Lower gas prices may help Dabhol tie up fuel

There's light at the end of tunnel for Ratnagiri Gas Power Private Limited (RGPPL). Petronet LNG and GAIL, which have been trying to source gas for the project, earlier called Dabhol Power Project, for several months, may now finally be able to tie up supplies. This is because the price of liquefied natural gas (LNG) has come down, thanks to a sharp drop in global crude oil prices over the last two months.

LNG prices are linked to the global price of crude, roughly between 9 and 12 per cent of what crude costs. For the reduction of every US dollar in the price of crude, gas should cost 13 cents less. A $10-per-barrel drop in crude price should reduce LNG price by $1.3 per million British thermal unit (mmbtu) to $7.66 per mmbtu.

Crude prices have come down from $78.40 per barrel in July to $63.60 per barrel on Tuesday. ?This should improve our prospects of sourcing gas for RGPPL but producers are still holding out," says Petronet CEO Prosad Dasgupta. Petronet has been mandated to source 1.2-1.5 million tonnes of gas for RGPPL from April 2006 to June 2009, for which it is negotiating a mediumterm contract of two-and-half years with Qatar's Rasgas. Thereafter, GAIL will source gas on a long-term contract from Algeria.

Higher gas prices ? which had peaked to $12-13 per mmbtu after hurricane Katrina destroyed 70 per cent of US gas-producing assets ? was a major irritant in Petronet and GAIL's efforts to tie-up supplies for Dabhol.

Until RGPPL is in a position to receive LNG supplies directly, gas will be pumped from Dahej, where Petronet LNG's re-gasification plant is located, on the Dahej-Uran pipeline, and onwards on the Panvel-Dabhol pipeline. Both these pipelines, being constructed by GAIL, should be ready by March 2007, says a GAIL spokesman.

The problem for RGPPL is securing short-term supplies as no new LNG sources are coming up during 20062009. It takes four years to develop new LNG infrastructure, work on which starts after companies sign back-toback long-term contracts. So, even a medium-term contract has to be at prices close to spot cargo prices: Shell and Petronet imported spot cargoes at $8 per mmbtu.

This means a delivered price of about $10 per mmbtu for RGPPL , which will be still cheaper than naphtha, which is available at $12 per mmbtu. With gas futures on the New York Mercantile Exchange falling to $5-6 per mmbtu for the next two months, Petronet would hope to pick up gas at prices lower than $8 per mmbtu.

What this means for Maharashtra is lesser power cuts next summer as the plant will be able to generate 1,400 MW from 6 million cubic feet of gas supply per day. It would also mean cheaper power for the state - a delivered gas price of $9 per mmbtu could help RGPPL produce power at less than Rs 4.50 a unit. As demand increases in October, Maharashtra will start buying power from Dabhol at Rs 6.25/unit, which will be run on naphtha.

Gassing up for power For every $1 cut in the price of crude, LNG comes down by 13 cents Gas futures on the New York Mercantile Exchange has fallen to $5-6 per MMBTU for the next two months Petronet hopes to pick up gas at lower than $8 per mmbtu It has been mandated to source 1.2-1.5 mt gas for Dabhol from April 2006 to June 2009 Thereafter, GAIL will source gas on a long-term contract from Algeria.

Source: Hindustan Times, New Delhi
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