The Andhra Pradesh government has taken a tough stance on how much it is willing to pay for natural gas, both from existing suppliers as well as those who will soon start producing gas from the state’s Krishna Godavari basin, which has emerged as one of the biggest sources of such gas in the world.
“We want the gas to be supplied to our gas-based power projects at a price not more than $2.96 per mmBtu (million British thermal units),” said a senior state government official who did not wish to be identified. That translates to about Rs121 per mmBtu of gas.
Both existing suppliers such as Gail (India) Ltd and Reliance Industries Ltd (which has one of the largest gas finds in the region), are looking at $4.5 per mmBtu as a benchmark. Because the gas would have to pass through the state, even if it goes elsewhere, Andhra Pradesh is insisting it get the lower price.
Moreover, “in most gas-producing countries, the well-head price of natural gas is well below $2 per mmBtu,” says Rachel Chatterjee, chairman and managing director, Andhra Pradesh Transmission Corp.
Ultimately, the Union government is likely to be the one that decides on the benchmark price. Responding to Andhra Pradesh chief minister Y.S. Rajasekhara Reddy’s plea on the issue of high prices of natural gas to power projects, petroleum and natural gas minister, Murli Deora, had given an assurance that the Centre would take a final decision on the pricing formula by the end of the month. Reddy leads a Congress government in the state.
But Andhra Pradesh’s position on pricing is coming at a time when the state’s gas-based power plants are already operating below capacity in the absence of fuel and has the potential of derailing the commissioning of new gas-based power projects in the state.
Andhra Pradesh has a total installed capacity of 11,617.4MW, of which close to 490MW power-producing capacity in the state is currently lying idle. The state plans to add 8,963MW capacity by 2012 at a cost of around Rs35,000 crore. Given the present gas situation, the state has been cautious in its approach for gas-based capacity addition and has planned only one gas-based project of 2,100MW to be set up at Karimnagar. The state has a total gas requirement of 16 million metric standard cubic metres of gas per day (mmscmd).
A spokesman for Reliance declined to comment on the issue. Mint had earlier reported that Reliance was negotiating with a group of domestic fertilizer firms to sell its gas at $4.5 per mmBtu and is looking for that as the benchmark for all domestically produced gas. Reliance had announced it would start producing 40mmscmd of gas by mid-2008 and?double?its?capacity?by 2012.
The state government has also opposed Gail’s decision to unilaterally raise the price of natural gas being supplied to the power projects in the state. Gail had entered into agreements with four existing power projects with a total capacity of 1,271MW, and four upcoming projects with 1,499MW capacity, for supply of gas in Andhra Pradesh. Gail recently informed each of the independent power producers as well as the Andhra Pradesh Gas Power Corp. Ltd of the increase in gas price from its Ravva Satellite fields, also in the Krishna Godavari basin, by more than one-third to $4.5 per mmBtu.
“This (hike) would result in an additional burden of Rs58 crore per annum on consumers at the current level of power producing capacities,” says Chatterjee. “The burden would further go up to a high of Rs568 crore per annum, once additional power projects with a capacity of 1500MW go on stream.”
It is not only the state government’s power projects that are seeing trouble from the price dispute.
Private sector power players, such as Gautami Power and Jegurupadu-II of GVK Group, Vemagiri of GMR group and Konaseema of VBC group, with cumulative capacity of 1,499MW, cannot be commissioned due to the gas shortage.
Industry analysts, who didn’t want their names used because of their direct involvement with the Krishna Godavari project and the state government, say they expect gas prices to be eventually set by market forces because of the gap between demand and supply. Gas shortage is a vexing problem across the country’s industrial spectrum. The Union ministry of petroleum and natural gas estimates that India will need around 180mmscmd of gas in 2007-08. The ministry also expects supply to be around 81mmscmd, and the shortage will persist till 2012. Currently, gas prices in the spot markets are about $8-10 per mmBtu, though prices are significantly lower on long-term contracts.
“There is nothing like a market situation in gas as there are only two-three players in the field,” insists Chatterjee. “It is a monopoly situation.”
Mint reported on 17 May that even NTPC Ltd, India’s largest power generation company, believes that the $4.50 per mmBtu price at which analysts expect gas from new fields to be sold was too high. It has already threatened to drop expansion plans for its gas-based projects if this is the cost of gas.