To partially offset sharp spikes in prices of imported natural gas, the government is likely to withdraw the 5% customs duties for liquefied natural gas (LNG) that is used as fuel in power generation projects, in the Union Budget for 2008-09.
“The finance ministry has indicated that this exemption will be made in the coming Budget for the power projects,” claimed a senior government official who did not wish to be identified.
A similar demand was made last year by the power ministry for the complete waiver of customs duty on the import of LNG, but was not considered by the finance ministry.
Mint couldn’t independently ascertain if the finance ministry has indeed agreed to do this. It is not unusual in the run-up to the Union Budget for various ministries to conclude some of their proposals have been agreed to.
“We will be very happy when this will be announced in the Budget as the power sector needs it very badly. All our gas-based projects are operating at low efficiency levels as there is no long-term gas available. Even the LNG in the spot market has seen a steep price hike, which has resulted in rise in fuel costs for the power projects,” said a senior power ministry official who also didn’t want to be identified.
India has a power generation capacity of 135,000MW, of which around 10%, or 13,691MW, is gas-based. Of 78,577MW that the country aims to add by 2012, some 5.45%, or 4,290MW, of gas-based capacity has been planned.
While Indian power projects are yet to tie up long-term gas supplies, they have been buying LNG in the spot markets, where prices are around $18 per million British thermal units (mBtu), to meet the demand shortfall.
A case in point is NTPC Ltd, India’s largest power generation company, which has been unable to buy enough LNG to run its power plants and has been forced to use alternative fuel naphtha, which is around 50% more expensive, as reported by Mint on 5 January.
NTPC has seven power plants fuelled by gas or liquid fuel with a total capacity of 3,955MW; it also runs a 740MW gas-based plant under a joint venture.
T. Sankaralingam, chairman and managing director at NTPC, said: “Any waiver that will be given to the sector will be welcome.”
Meanwhile, the power sector expects LNG prices to increase further. The prices are directly linked to crude oil prices, which have gone as high as $100 a barrel and are trading in the low $90s now.
“Waiver of the customs duty on LNG has become a necessary evil for the government as the spot rates have risen to $18-19 per mBtu, rendering the gas-based power plants unviable vis-à-vis the coal-based plants. The variable cost jumps by Rs5 against Re1 for coal. Considering the current deficit in power, though 5% customs duty is a minuscule component, the government’s step will be welcome, especially for NTPC’s fruitless gas-based power plants, and (those) who are planning to import huge quantities of LNG,” said Abhishek Puri, associate analyst at JM Financial Ask Securities Pvt. Ltd.
India imports around three million tonnes per annum, or 12 million standard cu. m per day (mscmd), of gas bought in the spot markets. This is primarily sourced by Shell India Pvt. Ltd and Petronet LNG Ltd. The balance comes from local production and long-term supply contracts with overseas sellers.
The petroleum ministry estimates India will need around 180mscmd of LNG in 2007-08. It expects supply to be around 81mscmd.