NEW DELHI: The coal ministry has proposed a sovereign fund to facilitate the acquisition of coal properties abroad. The proposal comes following the demands from steel, fertiliser and power companies that have been trying hard to buy mineral assets in countries like Indonesia and Australia.
“Though Coal India has surplus resources for investing outside, it is important to have financial support from the government for acquiring very large assets abroad,” coal minister Sriprakash Jaiswal told reporters on the sidelines of a CII conference.
Jaiswal said the size of the fund and other modalities would be worked out once the proposal is approved. “There are issues that need to be resolved urgently in regard to acquisitions abroad. The decision-making process needs to be fast-tracked and a policy support framework needs to be established to overcome risk aversion,” he said.
The overseas acquisition of coal blocks is significant as the country struggles with acute shortage of coal and is unable to meet the demands from sectors like steel, power and cement.
The coal production in the country is estimated to increase to 554 million tonne (mt) in 2012, against 533.12 mt last year. However, the demand for coal is 690 mt per year. The government had earlier estimated that the domestic coal production would touch around 680 mt by the end of current financial year.
However, the estimates were scaled down to 630 mt in the mid-term appraisal. The country’s biggest coal miner — Coal India— too has slowed down in the production. The company produced 435.84 mt coal during 2011-12 as against the original target of 486 mt.
The government has also shortlisted 54 coal blocks, which will be auctioned to companies for industrial use. Jaiswal said that the competitive bidding of these blocks will begin in a month or two. About the coal tegulator, the minister said, “The Bill in this regard is likely to come before the Cabinet next week.”
COAL MINISTRY SLAPS SHOWCAUSE NOTICES TO 29 COMPANIES FOR DELAY IN CAPTIVE COAL BLOCKS
KOLKATA: The coal ministry has slapped showcause notices to a fresh set of 29 companies that were allotted coal block for captive mining. The notices were served because these companies failed to stick to the milestones for development of these blocks.
According to the rules of allotment of coal blocks, a company has to start production from blocks within three years if coal is to be extracted through open cast mining. However, if the block allotted is on forest land the open cast mine has to be developed within 42 months. In case of underground mines, the time limit is four years or 54 months if the block falls within forest area.
The companies that were served notices have failed to meet one or a couple of milestones and they are slated to miss the deadline for developing these mines.
According to the coal ministry Maharashtra Seamless, Dhariwal Infra,KesoramIndshowcaused for delay in development of Gondkhari coal block. IST Steel & Power, Gujarat Ambuja Cements and Lafarge have been showcaused for the Dahegaon Makardhokra IV coal block. Assam Mineral Development, Meghalaya Mineral, Tamil Nadu Electricity Board, Orissa Mining Corporation was showcaused for its Mandakini-B block.
Domoco Pvt Ltd was slapped the showcause for delay in development of Lalgarh North coal block. Tenughat Vidyut Nigam received the showcause for delay in development of Rajbar E & D block. Andhra Pradesh Power Gen Corp for delay in development of Tadicheria-I coal block.
Metaliks, Adhunik Corporation and Visa Steel, Bhusan Steel, Orissa Sponge Iron, Adhunik Metaliks, SMS Power and Deepak Steel & Power were also show caused for delay in development of Patrapara block.
Coal ministry show caused CESC and Jas Infracture Capital for delay in development of the Mahuagarhi coal block. Himachal EMTA Power and JSW was also asked to show cause for delay in development of Gourangdih ABC block.
The ministry also pulled up Electrosteel, Jharkhand Ispat, Pawan Jay Steel and Adhunik Alloys & Power slapped showcause for delay in dev ofNorth Dhaducoal block as well as Jindal Steel and Power slapped showcause for delay in development of Jitpur coal block.
The ministry has asked all these companies to respond to the notice within 20 day as to why the delay in development of the coal block should not be held as violation of the terms and development of the coal block should not be held as violation of the terms and condition of the allotment of blocks. Failing this, it will be presumed that the companies are has no explanation to offer and the blocks will be de-allocated.
COAL SUPPLY PACTS LACK SUBSTANCE
It is hard to recall another commercial contract that has attracted as much impassioned debate as CoalIndia’s (CIL) fuel supply agreements (FSA). The unusual step of presidential directive, vocal stance of minority shareholders and terms of the agreement itself have all contributed to the high-voltage drama.
The underlying business of production and supply of coal to power plants on a regulated basis is as old as the mines. So what has changed? Shortages have become more acute with many power plants running low coal stocks and risking shutdown and imported coal, an increasingly inevitable substitute, is costlier.
Investment in new power generation is increasingly coming from the private sector that is more commercially alert, and power plants are increasingly refinanced by overseas capital. The FSA debates, hence, reflect the challenges of moving the primary fuel chain into commercial arrangements and real decontrol.
Changes are not easy to usher in at short notice and the current tussles reflect practical and institutional challenges of transforming a monopoly state-owned entity. A reasonable transition period is necessary for internal changes to take root, as CIL will need to reorganise its operations and administration, strengthen its mine planning and mine development activities, revise its rate-contracts with service providers and staff incentive systems to orient to the new demands.
The modified model FSA put up by CIL is a useful starting point, and doubtless, the current provisions would benefit significantly by an honest debate between the supplier and consumers. Let’s look at some of the prominent issues involved, and the implications that go beyond the FSAs.
The quality and quantity supplied remain a challenge. The FSA specifies but does not pin down to a specific grade or delivery system, and, in fact, is left open for modification at any point. It means that power plants risk bearing cost of uncompensated grade slippages and thermal inefficiency, and the only alternative is contract termination without liability.
The supply of ungraded coal (gross calorific value less than 2,200 kcal per kg) is another potential risk – the coal itself is nominally priced, but the purchaser ends up paying more royalty at the specified grade and freight charges.
The compensation for shortfall in quantity is currently set at 0.01% of the base price below 80% level, which translates into (say, for E-grade equivalent) less than 1 per tonne of coal or barely 0.05 per kWh of loss of generation, a minuscule amount in contrast to a potential large stranded capital cost for shortfall below normative levels.
The stranded cost can hit a newly-commissioned plant too if its designated supply has not achieved precedent conditions. The proposed transition period of three years could be used for internal reforms that give CIL confidence to bear more meaningfully-structured penalties after that.
The logistics of coal transport pose several issues to be addressed, and separate transport service agreements will be necessary. The current FSA leaves the purchaser liable for payment for rakes that are delayed or missing and coal not received at the power plant, although it is not clear if the clause is limited to purchaser’s default as it appears.
The transport cost borne is for the actual route and not normative, which means distant power projects suffer a significant uncertainty as freight can be 30-40% of the total cost. The overloading penalty too is borne by the purchaser, although the loading is at the mines and the collieries are best placed to manage it at their loading points.
Logistics and transport services agreements, such as with the railways, are clearly the next issue to address.
Import of coal is provided as an option to cover shortages on a cost- and risk-neutral basis, i.e., a back-to-back agreement. It is not clear how imports will be sourced and, so, the cost implications are unclear, although the procurer can decline the option without any penalties. The import option may not be any better than direct procurement by utilities, where they have better visibility of the terms, quality and pricing.
The pity is that the import provision could have been structured to drive strong economies of scale in procurement. Private power projects that have acquired captive coal assets overseas face a tsunami of resource nationalism, with exporting countries levying super-profit tax, export tax, carbon cess, imposing domestic supply obligations, transfer pricing and equity/profit share requirements, besides investments to be made in infrastructure development.
The FSA and the directives to sign them are not likely to achieve much unless the real commercial destination is visible. This is currently missing, and even after that, other actions are necessary to truly reform coal supply – namely, enhance competition in coal production by opening it to new suppliers, and to amend the 1973 Act to permit a third route other than government dispensation or captive dispensation, in effect, opening up coal to independent mining and domestic trading, even if in a phased manner.
(The author is leader for energy, utilities and mining at PwCIndia)
CIL TO INVITE BIDS FOR EXPLORING MOZAMBIQUE MINES SOON
NEW DELHI: State-owned Coal India (CIL) will soon invite fresh bids for exploration of its two coal mines inMozambiquehaving reserves of over one billion tonnes, according to sources.
“Very soon, CIL will float tenders for exploration of its two coal blocks inMozambique,” sources said.
The development comes at a time when the country is facing coal shortage, estimated at 142 million tonnes in the last fiscal.
CIL, the world’s largest coal producer, had invited tenders twice— first in 2010, which was cancelled due to shortcomings and the second in June, 2011, for exploratory drilling of its blocks.
The company that was shortlisted during the second tender in June had put some additional conditions as a result of which the tender became invalid, a CIL official had said earlier.
The production from the twin mines is scheduled from 2015 but analysts said it may get delayed as CIL is yet to to zero in on a company for exploration.
The two coal blocks— A1 and A2— at Motaize, in Tete Province of Mozambique, are spread over an area of 200 square km and their exploration may take over two years, as per CIL.
The company had planned production from blocks from 2015.
Coal India Africana Limitada (CIAL), a wholly-owned subsidiary of CIL, had won a five year licence for exploration and development of the blocks inMozambiquein August, 2009.
CIL, which accounts for over 80% of India’ production, is scouting for coal properties abroad to bridge the widening demand-supply gap estimated to touch 200 million tonnes in 2016-17.
WE ARE COMMITTED TO THE INDIAN MARKET: DART ENERGY
KOLKATA: Dart Energy is a prominent player in global coal bed methane (CBM) sector. CBM is a low pressure methane gas, extracted by fracturing coal seams.
In an interview to Business Line, Mr Sudhansu Adhikary, Country Manager India, explains the company’sIndiaplans.
Dart Energy is focused on coal bed methane (CBM) extraction globally. How do you rate the CBM prospect inIndia?
Dart Energy has more than 50 CBM and shale gas assets inIndia,Australia,China,Indonesia, theUnited Kingdom,Poland,GermanyandBelgium.
InIndia, we commenced activity in 2006, as Arrow Energy International. We obtained three blocks in the CBM III bidding round. We secured two additional blocks in the CBM IV bidding round in 2010. From an overall perspective, the CBM prospect inIndiais sufficiently attractive that we have made a long-term commitment to being in the Indian market. At this stage, we are the only foreign operator active in the Indian CBM sector.
You have relinquished the three blocks awarded in CBM III round. What’s the reason behind this dry run?
At one block we were confronted extreme hostility from the local tribal community. At the other two, technical results showed insufficient gas for a commercial CBM project.
Incidentally, in one block our pilot wells did show, for the first time inIndia, a potential oil flow associated with the CBM well. However, we could not continue exploration for oil as it is not permitted according to the CBM Contract.
You entered into a technical association tie-up with ONGC in CBM. Is that still the case?
In January 2009, Dart Energy and ONGC signed an MoU for co-operation on CBM. Since then, we have worked with ONGC’s technical teams on geological interpretation and selection of best technology in different coal basins. We believe, we have demonstrated ourselves to be competent, committed and reliable partners.
Are you one of the suitors for a farm-in to ONGC’s CBM blocks?
Yes, we responded to a request for an expression of interest. CBM is our specific area of expertise and we believe that we can complement ONGC in development of its CBM blocks in a fast and cost-effective manner. Our objective is to work with ONGC, to bring our strong technical expertise to the table.
Is there any Chinese ownership in Dart Energy?
In a complex corporate transaction inAustraliaabout two years ago, Arrow Energy was split into two parts. One part, which owned only assets inAustralia, was acquired by a consortium of Shell and Petrochina, which is presumably where the mistaken concept of a “Chinalink” comes from.
The other part, which includes all our Indian assets, was renamed as Dart Energy, and listed on the ASX. Dart is also a part of the ASX200 Index. A review of Australian regulatory data will confirm that Dart does not have any Chinese shareholding.