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Establishing an energy hub in Trincomalee

Jun 2, 2010 8:50:10 PM- transcurrents.com

By Dr. Janaka Ratnasiri

Since winning the war, according to media reports, persons in both the public and private sectors have been talking about converting Sri Lanka into various hubs in such sectors as business, aviation, shipping, energy etc.

Yes, Sri Lanka does have the potential to serve as an energy hub to serve the needs of both the South Asian region and the country’s. For this purpose, the availability of Trincomalee harbour, a gift of nature given to Sri Lanka, needs to be exploited. A moderate size natural gas terminal built at Trincomalee could serve this purpose.

Natural gas – the preferred source of energy

As a primary source of energy, countries world over are shifting to natural gas because of its many environmental benefits compared to those of coal. Natural gas (NG) does not emit any fly ash containing fine particulates, or any bottom ash containing hazardous substances, or any sulphur dioxide like other fossil fuels. For example, a 300 MW coal power plant generates daily about 250 tonnes of fly ash and about 60 tonnes of bottom ash. Though filters remove about 98-99% of the particulates from fly ash, the balance 2.5-5 tonnes are released into the atmosphere. However, with time, this amount could even increase. These very fine particulates cause much damage to the vegetation and health of the people living in the area where these ash settle down. Coal dust released during unloading is another hazard. With a NG fired power plant, there is absolutely no emission of any particulates or any SO2 emissions. Also, the amount of NOx emitted is also very much less.

The NG power plants have both local and global benefits. While the hazardous pollutants emitted and coal dust spread by a coal power plant are totally absent in NG power plants, the amount of CO2 emitted which cause global warming is also much less in NG plants, being only about 40% of what a coal power plant of similar capacity emits. Hence, many countries are shifting to NG as a source of clean energy and also to reduce carbon dioxide emissions and comply with the requirements of UN Framework Convention on Climate Change (UNFCCC).

Benefits to Sri Lanka in using natural gas

According to Ministry of Power and Energy website, the Ministry has decided to build a 1000 MW coal power plant at Sampur near Trincomalee as a joint venture with India. The website further says that it plans to build a second 1000 MW coal power plant at Muttur. If natural gas becomes available at Trincomalee, it will not be necessary to build coal power plants which would cause heavy pollution to water, land and air. Instead, natural gas-fired two combined cycle gas turbine (CCGT) power plants of same capacity could be built there at much less cost and in less time. It will totally eliminate pollution associated with coal power plants. Three CCGT plants are already in operation at Kelanitissa and Kerawalapitiya and they are known for their high efficiency.

There are other benefits the country would accrue by shifting to natural gas from coal to generate electricity. The carbon foot print of industries supplied with electricity generated from natural gas will be much lower than that when using coal-generated electricity. This will enable them to have a competitive edge over industries in other countries in selling their goods overseas. Also, Sri Lanka plans to get more tourists to the country in the coming years, and having a pollution free environment will certainly enable the country to achieve this target.

The third is the possibility to comply with the Copenhagen Accord targets. In the recently concluded Climate Change Conference at Copenhagen, Parties were required to report what voluntary measures they would take in order to mitigate greenhouse gas emissions. For a country like Sri Lanka, where the current level of emissions is at a minimum, there is no possibility of reducing emissions further. What we could do is to reduce future emissions and show it as a reduction relative to future business-as-usual (BAU) scenario. This is a topic that would come up at the UNFCCC meeting being held this week in Bonn.

If the two proposed coal power plants of capacity 1000 MW are operated till 2020 under business-as-usual (BAU) scenario, and under mitigated case if each is replaced by a similar capacity gas-fired CCGT plant, and the existing CCGT plants are also run with NG, the CO2 emissions alone could be reduced from about 26 million tonnes (Mt) to about 18 Mt by 2020. This is a 30 % reduction relative to BAU case, which is quite significant. It is assumed that thermal power of total capacity 4,500 MW will be in operation by 2020. Currently, Sri Lanka emits nearly 6 Mt of CO2 annually from thermal power plants.

Global utilization and transport of Natural Gas

In 2007, electricity was generated globally 21% from natural gas, 41% from coal, 14% from nuclear energy, 16% from hydro power, 6% from oil and 2% from other sources (Int. Energy Agency, 2009). However, electricity generation is not the only use of natural gas. It could be used as a feedstock in many chemical industries including the manufacture of urea. It is also used widely as a source of thermal energy in industries and for space heating during winter months in temperate countries as well as for cooking. The natural gas share of total primary energy source globally is 24%, while coal, oil and nuclear power contribute 21%, 37% and 11%, respectively (IEA, 2009).

In North America and Europe where NG is widely used, NG is transported in pipelines laid across borders. Across oceans, the gas transported in purposely built carriers in liquefied form when its volume gets reduced to a fraction of 1/600. However, special deep jetties (minimum 16 m depth) are required to berth LNG carriers and transfer the LNG to storage tanks built on-shore. From there it is re-gasified and distributed to users. Currently, Japan and Korea are the largest importers of LNG in Asia, the volumes imported annually being about 84 Billion cubic metres (Bcm) and 36 Bcm, respectively, and these come mainly from the Middle East and Australia.

The construction of LNG terminals is an expensive exercise, costing of the order of US$ 300-400 million for a small terminal with capacity of about 1.5 million tonnes per year (Mtpy), the minimum viable size sufficient to feed a 1,500 MW power plant. The high end cost could be as much as US$ 1,000 million for a 5 Mtpy terminal. The cost could be reduced drastically if a deep harbour is already available with adequate space to construct the necessary infrastructure. Generally, higher the throughput, cheaper is the terminal operation.

Proposals for the import of LNG to Sri Lanka

During the last decade, several proposals – both solicited and unsolicited - have been submitted to authorities in Sri Lanka for importing LNG. But, to date none appear to have been accepted. Some of these proposals were for plants to be built on the southern coast where it is relatively easy to import LNG because of the availability of deep sea at a number of locations, and others were for western coast plants. Some have even received Cabinet approval for undertaking feasibility studies, while others have been included in the Ministry agenda only.

In response to a call for proposals in 2001, the government had received several proposals for the construction of LNG terminals and a NG-fired power plants with capacity of 350 MW initially and expandable to 1050 MW within ten years. However, nothing was heard of these proposals thereafter. Had these were accepted and implemented at that time, we would have had the benefit of clean power today.

According to a Ministry progress report posted in its website, the government has taken a policy decision in 2007 to include LNG as a source of fuel for future power plants and has nominated a Japanese company to develop facilities in the western coast to import LNG. The Japanese Government has apparently agreed to finance the project on concessionary terms. Subsequently, the government has sought an independent assessment report under a Japanese assistance programme with regard to the feasibility of importing LNG, but this report has not been made public yet.

The Ministry of Power and Energy had made a previous attempt to obtain LNG from Iran and an exchange of delegations also taken place. The Cabinet has also granted approval to build a 300 MW NG power plant at Mirissa (where the sea has the adequate depth to bring LNG carriers) with assistance from Iran. Though Iran has the second largest NG reserves in the world after Russia, it lacks technology to liquefy the gas for export. Their attempts to develop this technology with technical assistance from European countries failed half-way in view of the economic sanctions imposed against Iran.

Iran had entered into long-term contracts with China and India to supply them LNG, anticipating completion of its liquefaction programme, and these proposals are now kept on hold. It was during this period that Iran offered Sri Lanka too assistance to build a NG-fired power plant and supply LNG to operate it. However, with the collapse of their liquefaction programme, the project has not been pursued. The latest information is that Iran has entered into an agreement with an Indian firm to develop its liquefaction facilities and in return has assured a supply of 6 Mtpy of LNG to India on long-term basis. This is an opportunity for Sri Lanka to reopen the negotiations with Iran.

Situation in India on the use of NG

According to 2007 Energy Balance Statement for India given in IEA Energy Statistics, India’s energy mix comprises coal (41%), oil (23%), biomass and other renewables (27%), natural gas (6%), hydro (2%) and nuclear (1%), with a total supply of 595 million tonnes oil equivalent (Mtoe) or 25,000 PJ approximately. India has its own gas fields, both off-shore and inland, but the supply, which is expected to be limited to around 160 Mcmd, is inadequate to meet the increasing demand. Hence, over the past years, India was attempting to import NG via pipelines as well as through on-shore LNG terminals.

India had commenced discussions with Pakistan in 2005 on building a gas pipeline from Iran via Pakistan. The pipeline is estimated to cost around US$ 7.5 billion and is expected to be 2300 km in length. Though there was general agreement for it by both countries, the matter did not progress much. India had also shown interest in joining the pipeline project to bring gas from Turkmenistan to Pakistan through Afghanistan. The proposed pipeline will have a length of approximately 1680 km up to the India border and a capacity of 90-100 Mcmd. However, geopolitical issues in the region probably had prevented these proposals from progressing further.

A third attempt by India to obtain NG via pipelines appears to show success. That is to import NG from Myanmar via a pipeline to be laid over Bangladesh. According to the latest information available, Bangladesh has now agreed to allow India to proceed with the project. The pipeline will be 900 km long and have a capacity of 20 Mcmd. The project is estimated to cost IRs 4,500 crore or US$ 1 Billion approximately. Myanmar has already agreed to build a pipeline to China and sell NG to them at US$ 7.72 per Million British thermal unit (MBtu), and probably a similar figure will apply to India too. In addition, there could be a toll fee payable to Bangladesh.

Within the India, there is a wide network of pipelines extending over 6,500 km, particularly in the northern half, with certain sections still under construction. When all these pipelines are commissioned by 2012, the total length of pipelines would be more than 12,000 km and the capacity is expected to increase to around 300 Mcmd. These pipelines supply NG to power plants, chemical industries, city gas distribution networks for domestic and commercial users and conversion to compressed form (CNG) for use in the transport sector in cities.

India has already built three LNG terminals in the Western coast - two in Gujarat State (Dahej and Hazira) and the third near Mumbai (Dabhol). Gas imported as LNG is sold in India around US$ 4.90 per MBtu, and this is cheaper than other fuels like naphtha, light and heavy diesel and LPG. A fourth is under construction in Kerala State at Kochi. A fifth planned in the Eastern coast at Ennore is being evaluated for feasibility. The project which has an initial capacity of 2.5 Mtpy is estimated to cost IRs 3,450 crore or US$ 766 million. These terminals have throughputs in the range 2.5 – 5 Mtpy and are expected to be expanded to 5-10 Mtpy capacity. With the expansion of the capacity of these plants, the total LNG supply to India is expected to reach 20 Mtpy by the end of 2012.

Outlook for NG use in India

Several analysis reports available in the internet forecast heavy shortfall of NG supply in India in the near future. According to a report prepared by the consultancy firm Mckinsey and quoted in Financial Express, India’s demand for NG will nearly double from the current demand of 166 Mcmd to 320 Mcmd by 2015, and with the inadequacy of domestic supplies, India has no option other than to go for large-scale LNG imports, if it were to shift away from coal in the power sector to comply with India’s voluntary targets under Copenhagen Accord (co-authored by India!) to reduce carbon emissions.

It was also noted that there is an increasing demand for NG in the domestic sector with plans to increase the number of cities supplied with piped NG from the current 40 cities to 200 or more. In the transport sector too, an increase in the demand is expected with more vehicles using CNG. According to a presentation made at a recently held meeting of the Asia Gas Partnership Summit at New Delhi, it has been mentioned that there is a huge opportunity in the LNG sector with the requirement of about US$ 50 billion investment over the next five years for expanding the infrastructure to meet the future demand.

Trincomalee as an energy hub to serve South India

With the anticipated shortfall in the supply of NG in India in the coming years, and the failure of India to secure piped gas supplies from Iran or Turkmenistan, Sri Lanka has the potential to fill that gap by supplying gas through a pipeline to South India from Trincomalee. If India needs natural gas in the Eastern coast, it will be more economical for them to import it as LNG up to Trincomalee and then to get the gas transported to India through a pipeline (for which only the initial capital is required), than importing it as LNG up to a terminal in the Eastern coast yet to be built for which higher freight will have to be paid all the time.

It is proposed that an LNG terminal be built at Trincomalee harbour to serve as an energy hub for the South Asia region. The government could call for proposals from reputed parties to build an LNG terminal on BOOT basis, initially with capacity 5 Mtpy and expandable to 10 Mtpy or more at a later date. In turn, Sri Lanka could offer a suitable site along with the necessary infrastructure facilities to the investor. A pipeline will also have to be laid to transport gas to South India, overland up to the Northern coast and under sea thereafter. A network of pipelines needs to be built within the country too, to distribute the gas to local users.

This facility could then be offered to any other party to import LNG for distribution to direct users after re-gasification, be it to feed power plants or to use as feedstock for the manufacture of such products as urea and other chemicals or to serve industrial zones for generating thermal energy. The terminal at Dhabol has been offered to independent parties to import LNG paying a toll fee to the plant operator. A similar system could be worked out for the Trincomalee terminal too.

A pipeline from Trincomalee will be cheaper to build than building one from Myanmar which is about 900 km over Bangladesh. The distance from Trincomalee to the northern coast overland is about 175 km, while the sea straight is only about 75 km, making the total distance 250 km. to the Indian coast. India is planning to build a high tension DC transmission line to take electricity from Trincomalee to South India once the proposed Sampur coal power plant is commissioned. The costs of such a transmission line and a gas pipe line would be of the same order of magnitude.

Suitability of Trincomalee for a LNG terminal

Trincomalee is known for its deep harbour and around it there are several places where the 10 fathom (18 m) bathymetry contour lies very close to the shore, making them suitable for locating an LNG terminal. One is the Chapel Hill lying to the south of Trincomalee town, which ends up at the Elephant Point. Both its western coast and south eastern coasts are steep reaching 10 fathom bathymetry contour within a few hundred metres from the shore. There are also a few islands close to the harbour entrance having steep shorelines suitable for this purpose. The jetty, LNG storage tanks and the re-gasification plant could be built on the island and the rest of the facilities including the gas storage tanks could be built on the mainland.

The problems encountered in building an LNG terminal in the western coast because of the shallow sea, could be overcome at Trincomalee where the sea is deep. Furthermore, it has the advantage of being able to serve both Sri Lanka’s needs as well as supplying gas to India. It could source its LNG requirements from suppliers in South-East Asia (Indonesia, Brunei, Malaysia etc.) as well as from Australia, a major supplier of LNG in the region. Iran is also a potential supplier if they manage to get their liquefaction programme operational with Indian assistance.

Use of natural gas in the country

The Ministry of Power and Energy is currently attempting to set up an LNG terminal near Colombo, but it is very likely to be not feasible, unless it is a floating or an off-shore terminal, simply because the sea is shallow in this stretch. The 10 fathom (18 m) bathymetry contour lies at least 6 km away from the shore at Kerawalapitiya, and building a terminal to unload LNG direct to on-shore cryogenic tanks is just not feasible at this location. A more plausible solution would be to locate a terminal either in the southern coast or at Trincomalee. If the terminal were to serve the needs of the entire country, a technically and economically sound location would be the latter. It is also necessary to bear in mind the future development pattern of the country in locating the terminal.

The National Physical Planning Department has drawn up a National Physical Plan (NPP) up to 2030 where it has been recommended that the future metropolitan and industrial zones need to be shifted away from the Colombo District, as it is not possible for the Colombo District to sustain the future population increase and meet other demands such as water and housing requirements while maintaining a proper ecological balance.

The recommendation of the NPP is to develop the major Metropolitan and Industrial zone (MIZ) in the future within the Anuradhapura – Trincomalee – Dambulla triangle, the second in the Batticaloa – Ampara area and the third in the Hambantota area. A basic requirement of a major MIZ is an adequate supply of energy; not just energy, but clean energy that will have the least impact on the environment. If an LNG terminal is built at Trincomalee, gas could be taken to industrial and commercial establishments in the proposed MIZ through a network of pipelines from the terminal.

In order to meet the energy needs of the Hambantota MIZ, either a separate terminal could be built or a pipeline laid from Trincomalee depending on the demand and cost-effectiveness. With the construction of a deep harbour at Hambantota, it will be possible to build a small terminal there to meet the local needs if it is more economical. Even for the generation of electricity, small embedded generators distributed in the country could feed the grid more efficiently than transporting diesel fuel by road to feed distant power generators, as done presently causing heavy traffic congestion.

These generators could be supplied with the fuel from the pipelines eliminating the cost of transport of the fuel by road. As done in India, city dwellers and commercial establishments could be supplied with gas on pipelines replacing the LPG as a fuel which need to be transported in cylinders across the country. It may be recalled that gas was distributed in pipelines to Colombo residents and others for cooking and heating purposes many decades ago.

Viability of the project

Under the Copenhagen Accord, UNFCCC is expected to create a special fund with contributions from developed countries, particularly USA, to meet additional costs incurred in reducing emission of greenhouse gases in developing countries. With the possibility of reducing emissions by about 30% by 2020 by changing the proposed 1000 MW coal power plants at Sampur and Muttur to NG-fired power plants, Sri Lanka government could seek funding from UNFCCC to make the conversion viable, if it is not so under normal commercial terms.

The utility authorities hitherto have not considered natural gas as a viable option for Sri Lanka, other than what is given in the current website, on the grounds that the country’s demand for electricity does not warrant incurring heavy expenditure to build an LNG terminal. However, if the terminal is built to handle a large amount of gas supplies to meet both the local as well as Indian markets, the project should become viable, and Sri Lanka will be in a better position to negotiate prices to obtain LNG on a long term contract.

LNG is traded generally on long term contracts, typically 20 years or more. The price is negotiated to allow adjustments within upper and lower limits depending on the global oil price. Generally, there is a gap about 4-5 years between the delivery of gas and signing the contract, because the supplier begins to open a well head and commence the associated liquefaction process only after the deal is signed. However, LNG could also be purchased on spot-markets at a higher price. According to a website report dated September 2009, India has agreed to import 1.5 Mtpy of LNG on a 20 year contract from Australia for its upcoming Kochi terminal at a price of US$ 13.5 per MBtu. According to another website, China is buying 3.6 Mtpy of LNG over 20 years starting 2014, at a price of US$ 11 per MBtu. As mentioned before, Myanmar has agreed to sell piped NG to China at US$ 7.72 per MBtu.

The way forward

It is suggested that proposals be invited from reputed parties to build a moderate size LNG terminal at Trincomalee on a BOOT basis. The terminal could be rented out to gas suppliers, both locally and in India, to import LNG and sell the gas. Sri Lanka government could earn revenue for providing the infrastructure facilities to the terminal operator. There will be no burden on the part of the government to meet the capital cost of the terminal as it will be a BOOT project. The gas could be distributed within the country through pipelines for use in power plants, industries, transport, commercial and domestic sectors.

The immediate step the Ministry could do is to renegotiate the proposed Sampur plant with the Indian partner to switch its fuel from coal to NG. The best way to do this is to get the Indian partner himself to seek an Indian investor to build an LNG terminal at Trincomalee. Switching the fuel from coal to NG will benefit India too, as the joint proponent of the Copenhagen Accord. Also, Sri Lanka could renegotiate with Iran to obtain LNG supply as proposed earlier. An early decision needs to be made in view of the escalating prices of natural gas in the region. If this proposal is implanted, then only the country can boast of being the energy hub in South Asia. It will also be a feather in the Minister’s cap for being able to develop the country’s power sector in an environmentally friendly manner.