OREANDA-NEWS. February 09, 2011. State-owned GAIL (India) Ltd is in talks with GVK Power and Infrastructure Ltd and GMR Group to set up a five million tonne per annum (mtpa) liquefied natural gas (LNG) terminal estimated to cost Rs.4,000 crore.

The proposed joint venture will ensure the two private sector firms, both of which have investments in power, have assured infrastructure for a crucial fuel supply—natural gas.

LNG is transported in liquid form by ship and needs to be converted into gas (regasification) before it is used. The success of any such terminal, where LNG is brought in on ships and regasified, depends on the ability of the firm building it to source LNG in an international market that is becoming increasingly competitive.

“The independent talks are on with private companies. The terminal may be either a floating or an on-land facility and a memorandum of understanding to this effect may be signed shortly,” said a senior GAIL executive, who declined to be identified.“GAIL is examining various options. It is too premature to comment on it,” said GAIL chairman and managing director B.C. Tripathi.

The LNG terminal plan has caught the private sector’s attention because firms need to ensure LNG supplies for gas-fired power projects. India has only two functioning LNG regasification terminals, both in Gujarat. One is owned by Petronet LNG Ltd (with a capacity of 10 mtpa) and the other by Shell India (2.5 mtpa). Other terminals in the works include one each in Dabhol (5 mtpa), Kochi (5 mtpa), Mangalore (5 mtpa) and Mundra (5 mtpa).

GAIL also holds a 28.33% stake in Ratnagiri Gas and Power Pvt. Ltd that owns the Dabhol terminal and 12.5% in Petronet LNG. GVK had earlier shown interest in using the Dabhol terminal.“The talks are at a very premature stage. Since we have a 900MW gas-based capacity and plans for a future expansion of 1,600MW, we need LNG as a fuel. Since other companies have showed interest, it is expected to be a joint effort,” said a senior GVK executive, who requested anonymity.

While a GVK spokesperson declined comment, the GVK executive referred to earlier added, “Everyone was making an independent proposal and GAIL suggested a combined approach. While we have been sounded, it has not progressed from there.”

Questions emailed on Monday evening to a GMR spokesperson remained unanswered at press time.The total supply of natural gas in the country is around 167.80 million standard cu. m per day (mscmd), including imported LNG, against a demand of 220 mscmd. Of this, LNG accounts for around 20%, or 44 mscmd. India imports around 1 mtpa of LNG bought in the spot markets. The gas availability is projected to be around 202.97 mscmd in 2011-12.

Gas supplies through long-term contracts are not available because global demand exceeds supply. Gas producers typically get a better price in the spot markets than through long-term contracts.

“GVK and GMR are looking at derisking their power business by getting into backward integration to ensure fuel supply. For GAIL, it is an expansion of their business as usual,” said Kalpana Jain, senior director at consulting and financial advisory firm Deloitte Touche Tohmatsu.

While gas available under the administered price mechanism and new exploration licensing policy (Nelp) is sold at USD 4.2 (Rs.191) per million British thermal unit (mmBtu) inclusive of royalty, that available under pre-Nelp contracts is sold at an average of USD 5.24 per mmBtu. While LNG imported under long-term agreement is sold at USD 6.53 mmBtu, the price of spot cargo varies.