Thanks, but no thanks

The country’s largest private sector company, RIL, moves heaven and earth to sell KG basin gas to the country’s largest power producer, but in vain.

All’s fair in love and war. That seems to be the motto on both sides in the stand-off between public sector power giant NTPC Ltd and Mukesh Ambaniled Reliance Industries Ltd. (RIL) over the supply of natural gas from RIL’s Krishna Godavari basin’s D6 block.

Consider this: In 2008-09, NTPC sold power from its gas-based Kawas and Gandhar plants in Gujarat at Rs 6.34 and Rs 4.64 per unit, respectively. Compared to NTPC’s average selling price of Rs 2.12 a unit last year, this was quite high. The two plants, with a combined capacity of 1,300 MW, had to buy gas from spot markets at steep rates. Since April, however, cheaper natural gas has started flowing from the KG basin and this can reduce NTPC’s cost of power. But apparently that’s not an important consideration for NTPC, which has decided not to touch RIL gas even if it means buying costlier gas for its Gujarat plants.

RIL reneged on its contract to supply gas at $2.34 per mmbtu to Kawas & Gandhar expansion projects.
Any gas deal with RIL for Kawas & Gandhar will hurt the court cases.
RIL’s marketing margin ($0.135 per mmbtu) unlawful, not approved by GoI.
At $2.34 per mmbtu, the 2,600 MW Kawas and Gandhar expansion projects can save consumers Rs 2,130 crore a year.

Indeed, Kawas and Gandhar are the reason why NTPC is averse to buying the KG basin gas. The public sector behemoth, which accounts for onefifth of the country’s installed capacity with its 30,644 MW, is miffed with RIL for allegedly reneging on its commitment to supply KG basin gas at $2.34 per million metric British thermal units (MMBTU) for the 2,600-MW Kawas and Gandhar expansion projects. The dispute is pending before the Bombay High Court after NTPC filed a suit in December 2005. (The same court has ruled in favour of Anil Ambani’s Reliance Natural Resources in a similar dispute, which is under appeal in the Supreme Court).

But RIL is not willing to leave matters at that and is trying everything from persuasion to complaints and campaigns to get the PSU to fall in line. Says P.M.S. Prasad, RIL’s Executive Director: “If NTPC buys gas from KG-D6 for Kawas and Gandhar (at the government approved price of $4.20), it will result in reduction in cost of power by Rs 3.3 per unit and Rs 1.6 per unit, respectively, or Rs 2,800 crore annually. This will directly benefit the state electricity boards (SEBs) and consumers.”

There was no contract concluded to sell gas at $2.34 per mmbtu as there was dispute over liability sharing.
We will sign GSPA with NTPC without prejudice to current court cases.
We have signed 36 GSPAs, including 16 with power producers, and all are happy.
If NTPC buys KG-D6 gas at $4.20, unit cost of power at Kawas and Gandhar will come down by Rs 3.3 and Rs 1.6, respectively, or Rs 2,800 crore annually.

In April this year, the government allocated to NTPC 2.67 million metric standard cubic metre per day (MMSCMD) of KG basin gas—2.06 MMSCMD for the Gujarat plants and 0.61 MMSCMD for Dadri, Faridabad and Anta plants in the National Capital Region. The PSU, in its September 4 note to stock exchanges said it “is committed to drawing the allocated gas for its plants in the national capital region”. But there has been no progress after that. RIL is waiting for the PSU to close the deal.

According to Prasad, NTPC will incur an additional cost of Rs 1,500 crore a year if it buys re-gasified LNG from outside to fire its plants in Gujarat.

However, in a note to stock exchanges on September 10, NTPC maintained that there is no question of considering the KG gas for the Gujarat plants as it might prejudice the case now in court. “If RIL is so much concerned about consumers, let them sell gas at $2.34 per MMBTU and we will buy right away,” a senior NTPC official told BT.

RIL states that the legal dispute concerns only the expansion projects of Kawas and Gandhar, and not their existing plants, and so NTPC should not have any qualms over lifting the allocated gas, especially since it (RIL) has agreed to include a caveat in gas sales and purchase agreements (GSPAs) that they are “without prejudice” to the court case.

But NTPC says it won’t sign the agreements till RIL withdraws the marketing margin of $0.135 per MMBTU that it is collecting over and above the gas price of $4.20 per MMBTU. “We are not convinced about their marketing margin. Who allowed them to collect it?’’ asked the NTPC official. In fact, NTPC Chairman R.S. Sharma has written to the Power Secretary over the margin and called for government intervention. The power ministry has lobbed the issue into the Ministry of Petroleum & Natural Gas.

RIL, too, is writing letters to government departments and agencies in its bid to bring into the public realm NTPC’s fuel purchase approach and step up pressure so that a deal is signed. On September 4, the company wrote to the Gujarat government explaining how the state would benefit from the supply of KG-D6 gas to the NTPC plants. RIL has also written to Haryana, Uttar Pradesh, Punjab, Delhi, Madhya Pradesh and Rajasthan accusing NTPC of preferring expensive gas over the cheaper KG basin gas.

In one of its letters to the power ministry, RIL states: “NTPC’s actions… appear to be driven by factors other than commercial prudence. This has led to NTPC losing out…resulting in higher costs to SEBs and the consumers.’’ The letter also accuses NTPC of buying spot gas for as high as $22 per MMBTU, while Panna, Mukta and Tapti (PMT) JV—comprising RIL, ONGC and Gujarat Gas—sold the gas to others at $4.8 per MMBTU for three years after the bidding process in 2005 which NTPC stayed away from. While NTPC’s Sharma declined to take questions from BT, the PSU’s latest note to exchanges dismisses this allegation saying: “NTPC has already been procuring spot regasified LNG (RLNG) at competitive rates from market through tenders and without any take or pay liability.’’

The KG-D6 gas field is currently producing 37 MMSCMD of gas but is capable of increasing its production to 80 MMSCMD. RIL is currently supplying about 18 MMSCMD to the power sector, and another 30 MMSCMD of gas, if produced, would help add 7,000 MW. Prasad estimates that NTPC requires 17 MMSCMD of gas to run its stations at 90 per cent plant load factor (PLS), but is getting only about 7 MMSCMD. “We have the capacity to meet NTPC’s requirements subject to the government allocating gas to NTPC and NTPC signing GSPA with RIL,’’ he says. In fact, NTPC’s proposed expansions have ground to a halt for want of gas. This includes the proposed capacity additions of 1,300 MW each at Kawas and Gandhar as well as at its Kayamkulam plant in Kerala where it plans to add 1,950 MW.

A section of senior power sector analysts BT spoke to attribute NTPC’s actions to the court case as also the deep sense of hurt it has suffered at the hands of RIL post the bidding process in 2005. But former power secretary R.V. Shahi says: “Since the KG basin gas has started flowing, there is good reason that the power sector should use it as much as possible. In that respect it will be advisable that NTPC should avail of KG basin gas for all its plants and also for future projects.’’ As for Kawas and Gandhar, Shahi, who now heads power consultancy firm Energy Infratech, however, adds a caveat: “If legal advice is not to use KG basin gas for these plants, then it is for NTPC to decide.’’

V. Raghuraman, former Principal Advisor, Energy, CII, who now advises a clutch of global energy firms, says: “It is logical to expect that the locally available gas at lower prices is favoured over the costly RLNG, and the decision of NTPC seems to be contrary to this. But then, there must be a reason for NTPC’s actions.’’ He regrets that a scarce national asset such as natural gas is allowed to go unutilised when the country is reeling under a power shortage and the swing in the cost of power traded through the exchanges is as extreme as 13 paise to Rs 15 a unit.

Raghuraman suggests that the country prepare a road map to move away from the current allocation approach to market-based pricing approach. His thoughts were echoed in a recent lecture by Finance Commission Chairman Vijay Kelkar, who believes the present gas pricing policy framework is non-transparent and causing price variation across the nation. According to him, it’s not helping rapid development of the natural gas sector, either.

“Given right incentives for producers, it is possible to foresee India to achieve over a decade or so gas output level of more than 500 MMSCMD from the current supply level of 120 MMSCMD,” he said.

But till that happens and until the country moves to a market-based pricing of gas, stand-offs like the current one would continue to be scripted in the power sector.