Costly RLNG short-circuits power sector, makes projects commercially unviable

However, country?s largest power company-NTPC Ltd, which has been fighting a long legal battle with Reliance Industries Limited (RIL) over gas supplies to its power projects at $2.34 per mmbtu, is currently in a dilemma as it has been offered gas (LNG imported from Australia) at a price of $21.1 per mmbtu for its Kayamkulam power project in Kerala.

NTPC has told the government that at $21.1 per mmbtu, the cost of power generation will be close to Rs 8 per unit, which will make the project commercially unviable.

Gas for NTPC?s Kayamkulam power project is being sourced from Gorgon of Australia by Petronet LNG Limited (PLL) under a long-term contract. NTPC is the main beneficiary of this contract, as out of the 2.5 million tonne per annum of LNG being sourced by PLL from Australia, 2.1 mtpa will be used for the expansion of Kayamkulam power project from 350mw to 1,500mw. This was a major decision taken by the Prime Minister?s Office in 2006. GAIL (India) Limited is the offtaker of this gas (R-LNG) from PLL.

Refusing to buy RLNG at this price, NTPC chairman and managing director R S Sharma has shot off a letter to power secretary Anil Razdan saying, ?PLL?s R-LNG offtaker?GAIL has indicated that the supply from Gorgon is likely to be linked to Japanese crude cocktail (JCC). With linkage at the rate of 16% of JCC plus $1.2 per mmbtu, the RLNG price on delivered basis at Kayamkulam is estimated to be around $21.1 per mmbtu at JCC crude price of $100 a barrel. The total cost of generation at this price would be Rs 7.87 per kilowatt hour. At this indicative delivered price of RLNG, the cost of power is just comparable with diesel power.?

According to NTPC Chairman, GAIL has also informed that the recently concluded long-term LNG deals in the international market have direct linkage to crude oil, reported to be at the rate of 16% of crude oil prices and there is no floor or ceiling.

?As per various reports, in recently signed LNG contracts of Qatar Gas with China and South Korea, the LNG prices have linkage at the rate of around 16% of crude oil prices. In view of the high x cost of generation fuel, uncertainty in RLNG prices?due to its linkage with crude oil?setting up of a LNG-based power plant at a price of $21.1 per mmbtu may not be sustainable,? NTPC chairman said in his letter.

?Even in merit order operation, the cost of generation with RLNG will be higher than that of generation with domestic coal, hydro, imported coal, natural gas and nuclear power and there will be difficulty in concluding power purchase agreements (PPAs) with the beneficiaries, hence making it commercially unviable,? Sharma told Razdan.

It is significant to point here that despite the ongoing turbulence in the global oil and gas market, country?s largest importer of LNG?Petronet LNG Limited?has not been sourcing LNG at high prices as this would set wrong benchmarks for LNG pricing in the country. In fact, following an unprecedented spurt in crude oil and gas prices, PLL has stopped buying spot LNG cargoes for over a year now.

In contrast, Royal Dutch Shell continues to procure spot LNG cargoes at prices close to $16-18 per mmbtu for re-gasification at its Hazira terminal and there are buyers for the fuel even at this price. However, fuel at this price is being bought only as a short-term stop gap arrangement and not on a sustained basis by the industry.

Therefore, if LNG being procured by PLL under a long-term contract with Gorgon of Australia results in a delivered gas price of $21.1 per mbtu (as indicated by NTPC), it is certainly a cause of concern for the power industry.

In India, the administered price of domestic gas for the core sector is less than $2 per mmbtu and even the highest price of domestic gas (from the Panna Mukta Tapti joint venture) is ruling at $5.7 per mmbtu.