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LNG sops in the pipeline

New Delhi, Nov. 11: Petroleum minister Ram Naik will be meeting finance minister Jaswant Singh soon to work out tax concessions for the liquefied natural gas (LNG) sector.

Petroleum secretary B. K. Chaturvedi told The Telegraph that the issue of reducing customs duty on imported equipment required to set up LNG terminals and income-tax exemption for the project had been discussed recently at a cabinet meeting where it was decided that the petroleum minister and finance minister would find a way to resolve the issue.

Rasgas of Qatar has agreed to reduce the price of LNG for India provided that some “belt-tightening” measures are taken for the total project. As a result Petronet LNG has reduced its projected profit and scaled down the internal rate of return on the project to 12 per cent. The petroleum ministry has also proposed a cut in taxes imposed on LNG as it is an infrastructure project and the product is environment friendly as well. However, the finance ministry has refused to accord it an infrastructure status.

The petroleum ministry’s argument is that since natural gas is used mainly in the power sector, which is categorised as infrastructure, there is every reason to include natural gas projects as part of infrastructure. Natural gas supply the input for power generation.

Naik has inherited a tricky problem from his predecessor, Vazapathi Ramamurthy, who had signed the contract with Rasgas and linked the price of LNG to crude oil. The landed price of LNG was working out to around $5 per million British thermal units (Btu) for which there were no takers.

Natural gas is used mainly as a fuel for power generation and as a feedstock for fertiliser units. Both these are priority sectors of the economy and are being supplied natural gas from the ONGC fields at a concessional price since they, in turn, have to sell power and fertiliser at regulated prices.

However, since there is a shortage of gas in the country it had been decided to import gas to meet the excess demand. Importing LNG is a costly proposition as the gas has to be first compressed so that large volumes can be imported in liquid form in a single cargo. Special cryogenic ships are required to keep the gas in liquid form while being imported. Once it arrives, the liquid gas has to be regasified again.

Import of the gas is due to start in January next year at Dahej and the concessions from the government have still not come through. In the meantime, the picture has got complicated with companies like Shell claiming that they could provide the gas at a cheaper price. Big consumers, such as National Thermal Power Corporation, have not come forward to buy the gas as according to them any price above $3.5 per million Btu is not economically viable given the regulated price at which electricity has to be sold.

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