Will President-proposed Korean LNG plant result in killing of Mannar gas?

The Koreans presented their offer to the unsuspecting President, who has absolutely no knowledge on the subject. Sirisena attempted to push the offer through the Cabinet, but the UNP refused to move, leading to the appointing of MR as PM

After the publication of my article ‘The 50-day Govt. in 7 days, attempts to award biggest value contract in history’ in Daily FT on 9 January, I received number of messages from individuals involved in the industry who upgraded my knowledge.

I am especially thankful to Nalin Gunasekara, a top professional in the oil and gas industry, especially in the Far-East Asia, with decades of hands-on experience, now retired. Another pointed out that the proposed FSRU project under Swiss Challenge is continuing and not abandoned as I hoped in my article.

 

The tender

President Sirisena got Mahinda Rajapaksa’s 50-day Government to approve within seven days the setting up of an FSRU by a Korean company to supply LNG. The new Minister for Power and Energy called for international competitive counter proposals under Swiss Challenge Procedure to be submitted within five weeks, against the Korean company’s proposal, but after protests the deadline was extended up to 31 January 2019, and again to end February.

Under the proposal, Korean company SK E&S would establish an offshore Floating Storage and Regasification Unit (FSRU) outside Colombo Harbour and supply one million tons of Liquid Natural Gas (LNG) a year to CEB for a period of 20 years. Under the ‘take or pay’ contract CEB would be contractually bound to pay for LNG and a penalty if the agreed quantity is not consumed.

 

Liquefied Natural Gas (LNG)

LNG is natural gas, predominantly methane CH4, which liquifies when cooled down to −162°C and occupies only 1/600th of natural gas. The non-pressurised in liquid form is convenient and safe for storage and transport. The liquefaction process removes dust, acid, water and heavy hydrocarbons, which could cause difficulty during usage.  

 

The proposed project

The project encompasses the design, fabrication and installation of an FSRU to be moored approximately nine km from Colombo Port. LNG would be procured and transported by a LNG carrier vessel to the FSRU. LNG would be re-gassified on-board and the gassified LNG under pressure will be delivered into two subsea pipelines. But pipelines undersea and overland are excluded from the proposal and would be the responsibility of the Government. The connectors would be supplied by the contractor. 

The price payable to LNG, whether linked to oil prices, quality of gas to international benchmarks or the heat rate of the LNG, are not given. The agreement is only to supply and purchase of gas for a 20-year period commencing from the second half of 2020 to March 2040.

The proposed offer by the Korean company involves a terminal supplying one million tons of LNG per annum (MTPA) 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’, to provide LNG to existing power plants at Kerawalapitiya and Kelanitissa.

The developer is responsible for the EIA, construction, operation and maintenance of the FSRU, mooring and unloading facilities, and deliver re-gassified LNG for 20 years.

 

Swiss Challenge

Under the Swiss Challenge, if the original proponent is unable to match the counter proposal, the tender will be awarded to the prospective bidder provided the challenger agrees to pay the development cost of the original proponent, quoted as $ 10.074 million. Can this amount be justified? The time period offered for the challenge was only five weeks, but extended later.

The published Swiss Challenge includes three additional items from the original proposal. 1. The FSRU would be newly built, whereas SK E&S offered a renovated LNG transporter (considering the short implementation time). 2. The estimated initial base-load LNG demand be 0.6MTPA, increasing to 1MTPA within two years and 3. The pipelines under-sea and overland to Kerawalapitiya and Kolonnawa.  

 

FSRU

The Floating Storage and Regasification business started only in 2001. FSRU are extremely complicated structures designed for 20 years on-station with no planned dry-docking requirement. They are expected to be available 98% and failures are subjected to extremely heavy fines. 

A new FSRU costs only 50-60% of an onshore terminal and can be delivered in half the time. A new unit typically costs $ 240-300 m and can be delivered in around 30 months. If hired, the cost would be $ 200,000 to $ 400,000 per day depending on capacity. FSRU on a converted LNG tanker costs half and modifications typically take 18 months.

 

Mooring system 

LNG is stored and gassified in the FSRU connected to the gas-carrying pipelines located in the mooring system. The mooring structure is constructed in 30m deep sea and connected to the FSRU through a swirling arrangement, allowing the FSRU to rotate. The rotation allows FSRU to move and face changing winds, currents and change in sea-levels. 

FSRU is also required to disconnect from mooring and sail away in extreme ocean conditions such as cyclones and tsunami. Such cutting-edge science in mooring technology being proprietary is confined to a few companies.

 

SK E&S Company

The proposal to establish and run the FSRU was submitted by SK E&S Company Ltd. of South Korea. But the following issues exist:

1. The proposed FSRU supplier SK E&S has never owned or operated an FSRU and has been operating LNG carriers.

2. The company has never operated a process facility offshore.

3. According to the Ministry of Power, the Government is seeking to procure two FSRUs intending a spare. Currently over 300 floating systems are in operation in the world and none of them are supported with spare units.

4. The parent company of SKE&S, SK Holdings, has equity in gas fields and reserves in Australia, Indonesia and shale-gas assets in North America, but is finding it difficult to find a market.

5. SK Holdings was held responsible for the collapse of a company-built dam in Laos in 2018, where over 30 persons died, creating major environmental damage, illustrating their lack of duty of care. The company may face difficulty in procuring insurance covering environmental damage.

 

Industry standards

1. FSRUs are expected to be available 98% over 20 plus years without being taken away for repairs.

2. When an FSRU fails to operate, power plants down the line are forced to close down. 

3. Thus when FSRU fails to operate, they are faced with extremely heavy penalties.

4. An EIA (Environmental Impact Assessment) needs to be undertaken by an independent third party to avoid any conflict of interest. Here, the contractor is given the responsibility.

5. An insurance of the project is not indicated; typically such operations require $ 400 m insurance, covering risks of environmental damage due to spills, fire, pollution and other infrastructural damages.

 

LNG prices

Currently the world is facing an oversupply of LNG and developers are finding difficulty to market their gas. The situation is bound to get worse during the coming years. The gas glut is so bad that excess gas is not allowed to be burned, but expected to be pumped back into the ground (an expensive exercise) due to environmental reasons. The situation has resulted US announcing in December 2018, that natural gas is offered free, with gas buyers being paid US 25 cents/mm BTU to take the gas away.

LNG could be purchased in the spot market under short, medium or long term contracts. But long term contracts are non-existent today. Close to home, Indian gas prices are the highest, but cannot find markets.

 

Gas from Mannar

The availability of commercially explorable gas in Mannar was discovered nearly 10 years ago, Block M2 has gas discoveries Dorado and Barracuda and a number of undrilled prospects. But past governments failed to take positive steps to recover gas. Now, the Mannar Basin exploration and drilling tender has been announced by the Ministry of Petroleum Resource Development, with tenders closing in May 2019.

With a gas-glut in the world market, explorers would wish exclusive rights to local market and export balance. The proposed import of one million tons of LNG a year for 20 years will discourage any prospective investor from developing Sri Lanka’s offshore reserves for decades to come.

India’s major off-shore gas reserves are in Bombay High and in the south adjoining Sri Lankan waters referred as Cauvery Basin. According to Indian sources, Sri Lankan gas reserves are richer than in Cauvery Basin. 

If the President still wishes to award the contract to Koreans, it would be the biggest blunder in the history, leading the country into a debt trap and death trap with unintended consequences for decades to come. Meanwhile, no developer would be interested in developing proven gas reserves in Mannar and will kill the prospect

Power generation policy

Unfortunately, the country does not have a power generation policy, with CEB engineers fighting with PUCSL. Since Norochcholai in 2012, the only proposed power plant is Kerawalapitiya, now pending Court ruling. The CEB is favouring coal and not allowed their young engineers to study LNG. Thus the country lacks knowledgeable staff on gas-based power generation. Meanwhile, our politicians fall prey to sweet-talking foreigners. 

 

Country’s past records

Sri Lanka for a small country may hold the record for the largest amount of financial and technical blunders. The urea fertiliser plant in 1980s was planned by the most competent bureaucrats at the time, under the advice of highly-paid foreign consultants. The plant was shut down soon after commencement and sold as scrap. The urea that was exported to Myanmar has never been paid for. 

Afterwards, Finance Minister Ronnie De Mel warned the public servants: “I am calling upon all chairmen of corporations, all directors, all general managers to note this: Please do not think you can get away with this type of nonsense in the future because we are going to make you personally responsible. We will sequester your property and your assets if you do this type of thing in the future.” Will the same apply to politicians?

The recent oil hedging deal by CPC, again with guidance from expert consultants, cost the country $ 168 million. Air Lanka was involved in a complex deal for payment of the leased aircraft, which cost $ 170 million for cancellation.

When Norochcholai coal power plant was proposed, a politician signed the MOU in China. The actual agreement was signed a year afterwards by the CEB Chairman CEB Engineers’ Union President. CEB had one year to study the agreement, but blamed the Chinese when the plant broke down repeatedly. The CEB staff proved they could not even run the plant, today the plant is run by the Chinese.

 

Risks involved

Storage, transport and power generation with gas are complex, involving cutting-edge technology, indexed LNG pricing, risk-sharing mechanisms, overseas governing laws, ‘take or pay’ contracts, overseas arbitration, etc. The penalties are higher, reaching billions and not millions. Insurance covers for catastrophic events are higher and so are environmental damages. No such insurance cover is being provided by SK E&S, with the Government oblivious to such mandatory requirements. 

Whilst our neighbouring countries as Pakistan, India, Bangladesh and Indonesia are all dealing with well-experienced FSRU suppliers to re-gassify their LNG, Sri Lanka selected a Korean contractor with no experience in these complex operations or its technology, which is seeking a market for its overpriced LNG.

The SK E&S proposal excludes undersea and overland pipeline installation, finding a contractor and acquisition of land which are time consuming. If not completed on time would be obliged to pay under “take-or-pay” contract.

 

Role of the President

The original proposal of the Korean company was handed over to the President by the Korean Ambassador in mid-2017. The President instead of passing the document to the line minister presented a Cabinet paper himself recommending its implementation. But the UNP Cabinet turned it down. 

Almost in parallel, Kerawalapitiya 350MW power plant tender was about to be awarded to State-owned Lakdhanavi Ltd., which submitted the lowest bid. But the President intervened and awarded it to higher-priced WindForce & RenewGen, pushing the UNP Cabinet to agree, costing the country an additional Rs. 2 billion a year for the next 20 years. But the award has been challenged in Court and the decision is awaited.

My earlier article detailed how Sirisena appointed MR over Ranil as PM who accepted the Korean offer and called Swiss Challenge within seven days. Why is the President pushing the Korean project so hard?

 

Comments

The country is facing a growing power shortfall and even with existing private power producers cannot meet the shortage. The situation is so critical that CEB has called quotations for a new private power plant. 

The parent company of SK E&S has acquired large amount of gas reserves in the world, but is facing difficulties in disposing of its gas, with the possible inability to utilise reserves prior to ending of lease period. Although the company runs LNG carriers, it has never run an FSRU.

Getting an FSRU manufactured to required standard, maintaining and running is an extremely complex business. SK E&S is anxious to learn the knowhow and enter the market, presently controlled by few companies. SK E&S would love an unsuspecting buyer as Sri Lanka. A poor quality FSRU without proper maintenance could easily break down and downstream power plants would stop working. Thus they offered Sri Lanka two units of FSRUs, which has never happened in history.

The price payable to LNG, whether linked to oil prices, quality of gas to international benchmarks or the heat rate, is unknown. The agreement to supply gas for a 20-year period commences from the second half of 2020 to March 2040.

Koreans claim the FSRU is given free of charge. But in the market a FSRU rental stands at $ 200,000 to 500,000 per day depending on the capacity. How this cost will be recovered from the buyer is unknown.

Under the offer EIA is the responsibility of SK E&S and should be carried out by an independent specialist organisation. Here, the EIA report could be biased towards SK E&S. 

The Koreans presented their offer to the unsuspecting President, who has absolutely no knowledge on the subject. Sirisena attempted to push the offer through the Cabinet, but the UNP refused to move, leading to the appointing of MR as PM. 

Why did Sirisena push the deal so hard, to the extent of pushing Ranil out, who was responsible for him being appointed as President? Is he aware that agreeing to buy one million tons of LNG would kill the country? The next possibility is, did Koreans offer Sirisena an irresistible incentive?

 

Way forward

Current 350MW Kerawalapitiya power plant owned by Lakdhanavi uses petroleum fuel and supplies power to the CEB at Rs. 28 a unit. The same company in the tender for a similar capacity LNG-powered plant offered power at Rs. 15 a unit, lowering costs by Rs. 25 billion a year, justifying moving the country’s power generation towards LNG.

In the tendered 350MW Kerawalapitiya power-plant, all tenderers would have allowed for an FSRU to supply LNG, including gas supply pipelines reaching Kerawalapitiya, with minor variations. Supplying additional gas to the existing 350MW power plant also in Kerawalapitiya would require a larger capacity FSRU and a pipeline of double the capacity. Kelanitissa would require a separate line. 

In the tender, Lakdhanavi, a State-Owned Enterprise, offered the lowest rate, and also owns and runs the current Kerawalapitiya plant. Modifying the plant to run on LNG, using gas from Mannar, would require time-taking negotiations. Also to be negotiated to accept gas from Mannar, when becoming available, as tenderers would have anticipated purchasing LNG on spot market. 

As shown earlier delays in bringing both power plants online with LNG would cost the country nearly Rs. 2 billion a month. Thus Lakdhanavi would be the most suitable contractor as financial implications could be easily sorted out. Entertaining an unsolicited FSRU proposal without gas supply lines on ‘take or pay’ basis, while international tender offer FSRU with pipelines with flexible LNG supply could only be termed as ridiculous.

If the President still wishes to award the contract to Koreans, it would be the biggest blunder in the history, leading the country into a debt trap and death trap with unintended consequences for decades to come. Meanwhile, no developer would be interested in developing proven gas reserves in Mannar and will kill the prospect.