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Floating storage regasification unit: Expert says Sri Lanka must call for open tender
Sri Lanka must call for an open, transparent tender for its first floating storage regasification unit (FSRU), a global oil and gas industry expert said, warning that plans to buy liquefied natural gas (LNG) from a single source could saddle the country with long-term overpriced contracts leading to high, not cheaper, electricity prices.
The Government signed a memorandum of understanding with India and Japan for an LNG terminal and FSRU in Kerawalapitiya. The State-owned Sri Lanka Gas Terminal Co Ltd will hold just 15 percent of equity in the joint venture (JV) while India’s Petronet LNG Ltd will have 47.5 percent and Japan’s Sojitz Corporation and Mitsubishi Corporation will secure 37.5 percent.
Sri Lanka’s status as junior partner in the JV makes its position “highly vulnerable”, said Nalin Gunasekera, who has spent the last 37 years in the upstream exploration and production sector. “This project could well turn extremely bitter and not sweet, if it is mismanaged by the Government of Sri Lanka.”
For the past six years, Mr Gunasekera–who works out of Perth and Singapore–has been making presentations and reviewing with the Sri Lankan Government its attempt to monetise the country’s offshore gas reserves and a proposal to introduce LNG to the energy mix.
Petronet has “a clear conflict of interest” in seeking a market for its “overpriced LNG”, he signalled. The Indian Government has contracted LNG procurement into the future via Petronet (and others) well above market price. Some of these agreements have been renegotiated. “India has long-term overpriced supplies through to 2038 to offload, with Sri Lanka probably not having the right of refusal,” he said.
India has been scouting for a market for this overpriced LNG as a re-exporter and is now turning to Sri Lanka, having been rejected by others, Mr Gunasekera analysed. “How Sri Lanka manages to procure LNG for its FSRU–whether overpriced gas from India or a through lower-priced long term deal or from the spot market–may determine the affordability of electricity for the Sri Lankan consumer for decades to come.”
Qatar has a monopoly of Indian LNG imports and has used this as a bargaining chip. Sri Lanka should be cautioned against having a single source of LNG from the lessons learnt by India.
“Are Sri Lanka’s consumers paying a premium to rescue India’s predicament with their long-term overpriced LNG contracts, ultimately paying an unaffordable price for electricity?” Mr Gunasekera asked. “These are questions being raised in the international marketplace watching these global transactions making ignoramus poor countries still poorer.”
Given Sri Lanka’s past record of oil price hedging (incurring a penalty of US$ 168mn), “lacking the basic skills in the complex business of LNG procurement makes the guaranteed success of this project questionable”. Other LNG brokers such as Woodside, TOTAL and Shell have also approached the Government. Their offers at prevailing prices and interest in participating in these projects were not reported in the public domain.
“The advantage of engaging with these companies is the technology transfer and the management expertise they bring along with their 100 years in this business,” Mr Gunasekera, who has worked with Shell, said.
In Sri Lanka, “the lack of transparency and basic skills required in these major undertakings leaves much concern when, ultimately, the public purse has to bear the penalty of the Government’s missteps into the future”. “Other countries openly tender such requirements to secure the best price, later negotiating improved terms for the sake of public transparency,” he saud.
India, which is guiding Sri Lanka, still has no functioning or operating FSRU. And there are no known FSRUs installed in Japanese waters. “Thus, all partners sponsoring this project have no direct record of past operational experience,” Mr Gunasekera said. India’s very first FSRU by H-Energy, having had a turbulent history due to volatile LNG prices, is likely to be operational by the end of 2018 or beginning of 2019.
FSRU leased contracts are known in the offshore oil and gas industry to be notoriously complex. They will also not be under Sri Lankan jurisdiction or governing law. “Eventually, high penalties become payable by those least knowledgeable of the stakeholders,” Mr Gunasekera said.
The Government of Sri Lanka has decided on the location for the FSRU–nominated by the Sri Lanka Ports Authority as being West Container Terminal No 1–without calling for expressions of interest (EoI). It will later be moved to the new breakwater arm when the existing one is extended to facilitate West Container Terminal No 2.
“There appears to be little justification for the proposed location when a number of them should have been reviewed before a final is selected,” Mr Gunasekera said. There have been no navigational simulations or quantified risk assessment. The regasified natural gas is to be transferred to the power station through subsurface and land pipelines or trucks, according to SLPA. No environmental impact assessment (EIA) has yet been done in choosing the location or for routing of pipelines or trucks carrying LNG.
“Lacking definition makes this project still at the pre-feasibility stage,” he said. At the conception stage of any FSRU project, specialist contractors, consultants and potential FSRU suppliers should be engaged to examine the proposed site location, subsea and offshore metocean conditions, soils and bathymetry and to perform feasibility studies for optimum project configuration.
“Commercial risk-sharing terms have to be reviewed with potential FSRU suppliers,” Mr Gunasekera advised. “This can be a lengthy process for a first FSRU project, often taking many months to complete.”