• Cabinet-appointed committee currently evaluating proposal
• Lakdhanavi to be entrusted with procurement, infrastructure facilities
• SL spends over Rs. 1 b daily on thermal power generation
• Amendment of national policy yet to be completed: Power Min.

Sri Lanka is likely to hand over its controversial Liquefied Natural Gas (LNG) supply to Petronet LNG Ltd., an Indian company specialising in LNG importation and terminal establishment.

As The Sunday Morning reliably learns, a Cabinet-appointed committee is currently evaluating Petronet’s LNG proposal. Once this evaluation is completed, the Power and Energy Ministry plans to entrust the procurement of LNG and the construction of essential infrastructure to Lakdhanavi Ltd., a subsidiary of Lanka Transformers Ltd. (LTL).

Power and Energy Ministry Secretary Dr. Sulakshana Jayawardena confirmed to The Sunday Morning that Petronet’s proposal was a government-to-government arrangement, explaining that the Government planned to entrust the procurement of LNG and the construction of necessary infrastructure to Lakdhanavi.

According to him, the ministry will evaluate the Power Purchase Agreement (PPA). However, since LNG will be required by Lakdhanavi, the fuelling of plants will be managed by the respective company. With the upcoming electricity sector reforms, there will be no Ceylon Electricity Board (CEB), but rather a National System Operator (NSO) with different responsibilities to those of the CEB.

Call for competitive bidding  

Nevertheless, the ministry’s plan to hand over LNG procurement to India has been criticised by senior electrical engineers attached to the CEB.

They argue that LNG should have been procured through competitive bidding, discouraging unsolicited proposals. Additionally, they have highlighted the Government’s cancellation of a previously finalised tender, which was at the last stage of being awarded after years of evaluations, alleging that the Government had strategically prepared to hand over LNG procurement to India while citing different reasons for cancelling the previous tender.

They also questioned whether the Government had fulfilled the requirements outlined in the Cabinet memorandum submitted by Power and Energy Minister Kanchana Wijesekera to justify the cancellation of the previous LNG tender.

Cabinet memorandum

Last year, Cabinet suspended the development of a Floating Storage Regasification Unit (FSRU) and associated LNG pipeline offshore Kerawalapitiya on a Build-Own-Operate-Transfer (BOOT) basis, along with a mooring system. This decision was made pending assessment and input from the Gas Utilisation Master Plan Committee to evaluate the project’s scope, necessity, and underlying assumptions in alignment with national energy plans.

However, Cabinet Memorandum No. 28/2023/PE dated 14 July 2023, submitted by Minister Wijesekera, emphasised the need for a systematic re-analysis of the LNG procurement process. This re-analysis was intended to tailor the process to meet electricity sector requirements amidst global environmental challenges.

The memorandum also highlighted the country’s transition plan from furnace oil and diesel-based power plants to LNG, aiming to reduce infrastructure and enhance energy efficiency. Furthermore, it identified deficiencies in Sri Lanka’s multi-sectoral energy strategy, citing inconsistent demand analysis as a significant obstacle in previous Government efforts.

The Cabinet memorandum further emphasised a policy shift towards green harbours and outlined the necessity for LNG infrastructure development to support comprehensive national energy demands beyond just electricity generation.

Additionally, it stressed the importance of revisiting the national policy on natural gas to align with broader energy sector needs, as outlined in a gazette notification dated 17 October 2020.

Until consensus is reached on these policy revisions, the ministry acknowledged the need for interim measures to address urgent LNG demands within the electricity sector.

In this context, the ministry has received Petronet’s LNG proposal.

A senior ministry official, when contacted by The Sunday Morning, disclosed that the amendment of a national policy, as emphasised in the Cabinet memorandum, had not been completed yet.

A national priority

As highlighted in the Long Term Generation Expansion Plan (LTGEP) 2023-2042, the existing 300 MW Yugadanavi Power Plant and the 165 MW Kelanitissa Combined Cycle Power Plant are expected to be converted to natural gas in 2025.

The LTGEP has highlighted that the natural gas-based power plants will operate initially on diesel until 2025 and the operation on natural gas is expected from 2025 onwards, with natural gas delivered to power plants through necessary infrastructure.

Therefore, the required LNG infrastructure with the associated natural gas distribution network should be developed in line with this time target considering it as a national priority project.

The LTGEP has highlighted the requirement of ensuring that LNG procurement contracts are made to minimise the ‘take or pay’ risks because such commitments can influence the dispatch decisions which will result in low economic benefits and inability to meet the national renewable energy targets. 

The feasibility study for introducing LNG to Sri Lanka was conducted in 2014. The study identified the Colombo North Port as the best site for development of an LNG terminal out of several promising candidate sites including Hambantota and Trincomalee and it also identified Kerawalapitiya as the most suitable location for the development of new natural gas-fired power plants by considering the technical, economic, social, and environmental aspects.

As identified therein, an LNG facility suitable for Sri Lanka would have land-based storage, a re-gasification unit, and necessary piping structures with a properly established LNG importing mechanism (via tanker ships).

Billions in savings

Recent data from CEB sources reveal that Sri Lanka spends over Rs. 1 billion daily to operate thermal oil (diesel) power plants. The impending launch of the Kerawalapitiya LNG power plant was expected to save the country nearly Rs. 50 billion annually, capitalising on significantly reduced international LNG prices.

Meanwhile, in February, Shell’s LNG Outlook 2024 forecast a more than 50% rise in global LNG demand by 2040, driven by industrial coal-to-gas transitions in China and Southeast Asia.

The report noted that LNG trade had reached 404 million tonnes in 2023, up from 397 million tonnes in 2022, with supply constraints maintaining prices above historical averages. Accordingly, despite peaking in some regions, global natural gas demand continues to grow, with LNG demand expected to reach 625-685 million tonnes annually by 2040.

Procurement controversies

The procurement of LNG in Sri Lanka has been fraught with controversy over the years.

In 2021, New Fortress Energy entered into a Framework Agreement with Sri Lanka to develop an offshore LNG terminal near Colombo. This terminal was intended to supply gas to both the existing 300 MW Yugadanavi Power Plant and a new 350 MW facility. 

The agreement included plans for constructing a floating LNG storage facility and a pipeline to transport gas to Yugadanavi. Subsequently, the Cabinet approved the transfer of 40% of Yugadanavi Power Plant shares to New Fortress, along with rights to supply natural gas.

However, following a change in government in 2022, progress on this agreement stalled.

Nevertheless, discussions regarding LNG resumed during talks in New Delhi on 21 July 2023. During these discussions, President Ranil Wickremesinghe and Indian Prime Minister Narendra Modi agreed to expedite the implementation of understandings reached on the Sampur Solar Power Project and LNG infrastructure.

In this context, should the Government proceed with the Petronet LNG deal with India, it would significantly influence Sri Lanka’s future electricity supply.

This decision comes at a time when two other major proposals are also progressing. Firstly, Sri Lanka recently approved a PPA with Adani Green Energy for the development of wind power facilities totalling 484 MW in Mannar and Pooneryn. Simultaneously, the Indo-Lanka electricity grid connectivity initiative is set to be formalised through a Memorandum of Understanding (MoU) in July.