) and pipeline infrastructure and supply of Liquefied Natural Gas (LNG).
The project encompasses the design, construction and installation of an FSRU to be moored approximately nine km north-northwest of Colombo Port entrance. The supply of LNG (including transportation) by LNG Carrier Vessel (LNGC) which is to be moored near the FSRU is required. LNG is then re-gassified on-board the FSRU and the re-gassified LNG is sent into two subsea pipelines. Each pipeline is then routed to the power-plants located at Kelanitissa and Kerawalapitiya.
The scope of the integrated LNG Project (the Integrated Project) includes:
(I) Procurement of LNG and transportation of LNG through LNGC to the FSRU
(ii) Re-gassification Project – The development (including Environment Impact Assessment), design, engineering, procurement, financing, completion, testing, ownership, financing, construction, commissioning, operation and maintenance of:
a) a standard new-build FSRU
b) offshore terminal including mooring and unloading facilities; and
c) delivery of re-gassified natural gas to the delivery points at the power plants at Kerawalapitiya and Kelanitissa
iii) Gas transportation and delivery – The development (including Environmental Impact Assessment) financing, design, engineering, procurement, construction, testing, commissioning, ownership, operation and maintenance of:
a) high pressure pipelines, including subsea and onshore segments, for the connection of the offshore terminal to onshore receiving facilities;
b) pipeline tie-in connection from the onshore receiving facilities to the delivery points at the power plants at Kerawalapitiya and Kelanitissa; and
c) Gas network control and management systems.
Comments by CEBEU
The deal approved by the Cabinet as reported publicly involves a terminal with one million tons per annum (MTPA). CEB Engineers Union commenting on the SK E&S Company offer to supply LNG on a ‘take or pay’ basis, where the buyer is expected to pay for LNG whether used or not. The company will build its own terminal ‘free of charge’, if it gets the contract to supply LNG. But the Government will have to build pipelines to Kerawalpitiya and Kelanitissa.
The price of LNG, or what premium to international benchmark is not given in the report. Also the heat rate of the LNG offered by the supplier is not indicated. The company has sought a purchase and supply agreement for a 20-year period. The sale and purchase agreement under the proposal would start in second half of 2020 and end in March 2040.
Earlier CEB was expected to build its own terminal to unload LNG – or call bids for a private or floating plant which will then charge a throughput fee for each ton unloaded. The Swiss Challenge method is one of the least used methods of procurement in the world.
History of offer
The Government proposed to set up the first LNG based 300MW power plant at Kerawalapitiya, indicating policy shift towards LNG, number of companies submitted unsolicited proposals to set up LNG terminals.
A Korean gas and power Company SK E&S, backed by Government of Korea had submitted a proposal to President Maithripala Sirisena in January 2018 to build the country’s first LNG import terminal. The company proposed “a free of charge floating Liquefied National Gas terminal (LNG). The company offered to supply one million tons of LNG a year, on a ‘take or pay’ basis where if the buyer does not accept a shipment, the buyer has to pay a penalty. The Government will have to build pipelines for the project. The price of LNG, or what premium to what international benchmark was not given in the report. The company has sought a purchase and supply agreement from mid-2020 to 31 March 2040.
Regarding the offer, the press commented this would be the most expensive tender to be floated in Sri Lanka. The procurement is to be carried out using a method known as the “Swiss Challenge” method. A Swiss challenge is a method of procurement, which invites third parties to match or surpass an unsolicited bid for a project.
Indian-Japanese offer
Prior to the Korean offer, India’s largest LNG importer Petronet with Japan’s Mitsubishi and Sojitz Corp had submitted an unsolicited proposal in 2016, for a Liquefied Natural Gas (LNG) terminal and storage unit. The LNG terminal is to be located within the Colombo Port and pipelines from the port will transport the gas to two fuel based power plants in Kerawalapitiya and Kelanitissa expected to be completed around 2021. After scrutinising the proposal the Government showed interest and has signed a tripartite Memorandum of Understanding (MOU) with India and Japan and the Cabinet accepted the conducting of the feasibility study.
As per the MoU signed in February 2018, the capacity of the LNG Terminal will be decided on local demand in two years after completion of initial formalities. The capacity would be around 2.6-2.7 million tons, bigger than the previously envisaged 1.5-2 million tons a year facility at a cost around $300-350 million. The LNG terminal, which will import super-cooled natural gas in ships, will take two to three years to build.
The Cabinet of Ministers has also authorised Sri Lanka Gas Terminal Ltd. to enter into agreements with the Indian and Japanese partners to establish the proposed pubic private partnership and will own 15% share.
The basis of offer
The Yahapalanaya Government entertained unsolicited proposals for a LNG terminal and a re-gassification unit and two proposals were considered. Both proposals offer floating, meaning units made elsewhere and brought to location. But the most important question is, what is the need? The offer indicates supply LNG to gas converted Kerawalapitiya and Kelanitissa power plants, although pipelines are not included (details of plants given below).
Has anyone carried out a feasibility study of converting the two plants to LNG and the costs involved? Especially Kelanitissa includes two power plants with different owners. Ownership wise 168MW plant is privately owned and the contract would end only in 2023. Government-owned plant is a mix number of plants some dating back to 1982.Thus even if LNG is supplied there would be number of issues as ownership, age of machinery, viability of converting to LNG, etc. Laying of pipelines always meets resistance from landowners and be time consuming.
The location of LNG storage and regasification facility in sea would question the ability to withstand storms, location depth also protests from fishermen. The Environment Impact Assessment and approval can take a long time.
In addition, has other options as reviving of Kelanitissa and Kerawalapitiya with local companies were investigated?
Kelanitissa Power Plant
The Kelanitissa Power Complex consists of two separately-owned facilities, capable of producing a total of 550MW of power. The private facility owned by Sojitz Kelanitissa Ltd., a 168 MW combined cycle power plant uses low sulphur diesel, been in operation since 2005. The plant contract ends on October 2023. The Government-owned facility Kelanitissa Power Station, capable of producing 380MW, consist of older conventional power station built in 1982 and newer combined cycle power station built in 2002.
Kerawalapitiya Power Plant
The power station also known as Yugadhanavi is an oil-fired plant using gas turbines and steam turbines capable of producing 300MW of power. The power plant completed in 2010 costing $ 300 million, uses sea-water for cooling.
Yugadhanavi is owned by Lakdhanavi, a subsidiary of Lanka Transformers Ltd., with shares owned by CEB, EPF and the Treasury.
3 power plants operating on natural gas
The Cabinet of Ministers on 9 May 2018 have accepted implementing three LNG power plants as Joint Venture Projects with Governments of Japan, India and China to generate electricity. They would be 500MW each capacity plants by Japan and India while 400MW plant in Hambantota with China. Hambantota plant is expected to supply industrial needs of proposed industrial estates in Hambantota and initial planning is already underway. For the other two even locations have not been identified.
Kerawalapitiya LNG Power Plant
After the commissioning of the Norochcholai power plant during the 2012-2015 period, no other power plants were approved for construction and the 300MW Kerawalapitiya LNG power plant was proposed as a solution for possible immediate electricity shortage.
International bids were called in November 2016 for a suitable investor for setting up of 300MW capacity Kerawalapitiya power plant on 20-year Build, Own, Operate and Transfer (BOOT) basis and bids opened in April 2017. After much hassle and arguments a decision was made. In April 2018, Dr. Suren Batagoda, Secretary to the Ministry of Power and Renewable Energy informed media that the much delayed Kerawalapitiya 300MW LNG power plant bid was awarded to Lakdhanavi Ltd., who submitted the lowest power rate.
However, in July 2018, Secretary submitting a report to Procurement Award Board (PAB) recommended the award the tender to the second lowest bidder, Concord Holdings and its local partner WindForce & RenewGen despite the State owned entity being the lowest bidder. The bid price of Lakdhanavi was Rs. 14.98 per unit while the Chinese company offered Rs. 15.97 a unit. Superficially one rupee per unit of power looks small, but if the plant works 75% of capacity the loss to the country is nearly Rs. 2 billion per year would continue for 20-year contract period. For a contract of this magnitude the contractor would be willing to oil lots of palms.
In the tender, both tenderers would have included LNG unloading, re-gassification and transfer pipelines to transfer imported LNG to the power plant.
Question remains why did the Secretary change his decision after three months? There were rumours that the Chinese investor has appointed the son of a very senior politician as their local representative, hence the change.
The Cabinet approval
The Subject Minister had presented a Cabinet paper to offer the tender to the Chinese company for approval to construct Kerawalapitiya 300MW power plant. But the Cabinet had to face strong opposition from the Minister Patali Champika Ranawaka and decided to postpone the decision.
However, at a later Cabinet meeting the President Sirisena took up the matter again and Cabinet approved to award the Kerawalapitiya 300MW power plant tender to Concord Holdings and WindForce & RenewGen at the higher rate.
But the tender award had to be suspended as a third party filed objections in the Supreme Court and the matter is pending.
Availability of local gas
The Indian firm Cairn conducted oil exploration in M2 Block in Mannar Basin made two natural gas discoveries in 2011. According to Cairn’s data, 850 billion cubic feet of gas reserves are available in the M2 block. Although the country received several unsolicited proposals from potential operators to develop Mannar Basin, no decision had been taken, also no steps forward.
On 30 May 2018, the country signed an agreement with Eastern Echo Holdings Plc, a fully-owned subsidiary of the world’s largest US-based oilfield services company, Schlumberger, to conduct seismic surveys off the country’s East Coast and Mannar Basin to evaluate prospects of oil and gas. The exploration will not cost Sri Lanka, but will receive a copy of the report; Eastern Echo Holdings will sell the obtained data to a prospective developer, as allowed in the agreement. None of the LPG import proposals consider usage of locally available gas.
LNG and LPG
LNG stands for Liquefied Natural Gas, which is just Methane (CH4) in its liquid form and LPG is Liquefied Petroleum Gas, is stored in pressure vessels. LNG is cooled and not under pressure, making LNG inherently safer than LPG.
LNG is liquefied by chilling it to −161°C and stored in insulated tanks. The storage pressure in these tanks is very low, at less than 10 kPa. The liquid is stored at its boiling point near atmospheric pressure. As the insulation is very efficient, only a relatively small amount of boil off is sufficient to maintain the desired temperature. As the vapour boils off, heat for the phase change cools the remaining liquid. This occurrence is known as auto-refrigeration. The boil-off gas is not wasted, as it is used as a fuel source.
Sri Lanka’s LPG use
Currently Sri Lanka uses around 480,000 tons of LPG a year. But with the completion of 300MW LPG based power plant in Kerawalapitiya the requirement would substantially increase. In addition the existing Kerawalapitiya plant currently running on petroleum-based fuel also the two plants in Kelanitissa too could be converted to LPG, thereby reducing electricity costs. Currently there are three organisations with the technical capacity and experience for such a project. Among them are Litro Gas, Lakdhanavi Ltd. and LAUGFS, why was the usage of local talents not considered?
Litro Gas Company
Decades ago, the island’s only LPG storage terminal was operated by Shell Gas Lanka Ltd. owned by Royal Dutch Shell. LPG storage was located in Kerawalapitiya, capable of storing 8,000 metric tons of LPG. The facility was supplied by a pipeline connected to a buoy 4km offshore into which gas tankers discharge, with rough seas sometimes disrupting unloading.
In 2010, the Government bought over Shell Terminal Lanka for $63 million creating Litro Gas. The Company also owns a modern LPG bottling plant situated in Mabima, Sapugaskanda using gas produced by the refinery. Litro today owns a fleet of modern LPG tanker trucks.
Litro too is capable of supplying LPG to Kerawalapitiya and Kelanitissa.
Lakdhanavi Ltd.
Lakdhanavi Ltd., a subsidiary of LTL Holdings (Pvt) Ltd, a subsidiary of CEB. The company already operates Yugadhanavi 300MW combined cycle power plant at Kerawalapitiya. Lakdhanavi also operates in Bangladesh, was successful through international competitive bidding process to construct a 114 MW thermal power plant, the fifth power plant to be built by the Company in Bangladesh.
The company submitted the lowest tender rate for the 300MW Kerawalapitiya LNG plant, which would have included a gas importing structure. If Lakdhanavi are awarded the tender, their proposed gas import system could be improved to supply needs of their existing plant to run on LPG at a nominal cost.
LAUGFS Gas
The local company, currently a supplier of domestic gas with storage and filling plant in Biyagama. The company has established a LPG storage complex of capacity 30,000mt (Metric Tons) in Hambantota Port at a cost of $ 80 million and was expecting the first consignment of gas during last December. Hambantota port has dedicated two jetties for oil, gas and petroleum business. Company’s storage facility is located three km from the jetty connected by a pipeline.
LAUGFS Hambantota facility can receive and store refrigerated propane and butane separately or in mixed form, via very large gas carriers and pressurised vessels. The company expects to extend the capacity to 45,000 MT. The company is moving towards building an integrated regional LPG Terminal for LPG importing, re-exporting and supply to retailers in the Indian Ocean Rim. The company currently operates three LNG carrying ships and expect to increase the numbers to 10 in the short-term – both owned and chartered.
LAUGFS Gas (Bangladesh) Ltd., having entered Bangladesh in 2001 is a major LPG distributor in Bangladesh, importing and distributing over 50,000 MT of LPG every year. LAUGFS have been complaining of problems faced by them in their current gas imports via Colombo Port. They too would be interested in establishing a LPG import and inland storage facility to support their domestic gas supply. They could easily supply Kerawalapitiya and Kelanitissa requirements with lower capacity storage as their stocks could be replenished easily from Hambantota.
Attempted tender awards
The 50-day Government attempted awarding setting up of Floating LNG Terminal and supply of LNG to the country for 20 years to a Korean contractor. Mahinda Rajapaksa having commenced work on 29 October with Cabinet approval called tenders under Swiss Challenge on 5 November, in only seven days.
With the political turmoil at the time, MR would not have any clue of the award, but fulfilled a promise. It is clear that all paperwork for the Swiss Challenge tender had been prepared in advance. The challenge period of five weeks allowed under Swiss Challenge an impossible task for another party to offer a challenge.
The previous Government may have wished to award the contract to one of the two aspiring groups, but did not award for some unknown reason. New Government’s Cabinet under President Sirisena gave immediate approval. It is recalled that Koreans submitted the proposal to Sirisena who forwarded to the Ministry.
Previously too Kerawalapitiya 300MW tender was awarded to the higher priced Chinese, overlooking state owned Lakdhanavi. The award of tender was objected by Patali Champika, but Sirisena overruled the objection at a subsequent cabinet meeting. Higher one rupee price of electric power would cost the country nearly Rs. 2 billion a year, a sum any contractor would go lengths to get the contract.
Breakdown of Yahapalanaya Government
The President and the UNP won the elections and formed the Yahapalanaya Government. While minor misunderstandings among two senior positions were understandable, the final breakdown of MS and RW relations may possibly due to three reasons among others.
1. Arrest of President’s Secretary while accepting Rs. 20 million bribe.
2. Objections to award Kerawalapitiya LNG power plant to Chinese contractor.
3. Not agreeing to award the floating LNG terminal to Sirisena-favoured contractor.
With the past record of MR, MS would have expected MR would be more accommodating, which was proved right when MR’s Cabinet approved the LNG terminal proposal and tenders were called within seven days.
Prior to appointment of MR, all documentation for the LNG Terminal would have been ready. RW did not wish to proceed with the tender for reasons best known to him. Changing the contractor was only the changing of name in documents. With the calamity the country was facing at the time, neither MR nor any of his Cabinet members would have time to understand the contents of the Cabinet paper nor the tender. MR only fulfilled a promise.
The country is fortunate that the unnecessary floating LNG terminal contract for 20 years got dropped and most likely would be replaced by a more acceptable solution from a local source. Fate of Kerawalapitiya LNG power plant would be decided by the Court.
