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New Govt. in ‘ungodly rush’ to work out US$ 10bn LNG project
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The Government has given international bidders just five weeks to apply for a complex, multibillion dollar Swiss challenge to supply an offshore floating storage and regasification unit (FSRU), pipeline and contract for liquefied natural gas (LNG), raising eyebrows in the oil and gas industry about the “ungodly rush”.
This will be Sri Lanka’s largest single Government tender: a 20-year LNG contract costing more than an estimated US$ 10bn. Preparation for such a tender, including an engineering estimate and financial model, would take at least six to eight months. But the advertisement was published on November 5, eleven days after the sacking of Prime Minister Ranil Wickremesinghe. And the closing date is December 12, 2018, a mere five weeks after.
The Power and Energy Ministry is seeking counter proposals under Swiss challenge procedure for the establishment of an FSRU, pipeline infrastructure and supply of LNG for the Ceylon Electricity Board (CEB). The first bid was put forward by the South Korean Government-backed SK E&S Company and presented to Cabinet in December 2017 by President Maithripala Sirisena.
“…any interested potential investor can challenge the proposal submitted by M/s SK E&S Company Ltd by submitting counter proposals which can be matched by the original proponent,” says the advertisement. “If the original proponent is unable to match the counter proposal, the tender will be awarded to the prospective bidder provided there is an agreement to pay the development cost of the original proponent.”
A Swiss Challenge usually grants an advantage to the original proposer with an opportunity to match whatever anybody else tenders. The call for RFPs (request for proposals) was heavily criticised by independent oil and gas industry experts. The selection process is wrong for a strategic national project such as this, they said.
“This is being done at a time when Sri Lanka’s political stability is at the lowest it has been for decades,” said a critic, requesting anonymity. “And it is without a shadow of a doubt Sri Lanka’s largest single sovereign commitment, a 20-year LNG contract is over US$ 10bn.”
“When signing a purchase contract, there are penalties for departure,” he warned. “You can’t expect to sign something today and change your mind tomorrow. My question is also on the timing, which is slap bang in the middle of the lowest investor confidence we have experienced.”
It was reiterated that five weeks to supply a competitive response to an existing proposal was woefully inadequate. “If we were to be suddenly told there is an opportunity like this–which is what has happened–even with all the information pertaining to it, we would still take between six to eight months,” another source said. “Why are they introducing it now and keeping it open for just five weeks?”
Crucially, the RFP does not give a definite location for the FSRU. It only says it will be moored about 9km North or Northwest of the Colombo Port entrance. This means there is no metocean, environmental or social data and no land allocated. “It is only a hypothetical location,” he pointed out. “Location studies alone will take several more months, extending the required period to one year.”
The RFP also contains no information on the level of insurance coverage or definition of liabilities, which are required to negotiate and cost an economically competitive proposal. It specifies that a newly-built FSRU is required. “That is nice, yes, you can start with brand new equipment,” said the oil and gas expert. “But there are only 27 FSRUs active in the world. It will be a few years’ wait and they will be expensive brand new.
Most people would consider an alternative solution–that of retrofitting existing infrastructure to perform the same function. The Ministry should simply call for open technology, cost-based, instead of prescribing it.
Another concern raised was that the Government was committing in this agreement to purchase LNG at a price indexed to oil. This, experts cautioned, was somewhat restrictive. “It precludes us from operating, even if it’s not immediately but later on, in the LNG spot market which is growing rapidly,” one said. “We are making a commitment to follow oil up and down. We will not be able to take advantage of arbitrage-driven price movements.”
It was pointed out, also, that if somebody does manage to “magically” propose in those five weeks an alternative to the SK E&S bid that is technically sound and does not get rejected, the successful party has to pay the Koreans US$ 10mn dollars for taking the project from them. “The principle of that is that, in a Swiss challenge, the original proposer retains some advantage,” said a foreign observer based in Britain. “Here, the Sri Lankan Government is taking upon itself–on the basis of some submission by the proposer–to specify a US$ 10mn payback. It has not cost that amount to make the proposal because, among other things, there has been no visible technical feasibility or pre-feasibility done in Sri Lanka.”
The process is “entirely non-transparent and unjustified”. While the principle of a Swiss challenge should be recognised, it should be left to further discussion. The experts said the invitation for RPFs could be improved if the technical option and financial model are left open, bidders are given 10-12 months to submit proposals and all relevant information is provided–including land clearance, EIA and insurance requirement.
“In the form it is in, it is not failing to plan…it is planning to fail,” said a foreign expert of Sri Lankan origin. “The Government could not send a stronger message to international players to stay away from Sri Lanka. Don’t stop the project. Just do it properly.”