High stakes for Essar over $58m hike in R-LNG bill

Vol 11, PW 6 (26 Jul 07) Midstream & Downstream

Few doubt why Essar Steel has taken the trouble to hire a battery of lawyers to fight the government in this case.

Saving money, as you would expect, is the principal driver. Huge amounts are at stake, running into millions of dollars.

To be precise: $58m, or Rs235cr over 12 months, assuming the current exchange rate of Rs40/$1. That’s how much extra Essar will have to pay for R-LNG from Dahej if it loses this case.

“Essar is doing this to save money over the next year,â€‌ says a source. Look at the numbers to see why.

Essar Steel’s complex at Hazira receives around 7m cm/d from several suppliers. This, according to market sources, is likely to rise to 8m cm/d next year.

For now, this 7m cm/d is split between R-LNG from Dahej and private sector suppliers of both spot R-LNG and locally produced domestic gas. A total of 2.8m cm/d of this 7m cm/d consumption is R-LNG from Dahej sold at the old, cheap rate by Indian Oil (1.5m cm/d), Bharat Petroleum (600,000 cm/d) and GAIL (700,000 cm/d); the rest comes from Gujarat Gas, Niko Resources (Hazira gasfield) and spot LNG supplied by Shell from its Hazira LNG terminal.

Essar Steel also receives erratic quantities of subsidised gas from ONGC through GAIL. These contracts with private sector companies are not the problem.

The problem for Essar Steel will be when IOC, BPCL and GAIL start charging the new â€کpooled’ price, if allowed to by the courts. When that happens Essar’s bill for 2.8m cm/d will jump by a staggering $170,000 per day.

In India top lawyers can cost anywhere from $500 an hour in fees, a small price to pay when you stand to lose $58m over a year. See below: Items Current Revised 1 Ex-terminal price Dahej $3.54 $4.92 2 Add transportation $0.56 $0.56 3 Service tax (12.36% of 2) $0.07 $0.07 4 Sub total (1+2+3) $4.17 $5.55 5 Add 12.5% VAT on 4 $0.52 $0.69 6 Burner tip price (4+5) $4.69 $6.24 7 Daily Contract Quantity 2.8m cm/d 2.8 m cm/d 8 mmbtu/day 109,778 109,778 9 Daily $ spend (6x8) $514,898 $685,328 10 Difference per day in ($) Dollars 170,430 11 Difference per day in (INR) Rupees 6,817,200 12 Annual Implication (INR) 2,351,934,019 (Source: PETROWATCH)