Tamil Nadu offers $3.75/mmbtu for PY-1 gas

Vol 10, PW 3 (01 Jun 06) Midstream & Downstream

Hindustan Oil Exploration and electricity utility Pillai Perumal Nallur (PPN) Power Generating Company are yet to agree a gas price from PY-1.

PPN operates a 330-MW combined cycle power station south of Chennai and wants to use PY-1 gas to replace costlier naphtha, which is currently part of the fuel mix. Gas sales agreement negotiations are deadlocked over disagreement on price.

HOEC is willing to sell 1.27m cm/d from PY-1 to PPN but wants $3.98 per mmbtu. With commercial sales beginning in April 2008, HOEC is offering a fixed price till 2014, with an option to re-negotiate later.

This includes transportation costs and looks attractive compared with the $4.75 per mmbtu that GAIL agreed to pay for PMT gas from 1st April 2006 till end-March 2008. But PPN thinks $3.98 is still too expensive and wants an even lower price.

PPN is under pressure from the Tamil Nadu Electricity Board, to which it will sell all electricity produced from PY-1 gas. Any gas price agreed with HOEC will be passed through to TNEB and as such TNEB approval of any agreed gas price with HOEC is critical.

As expected, TNEB refuses to pay $3.98 per mmbtu and is making a counter offer of $3.75 per mmbtu, which it wants fixed for the entire 12-year gas sales agreement. TNEB wants the price kept down as much as possible, we are told.

TNEB is also pressing for a gas reserves safety clause in the SPA. According to this clause, HOEC is prohibited from selling gas to third parties without the consent of TNEB, we hear.

TNEB wants to ensure that supplies to PPN are not jeopardised by any sales that HOEC makes in future. HOEC can now begin fresh talks with TNEB and PPN for agreement on the gas price following the election of a new government in Tamil Nadu.

But its uncertain if TNEB and PPN will agree to the price HOEC wants because Tamil Nadu unlike northern and western India - is power surplus. Any comparison with the price GAIL is willing to pay for PMT gas is not justified.