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Petronet raises gas prices to subsidize Dabhol plant

Petronet raises gas prices to subsidize Dabhol plant
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First Published: Fri, May 11 2007. 02 32 PM IST
Updated: Fri, May 11 2007. 02 32 PM IST
Dinakar Sethuraman, Bloomberg
Singapore: Petronet LNG Ltd, India’s largest natural gas importer, said the government ordered higher prices for Gujarat and other northern states to cut costs for the country’s biggest gas-fired power plant near Mumbai city.
Gujarat State Petroleum Corp. and other customers will pay 32% more starting in midyear, when a pipeline to transport gas to the power station in Dabhol is completed, Petronet Managing Director Prosad Dasgupta said. Current supply contracts valid until December 2008 will be canceled.
Customers from coastal Gujarat to New Delhi would subsidize fuel used at Dabhol and help keep electricity tariffs low in Mumbai, the nation’s commercial capital in Maharashtra, the most populous state. The government is banking on Dabhol to avert the first scheduled daily blackouts in a century in Mumbai.
“Our power costs will increase,” Saurabh Patel, Gujarat’s energy minister, said in an interview 9 May. “To subsidize the customers of Maharashtra, we feel it’s not fair to charge a higher price. The burden is not fair.”
India, Asia’s fourth-largest economy, plans to expand generation capacity by 65,000 megawatts in the next five years. Inadequate power supply and transportation bottlenecks cut two percentage points from economic growth every year, according to the Finance Ministry.
Power Capacity
Dabhol, a project started by Enron Corp. in 1996, has capacity to produce enough power for more than 2 million homes. The plant has never worked at more than one-third of capacity because of Enron’s collapse, disputes over power prices and a lack of gas for the furnaces. Today, it operates at 15%, burning the costlier oil product naphtha.
Higher gas prices will raise energy costs for businesses in Gujarat, the country’s most industrialized state and home of Petronet’s import terminal, by about $185 million annually. The company is importing extra liquefied natural gas at double the cost of existing shipments to supply Dabhol, crucial to ending power shortages in India’s, Maharashtra.
Gujarat state is ruled by the Bharatiya Janata Party, which is opposed to the Congress-led coalition national government in New Delhi. The Congress is in power in Maharashtra. Both the national Petroleum Minister Murli Deora and Power Minister Sushil Kumar Shinde are from Maharashtra state.
Government Letter
The central government sent a letter on 6 March to state- owned Petronet, authorizing the state-run company to increase the price of gas. In turn, Petronet told GAIL (India) Ltd, India’s largest gas distributor, that it will cancel an existing supply contract valid until 2008 and increase prices when Dabhol gets hooked up to Petronet’s pipeline distribution network, Dasgupta said. Gail sells gas from Petronet, supplier of one- fifth of India’s gas, to end users such as factories and power plants.
The price will go up to $5.83 a million British thermal units from about $4.4, he said.
“Our contract has a force majeure clause that allows us to change prices if the government changes the law,” Dasgupta said in an interview on 3 May. “The new prices will apply when we start supplies to Dabhol in June.”
The company imports 5 million tons a year of liquefied natural gas from Qatar under a multiyear contract and resells all the fuel to customers in northern and western India.
Nothing Spare
The company has no gas to spare from the Qatari contract and is importing about 1.5 million tons of LNG a year from the spot market to supply Dabhol, Dasgupta said.
Gas at Henry Hub, the trading point that sets the U.S. benchmark, costs about $7.78 a million British thermal units. Consumers in Asia must pay more to draw cargoes away from the U.S., said Morten Frisch, senior partner at U.K.-based Morten Frisch Consulting.
Petronet’s largest shareholders — Gail, Bharat Petroleum Corp., Oil & Natural Gas Corp. and Indian Oil Corp. — signed contracts to buy all the LNG imported under the 25-year contract from Qatar.
— With reporting by Archana Chaudhary in Mumbai
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First Published: Fri, May 11 2007. 02 32 PM IST
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