News
India and Sri Lanka work out massive Govt.-to-Govt. LNG supply contract
View(s):By Namini Wijedasa
An Indian government proposal, which Sri Lanka has accepted, will see the New Delhi-headquartered Petronet LNG Ltd. (PLL) supply liquefied natural gas (LNG) at the rate of 40 containers a day to thermal plants in Kerawalapitiya.
These will be shipped from the port of Kochi and taken by road to the power plants run by Sri Lanka’s LTL Holdings Ltd. in Kerawalapitiya. There is potential under the India-initiated proposal to expand the shipments to 60–70 containers a day.
However, questions have arisen about the nature of the contract as there was no competitive tender. While it is being described as a government-to-government (G-to-G) deal, Sri Lanka has proposed licensing LTL Holdings Ltd., which has a convoluted ownership structure, to buy the gas directly from the Indian government-owned PLL. The PLL deal was struck even as Sri Lanka last year suspended a proposal for China Harbour Engineering Company (CHEC) and Pakistan’s Engro Corporation to develop a floating storage and re-gasification unit (FSRU) at Kerawalapitiya and an offshore and onshore re-gasification LNG transmission pipeline network with an onshore receiving facility, etc. The expensive project was deemed unfeasible amidst changing—and much worse—economic conditions in the country.
Sri Lanka’s Cabinet later submitted a joint proposal from LTL and PLL to operate the 350 MW Sobadhanavi combined cycle plant, which is under construction in Kerawalapitiya, using re-gasified LNG.
“According to the report, it was proposed that LNG will be imported to Colombo Port via ISO tanks from PLL’s Kochi terminal, following a streamlined logistical process,” the Cabinet paper submitted by the Power and Energy Ministry says. LTL and PLL are to float a special-purpose vehicle (SPV) for this. And they have sought a take-or-pay guarantee from the Ceylon Electricity Board, which will purchase the electricity for the grid.
In the oil and gas industry, a take-or-pay contract obligates the buyer to take an agreed-upon minimum quantity of gas at a set contract price over a given period or to pay an agreed-on amount if the minimum gas quantity is not taken.
“The price LTL pays will be indexed to what PLL already has contracted with its suppliers, of whom it has several,” an informed source said. “LTL has the responsibility to negotiate a workable price and carry the procurement burden.”
“It is a G-to G in the sense that PLL, a government company, is the Government of India nominee to supply LNG and LTL is the Government of Sri Lanka nominee to receive LNG, for its own requirements,” he added.
Detractors said, however, that this is similar to the Indian and Sri Lankan governments passing off the Adani contract for the wind power plants in the North as G-to-G by virtue of Adani Green Energy Ltd. being India’s nominee. “There was no transparency in the PLL-LTL deal as well, and that contravenes IMF requirements,” one power sector source said. “It was done behind closed doors.”
“With limited fiscal space, balance sheet strength, and no track record, Sri Lanka will not be able to secure an LNG supply contract as an independent off-taker at a reasonable premium through competitive tender,” responded Saliya Wickramasuriya, Ceylon Petroleum Corporation Chairman, in his capacity as head of the government’s Gas Utilisation Master Plan Committee (GUMPC). “The only way the molecule can be sourced at this time is collaboratively, with a flexible and supportive supplier, who understands Sri Lanka’s needs.”
The PLL contract is an interim solution, Mr. Wickramasuriya added, pending the production of Sri Lanka’s own gas. The Cabinet recently sanctioned what he called “the final piece of the jigsaw puzzle that enables parties to express interest in conducting exploration offshore with a view to eventual production.” But local gas production will take time.
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