By Namini Wijedasa
\nExperts claim the multibillion dollar South Korean project is disadvantageous to Sri Lanka and like the infamous hedging affair; express concern over take-or- pay terms; say losses could be in billions<\/p>\n
Oil, gas and electricity experts have torn into a Power and Energy Ministry call to international bidders to match an unsolicited Korean proposal for a 20-year supply of liquefied natural gas (LNG), pipeline and floating storage and regasification unit (FSRU) in just a matter of weeks.<\/p>\n
File pic of a floating storage and regasification unit (FSRU)<\/p>\n
The Swiss Challenge was advertised on November 5, days after the sacking of Prime Minister Ranil Wickremesinghe, and the industry was given five weeks to bid, extended by a mere seven weeks after media exposure.<\/p>\n
The original bid was submitted by the South Korean Government-backed SK E&S Company and first presented to the Cabinet in December 2017 by President Maithripala Sirisena. A Swiss Challenge grants advantage to the initial proposer with an opportunity to match whatever anybody else tenders.<\/p>\n
This is to be Sri Lanka\u2019s largest single Government tender, worth an estimated US$ 10bn in LNG orders alone. And the arbitrary manner in which the Ministry manoeuvred the process drew widespread speculation and criticism.<\/p>\n
Now, more experts\u2014many with decades of experience in their respective fields\u2014are weighing in. Some did not wish to be quoted owing to contractual obligations. All unanimously questioned the manner in which the \u201ctender\u201d was devised. And the spectre of Sri Lanka\u2019s disastrous hedging deal was roundly evoked.<\/p>\n
Sri Lanka will enter into a long-term take-or-pay LNG supply contract, they pointed out. Yet both the Cabinet Appointed Negotiating Committee (CANC) and Technical Evaluation Committee (TEC) comprise \u201cwell-meaning but unqualified Sri Lankan officials who are provided with tender documents of unknown origin\u201d. They will shape the direction of a US$ 10bn sovereign commitment.<\/p>\n
\u201cWe even accept that project proponents may view the proposal as truly beneficial to Sri Lanka,\u201d said an international source who has worked nearly forty years in oil and gas technology and floating systems. \u201cBut as with all complex oil and gas transactions, in which companies pass on as much risk as possible to unsuspecting host Governments, the devil is in the detail.\u201d<\/p>\n
Lack of expertise<\/p>\n
There is no qualified business consultant to safeguard Sri Lanka\u2019s interests. \u201cA TEC and a CANC of non-relevant professionals are responsible for making an untutored recommendation based on what is, at best, a hazardous procurement practice never before undertaken in this country,\u201d he warned.<\/p>\n
\u201cIt must be systematic,\u201d insisted Tilak Siyambalapitiya, a senior energy consultant. \u201cBangladesh started the process in the proper way in 2015 and has now got the terminal up and running. Sri Lanka does not even want to issue a formal solicitation and expects friends of the Prime Minister to build one terminal, friends of the President to build another terminal, friends of you-know-who to build more terminals. This is all a farce for someone to push a project in, avoiding all bidding procedures.\u201d<\/p>\n
An \u201cunusual\u201d condition of this Swiss Challenge is that US$ 10mn is mandated to SK E&S (for having submitted an unsolicited proposal with limited technical information) should a competitor\u2019s bid be accepted. \u201cThe invitation to tender has most instructions on how and when this US$ 10mn payment has to be made, immediately and guaranteed to SK&E and the Government of Sri Lanka,\u201d the expert said.<\/p>\n
Sri Lanka needs LNG as a common, lower cost and \u201crelatively environmentally benign\u201d energy source. But any gas procured must power not only electricity generation but industrial thermal needs and transport. This has not been taken into account. The country\u2019s LNG requirements have not even been identified.<\/p>\n
There must be an open-technology solution where the infrastructure investors derive their return in a predictable manner, such as tolling charges for use of the facility. It must not be tied to the supply of gas, industry professionals urged.<\/p>\n
But according to a cabinet memorandum presented in 2017, \u201cA company backed by the Government of South Korea has agreed to provide an LNG terminal free of charge subject to the condition that compulsory purchase of 500,000 MT per annum during the first 5 years and 1,000,000 MT per annum during subsequent 20 years under the prices prevail in the international market.\u201d<\/p>\n
There was universal criticism about the proposed mode of purchase. \u201cThe contract they are said to be negotiating is a disastrous one\u2014take-or-pay,\u201d said Dr Siyambalapitiya. \u201cSo when our hydro, wind and solar are good and demand does not grow, we have to pay for unused gas in their tanks, as well.\u201d<\/p>\n
The rationale for a Swiss Challenge was repeatedly questioned. \u201cSuch a strategic procurement, with high ramifications to our energy security and long-term economic development, should be structured professionally and tendered globally along conventional lines,\u201d said Saliya Wickramasuriya, former head of the Petroleum Resources Development Secretariat (PRDS) and independent consultant.<\/p>\n
\u201cIt may be argued that Swiss Challenge is quicker, but with limited competition pricing lots of risk into their bid, at what cost?\u201d he asked. \u201cAnd why on earth does the long-term supply of LNG to Sri Lanka need to be an unsolicited proposal?\u201d<\/p>\n
For the Swiss Challenge to even work, the Korean proposal should have been vetted by competent technical consultants for all aspects of viability. \u201cIt is not clear who did this and it appears not to have gone through a valid process,\u201d Mr Wickramasuriya said.\u201d We are aware some Government institutions have pointed out serious concerns of the original proposal, but these do not seem to have been heeded.\u201d<\/p>\n
The project, several inside sources revealed, is \u201cbeing pushed from the highest levels even ignoring the concerns raised by CANC\u201d. The tender preparers briefed neither the CANC nor the TEC. The documents were merely handed over.<\/p>\n
There are no Petroleum Resources Development Ministry (PRDM) or Ceylon Petroleum Corporation (CPC) officials represented in the two bodies. And if the matter ends up in court, as did the hedging deal, the TEC and the CANC are likely to be censured.<\/p>\n
Company has no experience<\/p>\n
An important element of the Korean contract is the supply and operation of an offshore FSRU. SK E&S has no experience of ever running one.<\/p>\n
\u201cAnd because of this, the tender also does not seek the same from other bidders,\u201d said Mr Wickramasuriya. \u201cIt merely asks if the ship-builder has experience.\u201d<\/p>\n
\u201cThis is pure madness from our side,\u201d he said. \u201cWe have become guinea pigs for some operator to experiment if they can operate an FSRU while dumping their expensive gas into our country at high price.\u201d<\/p>\n
Who drafted the tender documents? The Power and Energy Ministry, while authorised by Cabinet to hire consultants, did not do so. The Korean company drew them up at its own cost. It is difficult to see how this process safeguards the interests of Sri Lanka and the public.<\/p>\n
\u201cThe notes pertaining to the preparation of these documents need to be made public, as well as the selection process and experience of the preparers,\u201d Mr Wickramasuriya said. Everything must be thoroughly vetted by the PRDS, among others.<\/p>\n
If Sri Lanka receives any bids within the stipulated two months, evaluation \u201ccategorically needs expert guidance\u201d. \u201cThe current set of officials may face serious reprimand in the future for taking the responsibility of making untutored recommendations if the outcome does not meet expectations of either time or cost,\u201d he warned.<\/p>\n
\u201cWhy doesn\u2019t the Government simply not call for competitive bids for an \u2018X\u2019 amount of natural gas at this maximum price, for this long, starting from this date, and leave the industry to work out how to make it happen?\u201d he asked. \u201cWhat we need is gas, not an FSRU! Not only are we over-prescribing this tender, we are playing to someone else\u2019s music.\u201d<\/p>\n
A properly executed tender would take a year to prepare and six to 12 months to respond to, professionals said. Not only is there a lack of material in this tender. There are constraints on the solution: A newly-built FSRU will take over two years to commission unless the proposers already have one in the pipeline, which would raise separate questions. A successful challenge within the allotted time frame, therefore, seems unlikely.<\/p>\n
\u201cA lot of focus is on the FSRU being free of charge,\u201d said one expert. \u201cThis is a false narrative on multiple counts. There is a tolling agreement specified, but not included in the tender documents or Korean proposal, which will be negotiated later. So any claims of a free FSRU is premature, to say the least.\u201d<\/p>\n
Also, the FSRU cost (approximately US$ 300mn) is insignificant\u2014less than five percent\u2014when compared with the size of the supply contract.<\/p>\n
\u201cSince we believe the pricing contract to be unfavourable to Sri Lanka, even if they throw in the FSRU for free, we will pay more,\u201d he pointed out.<\/p>\n
\u201cWe are merely avoiding the capital cost of the FSRU upfront. That could\u2019ve been done with a standard lease agreement.\u201d<\/p>\n
Environmental impact<\/p>\n
There has been no environmental impact assessment (EIA) despite the proposed facility requiring pressurised, highly-explosive, gas pipelines to run under densely populated areas. \u201cNatural gas lines are in a different league in terms of hazards,\u201d he warned. \u201cEven minor leaks result in major fatalities and many projects are delayed through public protest in affected areas, despite land being acquired.\u201d<\/p>\n
There have also been no met ocean studies, soil studies and bathymetry or pipeline route surveys. It usually takes six months or more to choose suitable location, said the international expert earlier quoted. The full impact of the monsoon will also be felt on the offshore FSRU.<\/p>\n
The proposed location\u2013about 9km outside the Colombo Port beyond an exclusion zone defined by the Sri Lanka Ports Authority\u2013has not been reviewed against all hazards. A navigational simulation was done to define the exclusion zone but there has been no comprehensive safety study.<\/p>\n
The tender envisages the purchase of LNG at a price indexed to oil. Professionals say this is deeply problematic. From being just ten percent a decade ago, the world spot market has grown to 50 percent of volume traded. This indicates significant uncontracted fuel in the market.<\/p>\n
\u201cThat, in turn, gives rise to price arbitrage opportunities between markets, which could both reduce and increase parcel price depending on circumstances,\u201d the international expert said. \u201cHowever, the trend is that the spot market will most often offer a price advantage over term.\u201d<\/p>\n
Having a price indexed to crude oil will prevent Sri Lanka from taking advantage of this in future, when the country\u2019s demand has stabilised and procurement practices have matured.<\/p>\n
\u201cThe proposed contract will lock Sri Lanka for 20 years to an uneconomical price with a glut in the LNG market,\u201d he warned. \u201cSoon, 50 percent of LNG will be sold in the spot market to which Sri Lanka will not have access. But the same deal provides for SK E&S to procure the gas in the spot market and sell to Sri Lanka on take-or-pay terms. I expect the loss here to be in the billions.\u201d
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