Tapping a new energy vein in coal

Tapping a new energy vein in coal

While the Indian steel industry has survived a series of crises over the years, it has also been diminished by them – until now. The industry is growing to take on cheap foreign competition by opening new steel mills to meet the needs of the oil and gas, ship-building and stainless steel industries among others.

While raw material costs remain high, steel companies are taking advantage of the lull in demand by hiking prices and acquiring new coal blocks while straightening out kinks in the line; whilst augmenting their armory to take on depleting energy resources.

These days, Angul town nestled in the rugged plains 129 km north-west of Odisha’s capital Bhubaneswar, the site of a integrated steel manufacturing project started by Jindal Steel and Power Ltd (JSPL), is humming with action on a rather different front. At least 300 workers are busy raising up a coal-to-liquid (CTL) plant within the upcoming steel complex as they work a Rs 55,000-crore vision to produce synthesis gas (or syngas) from non-coking coal – a first for Asia which the company says will be the largest project of its kind in the world on completion.

Naveen Jindal-led JSPL’s competitors Reliance and the Tatas have also announced plans for CTL plants, though JSPL gained a headstart by tieing up a technology partnership with German engineering firm Lurgi Gmbh last week. JSPL’s problem was one of scarcity.

The solution lay in using what was available in plenty. Coking coal has comprised a minority of the estimated 400 billion coal reserves in the country. “Considering the low levels of coking coal reserves, it has become important to produce steel out of non-coking coal.

Concomitantly, producing syngas and byproducts from non-coking or low-grade coal has became a strong ecological imperative to reduce dependence on crude oil imports,” says Ravi Uppal, the 60-year-old MD & CEO of JSPL who came on board in October last year.

The right risk

JSPL Deputy MD & CEO V R Sharma says that extracting syngas, an admixture of carbon monoxide and hydrogen, from gassification of non-coking coal will involve one of the single largest investments in Indian industry. “It is a risk which we feel obliged to take considering the rising energy prices and fuel shortages in the country. The risk on the CTL project with a capacity of 2 million tonnes per annum (mtpa) is as high as 400 per cent for Mr (Naveen) Jindal to take the plunge. But our assessment of the project reveals that the operating expenditure will be much lower than crude oil gassification,” Sharma says.

Angul has estimated coal reserves of 1.5 billion tonnes. The steel plant is being primed to deliver 12.5 mtpa of steel annually in phases, of which the DRI (Direct Reduced Iron) plant will pack a capacity of 4.5 tpa. Even as the steel complex is putting in place its critical innards – coal washery, oxygen plant, process boilers, a 840-MW power plant with five units, a lime and dolomite plant, DRI plant and steel plate mill – the CTL plant has its schedule cut out.

“We are currently running on investments of Rs 30,000 crore for extracting synthesized gas. The next stage will involve liquification of the gas which will call for setting up a distribution company called ‘Jindal Synthetic Fuels’. We will also be in a position to produce synthetic natural gas. We have not decided on a final product, whether gasoline, methanol or high-speed diesel, though these are clear possibilities right now,” Uppal says.

Jindal Synfuels will target 80,000 barrels per day of syngas from the CTL plant. The plant, likely for completion by 2019, is being set up near Ramchandi coal blocks, which were allotted to JSPL a few years ago. “Extracting coal bed methane was not an option for us as the CTL plant will be viable. We have six years to raise the capex for the plant,” Uppal says.

He justifies the high capex with a seemingly confident profitability outlook. “Once the Angul and Oman (Muscat) projects are completed, we will touch a capacity of 14 mtpa on investments of Rs 23,000 crore in the next three years. Our profitability will then touch Rs 5,000 crore annually. Coupled with internal accruals of Rs 10,000 crore, we see no problem while raising the money.”

But why go ahead full steam when coal and iron ore linkages are posing stumbling blocks for the CTL and steel plants? Responds Uppal, “We cannot wait till we get all the raw material we need. We have the license for the Ramchandi blocks and are awaiting the mining execution lease. Clearances take time.”

JSPL has decided to commit its entire investment quantum on a project only after gaining all necessary official approvals,  says Uppal.
 
Tight leash on debt

The steel maker will invest Rs 14,000 crore in the next two years on the 6-mtpa steel plant in Angul alone which is planned to be situated on 4,000 acres. Roughly 3,000 acres have been developed with 1,400-1,500 acres to be acquired additionally.

While the first phase of the plant will be  completed by May this year with production capacity of 1.8 mtpa, the remaining units will be operational by 2015. An additional Rs 13,000 crore will be absorbed in Phase II to scale up production capacity to 6 mtpa by 2016. Rs 17,000 crore has been spent so far on the Odisha operations. While, in neighbouring Jharkhand, JSPL’s 12-mtpa steel plant in Patratu will have 3 mtpa by end-2015 and the Oman project will have 2 mtpa by next month.

The Angul steel facility could hold a debt component of Rs 9,000 crore -- taking the Jindal group's total debt to Rs 12,000 crore. “We will maintain a debt-to-equity ratio of 1.65:1. Debt will be raised mainly by way of ECAs and term loans,” says Sharma.

Currently, about 26,000 people, including 3,000 direct employees, work at the Angul plant, of which at least 1,500 are locals displaced by land acquisition activity.

After suffering reverses in growth plans, particularly a $2-billion iron ore mining, DRI and pelletisation project in Bolivia -- called off last year following violations of contractual obligations by the Bolivian government --, JSPL set to work on building its core steel business. The money was put to better use in developing its power plant at Tamnar in Chattisgarh and the Angul projects. Besides acquiring mines in Mozambique, South Africa, Botswana and Australia, JSPL executives fanned out into Africa, Australia and other regions scouting for coking coal and iron ore linkages.

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