Reasons to oppose Dahej R-LNG 20-year contracts

Vol 12, PW 16 (15 Jan 09) Midstream & Downstream

Several compelling reasons explain why 20-year contracts for Dahej R-LNG will spell serious trouble not only for the industry, but also for the country, argue fertiliser companies.

Ideally, says an industry source, the new Dahej R-LNG contracts should have been for five years only so they match the government’s gas utilisation and pricing policy and the urea pricing policy, each of which are also valid for five years. “We do not know what the future gas utilisation and pricing policy and urea policy will be after the current policies expire,â€‌ he says.

“But the six fertiliser companies are now locked into 20-year R-LNG purchase contracts.â€‌ If a fertiliser factory produces beyond its rated capacity that difference is loaded against the costliest fuel used.

But a clear danger to the financially viability of fertiliser companies and the government’s subsidy programme could arise if domestic natural gas becomes available at a lower price than R-LNG when global crude oil prices rise to the highs of last year and push up the Dahej LNG price. “In such a situation the fertiliser ministry will logically ask us to buy the cheaper domestic gas and not compensate us for costlier R-LNG,â€‌ he adds.

In any case, adds this source, buying cheaper domestic gas makes economic sense because the government’s fertiliser subsidy bill will go down. Historically, the fertiliser sector uses 30% of the total gas available in the domestic market.

R-LNG also makes up about 30% of the total gas used by the six fertiliser factories on the route of the HBJ. These factories use between 8m to 10m cm/d of R-LNG, which is about 40% of the current R-LNG (18m cm/d) from the Dahej terminal.

A more immediate fall-out of the 20-year Dahej R-LNG contracts, we are told, is that cheaper domestic gas from Reliance (priced at $5.22/mmbtu, inclusive of $1 transportation charges), GSPC, ONGC and other NELP producers will go to sectors such as power, steel and city gas distribution.