The Trade Unions and certain coalition partners of the Government declared war against the proposed acquisition of 40 percent stake of the Yugadanavi LNG plant in Kerawalapitiya by the US based New Fortress Energy Inc.
The Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC) Trade Unions last week held token demonstrations in front of their offices demanding the immediate withdrawal of agreement.
The strikers threatened a blackout and tougher action if the government turned a deaf ear to the demand.
However, the CEB maintained, the offer by the US investor was rare and it brings enormous benefits to the CEB to salvage the debt-ridden institution from its current financial predicament. Senior CEB and Power and Energy Ministry officials asserted that the transaction will not let the US energy giant monopolise the supply of LNG to the country’s power sector.
The officials also refuted that the Government has sealed the share acquisition by the US investor saying what they signed in July this year was a framework agreement which was followed by a non-binding Share Sales and Purchase agreement, recently.
At a media briefing organised by the President’s Media Centre last week the CEB Chairman explained the benefits of the transaction.
CEB Chairman, M.M.C.Ferdinando said the US firm was acquiring 40 percent stake at over Rs.1,000 per share each priced at Rs.100, a deal highly beneficial to the government.
If the agreement goes ahead, the New Fortress Energy Inc. will acquire 40 percent stake in West Coast Power Limited, the local company that owns 310 MW Yugadanavi LNG power plant, infusing US $ 250 million. In turn it will supply LNG to the power plant and build an offshore Liquefied Natural Gas (LNG) receiving, storage and regasification terminal located off the coast of Colombo. It has agreed to build the pipes at no cost to the Government.
Long-term agreement
The 310 MW Yugadanavi plant comprises a long-term agreement to supply power to the national grid through 2035. An additional 700 MW of power is scheduled to be added to the plant and of it 350 MW to be operational by 2023.
The Chairman said, the CEB is currently in a deep financial crisis. It is in this context that the Yugadanavi investment by the US firm should be considered.
“The CEB faced a similar scenario in 2006 which was not a financial crisis but rather an issue due to the huge increase in demand for electricity triggering a power generation crisis. Since we have not built low cost plants to face the soaring demand, the crisis was created over a period of several years,” the Chairman said.
Due to strategies adopted, the CEB and the then government led by President Mahinda Rajapaksa, managed to overcome the challenge. Both the Norochcholaicoal and the Yugadanavi LNG plant were launched in 2006.The Upper Kotmale hydro power station was also built.
He said, “By 2014, our power generation surpassed the electricity demand and power supply to households was increased from 55% to 99%.The benefit of this surplus was passed on to consumers by way of a 25% reduction in the electricity bill.”
Now in 2020/2021, we are facing a similar crisis. Due to the non-commissioning of low cost power plants in keeping with generation expansion plans of the CEB we are today facing a similar crisis. The 500 MW coal power plant in Sampur never got off ground due to protests. Another high tech 600 MW coal power plant to be built with Japanese funding failed to see the light of day.
Another power crisis is imminent as the country failed to read the signs of time and expand the power sector accordingly to face the increasing demand. The CEB has expanded the electricity supply to 99% of households and the production/manufacturing sector has also expanded.
The CEB sells a unit of electricity at Rs. 16.65 (this is the cost of generation per unit in 2013) but the generation cost now has risen to Rs.23 – Rs.24. It will rise to Rs.25 next year. We used to buy one metric ton of coal at $ 55 but now it has shot up to $ 180 in the world market.
Dilemma
There is a dilemma, whether we would somehow lower the generation cost or increase the electricity bill burdening the consumer. The government is determined and has conveyed to the CEB to come up with strategies to lower the generation cost.
We currently generate 1086 MW of power using Diesel generators. Our plan is to reduce this to 70 MWs. Thereby the excessive costs on diesel can be cut-down. The CEB currently owes about Rs.80 billion to the CPC for fuel obtained so far. Two tenders to bring coal were unsuccessful because we are facing a dollar crisis. We don’t have enough funds to open LCs.
The CEB is indebted to private power generators. We owe over Rs.40 billion to Yugadanavi. The CEB cannot go on like this. Either the Government must increase the electricity tariff or the CEB must be allowed to implement strategies to lower the cost of generation.
The Government has proposed to reduce high cost diesel generation to 70 MW (from over 1000 MW) and substitute it with LNG and wind power by building two wind power stations. A unit of power can be generated by renewable energy at a cost of Rs.15
The CEB plans to increase renewable energy generation up to 70 percent in the long haul. Since we don’t generate adequate power, the Board has to go for emergency power acquisition from private parties at Rs.30-35 per unit. We must stop this.This is the current situation.
First power station
Yugadanavi is the first power station built after Mahinda Rajapaksa became President. It is a private station; we were facing severe power cuts at the time. And this was expedited a solution to end the crisis. The agreement with the US firm is to convert Yugadanavi to natural gas. We can reduce the unit price to Rs.16 from the current Rs.30 by the conversion. Currently the CEB pays this amount to Yugadanavi, which is privately owned.
A condition for the private investor on Yugadanavi to obtain the loan was that in two years this power station must be fully converted to LNG, or else the Treasury has to repay the loan it has obtained from the private sector on a Treasury security.
Therefore, the Government needed to ensure that it will facilitate the changes needed to revert this station to LNG. It was built on a Build-Operate-Transfer (BOT) project and will be fully vested with the Government in 2035 with an expansion up to 1000 MW, to be built in two stages. Our target is to reduce one unit of power generated in this plant to Rs.13.
The CEB wanted to do these changes and the government agreed to help.
The reason for selecting the US firm was due to the failure of the CEB engineers to garb the opportunity of the soft loan offered by the Japanese government offered through JAICA to build an LNG plant in 2006. Instead the engineers only wanted coal power as a low cost source. The Japanese Government offered Yen 8 million, to do a feasibility study to build the LNG receiving and storing terminal. That too did not materialise due to differences of opinion.
A floating terminal
In 2017-2018 former PM Ranil Wickremesinghe signed a bilateral agreement with India to build a 500 MW LNG plant in Kerawalapitiya and a 300 MW plant under Japanese funding. The 60 percent of the LNG was to be acquired from a Japanese company and 40 percent from an Indian company
A floating terminal was to be built within the Colombo Port. A lot of work went into the project. However, work on it came to a halt with the change of government.
In 2018, a Korean company also offered to build an LNG facility; they were also trying to supply LNG. After the tender procedures, it went to the Cabinet and it did not get approved due to many reasons. Acquisition of LNG became a distant dream. All those came as bilateral agreements between countries or as personal contacts.
In 2020, the New Fortress Energy Inc. approached the government and offered to build a 300 MW LNG plant. They said they could provide the required LNG for their plant as well as for other LNG plants as well. The then Minister of Power and Energy submitted their proposal to the Cabinet and obtained its approval. They wanted the CEB to proceed on this offer and negotiate better terms for us. The officials did not act on these instructions.
Later the Ministers changed after the election (August 2020) and the next Minister in charge also agreed to the project. In March 2021, the Company made inquiries about the proposal. They were a world renowned company which supplies LNG to countries worldwide.
The government was of the view that building a new plant will create unnecessary issues. Therefore it offered to sell 40 percent of the shares of Yugadanavi held by the state and in return the company was asked to build a LNG Terminal and supply natural gas to Yugadanavi. Their investment is US $ 250 million.
At the outset, the US Company was not interested in buying shares but the government insisted since it was cash strapped. It was an offer from the government. Then the definitive agreement was signed on September 17, 2021.
They are acquiring the 40% shares at a very high rate of $ 250 million, a new plant can be built at that price. Yugadanavi is a 12-year old plant and it is to be transferred to the government in another 14 years. The US agreed to these terms because they were interested in supplying LNG to the plant.
Earlier, in June 2021 an international tender was called by the CEB to lease a LNG floating terminal for ten years and to lay under water pipelines. A separate tender was called to lay LNG pipelines on the ground to Kerawalapitiya and Kelanitissa by the Ceylon Petroleum Corporation (CPC). We have not called for tenders to purchase LNG.
But during the technical consultations for LNG purchase from the US firm, the officials learnt the company can supply LNG to Sri Lanka at US $ 0.99. It is a low price. They were ready to lay pipelines without additional costs. We evaluated their proposal and advised the Cabinet that it was a good deal.
When we compared the proposals received for the tenders, there was a massive saving of funds for the country.
The tenders are still being evaluated by a committee head by the Ministry Secretary. However, there is no final decision on that. A separate tender board is attending to that. In 2006, when the Norochcholai power plant was built, it was on a bi-lateral agreement between the countries. Yugadanavi was also built in a similar manner. There were Chinese and Japanese companies vying for the contract but the then President Mahinda Rajapaksa took a firm decision to award the contract to the West Coast Lanka (Pvt) Ltd, a local company.
The company was to build it and transfer but the government was in a financial crisis. It did not have US $222.5 million to pay. Therefore, the company was asked to go to the sharemarket and also obtain a foreign loan and operate it for 25 years, repay the loan and transfer it to the government, under a BOT project. The Treasury had to intervene for the company to obtain the loan.
The allegation that Yugadanavi was built with state funds from the consolidated fund is completely false. It was during a war time. President Mahinda Rajapaksa said, issuing shares of the power plant to private parties was a risky affair, therefore, to use state sources.
The EPF bought Rs.2995 million worth of shares (27%), LECO invested 2,000 million securing 18 percent of the shares. The West Coast Lanka pumped in Rs.1,466 million worth shares. The 30 percent of the cost of this plant was covered by shares and 70 percent by a loan. The National Savings Bank (NSB) issued a loan of Rs.2,992 million, since they didn’t want to buy shares. The US $ 200 million loan was obtained from a foreign bank.
The private company building the LNG plant needed a security from the Treasury to obtain the loan.The Attorney General advised unless the Government held 50 percent of the shares of Yugadanavi, as per the Act the Treasury cannot provide such a security to a private company. Thus shares from the state sources including EPF and NSB were considered as the 50 percent nominal shares belonging to the government. The Treasury did not pull funds from the Consolidated Fund as claimed by the trade unions.
The company has finished repaying the foreign loan and in a couple of monthsthe security provided by the Treasury will come to an end along with the need to hold the shares by the state.
“This is the reason why the Government looked into the possibility of bringing in another investor to the Yugadanavi LNG plant to supply gas, to lower the generation cost by converting diesel to LNG and prevent any electricity tariff hikes,” the Chairman explained.
With the funds received from this transaction the plan was to settle NSB and EPF dues and give the balance to the Consolidated Fund.
On the issue of procuring LNG, the Government can issue guidance, and such transactions have been implemented on bi-lateral arrangements in the past. The officials can negotiate and ensure the rates are competitive. We have to preparer our own estimations of costs. For that there is a tender board and a technical evaluation team. A procurement committee is also there and the officials negotiate terms based on the estimations. The construction and procurement of coal for Norochcholai and Kerawalapitiya were done in a similar manner.
The Chairman said that the only valid claim by the protestors is that there was no tender procedure to supply LNG. The Government has accepted that. However, he said, there is a particular index to buy coal, LNG and fuel in the world market. The CEB officials analyse, cite these standards and negotiate best possible terms.
“I must emphasise that the CEB did not sign a final agreement so far. There is only an understanding, “the Chairman said.
Two coal tenders floated by the CEB recently had been unsuccessful due to the dollar shortage faced by the government. It was told that the situation is so dire; the CEB cannot even open LCs to import anything. The CPC is also in a bad financial footing due to CEB’s unpaid debts to the CPC.
The trade unions of the two institutions are jointly protesting but the reality is that these two institutions are financially in a bad sate.
“When we could not buy crude oil, the former president visited Iran and made a special arrangement to get crude oil, and settle payments in five months. Tender procedures were not followed then- special circumstances require special arrangements. The government must meet the energy demand but there is a dollar crisis. Thus, we need to make amends to overcome the challenges,” he said, adding the on-going strike is unfair in the backdrop of this crisis which has been aggravated by the pandemic.
Additional Secretary Power Ministry Dr. Susantha Perera, CEB General Manager M.R.Ranathunga, Chairman LECO Athula De Silva and General Manager LECO Dr.Narendra De Silva also presented views at the Media Briefing moderated by Preisdnet’s Media Spokesman Kingsley Ratnayake.
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What was signed between the US company and the Treasury
On July 7, 2021 the Treasury Secretary and New Fortress Energy Inc. signed a framework agreement to identify areas of discussion in the future.
The Cabinet paper was presented on July 1 and the approval was received on July 5, 2021. The draft agreement was submitted to the Cabinet along with the Cabinet paper and is available for perusal.
A Share Sales and Purchase agreement was signed in September.
This is to come to an agreement on selling and purchasing the shares and the rates.
This agreement is not legally binding. When we calculate the offer from NFE, we have sold one Rs. 100 worth share at over Rs.1000. This is a profitable transaction.