The Hindu Business Line : Domestic transportation of LNG — Well-defined regulation will ensure fair tariffs

IN LNG transportation the external issues relate to import, deployment of the right type of vessels and freight, and the current controversy about whether the import should be on f.o.b or ex-ship (c.i.f) basis. Earlier, this column discussed the controversy and the present world trend. It now looks at the relevant issues in domestic transportation.

The need for domestic transportation of LNG arises once regassification of the imported LNG is completed at Petronet LNG Ltd's (PLL) regassification plant at Dahej (Gujarat).

The regassified LNG (RLNG) is then sold by PLL to GAIL (60 per cent), Indian Oil Corporation (30 per cent) and Bharat Petroleum Corporation Ltd (10 per cent) at Dahej for further supplying to their respective customers.

GAIL's Dahej-Vijaipur pipeline (DVPL) system is used by all the three marketers for transporting RLNG from Dahej to various customers at a transportation tariff mandated by the Ministry of Petroleum and Natural Gas

At present, there are two inter-State gas pipeline systems in the country, namely, Hazira-Vijaipur-Jagdishpur (HVJ) pipeline for transporting domestic natural gas from Gujarat to Delhi and Dahej-Vijaipur (DVPL) for transporting imported RLNG from Gujarat to Delhi.

Both the pipeline systems run parallel up to Vijaipur in Madhya Pradesh and after that it is a common system right up to Delhi. GAIL owns and operates both the inter-State pipeline systems and charges transportation costs as mandated by the Ministry.

As regards determination of transportation tariff, the principle of discounted cash flow mechanism with 12 per cent post-tax return, as outlined by the Planning Commission in 1987 for HVJ, also applies to LNG transportation through DVPL. However, there is a difference between the two systems in recovering the calculated transportation tariffs from the pipeline users.

In the HVJ system, it is a constant tariff for all the users, right from Gujarat to Delhi. In the DVPL system, it is a zonal tariff system, with consumers in Gujarat being entitled to a lower tariff than those outside the State.

The first tranche of 2.5 million tonnes per annum LNG from the Dahej project has been sold mainly to non-fertiliser and non-power industrial users, with the second tranche of the next 2.5 million tonnes per annum expected to reach the market by first quarter of 2005.

As of now, Gujarat State Petronet Corporation Ltd (GSPCL) is one of the biggest buyers of RLNG. GSPCL receives gas from the DVPL system as also from the pipelines laid by its subsidiary company, Gujarat State Petronet Ltd. to transport the RLNG received from GAIL and others for further onward sale within Gujarat.

The government, through a group of ministers, has referred to the Tariff Commission the subject of pricing of various components of RLNG with the objective of making the delivered price of RLNG more attractive to consumers in the fertiliser and power sectors.

Accordingly, the tariff for transporting RLNG through the DVPL too was referred to the Commission, which is looking into various aspects of pipeline tariff estimation, including capital investment, operating cost and the capacity build up within and outside Gujarat. From the perspective of a gas marketing company, it is natural to expect non-discriminatory open access to the pipeline on payment of transportation tariff in order to reach the markets. But from the point of view of the pipeline company what is important is the fixing of transportation tariff at a level that will ensure a fair return on investment and help recover the expenditure incurred to operate the network.

Right now, IOC and BPCL, as they use the DVPL, insist on additional discounts by GAIL for transportation of the gas within Gujarat over and above what has been mandated by the Ministry. It may be noted that DVPL tariffs attract 20 per cent discount within the Gujarat vis-à-vis other States. It was so decided on the assumption that 25 per cent of the total sale of the gas would be in Gujarat and the remaining 75 per cent outside the State.

In reality, the picture is totally different. Nearly 83 per cent is sold in Gujarat, with the balance 17 per cent going outside the State. This has already affected the return that GAIL had projected to yield. Further discount, therefore, is unacceptable to GAIL.

In fact, GAIL is believed to have told the Tariff Commission that it is not opposed to the zonal tariff system, per se, but if the concept is pushed too hard to benefit a particular region, it would hurt the consumers in other regions where the market for the gas was also growing. The principle of uniformity will be given the go-by.

But, then, GAIL has also indicated it would pass on to the customers the benefits of cost savings achieved through impressive execution of the DVPL well ahead of the scheduled time. The company's stringent and professional project management resulted in reduction of financing charges and contingency expenditure, amounting to several hundred crores of rupees.

Once the capitalisation process is complete, GAIL, it is pointed out, will pass on the benefits to the marketers using GAIL's pipeline transportation network and, through them, the ultimate consumers.

Another important issue is the probable emergence of several players in pipeline transportation of gas, including LNG. Worldwide, large, capital-intensive, high-pressure gas pipelines are considered natural monopolies and, therefore, it is well-defined regulation rather than competition that ensures reasonable and fair tariffs.

In India, too, the way the gas sector infrastructure is growing, there is a merit in developing in a planned manner a nationwide inter-State grid through a single agency rather than encouraging multiple pipelines on a piecemeal basis.

This is because the multiple-player and multiple pipeline-model can lead not only to sub-optimal investments but also serious operational problems, ultimately forcing the consumers to pay a final tariff much higher than what they might pay under a single-agency system.

The government has initiated moves to set up an independent regulatory authority for the petroleum and gas sector with the objective of vesting it with the powers to regulate gas pipeline transportation tariffs.

The tariff methodology is India, many in the gas sector strongly feel, should be based on sound international practices such that there is optimisation of transportation tariffs for all inter-State pipeline users.

Fortunately, GAIL, which is seriously working on a national gas grid, is also examining the feasibility of entry-exit tariff methodology, a complex regression of tariffs of individual pipeline sections, which is generally adopted in European markets.

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