GSPC hits back at CAG over 'take-or-pay' R-LNG

Vol 15, PW 25 (28 Jun 12) People & Policy

GSPC has hit back at criticism from the Comptroller and Auditor General (CAG) over its practice of signing GSPAs with R-LNG buyers without ‘take or pay’ clauses.

A typical ‘take or pay’ contract obliges a gas customer to ‘take’ at least 80% of its Daily Contracted Quantity or ‘pay’ a penalty. National accounting watchdog CAG is accusing GSPC of squandering Rs502.19cr ($90m) over two years to March 2012 by failing to levy penalties on four power stations that failed to draw all the R-LNG they had contracted: Torrent Power for its 1147.5-MW Sugen power station and 100-MW Vatva power station in Ahmedabad; Essar’s 500-MW Bhander power station at Hazira; and gas-fired stations operated by state-owned Gujarat Industries Power Corporation and Gujarat State Electricity Corporation.

This month GSPC drafted a stinging reply to CAG, arguing that by removing ‘take or pay’ clauses it has - on the contrary - increased its profit margins by a staggering 300%. ‘Take or pay’ contracts frighten off customers, argues GSPC, as they don’t want to be tied into long term deals with no escape exit.

By removing this risk, says GSPC, it can capitalise on market fluctuation and offer short-term, more profitable deals. In back to back ‘take or pay’ contracts the profit margin is limited to Rs9.26/mmbtu ($0.16), says GSPC, but in contracts without ‘take or pay’ the profit margin can exceed Rs30/mmbtu ($0.53).

GSPC describes a growing trend away from ‘take or pay’ and cites NTPC, which issues a tender every month to buy R-LNG from GAIL, IndianOil, Bharat Petroleum or Shell/Total for its total gas-fired capacity of 3955-MW across seven stations. “NTPC insists on removing the ‘take or pay’ clause,” says GSPC.