Kirit Parikh Panel: Part of LPG and SKO subsidy can be financed through burden sharing by ONGC and OIL

Feb 3: The Committee is of the view that under recoveries will come down sharply if its recommendations are accepted. But to mop up the under -recoveries that will still remain in the sale LPG and SKO, the following steps have been suggested:

•  The  first step to contain under-recoveries/subsidies on PDS kerosene and domestic   LPG is to reduce all-India allocation of PDS kerosene and increase prices of both PDS kerosene and domestic LPG
•  When prices rise in the international market, and domestic retail prices are not raised, the under-recovery gap will widen. However, with the rise in prices, the estimated incremental income of ONGC / OIL will also rise.
• Therefore, the next step to finance under-recoveries of OMCs would be by way of mopping up part of the incremental income of ONGC and Oil India by way of price discounts extended to the OMCs. The petroleum ministry has been administering this method. It provides flexibility to the government in balancing the needs of ONGC and Oil India and the obligation to finance the under-recoveries of OMCs. Therefore, the present arrangement may be continued and incremental incomes of ONGC and Oil India can be mopped up bythe petroleum ministry in a calibrated manner. In this manner, a sustainable pattern of financing under-recoveries on domestic LPG and PDS kerosene can be put in place by:
• Determining the under-recovery on domestic LPG and PDS kerosene based on the import parity principle;
• Effecting suitable price revisions from time to time;
• Mopping up a portion of the incremental revenue accruing to ONGC/OIL from production in those blocks, which were given by the government on nomination basis (the mopping up procedures have been calibrated in a table)
• Providing cash subsidy from the Budget to meet the remaining gap.

Source: www.indianpetro.com

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Tripura to see more ONGC gas at market rates

Tripura in India’s volatile northeast used to be a region where you could sell gas only at the government subsidised ‘northeastern’ price of around $2/mmbtu, or Rs1920 per 1000 cubic metres. But no longer! Under new government rules ONGC has begun selling gas at a more respectable $4.25/mmbtu, or Rs4125 per 1000 cubic metres. Beginning April this year, ONGC will start supplies of 200,000 cm/d to the Tripura State Electricity Corporation (TSEC), quietly displacing GAIL as the supplier of choice in this highly gas prospective landlocked region on Bangladesh’s eastern border. ONGC is already supplying 100,000 cm/d to TSEC since last April. ONGC today produces around 1.67m cm/d in Tripura, mainly from its ‘jewel in the crown’ Agartala Dome gasfield (670,000 cm/d), but also from Baramura (200,000 cm/d), Rokhia (300,000 cm/d) and Konaban (500,000 cm/d). For years this gas has been sold through GAIL to the state’s power sector at hugely attractive rates, introduced by Delhi to stimulate economic growth in this isolated outpost. But under new legislation Delhi permits ONGC to sell newly discovered gas at market rates. “ONGC first asked GAIL to start selling gas at market driven rates,” we hear. “But for some reason GAIL could not. So, ONGC started selling direct to customers.” This trend is set to continue: ONGC is setting aside 500,000 cm/d at $4.25/mmbtu for NEEPCO, a second local power generation company, with first supplies to begin in 2013, when ONGC expects Tripura gas production to jump to 6m cm/d. By far the biggest chunk of this new production will go to a proposed 726-MW gas-fired power station promoted by the ONGC Tripura Power Company (OTPC). Around 3m cm/d is promised to OTPC, but only 2.65m cm/d has been formally contracted, again at $4.25/mmbtu. Does GAIL object to this encroachment onto its turf? “Even if GAIL objects,” we hear, “ONGC is hardly bothered.”

Source: Petrowatch

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RIL's pipelines to ferry gas from KG basin: Details

Following are the details of the pipelines laid or to be laid by Reliance Gas Transport and Infrastructure Limited (RGTIL), for transporting gas from the KG basin. 

They are:

8The Kakinada-Hyderabad-Ahmedabad pipeline: This pipeline is 1,385-km long and has already been commissioned.

8The Kakinanda-Chennai pipeline: This 600 km-long pipeline is to be commissioned by the second quarter of 2012.

8The Kakinada-Basudebpur-Howrah pipeline: The length of the pipeline is proposed at 1,100 km. The pipeline is likely to be commissioned by the third quarter of 2012.

8The Chennai-Tuticorin pipeline: This pipeline is expected to be 670 km in length and is to be commissioned by the third quarter of 2012.

8The Chennai-Bangalore-Mangalore pipeline: This proposed pipeline is 660 km long and is expected to be commissioned by the third quarter of 2012. 

Source: www.indianpetro.com

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KG D-6 Gas: Fast Replacing the Spot LNG Demand in the Country

Natural gas flowing from Reliance Industries’ operated KG D-6 block has fast emerged as an alternative to spot Liquefied Natural Gas (LNG) in the country. It is the supply of gas from prolific KG D-6 block due to which the spot market of LNG is continuously shrinking. This could well be estimated from the fact that the business has faced beating in last one month at the Hazira LNG terminal of Shell and Dahej LNG terminal of Petronet. Of late, KG D-6 gas has replaced the spot LNG to a great extent and bridged the demand-supply gap of natural gas in the country. RIL operated KG D-6 is now producing 60 million standard cubic metre of natural gas every day (mmscmd) and has almost wiped out the spot LNG demand in the country.

Most of the power and fertilizer companies have diverted their attention from the spot market of LNG to KG D-6 gas as the domestically produced gas is available at far cheaper rate. This has resulted in sharp decline of LNG demand which was used in the absence of domestic gas supply. This is evident from the fact that before the allocation of KG D-6 gas, RIL itself was consuming almost 4 cargoes of LNG every month. According to the government sources, not even a single spot LNG cargo has been received at Hazira and Dahej terminals during last one month.

Chief Executive Officer and Managing Director of Petronet Mr. P Dasgupta said, "No one is interested in spot LNG deal today. The last LNG spot cargo had arrived in November, 2009. The demand (for spot LNG) can only be rekindled if new power and fertilizer plants will be commissioned. The present demand for the gas is being met by KG D-6 gas and the long-term import of LNG by Petronet."

According to the sources, the future price of LNG is about $8.2 per million british thermal unit (mmbtu), whereas KG D-6 gas is available at $4.20 per mmbtu. As mentioned earlier, till December, last year even RIL was buying spot LNG from Hazira terminal every month for its Jamnagar Refinery. After the allocation of gas from KG D-6 gas, the company has closed the spot LNG purchase. Similarly, other companies too, which have been allocated gas from RIL’s KG D-6 block, have stopped buying LNG from spot market. A Shell India official admitted that spot LNG business has slowed down; but, refused to divulge the details of decline in number of cargos.

Prior to KG D-6 gas supply, total gas supply in the country was staggering at around 110 mmscmd, including the long-term LNG sourced by PLL and Shell, as against the demand of about 175 mmscmd. Remaining gas demand was met through spot LNG. With the production of 60 mmscmd gas from KG D-6 field, the present demand of gas in the country is satisfied. However, the gas demand in the future is likely to rise again in the coming years as the domestic supply is unexpected to match the pace of growing energy demand of the nation. 

Contribution from Business Standard

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Oil min seeks more tax relief for pipeline biz

The petroleum ministry has asked for enhanced tax relief for companies laying and operating cross-country petroleum pipelines.

Currently, the government allows these companies to deduct their entire capital expenditure made for laying and operating pipelines the previous year, while computing their taxable income if they reserve a third of the capacity for outsiders. The petroleum ministry has now told the finance ministry that the investors in cross-country pipelines should be allowed to reserve one fourth of their transportation capacity to outsiders (which means more tax relief), said a person privy to the development.

The oil ministry has also recommended that companies doing research in petroleum and alternate fuels like condensed natural gas, ethanol and hydrogen should be allowed duty-free import of research equipment and chemicals. Besides, they should also be given excise exemption when these items are sourced locally.

The oil ministry wants the finance ministry to amend the Income Tax Act so that the third-party usage norm for cross-country gas pipelines is the same as the norm prescribed by the downstream regulator, petroleum and Natural Gas Regulatory Board (PNGRB). The regulator maintains that one-fourth capacity of crude and petroleum products pipeline should be left for third party use.

For natural gas pipeline operators, the regulator’s third party use requirement is one third of capacity. Cost of acquiring land, goodwill or any financial instrument is not allowed to be included in the capital spending.

Access to transportation facility for entities other than the pipeline owner and associates is provided at the tariff fixed by the regulator because it is not feasible to let more than one entity to lay pipelines to serve one geographic region. Such access is to be given in a non-discriminatory way.

The oil ministry has also recommended that companies doing research in petroleum and alternate fuels like condensed natural gas, ethanol and hydrogen should be allowed to import research equipment and chemicals duty free. Besides, they should also be given excise exemption when these items are sourced locally. The petroleum ministry has also asked the finance ministry to scrap the duty of Rs 50 a metric tonne levied on locally produced and imported crude oil to raise funds for relief work in calamity struck areas. Domestic crude also attracts a Rs 2,500 a metric tonne cess, but no excise duty.

Senior finance ministry officials told FE that while the ministry may be willing to make small concessions to the sector, significant sops like giving infrastructure status and the accompanying ten year income tax holiday to the entire hydrocarbon exploration and production activities is not possible. The petroleum ministry is, however, making a compelling case for it. Now income tax sops are available for different segments in the industry—tax holiday for mineral oil refiners (but not beyond 2012) and for those laying cross-country pipelines.

The petroleum ministry also wants the finance ministry to step up the direct subsidy component from union budget for kerosene and domestic LPG when it extends the scheme beyond March 31, 2010. Now the budget subsidy on kerosene and domestic LPG is a small part of the entire subsidy to these products, which are met partly through discounts from producers and partly through issue of oil bonds to retailers. Stepping up direct subsidy would enhance transparency in government accounts and reduce the requirement of oil bonds to state-run retailers, said a government official, who asked not to be named.

Source: Financial Express

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RIL’s new Jamnagar unit can clock 20% more

The company’s refinery operated at 115% of its stated capacity in the quarter ended 31 December

The world’s largest refining hub could just get even bigger. The second refinery, set up by Reliance Industries Ltd (RIL) at its Jamnagar complex in Gujarat, has already overtaken the older, adjacent refinery in production volumes and could go even further—exceeding its design capacity by at least 20%, according to four persons familiar with the development.

The second refinery, which was commissioned by RIL in end-December 2008 to process 580,000 barrels per day (bpd), started full-scale commercial production early this fiscal. It operated at 115% of its stated capacity in the October-December quarter, according to the firm’s 22 January statement.

At this rate, the refinery could refine 667,000 bpd, overtaking RIL’s older Jamnagar refinery, which can process 660,000 bpd. Put together, it’s the largest refining operation globally at a single location.

At least two firm officials familiar with the matter and two sector analysts confirmed that the new refinery had the “elbow room” to boost capacity up to 700,000 barrels of crude of oil a day or a fifth more than its nameplate capacity. Although this comes at a time when most sector analysts are forecasting a subdued outlook for the refining and petrochemical segments, they are less worried about the impact an extra dump of refined fuels could have on the oil-and-yarn conglomerate. Other refiners will lose out not RIL, they said.

“Right from the time the design plan for this refinery was announced, a section of the market believed that the capacity will eventually be higher than announced. It happened with the previous refinery too,” said Mumbai-based brokerage Angel Broking Ltd’s analyst Deepak Pareek. He estimates that RIL’s profit before tax could swell by as much as Rs750 crore if the new refinery operated at 120% of its stated capacity.

A questionnaire emailed to the RIL spokesperson on Friday remained unanswered till press time. A firm executive explained that when all the parameters in a refinery—such as the crude mix, pressure, heat catalysts and other operating conditions—are at optimum levels, then it can process more than its design capacity through “debottlenecking”, “especially if some elbow room is built into it”. The executive, who did not want to be identified, added that this happened in other places as well, such as fertilizer plants.

Apart from a possible increase in refining, RIL is also undertaking steps to boost storage. International news agency Reuters had reported on 28 January that RIL had leased capacities to store petrol at the Borco oil terminal in the Caribbean, as it eyes the US market and those to its south. The deal on the 500,000 barrels storage facility was secured sometime towards the end of last year, it had said.

“All refineries and plants when they are designed and contracted out, are supposed to run at a certain capacity. To keep it steady at that level, usually a 10-15% higher capacity is built into it as a buffer,” said a sector analyst with the Indian arm of a foreign brokerage who, along with his counterpart in another brokerage firm, confirmed that the Mukesh Ambani-owned firm had indicated successfully “stress testing” the new refinery up to 700,000-710,000 barrels of crude a day. The refinery seems to have stabilized faster and achieved higher performance sooner than the street expected. Stress testing helps to determine the stability of a given system and involves testing it beyond the normal operational capacity, often to a breaking point, in order to observe the results.

This analyst, who did not want to be named as he doesn’t officially speak to the media, said the previous refinery too had undertaken the same route and went from a stated capacity of 27 million tonnes to 33 million tonnes— an increase of about 22%.

“This higher capacity will be a very low cost expansion,” pointed out Pareek. Concurred the other analyst: “This will go straight to the profits since no capital expenditure is incurred. And this extra capacity is an option RIL can choose to exercise or not. It gives flexibility.” Analysts pointed out that additional supply might depress the product prices but refined fuels are ultimately a commodity with existing demand. This means, if RIL produces more, it may edge out less efficient suppliers.

RIL beat street estimates in the December quarter earnings, clocking higher refining margins—or earnings from turning crude oil into a number of fuels—of $5.9 (around Rs274) per barrel and much of it on account of the higher utilization of the new refinery. The firm doesn’t report margins for the two refineries separately and hence, one cannot delineate its efficiency from the overall performance. The firm had reported a $4 per barrel premium over Singapore gross refining margins, the Asian benchmark, marking a rebound after eight quarters in which RIL saw its lead over peers eroding.

RIL’s chief financial officer Alok Agarwal told reporters after the latest quarterly results that he was “confident” the refining margins will improve in 2010. The new refinery could be of help here.

Source: Live Mint

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Time to think of gas-based UMPPs

The government’s ultra mega power project (UMPP) scheme has proved a big hit among investors. However, this effort alone would not go far enough in meeting the country’s growing power shortage. With natural gas availability from domestic sources improving significantly in recent years, the government needs to think of a gas-based UMPP scheme if it is to effectively deal with the country’s power problems. In any case, cost economics of gas-fired power projects near load centres compares well with imported coal-fired power plants set up at coastal locations.

India has faced huge shortfalls in its envisaged power generation targets for every Five Year Plan. In view of that, the government has launched the ultra mega power project (UMPP) policy to accelerate the country’s coal-based capacity addition pace. The government has successfully bid out four UMPPs so far and more are in the pipeline.

The government has also envisaged tapping renewable energy sources like solar, wind, bio-mass as well as nuclear to overcome the country’s electricity shortage. However, the cost of generating electricity from these sources works out much higher compared to fossil fuel-generated power because of high capital cost. So the government will have to make huge subsidy payouts to support renewable power generation capacity addition. In any case, these are not appropriate sources for meeting peak power requirement.

Cost economics apart, these efforts might not be enough in bridging India’s power demand-supply gap. India’s power requirement is rising at a much faster pace than the official projection. Global consultancy firm McKinsey has said that if India continues to grow at an average rate of 8%, the country’s demand for power will soar to 315-335 gigawatt (gw) by 2017, a projection that is 100 gw higher than the estimates put out by the Planning Commission. To meet the country’s projected electricity demand, McKinsey has suggested that India focus on setting up peaking power sources like hydro and gas-based power plants.

Although India has the potential to develop 1,48,700 mw of hydro-based power generation capacity, there are serious geological and technological constraints in harnessing country’s hydro resources. Most of the hydropower projects face delays because of hydrological and geological uncertainties involved in their execution. India has so far harnessed only 20% of its hydrogenation potential.

Natural gas availability from domestic sources has significantly improved in recent years. Additional 80 million standard cubic meter per day (mmscmd) of gas became available from Reliance Industries Ltd’s (RIL) D6 block in the Krishna-Godavari basin. Gujarat State Petroleum Corporation (GSPC) also plans to begin production from its Deendayal gas field in 2012. GSPC expects production of 200-300 million metric cubic feet a day (mmscfd) from the block. Meanwhile, exploration work is on in the KG basin and more discoveries are likely to be made in days ahead.

At current market prices, cost economics of gas-fired power projects near load centres compares well with those in coastal areas based on imported coal. For example, electricity tariff for a power plant at coastal location based on imported coal works out to Rs. 3.5 per unit. A gas-based power plant near load centre will be able to compete with an imported coal-fired power project if it can procure gas at a price in the rage of $7 million British thermal unit (mBtu). Significantly, delivered market price of domestic gas available from RIL’s D6 works out to $6-7 per mmBtu.

Not only in terms of generation cost economics, gas-based UMPPs also compare favourably with imported coal-fired UMPPs in respect of transmission losses. Gas-fired UMPPs’ transmission losses would work out much lower compared to coal-based UMPPs set up at coastal locations because of their proximity to load centres. By a rough estimate, transmission losses for these coastal plants would be in the range of 18-20%. In comparison, transmission losses for gas-based UMPPs should be about 80% lower.

Capacity addition and cost considerations aside, increasing share of natural gas in power generation can also help the country in checking its fast-expanding carbon footprint. India has volunteered to make a significant reduction in its carbon emissions. Gas-based UMPPs will come in handy for India in meeting the emission cut promise.

While the government can award captive coal mines for coal-fired UMPPs, there is no such assurance for gas-based projects. That means tying up fuel linkage for a gas-based power project will take more time. So while the government can replicate other provisions of the current UMPP policy in formulation of a gas-based policy, it will have to allow a longer timeframe for completing bidding for allocation of these projects.

Carbon footprint of the Indian power sector is growing fast. Given the growing global concern against global warming, it might not be feasible for India to maintain the current share of coal-based power generation capacity in the long term. So, it is high time the government started thinking about gas-based UMPP scheme.

Source: Financial Express

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