Vol 3, PW 16 (01 Sep 99) Midstream & Downstream

There was a time when Andhra Pradesh was considered one of the most investor-friendly states in India - especially in the power sector.

That impression may now be about to change. The reason for this centres on a major policy shift with regard to the vexed question of escrow cover for Independent Power Producers (IPPs).

In June this year, Andhra Pradesh created a major stir among multinationals with news that it will only consider granting escrow cover 30 days before the start of commercial production. The directive was conveyed by AP Transco, the transmission and distribution arm of the Andhra Pradesh State Electricity Board (APSEB).

One foreign multinational, BHP Petroleum of Australia, has been quick to react by announcing "a major rethink" of its proposed 2.5m tonnes a year LNG project at Kakinada, in a joint venture with Tractebel of Belgium. Others may soon follow.

It is not difficult to see why the new directive is causing such a stir. Financial institutions are reluctant to finance any power project without an advance state guarantee of escrow cover - creating a classic Chicken and Egg situation with regard to financial closure.

For Andhra Pradesh, the new policy - if continued - could prove fatal for its ambition to be a major LNG hub in India. Next to Gujarat, the port of Kakinada has the largest number of LNG projects under consideration (see: table below).

Location Initial (mt/y) Eventual (mt/y) Consortium Kakinada(AP)_ 2.5 CMS Energy/Unocal/GVK Industries Kakinada(AP)** 2.5 Ispat Energy Kakinada(AP) 1.0 2.5 Hardy/Nagarjuna/HOEC Kakinada(AP)* 1.0 2.5 BHP/Tractebel Kakinada(AP) 2.5 Petronas/GAIL *FIPB approval November, 1998 **FIPB approval October, 1997 _"Unocal and CMS previously submitted a proposal for an LNG facility at Kakinada but there is nothing ongoing and no recent activity on that proposal" - May, 1999 (Unocal press office)