LNG firms' profits may dip

Tariff panel for capping LNG margins at 1%.

In what may erode the profits of companies like Indian Oil, GAIL and Bharat Petroleum, the tariff commission has recommended a trade margin of one per cent on the sale of regassified liquid natural gas (R-LNG).

Currently, this margin stands at 2.5 per cent based on a jointly adopted principle by the three companies.

The recent final tariff commission report on pricing of cost components for regassification, transportation tariff and marketing margin for R-LNG follows a decision of an inter-ministerial group headed by finance minister P Chidambaram.

This may also have an impact on private gas players and those who purchase gas from the intermediary off-takers.

As per the calculations of the oil marketing companies, the 1 per cent margin roughly equals Rs 1.97 per million British thermal units (mmbtu). This has the companies all worked up.

In fact, Indian Oil Chairman S Behuria shot off a letter to Petroleum Secretary MS Srinivasan on the issue. Bharat Petroleum had also opposed this recommendation, a top company executive told Business Standard.

Behuria's letter makes the point that the suggested margin is not justified. "No rationale has been given for fixing this trade margin," he said.

He demanded a margin of 10 cents per mmbtu, a 2.5 per cent margin. On its part, Bharat Petroleum wants this to be at least 18 cents per mmbtu.

"Tariff Commission cannot dictate this aspect, which is determined by market forces," the BPCL executive added.

The demand for a higher margin is also because the intermediary off-takers of gas, who take the gas supply from importers like Petronet LNG for sale to end consumers, are exposed to high risks.

These contracts are "take or pay" agreements under which the off-taker is obliged to pay for the gas from the supplier regardless of whether it is sold to the end user.

Behuria has also pointed out that internationally this margin typically varies between 2 per cent for large industrial consumers and 5 per cent for small consumers. "Moreover, trading margin is not regulated but left to the market forces to decide," he added.

He also cited the case of the Petronet LNG sale purchase agreement with RasGas, where the latter only agreed to sell gas after all the four promoters "" GAIL, IOC, ONGC, BPCL "" executed commitment letters assuming the obligation of the sales pact between the two parties.

In July 2003, an inter-ministerial group, under the finance minister, decided to consult the tariff commission as an independent expert agency for looking into the regassified cost of LNG, the transportation tariff for Dahej-Vijaipur pipeline and the HVJ pipeline and the marketing margin on the sale of R-LNG.

The group had submitted its interim report in December 2004. The final report was submitted a few months back.