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LNG agreement with New Fortress: Mixed signals on energy exploration

By Asiri Fernando

The controversial decision by the Government to include a five-year liquefied natural gas (LNG) supply agreement along with the sale of the Treasury-held 40% stake of the Yugadanavi Power Station to US-based energy giant New Fortress Energy Inc. may send contradictory signals to potential investors interested in energy exploration in the Mannar Basin, The Sunday Morning learnt.

The Government agreed to grant New Fortress a five-year LNG supply deal to recover their expenditure on the floating storage regasification unit (FSRU) and pipeline construction.

Responding to a query about the LNG supply agreement with New Fortress that might send mixed signals about the national energy strategy, energy expert Dr. Vidhura Ralapanawe pointed out that it may lead to confusion among potential investors and cast doubts on government policy.

“Yes, at a minimum, it indicates a lack of internal co-ordination between ministries. At worst, it appears contradictory to upstream and downstream investors,” Dr. Ralapanawe said. He opined that the move could push back local LNG sourcing ambitions.

When asked if the agreement with New Fortress will benefit Sri Lanka, Dr. Ralapanawe opined that the agreement offers a better deal for Sri Lanka than what the Ceylon Electricity Board (CEB) tender process offered, due to lower costs for regasification, terminal services, and lower quantities of gas than identified in the CEB tender, and by the pricing being pegged to the Henry Hub Index of the US.

However, Dr. Ralapanawe pointed out that even though the New Fortress gas offer is cheaper than that of the CEB-floated tender, neither will reduce the CEB’s cost of generation. “Additionally, there are many project uncertainties overall that could add to the cost burden of the consumer in the form of ‘pass-through’ when realised,” he added.

He questioned if the CEB generation plan was in line to meet the government policy of 70% renewable electricity by 2030, adding that if the generation plan was not accurate, then it might lead to obtaining excessive stocks of LNG.

The Yugadanavi-New Fortress agreement, which had not followed existing tender processes, drew strong condemnation from the Opposition and from within the Government’s ranks.

A meeting between Prime Minister Mahinda Rajapaksa and leaders of the governing Sri Lanka Podujana Peramuna (SLPP) alliance last week ended with the coalition partners deciding to request a meeting with President Gotabaya Rajapaksa upon his return to the country.

Several coalition members of the SLPP met in Colombo last week to discuss steps to be taken against the New Fortress deal. The Sri Lanka Freedom Party (SLFP) members of the Government had also voiced their concerns regarding the agreement.

Minister of Finance Basil Rajapaksa had, however, explained to the governing party parliamentary group that the deal was beneficial to the country, as it would help reduce electricity tariffs while also bringing in $ 250 million in foreign exchange to the country’s crisis-ridden foreign reserves.

A former Petroleum and Petroleum Resources Minister, Chandima Weerakkody yesterday (25) explained the reason for his objections to the LNG deal with the US-based energy company.

He claimed that his objections to the proposal during the previous Government even resulted in him losing the petroleum portfolio.

“I had to work according to my conscience, and I couldn’t let such an agreement proceed. I was against it, and it cost me my cabinet post,” Weerakkody told the media in Galle.

He opined that if Sri Lanka enters into a long-term contract to obtain LNG from a foreign source, the country runs the risk of not being able to use and develop its own LNG resources.

“I have nothing against investment projects by the US or any other country in the local energy sector. However, we must remember that Sri Lanka is venturing into extracting gas and petroleum in Mannar. Two of the four wells explored in Mannar gave good results,” he added.

Meanwhile, Opposition Leader Sajith Premadasa issued a statement calling on the Government to withdraw the agreement, alleging that the LNG supply agreement will give the US-based company a monopoly.

“Energy security in the country will be jeopardised by transferring a controlling power of a central power plant in the country, and this also endangers power generation in the country by letting a foreign company weaken LNG supply in the future. No country in the world has called the tenders for supplying natural gas and for related infrastructure development jointly, because those countries are aware that such a move would not ensure national security and energy safety in the country,” Premadasa charged.

The Opposition Leader called on the Government to explain its decision to bypass tender processes and award a 40% stake in an important segment of the power generation system.

“A foreign private company will have the monopoly in generating 50% of the power requirements in the country in terms of this proposal. We urge the Government to explain reasons for offering this to a private company, even after calling tenders and the completion of evaluations, and the consequences of possible diplomatic issues likely to arise from other countries who had already forwarded tenders accordingly,” Premadasa demanded.

Speaking to The Sunday Morning, Janatha Vimukthi Peramuna (JVP) MP Sunil Handunnetti questioned the LNG purchase model, raising concerns that Sri Lanka may have to pay for LNG received through the New Fortress agreement, even if it was not used for energy generation.

“The agreement allows New Fortress Energy to supply LNG to any power plant in the country. Furthermore, the terms of LNG purchase that have been worked out give a monopoly to the foreign company. How can we let a foreign company, which is not under the purview of local legislation, have control over the country’s energy security?” Handunetti questioned, urging the public to speak up against the agreement.

The Lanka Viduli Sevaka Sangamaya (LVSS), which opposed the agreement, will meet community and religious leaders this week to share their concerns about it, The Sunday Morning learnt.

Attempts to contact the utilities regulator, the Public Utilities Commission of Sri Lanka, for their view on the controversial agreement proved futile.