Gujarat must lower sales tax if it wants LNG at home

Vol 7, PW 15 (08 Oct 03) Midstream & Downstream

If the LNG numbers circulating in the market are correct (give or take a few cents we believe they are) then the price power producers in Gujarat can expect to be offered by GAIL, IOC or BPCL is $4.80 at the Burner Tip (see below).

Expect a reduction of this price only if Gujarat keeps it promise to reduce the 20% sales tax it charges on domestic gas and regassified LNG. According to an industry source, Narendra Modi, Chief Minister of Gujarat, has promised RasGas that he would reduce sales tax to 12.5% by 1st April 2004.

When asked why Gujarat imposes the highest sales tax on gas in India, state officials replied candidly: Because we can get away with it. Demand outstrips supply and the market can absorb it.

When we find the market can no longer absorb this high rate, well reduce it. Such a scenario is fast approaching: in January next year less than four months away the first LNG tanker will berth at Dahej and unload 138,000 cubic metres of LNG.

When the Dahej regassification facility is commissioned six weeks later, possibly earlier, regassified LNG will start flowing through the Hazira-Bijaipur-Jagdishpur pipeline to customers outside Gujarat where local sales tax is lower. After commissioning, expect a LNG tanker to berth every 12 days for the first year, and every six days the year after, an average of 80 cargoes a year.

Before long, the market will be flooded with gas and Gujarat authorities will have little choice but to reduce sales tax to stop gas flowing out of the state to cheaper destinations elsewhere. FOB gas price (Equivalent to12.67 on the JCC slope) $2.53 per mmbtu Shipping Charges $0.26 per mmbtu Landed Cost $2.79 per mmbtu Customs Duty (5% of FOB + Shipping) $0.13 per mmbtu Regassification $0.49 per mmbtu C2 (Ethane) C3 (propane) extraction (ONGC) -$0.15 per mmbtu Marketing Margin (GAIL, IOC, BPCL) $0.10 per mmbtu Transmission HBJ (GAIL) $0.32 per mmbtu Before Sales Tax $3.68 per mmbtu Sales Tax (20% in Gujarat) $0.73 per mmbtu Gross Heating Value $4.41 per mmbtu [Net Heating Value (+9% = Burner Tip) $4.80 per mmbtu]

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