Indian Oil's JV with Tata in $1.3 Billion Terminal Project Challenged by LNG Cost

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Researched by Industrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas). A base of common interests in LNG supplies, downstream petrochemical products, and new power generation capacity is putting major projects on the negotiating table between the Indian Oil Corporation (IOC)(Bombay, India) and Tata Group companies (BOMBAY:TTCH,TTPW).

In September, IOC offered Tata an equity holding in its proposed $1.3 billion LNG terminal project to be sited at Krishnapatnam in Andhra Pradesh. With the offer came the prospect of a Tata company building a 1,000 MW gas-fired power plant that would sell power output to Andhra Pradesh. State-owned IOC also wants Tata to set up a 500 MW plant at its existing Panipat refinery, with gas feedstock supplied by IOC. The refinery and a petrochemical complex would need 350 MW of power. IOC would either buy the power from Tata as a client or the two companies could form a joint venture to build and run the plant. A company would be formally incorporated after Tata has decided to participate in the LNG project, probably before the end of November. Prospective customers are being identified.

Tractebel is conducting the technical evaluation of the project at Krishnapatnam port, which is only 90 kilometers away from the industrial region of Chennai and 300 kilometers away from Bangalore, the Silicon Valley of India. The consortium is working to bring in gas at a landed price of less than that of the landed price of Reliance gas. One source said that this would mean beating a landed price of $2.7 per million Btu, which is unbelievably tight by current market standards.

IOC moved the original site for the LNG import terminal from Kakinada as Reliance Industries is using this location as a landfall point to bring in natural gas from the Krishna-Godavari basin.

The original shape of the consortium, Kakinada Indian Oil LNG Consortium, is changing with the recent withdrawal of BP Amoco (29%) (LSE:BP) (London, U.K.) from the grouping with IOC (32%), Malaysia's Petronas (29%) (Kuala Lumpur), and Singapore's International Sea Ports (10%) - (plus the now likely confirmation of Tata). Sources associated with the project say that BP, as a supplier, withdrew from the project, since it felt that consumer expectations of LNG price were unrealistic.

Tata Chemicals has been supplied with LNG from IOC on an ad hoc basis since July. Now this arrangement could become a long-term understanding within the parameters of the possible JV project. The undersupply of LNG has caused the company to use the more costly naphtha in its fertilizer manufacturing operations.

The major consumers of natural gas in India are the power and fertilizer industries. They are unwilling to pay more than $3.5 per million Btu (mmBtu) for fuel while the landed price could be as high as $5 per mmBtu. Regasification cost, taxes, and transportation rates could add another dollar to the price. Petronas had previously quoted $3.63 per mmBtu, without regasification and transportation charges, for three million tons of LNG for National Thermal Power Corporation's Kawas and Gandhar project in Gujarat.

Running parallel with the Andhra Pradesh projects is IOC's plan for an LNG import terminal at Ennore in Tamil Nadu, for which it has floated an international tender to source LNG. The terminal would cater to the fuel supply of its subsidiary Chennai Petroleum Corp and supply regasified LNG to industrial customers, who are willing to switch to natural gas, in Tamil Nadu and Karnataka. IOC has already entered into Heads of Agreement with some Tamil Nadu power companies for the sale of regasified LNG.

Currently, IOC is said to be redrawing its Krishnapatnam project plans, and if its other partners in the Andhra Pradesh project follow BP, then it may only go for the Tamil Nadu project, with the prospect of Tata coming along in JV mode.

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