Reply To: Soko Islands will be harmed by ExxonMobil-CLP LNG terminal


Here’s a position paper from the Green Lantau Association and the Living Islands Movement, with arguments against building a Liquefied Natural Gas terminal at the Soko Islands – or, indeed, within Hong Kong.

If you wish to comment on this, you could post below – I can forward to govt etc.

Options for the Supply of Liquefied Natural Gas (LNG)
to Hong Kong

A position paper by the Green Lantau Association and the Living Islands Movement

Summary Position

1. This paper looks at the China Light and Power (CLP) proposal to build a LNG terminal in HK waters and explains why this is inappropriate and what the options should be. In essence our view is that,

(i) There are strong strategic reasons why LNG supplies should be secured from terminals built in the Pearl River Delta (PRD) rather than from a HK terminal. Also, the time has come to realize that we now have no suitable land left for this kind of development.

(ii) There are viable options to source LNG from PRD sources which will obviate the need for a HK terminal, and thereby preserve our remaining coastal and marine environment. These options are already being used by Hong Kong Electric (HKE), and

(iii) The justification by CLP, for building a stand-alone LNG terminal within HK waters appears to be principally motivated by the income on capital investment derived under the Scheme of Control (SoC). This course would result in higher electricity charges than from PRD alternatives, and this is not in the interest of the HK public.


2. Air quality considerations make it imperative that HK’s power stations are operated with the cleanest fuel available. LNG offers significant improvements over the burning of coal. Both power companies, Hong Kong Electric (HKE) and China Light and Power (CLP) are committed to using LNG to partially power their turbines.

3. HKE will source LNG from a terminal at Dapeng, Shenzhen in which HKE have acquired a 3% shareholding. This will power a new turbine at Lamma, and, after conversion, other existing turbines.

4. CLP will use LNG to power their entire Black Point Power Station. This station has an installed capacity of some 2500MW representing some 36% of CLP’s installed capacity. The turbines are configured to run on gas, which is presently supplied by a 650 km submarine pipeline from China’s Yacheng field off Hainan. Despite a long term supply contract which runs to 2016, CLP have belatedly advised that the contracted supply conditions will not be met, with supplies lasting until “the beginning of next decade” only. The position has been exacerbated by CLP continuing to sell power to the PRD, when such surplus capacity could be retained to provide a longer gas supply to Hong Kong.

5. CLP apparently became aware of the diminishing gas supply in 2002. Since then, CLP has been adamant that only a HK-located terminal can supply their needs, and has restricted its site search accordingly. Two sites have been identified for the terminal, one at Black Point alongside the power station to be served, the other on the Soko Islands off South Lantau. CLP have now declared their open preference for the Sokos site.

6. An Environmental Impact Assessment (EIA) is now approaching completion in respect of each of the two sites. CLP expects an early decision to be reached, and for the Hong Kong Government (HKG) to grant the favoured site to them by late this year. Construction is expected to last 4 years with the terminal being completed in 2010.

7. CLP have not undertaken a comprehensive assessment of sourcing LNG from external sources, in clear anticipation of being awarded a HK site upon which to build it’s own terminal.

Requirement of a LNG Terminal

8. LNG is delivered by purpose built tankers of 60 000 tons deadweight and upwards. They require a tidal assisted depth of 15 metres at mean High Water. The terminal site therefore requires coastal land adjacent to deep easily accessible water. A substantial area of naturally flat or reclaimed land is needed for the on-site tanks and associated facilities. The adverse impact of this on Hong Kong’s remaining environment will be considerable and incapable of mitigation.

Scheme of Control

9. Both HK power companies, HKE and CLP operate under a Scheme of Control (SoC), which prescribes the rate of return which they can derive on their assets. This return provides the basis of power charges to consumers. Currently CLP can earn 13.5% return on any assets, and up to 15% return on those purchased with shareholders funds.

10. No return however is earned on assets situated outside HK. For example CLP earns no return on their investment in the Daya Bay nuclear facility. Power or fuel purchased from outside HK is credited at cost only. Accordingly there is a significant financial incentive to hold where possible, substantial assets within HK.

11. The SoC arrangement has served HK well in the days HK was a colony, and stood alone and apart from China. Power stations inside HK provided reliable power in a region where alternatives were simply not available, and the political relationship fluctuated. This is no longer the case. HK is now part of China, and is partnering the Mainland in ever increasing areas. There is no longer the need, nor indeed is it appropriate, to insist or expect, that HK continue to operate in isolation from the rest of China, and build standalone facilities within the SAR. Indeed CLP’s existing partnering arrangements in respect of Daya Bay nuclear station and Yacheng gas have operated successfully for many years.

12. We believe it is time that the opportunities presented by our close relationship with the Mainland are fully exploited to the benefit of all residents of HK. The high electricity prices paid by HK consumers brought about by the past stand-alone SoC approach to the supply of power, should not continue. In this respect we should note that construction costs for large infrastructure projects are significantly cheaper in the PRD. Accordingly sourcing LNG from a PRD terminal would be markedly in the interest of HK consumers, as lower electricity tariffs are virtually assured.

Air Quality Objectives

13. HKG and the Guangdong authorities have a stated intention to bring regional air quality back to 1997 levels by 2010. Separately, the HKG is proposing air quality requirements in the new SoC to be applicable to CLP from 2010. CLP has stated that the new LNG terminal is necessary in order to meet SoC requirements, although emission trading and/or reduction in coal-fired generation may achieve the same results.

14. We say that the 2010 date should not be a rigid requirement, if it is wrongly used to validate a hasty decision on the terminal location.

15. Why not a HK LNG Terminal

(a) HK has a small land area (some 400 square miles), which is already under extreme pressure to accommodate the requirements of HK’s wish to be a logistics hub for the PRD. HK does not have an infinite capacity to accommodate unlimited industrial infrastructure, and, as with Singapore, another island entity, must perforce ‘outsource’ certain undertakings to friendly neighbouring jurisdictions. For example, HK has effectively outsourced its entire manufacturing base to southern China. Whilst arguably environmental trade-offs can be made for truly essential infrastructure projects, the supply of LNG does not fall into that category, given that there are viable alternatives.

(b) The two HK terminal site options are both on green-field sites, requiring the sacrificing of more remaining coastline and adjacent waters. Black Point might appear suitable as being adjacent to the power station, but current indications are that perceived safety considerations arising from the use of the Rambler shipping channel and the 3 kilometre-away village of Leung Kwu Tan, and a planning wish to reserve BP for future unspecified cross-delta links, will invalidate this option. Further, there is evidence that the waters off BP form an important dolphin breeding ground.

(c) The other location, the Soko Islands, is situated immediately off highly scenic South Lantau. This island group was slated to be a marine reserve as recently as 2001 in government’s own South West New Territories Development Strategy Review (SWNTDSR). In 2002 a government proposal to gazette the Sokos as a Marine Park reached an advanced stage. They form a most attractive recreation area, and are both rich in marine life and an important breeding ground. One island hosts a recently constructed low-level radioactive storage facility, which would be an unacceptable risk in the event of an LNG accident.

(d) The PRD has a chronic shortage of clean power. The problem has however been identified, and energetic steps are underway to replace highly polluting oil and coal fired plants with larger LNG fired facilities. The Shenzhen LNG terminal is a forerunner, Phase I has a capacity of 3M tonnes p.a., whilst Phase II yet to be committed, has a capacity of 2M tonnes p.a.
Power requirements in the PRD vastly exceed HK’s needs and are expected to grow exponentially. It makes no sense therefore for HK to construct a stand-a-lone terminal of limited capacity when partnering with the PRD could produce a Delta-serving terminal of substantially larger capacity and cost-effectiveness.

A rebuttal of CLP’s position

16. CLP has advanced a number of reasons why LNG for their Black Point Station can best be supplied from a CLP-owned terminal to be constructed in HK.

(a) CLP says – a HK terminal would ensure security of supply
We say – this is simply not true. The proposed terminal is a storage facility only. LNG is supplied from producer countries on long term supply contracts. The location of the storage terminal is immaterial. Further, the Mainland has proved a most reliable partner over many years, first with the nuclear supply from Daya Bay and latterly with the gas supply from Yacheng. For CLP to imply that that PRD-located terminal would not be secure, or a PRD supplier to be unreliable, is totally unfounded.

(b). CLP says – a HK terminal will bring environmental benefits because it can supply clean fuel.
We say – it is the fuel and not the location of the terminal that matters. HKE’s LNG from Shenzhen will be just as clean.

(c) CLP says – a HK terminal enables the project to be delivered under a single jurisdiction with clear policy and regulations
We say – this is indeed true, but this is an insufficient reason in itself. HKE has evidently overcome successfully any problems in securing supplies from Shenzhen.

(d) CLP says – a HK terminal will bring economic benefits in the form of infrastructure investment, and additionally provide engineering and construction jobs.
We say – the infrastructure benefits only CLP. Job creation is mainly for the 4 years of construction, with less than 30 permanent jobs created. Almost certainly, wider –ranging economic benefits for the whole community in the form of cheaper power would accrue if the terminal was sited in the PRD rather than inside HK waters.

17. Options for the supply of LNG to HK

(a) Shenzhen Dapeng Terminal

Whilst Phase I (with a capacity of 3M tonnes p.a.) is about to commission and has been fully committed, Phase II of this terminal has yet to be built or committed. With a capacity of some 2M tonnes p.a. this would substantially cater for CLP’s requirements of 2.6M tonnes p.a. Situated to the east of HK, either a dedicated submarine pipeline would be required, or a Shenzhen land connection built. Given the future needs of the western PRD, the probability of a convenient land connection is high.

(b) . Sinopec Zhuhai Terminal

The China Petroleum and Chemical Corporation (Sinopec) has announced its intention to construct a LNG terminal off Zhuhai, on Huangmao Island in the Pearl River. Sinopec has advised that the terminal will complete by 2009 and could be expanded to meet CLP’s requirements by 2011.

This proposal has been specifically targeted at CLP requirements in terms of location, capacity and timing. It offers potentially significant benefits in cost-effectiveness, cheaper fuel, environmental protection, and additionally fosters synergy across the PRD.

As announced in the SCMP (dated 26 July 2006), the Sinopec project will be built with sufficient infrastructure to service both HK and Macau. Sinopec has stated that the development cost will be less than $10 billion, of which presumably some 50% or $5 billion will be allocated to the portion servicing HK. It has been stated in the Press that the development cost of a HK-based facility will be in the order of $9 billion, or almost double the cost of the Sinopec facility. Such a dislocation of resources is simply not justified from any perspective.
This option is in our view, the preferred option.

(c) The emergence of direct LNG supplies

Supporting both options for outsourcing HK energy supplies is the very recently announced find by Husky Oil of vast quantities of LNG in Chinese waters some 250km from HK. Potentially this gas source, like the present Yacheng gas supply, could also become a viable long-term direct LNG energy supply for HK. It also further raises the possibility to directly pipe gas to HK, a significant opportunity which when evaluated may bring obvious benefits.

Current Position on CLP’s LNG initiative

18. It appears that due to singular commercial interests (by CLP), and regulatory inertia (by HKG), a position is emerging which, if not addressed quickly will inevitably lead to the sacrifice of HK’s interests . As the supply of Yacheng gas diminishes (on which CLP has yet to provide substantive figures, but which it is using to exert undue pressure on the HKG), the prospect increases of Black Point’s 2500 MW going off-line due to want of gas supply. Clearly the loss of 2500MW of relatively clean power cannot be allowed to happen.

19. Given justifiable public concern on air quality, and in the absence of any self-investigation of alternatives, it seems possible that HKG will concede CLP’s position and allow construction of a LNG terminal in HK waters and on the Soko Islands.

20. This we believe would be a decision of immense folly, turning one of the few remaining natural seascapes of great beauty into an industrial undertaking of extreme ugliness. There would be environmental damage which cannot be mitigated, the loss of remaining recreational areas, and a permanent blight on an area of outstanding natural beauty.

21. Our intentions and views

(a) We have no wish to frustrate the supply of LNG to HK. Indeed we believe it is vital to our air quality that LNG be brought to HK as soon as practicable. That said, a hasty decision which would see the permanent sacrifice of some of our best remaining natural areas (the Soko Islands) would be unacceptable. Were the Sinopec option to be found preferable but unable to meet the 2010 target by one to two years, we would think the delay would on balance be acceptable.

(b) We feel whilst CLP has understandable commercial incentives in building a HK terminal and enjoying SoC returns thereon, the outcome is most unlikely to be favourable to the HK consumer. Furthermore, CLP has openly expressed favour building on the more remote Soko Islands, thereby recouping an even greater return on their capital expended. Indeed the whole SoC equation is predicated toward profligacy in expenditure at the expense of the HK consumer. In order that the matter be clearly debated in financial terms, we strongly recommend that a zero-capital-cost scenario (which would result from sourcing LNG from a terminal outside HK waters) be developed against which to assess the true cost-to-consumers of CLP’s proposal.

(c) Additionally we would point out that CLP’s assessment of the economics of development at the Sokos will not take into account the totality of the entire development process. The Sokos are a unique marine environment supporting a large number of marine mammals, fishing and recreation. The development’s financial assessment will not price in the permanent loss of wildlife, marine habitants, or the scenic and recreational benefits of this site.

(d) We feel the HKG has a clear leadership responsibility in a matter as important as this, and should act more proactively than it has thus far. It is not sufficient to act as a passive regulator which responds only to proposals made to it. In this case it has taken no lead whatever during the four years spent by CLP in bringing forward its HK-only options for the terminal. Ideally we would wish to see CLP being directed now to investigate PRD options, or secondary suppliers of gas from centralized supplies such as Sinopec, which proposal seems eminently viable, with the clear message that a HK-based terminal is most unlikely to find approval.

(e) We believe it is vital for the HKG to take a proactive role in matters such as the need for and timely construction of, massive infrastructure projects, and not to simply rely on private sector initiatives to provide the only options. The current debate on the LNG terminal is one-sided, with the play being made solely by CLP for their commercial benefit. We suggest the HKG initiate a cost/benefit study of the possibilities of encouraging external sourcing of LNG to HK. Clearly HKE have already taken the view that the most viable supply source is Shenzhen, and have even entirely implemented the process from planning through to installation. This approach by HKE indicates that CLP’s commercial interests are preventing an even-handed balance to what is effectively a simple supply and demand matter. As with the supply of power itself, HKG should be looking at opening up the fuel supply side of the power equation to ensure that HK is not trapped into a one-horse race.

Green Lantau Association Living Islands Movement

September 2006

Post edited by: Martin, at: 2006/09/21 23:40