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CORPORATE FRONT: SECTOR
STUDY Will the Great Gas Gamble Pay Off? Energy majors, ready to commit $10 billion, make a beeline to grab a share of India's LNG market. By Hema B Rajashekar
Little wonder then that both global and domestic players, many of them with hardly any experience in the sector, are placing their chips on gas. Even as India is hailed as the Texas of the New Millennium, the government seems convinced that LNG is the answer to the country's energy crisis, and is welcoming transnationals with open arms. Consider the proposals in the pipeline: Petronet LNG (Petronet)--promoted jointly by the Rs 4,969.72-crore Gas Authority of India Ltd (GAIL), the Rs 56,003.98-crore Indian Oil, the Rs 16,535.75-crore Bharat Petroleum, and the Rs 11,277.39-crore Oil & Natural Gas Commission--plans to set up three LNG terminals at Dahej (Gujarat), Cochin (Kerala), and Mangalore (Karnataka). The cost of the three terminals, which will, together, handle 10 million tonnes of LNG every year: Rs 4,500 crore.
The Tamil Nadu Industrial Development Corporation (TIDCO) has invited bids for a 2.50-million tonnes per annum (tpa) terminal at Ennore, which will be linked to a 2,000-mw LNG-based power plant at the same site. The shortlisted joint bidders include Shell-Powergen, gail-Petronas, Mitsubishi-Enron, Siemens-Woodside, and National Power-Mitsui. TIDCO will identify the developer by June, 1988, and the $2.25-billion project (terminal and power plant) is expected to be commissioned by 2003. The first LNG terminal will probably come up at Dabhol (Maharashtra). Partially linked to the 2,450-mw power plant being set up by the $13.30-billion Enron (US), the 5-million tpa terminal is expected to be ready by 2000-01. It will, initially, handle 2 million tonnes to fulfil the power plant's annual requirement. Later, its capacity will be increased to 5 million tpa to supply gas to consumers along the West Coast. Enron is also hoping to bag the Ennore project, and has signed an agreement with the Kerala-based K.P.P. Nambiar Group to implement the 513-mw Kannur power project, based on either naphtha or LNG. The combined investment: $5 billion. Apart from being interested in supplying the fuel to Petronet, Total has two other joint ventures: with the Rs 18,368.42-crore Hindustan Petroleum (hp), and the Rs 2,526.15-crore Tata Electric. With hp, Total will build two terminals--with a capacity of 2.50 to 3 million tpa each--at Kakinanda and Vishakhapatnam, both in Andhra Pradesh. And with the Tatas, it has planned a 2-million tpa terminal in Mumbai to cater to the needs of Tata Electric's three power stations at Trombay. However, says J.C. Breton, 54, Total's chief representative in India: "The venture (with Tata Electric) is only at the initial stage." Shell has obtained the approval of the Cabinet Committee on Foreign Investment (CCFI) to set up a wholly-owned subsidiary to operate two LNG terminals at Hazira and Surat, both in Gujarat. The $540-million projects will, partly, supply fuel to the recently-commissioned Essar Power and the Rs 2,162.64-crore Essar Steel, with whom Shell has supply agreements. Says Vikram Singh Mehta, 45, the CEO of Shell's India operations: "If we were to have all the approvals today, we can bring the fuel by 2001." The list of prospective entrants also includes players like the Rs 9,004-crore Reliance Industries Ltd (RIL), which has received CCFI clearance to set up two terminals of 5 million tpa each at Hazira and Jamnagar, both in Gujarat; the Rs 1,200-crore Finolex Group, which wants to build a $700-million 2.50-million tpa terminal near Mangalore (Karnataka); and the $7.17-billion British Gas' $400-million proposal for a terminal, with an initial capacity of 2.50 million tpa, at Pipavav (Gujarat). If all the projects fructify, India will have 14 terminals dotting the West and the East Coasts. Together, they will have the capacity to handle 50 million tonnes of LNG every year. But most of these projects will remain only on paper. Predicts Afsir Ahmad, 43, the director of the Coastal Petroleum Overseas, the liaison office of the $121.67-billion Coastal Corp., which is exploring investment opportunities in India: "I expect (only) two or three terminals to get going by 2010." What, then, are the strategies of the entrants, and the prerequisites for success in this business? WHY IMPORT LNG? Before deciding who, it is better to determine how many. To do that, it is imperative to analyse the demand estimates, and to gauge whether LNG can substitute alternative fuels like coal and naphtha. In the past, most of the user sectors--power, fertiliser, and sponge iron--opted for the traditional fuels. However, the surfeit of new power projects--at present, the private sector is pursuing 126 proposals to generate 36,000 mw of power in the next few years--has changed the scenario. Although India has rich reserves, coal-based power plants located far from pit-heads are uneconomical. Similarly, naphtha-based power units--attractive due to their low gestation periods of 12 months--are losing their sheen for three reasons: using naphtha to produce power is a waste, the GOI is unable to allocate naphtha for all the proposed projects, and naphtha is subject to volatile price fluctuations. Natural gas seems to be the next best alternative. But then, domestic gas production is not expected to meet the country's demand. In 1996-97, the demand-supply gap was 39 million metric standard cubic metres per day (MMSCMD), which is estimated to sharply rise to 102 MMSCMD by 2006-07, while domestic supply will increase to 72 MMSCMD from 49 MMSCMD in the same period. Most experts--including the R-Group Committee, which submitted its report in September, 1996--feel that the shortfall can be made up by importing gas through pipelines. But two proposed offshore pipelines--under an agreement signed between India and Oman in October, 1994--to deliver 28 MMSCMD each have failed to take off. The reason: technological hurdles in laying deep-sea pipeline. The R-Group report also states: "The availability of sufficient reserves (in Oman) for supplying the contracted quantity for the next 20-30 years is yet to be verified." Another proposal for an on-shore pipeline from Iran to deliver 50 MMSCMD of gas has run into difficulties owing to political reasons. This pipeline has to pass through Pakistan, which has not given its approval. HOW MANY TERMINALS ARE REQUIRED? What is the next best alternative? Of course, LNG, which is gas liquefied at a temperature of Ä161ºC. LNG provides a flexible and secure mode of transporting natural gas from producer-countries to distant markets. Not surprisingly, gas-producing nations are trying to find new markets for LNG, which constitutes nearly 25 per cent of the global gas trade. For instance, Qatar is desperately trying to invite global companies to develop the world's largest reservoir, North Fields, which would cost $25 billion, and, simultaneously sign fresh agreements with either suppliers or users of gas or LNG. Two such agreements--with Japan and South Korea--have been tied to two new LNG plants. On January 11, 1998, Qatar also signed a Memorandum of Understanding (MOU) with the GOI to supply LNG to GAIL (read: Petronet). True, but India does not need all the terminals which are on the anvil. The R-Group report claims that India's LNG requirement will be less than 11 million tonnes in 2006-07, which translates into a maximum of four terminals with a capacity of 2.5 million tpa each. However, Rebecca Mark, 42, the CEO of the Enron's subsidiary, Enron International, says that India should go in for large capacity terminals, and build only two terminals each with a capacity of 10 million tpa. Explains Mark: "The LNG business is driven by economies of scale and, thus, a large facility will lead to lower prices." IS LNG A VIABLE OPTION? Price-wise, LNG can compete with coal, liquid fuel, and naphtha. A GAIL study found that while LNG can be imported at between $3 and $4 per million metric British thermal units (MMBTU), imported coal would cost $3.87, liquid fuel, $3.35, and naphtha, $3.97. However, these cost estimates do not compare LNG prices with domestic coal, whose price is as low as $2.50 per MMBTU in coal-surplus states like Bihar. But high transportation cost, and additional investments in coal washeries may hike the final cost of coal to users. Despite this, LNG suppliers are trying to convince their customers that costs will be reasonable. Says Sanjay Bhatnagar, 36, country manager, Enron India: "We are assuring our potential customers that we will match, or even better, their fuel costs." In fact, the R-Group found that transporting gas through a pipeline was viable only if the distance between the user and the producer was less than 5,000 km (over land route), and 1,500 km (under sea). Considering the distance between India and the gas-producing nations, like Qatar, Indonesia, and Malaysia, LNG imports seem lucrative. Indeed, the price of imported gas through a pipeline, between $3.60 and $3.80 per MMBTU, in Bangalore will be more expensive than imported LNG at $3 per MMBTU. WHO WILL WIN? In the LNG race, speed will be of utmost importance. For, the winners are likely to be those who enter the market before their competitors. For instance, in the late 1980s, when many of business groups were vying with each other to enter the petrochemicals sector, it was RIL which set up huge capacities, and forced others to wait, watch, and withdraw. Although six companies planned to set up Purified Terephthalic Acid units, RIL still enjoys a monopoly. That explains why Enron, which was one of the first off the block, is aggressively trying to reach the finish-line before its competitors. According to the company's calculations, the financial closure will be over by mid-1998, and the terminal will be ready by 2000. But Enron's experience is restricted to LNG marketing, and it has not yet finalised the source for the proposed Dabhol power project. The company has only signed an MOU with the Qatar General Petroleum Corporation (QGPC) to set up a production facility. Although Enron is confident of converting its MOU into a sales agreement in the near future, the delay could prove to be its undoing. Enron may find that an assured gas supply, usually for a period of 20 to 25 years, past experience in running terminals, and owning a fleet is critical to woo bankers to finance the project. And none of these details have been finalised as yet. For example, QGPC has signed MOUs with several energy companies, but none of them have been converted into a sales agreement. Enron, according to Mark, is also trying to woo Shell to part-finance both the Qatari and the Indian projects, estimated at $10 billion, but has not been able to finalise an agreement. Shell, in contrast, may be more interested in pursuing its own projects. Because the Anglo-Dutch major, which has been operating in the sector for three decades, has established joint ventures for the production of LNG in Australia, Brunei, Malaysia, Oman, and Nigeria, and possesses a fleet of 26 ships to transport the fuel. Says Shell's Mehta: "We are the biggest suppliers of LNG in Asia." Similarly, while Total set up its first LNG plant in Algeria two decades ago, Mobil has a joint venture with the Indonesian oil company, Pentamina, to set up one of the largest LNG plants with an annual capacity of 12 million tonnes. ARE THERE CREDIT-WORTHY BUYERS? Both Enron and GAIL claim to have received a huge response from prospective users. "We have received queries for over 25 million tonnes per year," says Bhatnagar, adding that MOUs have been signed with large users like the Rs 1,858.47-crore BSEs, the Rs 2,820.53-crore Indian Petrochemical Corporation, the Rs 1,513-crore Indian Farmers Fertilisers Co-operative, and the Rs 956.60-crore Krishak Bharati Co-operative. Similarly, the demand registered with GAIL is more than 250 MMSCMD per annum. Or thrice the existing demand. However, as LNG is available only on a take-or-pay basis, the energy companies have to be extremely careful about the credit-worthiness of the user. Assessing the customer's ability to pay is important for both the LNG company, and its bankers. Explains Anand Mukerji, 39, deputy general manager, the Industrial Credit & Investment Corporation of India (1996-97 income: Rs 4,510 crore): "If the buyer is a steel company, we will assess its strength, and if the buyer is a power plant, we will have to look at the credit-worthiness of its customers." However, as 70 per cent of the total LNG demand will come from the power sector, Mukerji is sceptical about the viability of several terminals given the financial state of the state electricity boards (SEBs) in the country. According to the Independent Power Producers' Association of India: "The overall commercial losses of SEBs in 1996-97 are estimated to be in excess of Rs 10,000 crore." The only hope: the SEBs are expected to reform themselves drastically in the next four years. "But that would mean that financial closures for the LNG terminals will take the same time," says Mukerji. As construction can only begin after the financial closure, terminals will not be ready before 2005. Given that finding credit-worthy customers will be a problem, most of the proposed terminals--linked to new power plants--might come up before others. It must be added that GAIL is one of the promoters of Petronet. Clearly, the pipeline to success is clogged with challenges and risks. All of which could lead to a financial disaster. For instance, if the LNG supplies are not tied up, the terminal may never take off; if enough credit-worthy users are not found, the companies may face a cash crunch; and the projects have inherent investment risks as the cost per terminal, including the re-gassification unit and the pipeline, is nearly $1 billion. Obviously, the Texas of the 21st Century--like the one of this century--will witness more failures than success. PROJECTS IN THE PIPELINE... |
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Forget the gold rush. Feel the great
gush sweeping India. Caught in its wake are the global energy giants, who are already
sniffing success in a new fuel: Liquefied Natural Gas (LNG). And they have big plans. They
are willing to commit $10 billion to build the infrastructure to ship LNG from producer
countries in West Asia and South East Asia, re-gassify it at an Indian port, and
distribute the gas across the country. Obviously, the challenge of logistics is eclipsed
by giant opportunity. 
Seven global companies--including the
$75-billion Mobil LNG Inc. (US), the $32.73-billion Total (France), the Anglo-Dutch
$128.17-billion Royal Dutch Shell (Shell), and the $37.58-billion Chevron (US)--have been
shortlisted to supply the fuel, and also own a possible stake in the venture. Says K.P.
Roy, 51, general manager, GAIL: "We have not decided how many companies will be
finally selected." 