[NGW Magazine] China Outflanks Rivals in Sri Lanka

The New Delhi-Tokyo alliance to push back against growing Chinese geopolitical influence in south Asia may have met its match in Sri Lanka, whose government appears all too willing to embrace the economic benefits Beijing offers. 

China’s economic and military ambitions are not only changing geopolitics in Asia as the country continues to build on disputed islands and reefs in the heavily contested South China Sea, but Beijing is also pushing the envelope in the nearby Indian Ocean.

To counter what many in the region view as Beijing’s overly ambitious strategy, often referred to as its “One Belt, One Road” initiative – which includes setting up strategic economic and military outposts along its sea lanes which extend from the Chinese mainland all the way to Sudan – New Delhi and Tokyo have formed a coalition to push back. 

The latest development in this protracted geopolitical jockeying for influence in the region came just two weeks ago when Petronet, India’s largest gas and liquids importer, said that it, and its Japanese partners, would invest $300mn setting up Sri Lanka’s first LNG import terminal near Colombo, a port on ancient east-west trade routes and the country’s capital.

The Indian-Japanese partnership will develop a 2.6-2.7mn mt/yr floating LNG facility off Sri Lanka’s western coast. This is bigger than the previously-announced 1.5-2 mn mt/yr facility, Petronet’s CEO Prabhat Singh said in remarks covered by several Indian news outlets.

Petronet will hold a 47.5% interest in the project, while Japanese firms Mitsubishi and Sojitz Corp. collectively will hold a 37.5% cent stake. The remaining 15% will be held by a Sri Lankan entity.

“Commercial details like the exact size of the plant and investment will be worked out in the detailed feasibility report to be commissioned after signing of the MoU. Broadly, it would be about a $300mn investment,” Singh said. 

This disclosure comes six months after the Petronet led-consortium signed a letter of intent with the Sri Lankan government to build a FSRU at Kerawalapitiya, only eight miles (13 km) from Colombo. The FSRU will take up to three years to build, Petronet officials said at the time. The facility will provide gas for a yet to be built 300-MW power plant, adjoining an existing plant that generates power by using oil, which will also be converted to gas once the terminal is completed.

Take-aways

There are several take-aways from Petronet’s latest disclosure. First, a new LNG import facility will help Sri Lanka diversify its energy mix needed for power generation. Today, around 82% of the energy the country uses for power generation is derived from petroleum products and bio-mass. 

Sri Lanka doesn’t have any proven oil or natural gas reserves or any domestic hydrocarbon production, according to the CIA World Fact Book. However, the government does claim that it has undeveloped deep-water oil and gas resources. LNG imports will also help Sri Lanka meet its goal of having as many as four LNG based power plants with a combined capacity of 2.040 GW. The total cost of the projects has been placed at $3bn.

In addition, the development of an LNG receiving terminal in this country of some 22mn people will offer a new market to LNG producers, notably nearby Australia, that have been searching for new and smaller markets to help lock in market share amid an historic supply glut of the super-cooled fuel that will likely last at least until 2022.

Yet, the most significant ramification of Sri Lanka’s developing LNG terminal infrastructure will be geopolitical. Not only will the Indian-Japanese consortium invest in Sri Lanka, but so is China and on a much larger scale.

China ups the ante

In December, China’s Merchants Group, one of China’s wealthiest state-owned firms, closed a $1.1bn purchase of a majority stake in a deep-water container port at the southern port of Hambantota, 149 miles from Colombo. The port was opened seven years ago using debt from Chinese state-owned companies. It was also constructed by Chinese firms. Upping the ante even more, Chinese firms are also funding a $1.4bn port expansion and new commercial and residential development at Colombo. 

Meanwhile, in a gesture that was sure to catch the attention of all parties interested in the region, from the US to Australia, to Asean and back again to India and Japan, the Sri Lankan president Maithripala Sirisena said that his country would actively support Chinese projects and investments in Sri Lanka, according to a China Times report. 

Despite New Delhi and Tokyo’s recent pivot to catch up with China in south Asia, including Sri Lanka, it could be too little too late given the vastness of China’s ambitions and the money being poured into key industries in the country.

“The scale and scope of Chinese investments are difficult to compete with,” Harsh Pant, a professor of International Relations at King’s College London told NGW. “However, the aim is to present an alternative economic and developmental model whose norms are distinct from the opaque, top-down version of the Chinese.”

Sri Lanka’s massive debt with China made headlines during the country’s most recent presidential election in 2015, but it seems that there is little it can do to wrest control away from its largest financial benefactor.  

“Sri Lanka's debt to China is quite significant and despite the fact that the present government in Colombo wanted to wean Sri Lanka away from China, it has not been successful because of underlying economic realities,” Pant said. 

The country owes China an estimated $15bn, received between 2005 and 2017 and mostly used to fund Chinese-built infrastructure projects within the country, according to the China Global Investment Tracker, sponsored by the American Enterprise Institute. 

Another concern has been that China’s increased presence in Sri Lanka and South Asia could also impact current shipping routes. “The ramifications of a long term lease at Hambantota will eventually make the port an outpost of China. China already has considerable leverage over Sri Lanka and it will only grow in the coming years,” Pant added.

“If the Chinese dominance continues, other states will look for alternative routes and China itself might be tempted to develop new routes to reduce its vulnerabilities.” 

Tim Daiss