• Phased approach considered to match low demand
• LNG deal tendered in Feb. 2021, finalised in July 2025

The Government is reconsidering the awarding of a multi-billion-rupee Liquefied Natural Gas (LNG) terminal and pipeline off Kerawalapitiya to the already finalised Chinese contractor due to the contract’s ‘take-or-pay’ clause, which could expose the country to substantial losses given its current limited LNG demand, The Sunday Morning learns.

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 reignited debate over the take-or-pay component. The Government finalised the tender in July.

When contacted, Ceylon Petroleum Corporation (CPC) Managing Director Dr. Mayura Neththikumarage said that Sri Lanka had technically finalised its Floating Storage Regasification Unit (FSRU) and associated pipeline infrastructure, but the projects had not been officially awarded yet.

He clarified that while the infrastructure plans were ready, agreements for LNG supply were still under review. The delay, he explained, was due to phased energy requirements at the initial stage, which did not demand full-scale infrastructure immediately. Some pipelines may not be needed initially and authorities are exploring whether construction can be carried out in phases.

A key concern is the take-or-pay clause in LNG supply contracts. With several of Sri Lanka’s power plants operating in standby mode, committing to full take-or-pay contracts could lead to unnecessary expenditures, Dr. Neththikumarage opined.

When asked if smaller-scale options, such as a prior proposal from India, were being considered, he noted that these alternatives could be costly. However, he added that no final decision had been made on pursuing short-term or interim solutions.

In this context, a senior official close to the matter told The Sunday Morning that while take-or-pay clauses were common in global LNG contracts, including them in a smaller market like Sri Lanka could result in major financial losses. “Even if the system has cheaper sources like hydro or coal, we would still be obligated to pay for LNG we do not need,” he warned.

Nevertheless, the official claimed that LNG remained essential for the country’s energy requirements.

Renewable energy suppliers have also raised concerns, warning that the agreement could limit the integration of clean energy into the national grid, potentially undermining Sri Lanka’s transition to renewables.

According to a 2014 feasibility study, the Colombo North Port was initially identified as the best site for an LNG terminal. However, Kerawalapitiya was later selected 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 and minimum LNG storage of 156,000 cubic metres, is set to operate under a 10-year Build-Own-Operate (BOO) model, while the pipeline infrastructure will be developed by the CPC under BOOT terms.

Global LNG prices, averaging between $ 8.2 and $ 9.6 per MMBtu from 2020 to 2023, remain a key factor. For long-term planning under the CEB’s Long-Term Generation Expansion Plan 2025–2044, a projected price of $ 11.2 per MMBtu is being used, excluding infrastructure costs, with a sensitivity analysis included. 

Attempts made by The Sunday Morning to contact CEB Chairman and Ministry of Power and Energy Secretary Prof. Udayanga Hemapala regarding the proposed LNG supply for power generation were futile.