Dhamra LNG: Why're IOC, GAIL hiring capacity from Adani

It is a well-researched fact that oil is a curse. All over the world in every country where oil is found in abundance, scholars have shown that it has turned into a curse. India is no exception, despite not being an oil-rich country. So, any transaction involving a government agency and a private company in the petroleum sector will naturally come under suspicion.

Given this reality, it is surprising that two leading public sector companies, Indian Oil Corporation (IOC) and Gas Authority of India Limited (GAIL) have entered into a contract involving a huge commitment, with questionable economics and doubtful strategic importance, with a private company.

IOC and GAIL have signed a long-term ‘take or pay’ contract with an Adani Group company. It is to hire capacity in a 5 million-ton Liquefied Natural Gas (LNG) import terminal involving regasification facilities at Dhamra in Odisha. Recently, this deal was questioned by Trinamool Congress MP Mahua Moitra in Parliament.

The MP’s main objection was that the contract, worth a huge Rs 46,500 crore, was signed without a tender. While she was justified in questioning the contract, she has failed to highlight the real issues. Since owning an import terminal is a monopoly business (in some European countries, such monopolies are regulated), tendering is not possible.

Still, there are several troubling issues concerning this contract. According to Petroleum Minister Dharmendra Pradhan, India wants to increase the share of natural gas in meeting India’s energy needs to 15% by 2030. Currently, it is at 6.3%. According to Pradhan, gas consumption has to go from 60 billion cubic meters (bcm) to 215 bcm in 2030 to reach this target. This can be met mostly by increasing gas imports in the form of LNG, and thus there will be a greater need to increase LNG import capacity from the current 41.5 million tons.

It is this consideration that drove IOC and GAIL to have a non-binding agreement to take 50% interest in Adani’s project at Dhamra in 2016. However, the companies decided not to invest in the Rs 5,600 crore project, which would have entailed considerably less money than the commitment they have taken on by signing a ‘take or pay’ contract. The reason given for this was that they could not agree on the valuation. Then, how could Total, which is new to gas business in India, do so and invest in the project? This raises doubts over the real reason for their dropping out of the project.

Minister Pradhan also agreed that the initial payment of Rs 60.18 per million BTU (mmbtu) to Adani is 5% higher than what they are paying for other terminals. He justified it by saying that these fees are inclusive of port charges, terminal charges, etc. In companion, the international prevailing charges for re-gasification is only $0.45 mmbtu (Rs 32 per mmbtu). This is 50% less than the contract fee of Rs 60.19. Why did IOC and GAIL agree to such a high fee?

Moreover, the current utilization rate of LNG terminals is only around 60%. Based on this, one may argue that there was no need to invest in additional capacity and it is better to hire capacity from a third party and avoid risking capital. We need to take a strategic view.

Most current LNG terminals, with the exception of IOC’s Ennore terminal, are on the west coast. Also, the Kochi terminal was built even before the connecting gas network was built, which resulted in its poor utilization. However, where there are gas connecting networks, say near Dahej (owned by Petronet in which both IOC and GAIL have interest), utilization is around 109%.

IOC needs to supply gas to three of its refineries in Paradip, Haldia and Barauni, while GAIL has to meet the gas needs of its customers in and around Odisha. There are several gas powerplants on the east coast which have low plant load factor because of lack of gas supplies. When market conditions improve, IOC and GAIL can tap this market by supply LNG to them.

If they had developed their own LNG import terminal near Dhamra after ensuring putting in place the network to take the gas supply, it would have been a far better strategic fit than signing a ‘take or pay’ contract with a private company for what looks like a high fee.

GAIL and IOC have technical ability (far more than Adani Group) in LNG terminals. They also have the financial muscle needed. In addition, as discussed above, there is a strategic need to control LNG import terminal capacity when demand for LNG increases. Why did IOC and GAIL suddenly drop the project and decide to hire capacity from Adani, instead?

Though the stated policy of the Narendra Modi government is that government has no business to be in business, it does not apply in a situation in which public sector companies need to compete with private companies. Also, the government has not announced any plans to privatise these companies (IOC, GAIL) any time soon.

Thus, putting direct or indirect pressure on them to sign a contract with a private company amounts to not giving a level playing field to public sector companies and harming their long-term interests. Imagine, if and when IOC and GAIL are privatized, if they were to control strategic assets like LNG terminals in key areas, the potential buyers would be prepared to pay more.

In this context, it may be useful to recall the political decision the Modi government took to force the Oil and Natural Gas Company (ONGC) to buy the loss-making assets in the Krishna Godavari basin of the Gujarat State Petroleum Company (GSPC) to prevent its bankruptcy, after it had blown some Rs 20,000 crore, under Modi as Gujarat chief minister, on a false gas find. For all these reasons, is it possible that IOC and GAIL hiring capacity from the Adani Group, considered to be close to Modi, is more a political decision on the part of the companies than a prudent business decision?

(The writer is former governing council member of Manipal Institute of Technology, and an international oil expert)