Shell still going ahead with Andhra LNG project in India despite the Reliance withdrawal

Reliance Power has pulled out from the proposed LNG terminal with Shell on the east coast, but the global major has a bullish long-term view on India and has decided to complete the project on its own in the market that has also lured BP. The Indian market is crying out for gas supply and infrastructure with dozens of power projects waiting in the wings.
Roger Bounds, global head of Shell’s LNG business, said the project was originally envisaged as a 50:50 partnership between Shell and Reliance Power, but this year the two sides agreed that “the best way forward to ensure a speedy implementation of the project was for Shell to take full control. The project is currently a 100% Shell project.”

Shell finds the Indian market attractive and is not deterred by the economic downturn. “Shell normally takes a long-term view of the markets it is looking to invest in and the fundamentals of the Indian energy demand and supply situation remain unchanged,” he said.

Three gas-based power projects, developed by Reliance Power, Lanco and GMR in Andhra Pradesh that are ready for regular power generation, are sitting idle due to lack of gas allocation from RIL-owned D6 Block in Krishna-Godavari basin in the East coast.

Reliance Power, declined comment, but Bounds said the company was still positive about the LNG project. “It is our understanding that Reliance Power remains interested in the success of the project,” Bounds said.

An industry official said the rise in LNG prices in recent years has made the imported fuel unattractive for Reliance, but the company would be interested in LNG if prices fall in the future.

Shell’s 100% subsidiary Andhra LNG has opened an office in Hyderabad to support its local activities. Shell already operates a terminal to import liquefied natural gas (LNG) at Hazira on the west coast with a capacity of 5 MT a year. The new terminal would have the same capacity, which can be doubled.

Some industry officials say that the west coast is a better location for an LNG terminal because it has customers who can afford the relatively costly gas, unlike the east coast, where many potential buyers are power and fertiliser companies, that are leading the campaign against higher domestic gas prices.

Also, the presence of Reliance Power would have given the terminal a large committed customer. Shell is upbeat about the market on the east coast. Bounds said thousands of megawatts of power capacity was idling in Andhra Pradesh because of gas scarcity and a comparable amount was under construction, forcing companies to count of costly liquid fuel to generate electricity.

LNG, which in terms of energy content is cheaper than oil, replaces liquid fuel. Bounds said Gujarat has already shown the way. “Gas (of which LNG is a significant component) makes up 26% of the energy mix in Gujarat, where LNG import capacity is available, compared to 10% for India as a whole – a testimony to the affordability of LNG,” he said.

“Nearly 80% of Andhra Pradesh’s gas demand today remains unmet. This shortage of gas and the rapid growth of LNG imports, which is nearly 33% of overall gas supply, indicates that the gas demand cannot be met by domestic sources alone. Shell therefore, based on its experience in Gujarat, believes that setting up an LNG terminal in Andhra Pradesh will help in meeting this large demand of gas in the state,” he said.

“Shell is in regular engagements with a number of interested parties in Andhra Pradesh,” he said. Shell has promised the state government it would to give top priority to customers in Andhra Pradesh for natural gas supplies.

Globally, Shell has 22 million tonne per annum (mtpa) of LNG capacity on-stream today and its sales volumes grew by 7% in 2012. It also manages one of the world’s largest fleets of LNG carriers and oil tankers. For its second terminal in India, Shell has already completed front end engineering design phase. Shell is waiting for public hearing to process necessary permits and clearances.