India attracting foreign firms with LNG deals

Royal Dutch/Shell, Mobil Corp., Enron Corp., Amoco Corp., Total SA, and BG plc are among 11 companies that in the last 6 months have announced plans to invest in liquefied natural gas ventures in India. The companies have been negotiating for projects with domestic oil firms Indian Oil Corp. (IOC), Oil & Natural Gas Commission (ONGC), Gas Authority of India Ltd. (GAIL), Bharat Petroleum Corp. Ltd. (BPCL), and Hindustan Petroleum Corp. Ltd. (HPCL).

Sept. 8, 1997

6 min read

The companies have been negotiating for projects with domestic oil firms Indian Oil Corp. (IOC), Oil & Natural Gas Commission (ONGC), Gas Authority of India Ltd. (GAIL), Bharat Petroleum Corp. Ltd. (BPCL), and Hindustan Petroleum Corp. Ltd. (HPCL).

The foreign companies plan to invest a combined $10 billion to develop projects with capacity to produce and import more than 15 million metric tons/year of LNG by 2005. A major driver for the program is the need for electricity in a power-starved country.

Ashok Mehta, HPCL executive director, corporate planning and projects, said, "LNG is the fuel of the future and therefore offers a major potential for long-term investment."

In a venture with Total, HPCL intends to invest more than $1 billion to build LNG plants in the country. An initial capacity of 2.5 million tons/year is envisioned in the eastern state of Andhra Pradesh, for a capital cost of $500 million. The target is a capacity of 6-7 million tons/year.

HPCL is the only Indian company working through a joint venture, with Total. IOC, BPCL, ONGC, and GAIL have formed a group to build LNG import terminals and perhaps power plants to use locally produced LNG.

The four Indian partners will each hold 12% equity; the rest will be split between the foreign partners and financial institutions.

Seventeen foreign companies, including Mobil, Enron, BG, and Shell, have submitted bids to join the group. Evaluation is currently under way.

The group aims to set up two LNG terminals, each with 2.5 million ton/year capacity, on the east coast at Ennore in Tamil Nadu and on the west coast at Mangalore in Karnataka. Total cost is estimated at more than $840 million.

BPCL was the last company to join the group, which was formed this year. Initially, BPCL had planned to go it alone but decided against that after considering the huge cost involved.

A BPCL official said, "We thought it wise to join people with expertise in the sector; that would split costs and make it more viable."

Apart from the public sector, many foreign oil majors have announced similar plans. Mobil has not finalized any project but is awaiting the outcome of its bid and is preparing a feasibility study on the entire process of importation, liquefaction, and supply of LNG in the country. It tentatively plans to invest $1 billion.

Martin Houston, director-LNG for BG, said, "LNG will provide the long-term stable fuel for power generation and is cheaper than pipeline gas over long distances."

The keenest foreign firms so far are Amoco and Shell. With a $3 billion investment, Amoco plans to set up a 5 million ton/year LNG terminal at Hazira, Gujarat. It will handle importing, liquefaction, regasification, and supply.

Shell India Pvt. Ltd. has identified a potential LNG/power plant project in Tamil Nadu. It plans to invest more than $1.12 billion in a 1,400-MW power plant.

Shell International Gas disclosed Sept. 1 it also proposes investing about $2 billion to build an integrated power project and LNG terminal at Hazira. Shell has signed a joint development agreement for the scheme with India's Essar Group.

The project will involve expansion of Essar's existing 515-MW electric generating plant at Hazira and construction of an LNG terminal with an initial capacity of 2.5 million tons/year.

The rush of foreign companies to India has generated a lot of interest in this relatively unknown sector (see Watching the World, p. 37). India has no LNG terminals or LNG-fueled power plants, although natural gas is widely used in the petrochemical, fertilizer, and power sectors.

LNG is increasingly viewed in Asia as having an advantage for power generation over naphtha, coal, and fuel oil. In addition to LNG being a cleaner fuel, LNG-based power plants can be set up in 24 months, while coal-based plants take at least 48 months. LNG-fired plants are also more efficient than coal plants.

There is a huge potential demand for LNG in India, driven mainly by the power sector. The country needs to install almost 57,000 MW of power capacity in the course of the ninth 5-year plan (1997-2002) to meet expected demand, but the power ministry estimates that only 34,000 MW is possible, leaving a gap of 23,000 MW.

In the eighth plan, added capacity was only 17,688 MW compared with a target of 30,537 MW. The power shortage in the country is estimated at 7% of average electricity demand and 16% during peak periods.

One barrier to establishment of the LNG industry in industry is subsidized coal prices. Price distortions through subsidies favor domestic coal production, although imports are allowed for power plants near the coast and away from coal deposits.

A BPCL official said, "The key to LNG viability is pricing. It should either be on par with coal or cheaper than coal. Otherwise, it is not viable."

A BG comparison of prices among competing fuels shows that LNG priced at $3.84-4.50/MMBTU is only slightly costlier than imported coal at $3.40/MMBTU. Naphtha is costlier at $4.40-5.00/MMBTU, as is low-sulfur heavy fuel oil at $4.30-5.70/MMBTU.

"Assuming a level playing field, LNG can compete with the other fuels," said Houston. To compete effectively with coal, LNG terminals are expected to be located on western and northwestern coasts or in places far away from coal deposits.

Coal deposits are not found in Northwest India, except for small deposits in Maharashtra, so power developers have taken to alternate fuels like naphtha and natural gas.

To compete on price, LNG costs have to be on a tight leash. This is difficult, given LNG's requirement for large-scale investment. Liquefaction is the most expensive part of the LNG process, typically costing $2.50/MMBTU, while regasification costs about $1.25/MMBTU.

There is always the looming danger for LNG of a price hike, caused either by a rise in crude oil prices or in tanker rates. Multinational companies will be at an advantage when it comes to tankering. With their fleet of LNG carriers, they are thought to be able to pare shipping costs by at least 30¢/MMBTU.

LNG import terminals could be built where there are clusters of power plants so that the cost of laying pipelines is minimized. As an alternative, importers could set up LNG power plants for captive consumption, similar to what the HPCL-Total combine is doing in Andhra Pradesh, which is near the southeastern coal fields.

Although LNG is being touted as the fuel of the future and the answer to India's energy problems, there is still a lot of preparation required. Handling imports and supplies of LNG is a totally new experience for Indian companies, while only GAIL and ONGC have experience in gas marketing.

As HPCL's Mehta said, "India's LNG industry is still at a preliminary stage. We are doing feasibility studies to understand how it works, and only after that will we have an idea of its future shape."