- Take-or-pay clause raises concerns
- FSRU capacity set at 375 MMSCFD
- Storage to hold 156,000 cubic metres
- LNG prices average $ 8.2-9.6/MMBtu
The Ceylon Electricity Board’s (CEB) agreement with a Chinese company to develop a multi-billion-rupee Liquefied Natural Gas (LNG) terminal and pipeline off Kerawalapitiya is currently under legal review by the Attorney General’s (AG) Department, which is examining the legality of key clauses amid rising concerns over a potentially costly take-or-pay provision.
CEB Chairman and Energy Ministry Secretary Prof. Udayanga Hemapala confirmed to The Sunday Morning that the final signing of the agreement hinged on the AG’s clearance of key contractual clauses.
Once cleared, the deal will proceed to the implementation phase, paving the way for construction of a Floating Storage and Regasification Unit (FSRU) and an offshore pipeline network.
The deal – initially tendered in February 2021 and closed in June that year – is structured under a Build-Own-Operate-Transfer (BOOT) model and has sparked fresh controversy over its take-or-pay component.
Critics argue the clause could force Sri Lanka to purchase LNG regardless of demand, potentially sidelining cheaper renewable and hydro power sources.
A senior CEB engineer told The Sunday Morning that while take-or-pay provisions were common in LNG contracts globally, their inclusion in a small market like Sri Lanka could lead to significant losses. “If the system already has cheaper sources like hydro or coal, we’d still be forced to pay for LNG we don’t need,” he warned.
However, he stressed that with the take-or-pay clause being unavoidable in LNG contracts and LNG remaining essential for the country’s energy needs, it was advisable to negotiate terms that minimised the negative impact as much as possible.
The concerns have also alarmed renewable energy suppliers, who fear the agreement could curtail the absorption of clean energy into the national grid, casting doubt on the viability of Sri Lanka’s transition to renewables.
Prof. Hemapala, however, distanced himself from the specifics of the clause, stating that the AG’s Department was currently evaluating the legal soundness of the agreement.
According to a 2014 feasibility study, the Colombo North Port was identified as the best location for an LNG terminal, but Kerawalapitiya was later chosen due to its suitability for natural gas-fired power generation.
The proposed FSRU, with a regasification capacity of 375 million standard cubic feet per day (MMSCFD) and a minimum LNG storage of 156,000 cubic metres, is set to operate under a 10-year Build-Own-Operate (BOO) model, while pipeline infrastructure will be developed by the Ceylon Petroleum Corporation under BOOT terms.
Global LNG prices – averaging between $ 8.2 and $ 9.6 per million British thermal units (MMBtu) from 2020 to 2023 – remain a key consideration. For long-term planning under the CEB’s Long-Term Generation Expansion Plan (LTGEP) 2025-2044, a projected price of $ 11.2 per MMBtu is being used, excluding infrastructure costs, with a price sensitivity analysis built in.