Performance Evaluation Report

Project Number: 37905 Equity Investment Number: 7192 November 2006

India: Dahej Liquefied Natural Gas Terminal Project

Operations Evaluation Department

CURRENCY EQUIVALENTS Currency Unit Indian rupee/s (Re/Rs) At Appraisal (15 December 2003) $0.02 Rs47.00 At Operations Evaluation (15 May 2006) $0.02 Rs45.00

Re1.00 $1.00

= =

ABBREVIATIONS ADB APM BPCL CAPEX CIF CNG CO2 CPCL CSP DMP EIA EIRR EPC ERP FIRR FOB GAIL GDF GDFI GE GIDC GMB GPCB GSPA GTG HBJ IGL IHI IOC IPO ISO JCC JV KG LNG MGL MOEF MOPNG MSEB Asian Development Bank administered pricing mechanism Bharat Petroleum Corporation Limited capital expenditure cost, insurance, freight compressed natural gas carbon dioxide Chennai Petroleum Corporation Limited country strategy and program disaster management plan environmental impact assessment economic internal rate of return engineering, procurement, and construction emergency response plan financial internal rate of return free on board GAIL (India) Limited Gaz de France GDF International General Electric Gujarat Industrial Development Corporation Gujarat Maritime Board Gujarat Pollution Control Board gas sales and purchase agreement gas turbine generators HaziraBijaypurJadgishpur Indraprastha Gas Limited Ishikawajima-Harima Heavy Industries Company Limited Indian Oil Corporation Limited initial public offering International Standards Organization Japan crude oil cocktail joint venture Krishna Godavari liquefied natural gas Mahanagar Gas Limited Ministry of Environment and Forests Ministry of Petroleum and Natural Gas Maharashtra State Electricity Board

NELP NOx O&M OCR OEM OIL OISD ONGC PCG PLL PPER PPP PSD PSOD Rasgas RIL RRP SCV SO2 SPA SPM STV TA USEPA WACC

New Exploration Policy nitrogen oxides operation and maintenance ordinary capital resources Operations Evaluation Mission Oil India Limited Oil Industry Safety Directorate Oil and Natural Gas Corporation Limited partial credit guarantee Petronet LNG Limited project performance evaluation report public-private partnership private sector development Private Sector Operations Department Ras Laffan Liquefied Natural Gas Company Limited Reliance Industries Limited report and recommendation of the President standard combustion vaporizer sulfur dioxide sales and purchase agreement suspended particulate matter shell and tube vaporizer technical assistance US Environmental Protection Agency weighted average cost of capital

WEIGHTS AND MEASURES BBL BCM km m3 mg/N m3 MMBTU MMSCMD MMT MMTPA MW ppm SCM TCF barrel billion cubic meter kilometer cubic meter milligrams per normal cubic meter million British thermal unit million standard cubic meters per day million metric ton million metric ton per annum megawatt parts per million standard cubic meters trillion cubic feet

NOTES (i) (ii) The fiscal year (FY) of Petronet LNG Limited ends on 31 March. In this report, "$" refers to US dollars.

Keywords Asian Development Bank, Dahej Indian gas sector, liquefied natural gas, Petronet LNG publicprivate partnership

Director General Director Team leader Team members

B. Murray, Operations Evaluation Department (OED) R. Adhikari, Operations Evaluation Division 2, OED B. Finlayson, Senior Evaluation Specialist, OED J. Dimayuga, Evaluation Officer, OED R. Perez, Senior Operations Evaluation Assistant, OED Operations Evaluation Department, PE-693

CONTENTS Page BASIC DATA EXECUTIVE SUMMARY I. THE PROJECT A. B. C. II. Project Background Project Features Progress Highlights ii iii 1 1 2 4 4 4 5 10 10 11 11 12 12 13 14

PROJECT EVALUATION A. B. C. D. E. F. Overview Development Outcome ADBs Investment Returns ADBs Effectiveness ADBs Additionality Overall Rating

III.

ISSUES, LESSONS, AND FOLLOW-UP ACTIONS A. B. C. Project Issues Lessons Follow-Up Actions

APPENDIXES 1. 2. 3. 4. 5. Private Sector Development Indicators and Ratings Developments in the Indian Gas Market Review of Petronet LNGs Operations Reevaluation of the Economic Internal Rate of Return Social, Environmental, Health, and Safety Performance 15 16 21 26 30

The guidelines formally adopted by the Operations Evaluation Department on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. The fieldwork was undertaken by consultants Pradeep K. Dadhich (Gas Specialist) and TS Panwar (Environment Specialist) under the guidance of the mission leader. To the knowledge of the management of the Operations Evaluation Department, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. This report contains information that may be subjected to disclosure restrictions agreed between ADB and the relevant sponsor or recipient of funds from ADB. Recipients should therefore not disclose its content to third parties, except in connection with the performance of their official duties. A summary of this report shall be made publicly available in accordance with ADBs Public Communications Policy (PCP) and such summary shall not include any confidential information and other information that falls within the exceptions set out in Paragraphs 126, 127 and 130 of the PCP.

As agreed by Operations Evaluation Department, Office of the General Counsel, Office of the Secretary, and the Department of External Relations, only the 35-paged redacted summary will be uploaded in the Board Document System.

BASIC DATA Equity Investment 7192: Dahej Liquefied Natural Gas Terminal Project in India
TA Number TA 2752 TA Title Technical Assistance to India for the Liquefied Natural Gas Terminal Project Type PP Amount $600,000 Approval Date 27 Jan 1997

KEY DATES Fact-Finding Appraisal Board Approval First Disbursement Project Completion

Expected Jul 2003 Nov 2003 Jan 2004 Feb 2004 1 Apr 2004

Actual 28 Jul 2003 11 Nov 2003 13 Jan 2004 6 Feb 2004 9 Apr 2004

DMC Executing Agency MISSION DATA Type of Mission Fact-Finding Appraisal Project Administration Review Operations Evaluation

Government of India Petronet LNG Limited Missions 1 1 1 1 Person-Days 8 6 2 24

ADB = Asian Development Bank, DMC = developing member country, EIRR = economic internal rate of return, FIRR = financial internal rate of return, OEM = Operations Evaluation Mission, PP = project preparatory, TA = technical assistance, WACC = weighted average cost of capital.

EXECUTIVE SUMMARY In December 2003, the Asian Development Banks (ADB) Board of Directors approved a report and recommendation of the President (RRP) for: (i) an equity investment in Petronet LNG Limited (PLL) for a 5.2% shareholding; and (ii) a partial credit guarantee (PCG), without a Government guarantee, to support a PLL bond issue of up to Rs7 billion, amounting in exposure terms to Rs3.525 billion. The funds, sourced from ADBs ordinary capital resources (OCR), were to be used to construct and operate a liquefied natural gas (LNG) import and regasification terminal with a 5.0 million metric tons per annum capacity at Dahej in Gujarat state. This project performance evaluation report (PPER) assesses ADBs support to help develop PLLs LNG plant at Dahej (the Project). The Operations Evaluation Mission (OEM) visited India 24 April5 May 2006 to review the Project and obtain the necessary data to prepare the PPER. The OEM interviewed project stakeholders, including representatives of PLLs senior management team, shareholders, lenders, and government officials. The PPER incorporates the findings of the OEM, observations of relevant ADB staff, and a review of project reports and documents. The evaluation criteria used for the Project were based on the best practice guidelines identified by the Evaluation Coordination Group of the Multilateral Development Banks on Private Sector Operations, as well as the criteria presented in ADBs draft Guidelines for the Preparation of Performance Evaluation Reports of Private Sector Operations. Reflecting these arrangements, ADBs participation in the Project was evaluated using four criteria: (i) development outcome, (ii) ADBs investment returns, (iii) ADBs effectiveness, and (iv) ADBs additionality. Overall, the Project is rated satisfactory. The development outcome is rated satisfactory. It was evaluated using five subcriteria: (i) private sector development (PSD), (ii) business success, (iii) economic sustainability, (iv) contribution to living standards, and (v) and environmental impacts. For PSD, the primary justifications for the Project presented in the RRP were to (i) help meet growing energy demand in North and West India; (ii) enhance energy security by diversifying the energy base; (iii) contribute to economic development by providing additional and lower-cost alternate inputs to the power, fertilizer, oil, and transport sectors; (iv) promote the use of clean energy; (v) provide an example of good practice in public-private partnership in infrastructure development; and (vi) further develop the capital market for long-term, fixed-rate financing through the use of the PCG. The RRP objectives were relevant. With the exception of capital market developments, the Project helped achieve these goals. The Project was the first step in liberalizing and commercializing the LNG segment of the Indian gas industry, and encouraging the use of a clean, environmentally friendly fuel. Demand for energy in India continues to grow rapidly, and the increased availability of clean energy at internationally competitive prices is important for the development of the country. The Project demonstrated that the successful importation of LNG at competitive prices is possible, thereby supporting the liberalization of the gas sector and enhancing the level of private sector participation in the energy sector. PLL has demonstrated the high standards of performance that can be achieved by a modern, well-run public-private partnership managed on a commercial basis. PLLs business success has been excellent due to lower-than-expected operating expenses and interest costs. Further, the Project has demonstrated that the use of LNG technology is feasible in India. As such, additional plants are being developed. Economic sustainability was rated excellent due to the substantial benefits derived from meeting unmet demand, and the cost savings realized by firms that can use gas instead of

iv naptha. The environmental benefits associated with the use of gas, offsetting emissions from coal-fired generation, are difficult to quantify. However, they are likely to be substantial. While the Project was assigned an environmental rating of category A at project appraisal, the actual direct social and environmental impacts have been minimal. The main issues at the plant site relate to safety of the mooring facilities during the monsoon period. A shareholder in PLL, GDF International, which has more than 30 years of LNG experience, is assisting in developing and refining the mooring procedures. ADBs investment returns have been excellent, as PLLs share price has risen significantly since investment. Offsetting this result, ADB did not issue the PCG that was originally envisaged in the RRP, as it was not commercially attractive. ADBs effectiveness is a function of factors such as screening, appraisal, structuring, monitoring, and supervising the Project. The result has been satisfactory. PLL management found that ADBs financial appraisal was performed to a high standard, and investment approval was completed promptly. Most assumptions underpinning the Project have been realized largely as envisaged in the RRP. The main weakness of the Project was the PCG, which was not commercially viable. This outcome was primarily due to adverse movements in the market. Monitoring of the Project appears to have been of a high standard, with regular visits by ADB staff to PLL headquarters and the plant site, although most of these visits focused on arranging financing for the phase II expansion. The documents on the subscription agreement and insurance documents are in order. The main issue with the monitoring arrangements related to environmental and social safeguard policies, as regulatory reports were not supplied to ADB quarterly as stipulated in the equity subscription agreement. The OEM confirmed PLLs compliance with regulations through its review of the regulatory reports submitted to the Government. ADB additionality for the Project appears material, and was rated satisfactory. In discussions, the management said ADB played a critical role in facilitating the liberalization of the gas market. Subsequently, ADB helped mitigate investor and lender concerns regarding a new and untested product and technology in India, where locally available skills and experience were limited. ADB was given a position on the board of directors, and contributed to improvements in corporate governance by heading the PLL audit committee. The main variations from the original project concept were as follows: (i) the price of oil and natural gas increased dramatically, (ii) the construction by GAIL of the DahejUran pipeline was delayed, (iii) the breakwater was replaced with the construction of a third LNG tank, (iv) the Government did not divest its majority shareholding in one the main state-owned shareholders of PLL, and (v) ADB was unable to issue the PCG due to adverse market movements. The Project generated lessons in a number of areas. PSD was significant in terms of helping to catalyze industry reforms through technical assistance to improve the enabling environment, and through direct investment that helped reduce financiers concerns about project risks. Although the Project has been operating for only 2 years, the financial assumptions are radically different from the investment appraisal, especially regarding international prices for oil and gas, highlighting the importance of an adequate financial assessment. Despite a category A rating at project approval, environmental impacts and social externalities at the plant site have not been significant. However, some safety issues still are being resolved. Unstable mooring conditions have been more challenging than originally anticipated, reinforcing the need for an adequate assessment of new technology during due diligence. Some of the original assumptions on privatization of PLL have not materialized, and

v the current ownership structure continues to represent a public-private partnership. A small shareholding by ADB was required to help make the project viable. This model can be replicated in future gas projects, which potentially can be financed without ADB support. The most important lesson that emerges from the Project was the ephemeral demand for PCGs and bond finance for infrastructure projects in India. No follow-up social and environmental action is required.

Bruce Murray Director General Operations Evaluation Department

I. A. Project Background

THE PROJECT

1. In December 2003, the Asian Development Banks (ADB) Board of Directors approved a report and recommendation of the President (RRP) for: (i) an equity investment in Petronet LNG Limited (PLL) for a 5.2% shareholding; and (ii) a partial credit guarantee (PCG), without a Government guarantee, to support a PLL bond issue of up to Rs7 billion, amounting in exposure terms to Rs3.525 billion. The funds were to be used to construct and operate a liquefied natural gas (LNG) import and regasification terminal (the Project) with a 5.0 million metric tons per annum (MMTPA) capacity at Dahej in Gujarat state. The Project would serve gas users along the 2,500-kilometer (km) HaziraBijaypurJadgishpur (HBJ) pipeline that covers Gujarat, Western Madhya Pradesh, Rajasthan, Delhi, Haryana, Western Uttar Pradesh, and Uran, Maharashtra. It was to be the first ADB private sector transaction to utilize a long-term PCG, as well as the first PCG that would support local currency debt. 2. At appraisal in 2003, the Project was to be financed based on a debt-equity ratio not exceeding 70:30 and achieve an economic internal rate of return (EIRR) of 23.0%. The Project began operations in April 2004. ADBs Private Sector Operations Department (PSOD) had not prepared a Project Completion Report at the time of appraisal. 3. The Project was strongly oriented towards strengthening the energy sector. At appraisal, Indias predominant source of energy was coal (55%), followed by oil (31%), and natural gas (8%). Energy consumption in India had been growing rapidly through the 1990s, relative to the rest of the world, reflecting strong potential for continuing growth in the sector. Rising oil prices and concerns about environmental impacts stimulated demand for natural gas, which was envisaged at appraisal to increase from 8% to 15% of Indian energy consumption by 2011 2012, provided gas was available. In addition to relieving energy constraints, the Project was expected to lower industrial costs. The industrial sector is a heavy user of natural gas, which can be used as a substitute for naphtha. At appraisal, about 50% of fertilizer units in India used natural gas as feedstock. While growth in this sector was not expected to be high, an increasing number of plants using naphtha and fuel oil were expected to switch to gas. 4. Traditionally, the Government of India (the Government) has dominated production in the gas sector. At appraisal, the majority state-owned companies Oil and Natural Gas Corporation Limited (ONGC) and Oil India Limited (OIL) accounted for 75% of gas production, with the balance controlled by joint ventures (15%) and private companies (10%). State-owned GAIL (India) Limited (GAIL) had a near monopoly on onshore transmission, including the HBJ pipeline. The Ministry of Petroleum and Natural Gas (MOPNG) regulated GAIL in areas such as setting gas quality and access standards, and administering monopoly tariffs. 5. To help relieve supply constraints, the Government started to liberalize the gas sector in 1991 with the opening of oil exploration to small-scale private sector participation. Despite the reforms, domestic production did not keep pace with the increase in demand for natural gas. As India has limited indigenous natural resources, the supply shortage was expected to increase. In 1996 and 1997, ADB provided technical assistance (TA) for two studies that helped develop a master plan for the natural gas industry in India. These studies also assisted with (i) an assessment of the potential for setting up public-private joint ventures to build and operate LNG terminals, (ii) formulation of a project implementation plan, and (iii) development of a structure to enable limited recourse financing. Although the TA studies have not been evaluated formally,

2 the sponsors appeared to regard them highly, and they seemed to contribute to the liberalization and development of the gas sector in India. In 1999, the Government introduced further reforms to allow private domestic exploration, incorporated the TA concept into its Hydrocarbon Vision 2025, and removed many of the restrictions on LNG imports. 6. As part of these developments, four state companiesBharat Petroleum Corporation Limited (BPCL), Indian Oil Corporation Limited (IOC), GAIL, and ONGC (collectively referred to as the sponsors)formed PLL to develop LNG facilities at Dahej, Gujarat and Kochi, Kerela. The sponsors include some of the largest companies in India. BPCL is engaged in refining crude oil, and production and distribution of petroleum products. IOC, the largest company in India in terms of sales, is engaged in refining and distributing petroleum products. GAIL is the dominant gas transmission and marketing company, while ONGC produces the majority of the natural gas in India. In 2002, the sponsors asked ADB for financial assistance to implement the Project in Dahej. B. Project Features

7. The Project was designed to build, operate, and transfer the first LNG import and regasification terminal in India, with a phase I capacity of 5.0 MMTPA. The land at the project site is part of an industrial complex owned by Gujarat Maritime Board (GMB). At appraisal, PLL had signed a letter of intent with GMB to enter into a 99-year concession agreement to lease the 58.6 hectare site at Dahej, Gujarat, as well as a 30-year agreement to develop and use a port facility. The concession was not tendered formally, as the market for leasing land at the project site was competitive and does not have any monopoly characteristics. The project facilities comprised (i) two full-containment LNG storage tanks, each with a gross capacity of 160,000 cubic meters (m3); (ii) recovery system for re-condensation of the boil-off gas; (iii) send out facilities, including shell and tube and submerged combustion vaporizers; (iv) auxiliary facilities, including a 23-megawatt (MW) gas-fired captive power plant; (v) electrical and utilities production control systems; (vi) metering, fire, and gas detection and protection systems; (vii) a jetty; and (viii) initially, a breakwater. A backup power agreement was signed with the Gujarat State Electricity Board, and the plant is connected to the local high-tension network. At appraisal, the Project had an environmental rating of category A, indicating substantial impacts primarily in the area of safety, rather than emissions. Two environmental impact assessments (EIA) reports were prepared for the Projectone for the onshore storage and regasification facility, the other for the marine unloading facilities. The Ministry of Environment and Forests (MOEF) and the Gujarat Pollution Control Board (GPCB) approved the EIAs, which defined the standards that are monitored by their local regional offices. 8. Following competitive bidding, PLL signed a sales and purchase agreement (SPA) with Ras Laffan Liquefied Natural Gas Company Limited (Rasgas), obligating PLL to purchase up to 7.5 MMTPA of LNG for 25 years. The agreement had two stages. In the first stage, PLL would take 5.0 MMTPA on a take-or-pay basis up to 2009. After 2009, PLL could take the remaining 2.5 MMTPA subject to the mutual agreement of both parties. The purchase price initially was set at $2.53 per million British thermal units (MMBTU), and it will be rebased regularly in accordance with a defined formula after 2009. Rasgas, a joint venture between Qatar Petroleum (70%) and Exxon Mobil (30%), has access to the largest non-oil associated gas fields in the world. An international consortium led by Mitsui OSK Lines provided two dedicated special purpose tankers with capacity of 138,000 m3 each to transport LNG to PLL under a 25-year contract under terms that were commensurate with the Rasgas contract. GAIL (60%), IOC (30%), and BPCL (10%) (collectively referred to as the offtakers) are purchasing gas from the

3 LNG terminal. The offtake contract is take or pay, with terms that are back-to-back with PLLs SPA. 9. As envisaged at appraisal, the offtakers initially were to transport the gas from the PLL terminal to consumers through an expanded 528 km HBJ pipeline system, and eventually through a new 485 km pipeline connecting Dahej to Uran. IOC and BPCL have executed gas transport agreements through GAIL, which is responsible for expanding the existing and proposed pipelines. The offtakers intended to use the gas for internal consumption, or to sell it under long-term contracts to industrial users. One third of the output would be consumed by IOC and BPCL at their refineries; one third would be sold to large end-use consumers, such as Hindustan Petroleum Corporation Limited, ONGC, and a fertilizer company; and the balance sold to smaller end-use consumers, such as power and fertilizer companies that are customers of GAIL. 10. PLLs gas sales price to end users is set commercially without any Government control. The price consists of the LNG rate, taxes and duties, and a regasification charge that reflects actual costs of LNG supply. As presented in the RRP, the gas price was estimated to average $3.27 per MMBTU at PLLs delivery point n the first 5 years of operation; and, after the offtakers add transport charges and sales tax, $3.80 per MMBTU at the end-user point. This price was considerably higher than the subsidized domestic gas price of $2.84 per MMBTU being charged at the time of appraisal, though it was commercially attractive due to the substantial demand supply gap in the market. PLLs gas was expected to meet demand that was either not met at all, causing capacity underutilization; or replace alternate fuels, such as naptha, that were more expensive than PLLs gas. 11. The Project was to be constructed under a lump sum, fixed price, date certain turnkey EPC agreement with an international consortium selected through international competitive bidding. PLLs in-house staff was to operate and maintain the LNG terminal with technical input from ONGC and a new strategic shareholder in PLL, Gaz de France International (GDFI). A combination of equity and short-term bridging debt finance, was to fund project construction. As part of the Project, the shareholding structure of PLL would be expanded from the four original state-owned shareholders, which would retain a 50% interest with equal 12.5% shareholdings. The remaining 50% ownership interest in PLL was to be allocated to (i) GDFI holding 10%; (ii) ADB holding 5.2%; and (iii) public and other shareholders holding the remaining 34.8% of the shares. The inclusion of offtakers and the supplier in the shareholding structure was intended to help mitigate risks. As envisaged, the Indian public sector shareholding would not exceed 50%, and would decline as a consequence of the proposed privatization of BPCL. ADB became a shareholder to meet its charter requirements for an anchor investment to support its guarantee operations, and these funds were to be injected in January 2004 after mechanical completion. 12. After the start of commercial operations, the Project was to be financed under a debtequity ratio that would not exceed 70:30. The 70% debt financing was to be sourced from local currency ADB-guaranteed bonds (up to approximately 30.0% of total debt) and Indian commercial bank debt (up to approximately 70.0% of total debt). The bonds were to be issued after construction in April 2004. A charge on all of PLLs assets, project documents, and cash flows were to support the bonds in the first instance. Subsequently, a PCG that covered part of the scheduled principal repayments and part of the scheduled interest payments on the bonds was to provide support. ADB was given a position on the board of directors.

4 C. Progress Highlights

13. PLL and a consortium led by Ishikawajima-Harima Heavy Industries Company Limited signed the EPC agreement in January 2001. Construction was completed on schedule, and the plant was mechanically complete in December 2003. At the same time, GAIL doubled the capacity of the HBJ pipeline by laying a new 82 km pipeline from Dahej to Vemar, Gujarat; and a 528 km pipeline parallel to the existing HBJ pipeline from Vemar to Bijaypur, Madhya Pradesh. The DahejUran pipeline identified in the RRP has not been constructed due to delays in the tender process, and completion is now targeted for 2007. The first shipment of gas arrived from Qatar in January 2004, initiating the commissioning period. Commercial supply commenced on schedule in April 2004. 14. The actual project cost of the PLL plant was less in local currency terms than the initial cost estimate in the RRP. This cost saving resulted from a decision by PLL not to proceed with the construction of the breakwater that had been included in the original design. Originally, a 660-meter breakwater was included in phase I to restrict downtime during the monsoon period. Based on the morphological data collected in the early stages of breakwater construction, PLL concluded that the breakwater was not required. The plant could accommodate any potential delays arising from the lack of a breakwater by increasing storage capacity, and an additional LNG storage tank would provide greater operating flexibility. As a result, PLL decided to reallocate breakwater funds to construct a third tank, which will be part of the phase II expansion that will increase plant capacity to 10 MMTPA by 2009. Operating at 50% capacity in 2004, and then increasing to 100% in 2005, the terminals technical performance has exceeded expectations at appraisal. LNG has been of high quality, supply and transportation risks have not materialized, and the delivery of LNG to the regasification plant has not been delayed or interrupted. Staff from ONGC and GDFI supported PLL staff for the initial period of operations under a series of technical support agreements. A possible extension is being negotiated with GDFI, primarily to address ship mooring safety issues. 15. The projected financial structure has been changed slightly, with a 34.8% stake allocated to the public through an initial public offering (IPO) in March 2004. The price per shares at IPO was Rs15, compared with the price at OEM appraisal of Rs60 per share. The most important material departure from the financial structure presented in the RRP was the failure to issue a PCG that could be used to support a bond issue. Due to adverse movements in the Indian capital markets, bond financing was not seen as cost-effective. As a result, ADBs PCG was not issued, and the Project relied on local currency long-term debt finance from Indian banks. II. A. Overview PROJECT EVALUATION

16. The evaluation criteria used for the Project are based on the best practice guidelines prepared by the Evaluation Coordination Group of the Multilateral Development Banks on Private Sector Operations, and the derived criteria incorporated in ADBs draft Guidelines for the Preparation of Performance Evaluation Reports of Private Sector Operations.1 Reflecting these developments, ADBs participation in the Project was evaluated using four criteria: (i) development outcome, (ii) ADBs investment returns, (iii) ADBs effectiveness, and (iv) ADBs additionality. Overall, the Project was rated satisfactory.
1

ADBs Operations Evaluation Department is preparing the guidelines, which will be finalized in 2006.

5 B. Development Outcome

17. The initial criterion, development outcome, is rated excellent. It was evaluated using four subcriteria: (i) private sector development, (ii) business success, (iii) economic sustainability, and (iv) social and environmental impacts. 1. Private Sector Development

18. Private sector development impact is rated satisfactory (details are in Appendix 24). In the RRP, the primary justifications for the Project were to (i) help meet growing energy demand in North and West India; (ii) enhance energy security by diversifying the energy base; (iii) contribute to economic development by providing additional and lower-cost alternate inputs to the oil, power, fertilizer, and transport sectors; (iv) promote the use of clean energy; (v) provide an example of good practice in public-private partnership (PPP) in infrastructure development; and (vi) further develop the capital market for long-term, fixed-rate financing through the use of the PCG. Overall, the RRP objectives were relevant. With the exception of capital market development, the Project helped achieve the envisaged goals. a. Beyond Company Impacts

19. In 1996, ADB provided TA to develop a master plan for the development of the natural gas sector in India. The main objectives of this study were to (i) rationalize the projected demand for natural gas, taking into account alternate energy sources and economic costs; (ii) establish and analyze gas import alternatives; (iii) develop a plan for expansion of gas infrastructure in India to meet the projected demand; and (iv) identify the economic, technical, legal, and regulatory issues that need to be addressed as a result of the importation of natural gas. The Government accepted ADBs recommendations on gas industry liberalization and commercialization, establishing the foundation for investments in a public-private partnership structure. In 1997, ADB approved a TA to provide financial, legal, technical, and economic advice and assistance to PLL to develop LNG importation and regasification facilities in Western and Southern India. The second TA project focused on formulating a bankable project structure for specific facilities to the established at Dahej in Gujarat state, and at Kochi in Kerala state. The second TA also was successful, and led to the PLL project at Dahej. The Project was the first investment that reflected tangible progress in liberalizing and commercializing the LNG segment of the Indian gas industry, and in encouraging the use of a clean, environmentally friendly fuel. Overall, these activities provide an excellent example of how ADB can create an enabling environment through its public sector operations, and then catalyze private investment through its private sector operations. 20. Development of the gas sector was important for India due to shortages of energy, as well as the positive environmental impacts of using natural gas as an energy source. The power sector accounts for the bulk of LNG demand (69%), followed by fertilizer and petrochemicals (29%), with the balance consumed in sectors such as transport. Domestic fuel consumption is growing following directives from the Supreme Court of India to increase the use of compressed natural gas (CNG) as a fuel for the transport sector. Indraprastha Gas Limited (IGL) in Delhi and Mahanagar Gas Limited (MGL) in Mumbai are developing city gas distribution projects for the supply of CNG and piped natural gas in these cities. IGL is catering to about 94,246 vehicles of different categories through 135 CNG stations. MGL has set up 105 CNG stations that serve about 147,536 vehicles, mainly three-wheelers and cars.

6 21. Coal is the main source of energy in India, though domestic supplies are low quality and generate significant levels of harmful environmental emissions. While most of the coal is in Eastern India, the majority of industrial demand is in Western India. This makes coal a high-cost form of energy compared to alternative sources, such as LNG. The potential to increase the availability of energy from other sources, such as nuclear and hydro power, is limited. Oil-based products, such as naptha, have become expensive. Demand for natural gas in the fertilizer and petrochemical sectors remains high. These circumstances are likely to continue for the foreseeable future due to the continued price differential between natural gas and feedstock substitutes, such as naptha. 22. The two main constraints on natural gas supply are inadequate reserves and a lack of transmission capacity. The Bombay High fields and Gujarat produce the bulk of Indias natural gas. However, these fields are relatively old, output is declining, and production is expected to be exhausted by 2020. To help offset this decline in production capacity, the Government opened the gas sector to private participation by awarding concession rights to public sector joint ventures (JV) with private sector operators. In 1999, the Government developed the New Exploration Policy (NELP), under which additional gas exploration concessions have been awarded to private operators. As a result of these initiatives, a series of major new deep sea gas fields have been discovered recently, especially by Reliance Industries Limited (RIL) in the Krishna Godavari (KG) Basin off the coast of Andhra Pradesh in eastern Indian. These are expected to substitute for the diminishing supplies from the existing fields. 23. The Government is developing additional transmission capacity. The Indian gas transmission infrastructure has consisted of small regional pipelines and the HBJ pipeline operated by GAIL, which carries gas from the offshore Mumbai High basin to fertilizer and power plants in North West India. However, the capacity of the HBJ pipeline is sufficient to meet only about 45% of Indias gas consumption. GAIL has expanded the DahejBijaypur section of the HBJ pipeline; and is building the DahejUran gas pipeline, which is scheduled for completion in 2006. GAIL also is developing a $4.4 billion National Gas Grid, which is expected to cover the entire country. The 8,000 km project will be implemented in phases over the next 67 years. With the Government permitting private sector investment in gas transmission infrastructure, RIL intends to build a 1,400 km pipeline from Kakinada to Ahemdabad via Hyderabad and Uran in Maharashtra. The pipeline would transport the RILs reserves in the KG Basin to the Gujarat power plants belonging to National Thermal Power Corporation. In addition, RIL plans to build a pipeline from Hyderabad on the east cost to Delhi. Several smaller projects are also are being implemented. 24. Despite these developments in the local gas industry, demand continues to outstrip supply. To help bridge this gap, the Government has removed many of the restrictions on importing gas, and some public and private sector companies are pursuing gas importation options. Potentially, gas could be imported by pipeline from Iran, Turkmenistan, Bangladesh, and Myanmar. However, none of these pipeline projects is expected to materialize in the next 45 years due to technical or political constraints, and LNG remains the most important source of imported energy. India has only three LNG import terminals: (i) PLLs Dahej plant with a capacity of 5.0 MMTPA (equivalent to 17.5 million standard cubic meters per day [MMSCMD]); (ii) the Dabol plant (recently renamed Ratnagiri Gas) also with a capacity of 5.0 MMTPA, which is only beginning production after years of inactivity due to the collapse of Enron in 2001; and (iii) the Hazira plant owned by Shell, which has a capacity of 2.5 MMTPA (equivalent to 8.8 MMSCMD) and began operation in April 2005. Reportedly, the Hazira plant is operating at only about 5% of capacity due to its reliance on a merchant business model that is unsuitable for gas user requirements. The current gas deficit has prompted PLL to accelerate the phase II

7 expansion of its Dahej plant, increasing its capacity to 10.0 MMTPA. PLL also has started the development of a 2.5 MMTPA LNG plant at Kochi, which was part of the TA concept investigated in 1997. The plant should be operational by 2009. In addition, a new 2.5 MMTPA plant is expected to be developed at Ennore in Tamil Nadu. This plant, which is being developed independently of PLL, appears to have been catalyzed by the excess demand for gas and by the demonstration effects of the PLL projects. 25. The current market structure uses gas prices that are administratively and market based, although PLLs LNG is competitive. The Government sets the consumer price of natural gas for approximately 54% of the market at $1.80 per MMBTU, compared with PLLs ex-terminal price of $3.51 and a delivered price of $4.25 per MMBTU. Sourced from ONGC and OIL, the subsidized gas is sold mainly to nominated consumers in protected sectors, such as power and fertilizer. Although the Government announced in 1997 a program to eliminate these subsidies, the program has stalled for political reasons. The proportion of the market that is subsidized is expected to continue to decline over time. The Government subsidies are only sustainable as the state-owned resources are sold at prices substantially below market rates. Available supplies of subsidized gas are expected to fall as state-owned reserves are rapidly becoming depleted. Approximately 20% of Indian gas consumption is sourced from JVs and private concessions that are sold at market-linked prices (effectively market rates). The remaining 26%, which is sourced from LNG, is sold at market rates. Gas produced from new fields will be priced at market rates. 26. While gas importation and exploration are now substantially competitive markets, GAIL continues to maintain a near monopoly on onshore transmission. The Petroleum and Natural Gas Regulatory Bill, enacted in April 2006, established an independent gas regulator. The new regulatory body, which will be separate from MOPNG, is expected to be established and staffed later in 2006. The precise regulatory framework that will be introduced is not clear, although the independent regulator will be responsible for downstream operations relating to transmission and distribution. Regulations will be based on competitive principles that will help attract private investment in transmission, and will ensure open access to existing monopoly facilities. Tariffs will be cost-based, which will ensure that private gas supplies are sustainable. Like the power sector, gas supply will be subject to the requirements of the Competition Commission. b. Direct Company Impacts

27. PLL has demonstrated the high standards of performance that can be achieved by a PPP managed on a commercial basis. PLL has helped increase firm access to gas at affordable prices in Northern and Western Indian states, and now accounts for 20% of the countrys natural gas. As natural gas provides 8%9% of domestic energy consumption, the Project has increased the available energy in India by 1%. As the first company to establish and operate a commercial LNG plant in India, PLL has provided strong demonstration effects. Steps are being taken to replicate the original concept applied at Dahej at other LNG sites. As relatively few skills were available in India to operate the plant, PLL has successfully trained local staff through the use of a management contract with GDFI, which has more than 30 years experience managing LNG plants. Further, PLL has completed international standards organization (ISO) programs for quality, environment, health, and safety procedures, confirming that policies and procedures reflect world class norms. 28. Management and reporting systems are of a high standard. Accounts are prepared in accordance with standards for publicly listed companies that reflect international accounting and audit requirements. ADB has its own independent board representative, who has contributed to

8 the development of high corporate governance standards by chairing the audit committee. The private sector participated directly in the ownership of PLL through a highly successful initial public offering (IPO) of 34.8% of the companys shares. Offsetting these positive results, the objective of stimulating bond market development was not achieved due to an adverse shift in the cost of this form of finance, which obviated the need to issue a PCG and PLL bonds. 2. Business Success

29. Business performance is rated excellent.2 The recalculated real financial FIRR before phase II expansion was higher than the estimate at loan approval. The assumptions and analysis underpinning the FIRR calculation are in Appendix 5. The recalculated FIRR exceeds PLLs WACC. Project performance has been strong, and no material problems with supply, plant operation, offtake, or gas pricing risks have arisen. PLL has a competitive advantage relative to other energy companies through its long-term access to low-cost gas under the takeor-pay contract with Rasgas, and its access to the GAIL transmission network. GAIL, IOC, and BPCL procure the gas from PLL under take-or-pay arrangements that are very low risk, although end-user demand ultimately will underpin the security of these arrangements. 30. Natural gas customers of the state-owned oil companies currently pay only $1.80 per MMBTU, while private sector operators sell domestic gas at international prices that range from $3.00 to $3.50 per MMBTU. Nevertheless, private firms remain competitive as the availability of state-owned gas is declining, and not enough gas is available to meet consumer needs. LNG imports from Dahej for the first 5 years have an external price of $3.51 and a delivered price to end users of $4.25 per MMBTU. Although this price is slightly more than the market price of local gas supplies, it is substantially less than naptha, which costs about $16.50 per MMBTU. After 2009, PLLs fixed procurement price for gas will become variable and linked to the Japan crude oil cocktail (JCC) price, with a cap and floor. The move to a floating rate will increase offtake risks, though this risk is substantially moderated by the rolling average cost of gas that was secured contractually when gas prices were much lower than current market rates. Table 1: Key Financial Ratios of Petronet LNG Limited Item 2004A 2005A 2006
3.51 12.19 13.03 2.84 46.6

2007
3.73 12.69 13.48 2.32 42.8

2008
3.84 13.45 14.45 2.11 38.7

2009
2.88 12.85 13.38 2.00 32.9

Net Profit Margin (%) (0.01) 4.57 Return on Average Assets (%) 15.30 Return on Average Equity (%) 18.01 Current Ratio 1.65 3.01 Long-Term Debt: Total Assets (%) 50.00 49.1 ( ) = negative, A = actual. Sources: Audited accounts and PLL and ADB estimates.

31. Reflecting the near certain demand and low cost of gas, PLLs financial performance has been strong. In its first year of operations, PLL recorded a net loss of Rs284 million in 2004 as the plant ran at 50% capacity. In 2005, the plant utilized 100% of its capacity utilization and achieved a profit of Rs1,755 million, more than five times the appraisal estimate of Rs335 million. This improvement in projected performance, which is attributed to lower-than-expected operating expenses and interest costs, is the reason for the material increase in the FIRR. Sensitivity analysis of critical variables, such as the exchange rate and movements in the LNG price, indicate that the FIRR is reasonably robust. Long-term debt as a percentage of total assets does not exceed 50%. PLL has raised additional debt for the development of the Kochi
2

The rating scale is as follows: (i) excellent: FIRR > WACC + 2.5%, (ii) satisfactory: FIRR > WACC, (iii) partly unsatisfactory: FIRR > WACC 2%, and (iv) unsatisfactory: FIRR < WACC 2%.

9 plant, and might raise additional finance through the international sale of a convertible bond on the Singapore exchange. This underscores the financial success of the PLL venture. 3. Economic Sustainability

32. Economic sustainability is measured by the EIRR generated by the Project, which aims to capture the effects of competition, as well as externalities associated with social and environmental impacts. The recalculated EIRR is 32.6%, which is excellent.3 Appendix 6 shows the assumptions underpinning the EIRR calculation. The recalculated EIRR is higher than the appraisal estimate of 23.0%. The end users for PLL gas are predominantly industrial users along the expanded HBJ pipeline, consisting of fertilizer (40%), power (20%), petrochemical and chemical (20%), and others (20%). These benefits are derived from the Project meeting unmet demand (incremental), and generating substantial cost savings for firms that can switch from naptha to gas (non-incremental). Sensitivity analysis indicates that these results are robust under a wide range of scenarios. 4. Social and Environmental Impacts

33. While the Project was assigned an environmental rating of category A at appraisal, the actual negative social and environmental impacts have been minimal. The main issues relate to safety of the mooring facilities during the monsoon period. Details on social and environmental impacts are in Appendix 7. PLL has provided positive social impacts by investing in local road, water, and power infrastructure; and by providing emergency relief to local residents affected by the earthquake that occurred in the region several years ago. During the 3 years of construction, an average of 700 new jobs were created. About 160 staff are required for continuing operations at the plant, and 50 staff are employed at the head office in Delhi. An additional 176 staff are employed indirectly through shipping LNG (60 staff), outsourcing of jetty management (70 staff), and security (46 staff). Approximately 15 squatters on the project site were resettled. Stateowned Gujarat Investment Development Corporation, which created the project site for industrial use, addressed the associated issues before the Project started. The main forms of compensation provided to the resettled parties were comparable land, and accommodation and cash grants financed by PLL to cover daily living expenses during the construction of new premises. 34. LNG is a cleaner source of energy than oil and coal. The environmental benefits of the project arising from offsetting the use of coal are likely to be substantial due to the reduction in energy-related emissions, such as carbon dioxide (CO2). Natural gas is about 32% cleaner than coal. Conservative estimates of the value of these CO2 savings in India range from about $4.0 to $24.0 million per year. These external environmental benefits were not included in the EIRR due to difficulties in precisely quantifying them. Additional economic benefits are being generated by the project site, where the high quality of the technology and strong management team have resulted in virtually zero emissions. However, some safety issues still are being resolved. The LNG terminal has limited environmental impacts. PLL has complied with all necessary environmental regulations. Independent third parties audit the annual and quarterly reports, which are submitted to MOEF, GPCB, and Forests and Environment Department of the government of Gujarat. The terminal has received ISO certification for its processes and procedures for quality (ISO 9001), environmental management (ISO 14001), and occupational
3

The rating scale is as follows: (i) excellent: EIRR > 18%, (ii) satisfactory: EIRR > 12%, (iii) partly unsatisfactory: EIRR > 6%, and (iv) unsatisfactory: EIRR < 6%.

10 health and safety management (ISO 18001). PLLs Dahej plant was the first LNG facility in the world to achieve accreditation within 1 year of operation. 35. The Projects major environmental risks are associated with safety. PLL has prepared various emergency response plans. The terminal has achieved 2.73 million accident-free hours of operation to date. In October 2005, the National Safety Council conducted a safety audit and made recommendations for improving systems and procedures. The main issues that have arisen involve the safety of the jetty and ship mooring operations due to strong currents, high winds, and large waves during the monsoon season (May to September). As originally envisaged, a breakwater was to be constructed to help mitigate the effects of wind and waves. Construction started and then was halted following an analysis that concluded the breakwater would not mitigate these effects. A program is being developed to remove rock debris that was being used to construct the breakwater, and this will increase ship maneuverability. GDFI is providing assistance to develop and refine safe mooring procedures. In the event of an accident at the terminal, the effects probably would not extend beyond the boundaries of the plant site. C. ADBs Investment Returns

36. PLL is in a strong financial position, which is reflected in the substantial appreciation in ADBs equity shareholding in the company. Offsetting this result, ADB did not issue the PCG as envisaged at appraisal because it was not commercially attractive. While no direct costs arose from the PCG, an opportunity cost was associated with the facility. D. ADBs Effectiveness

37. ADBs effectiveness is rated satisfactory, based on an evaluation of screening, appraisal, and structuring; and monitoring and supervision. 1. Screening, Appraisal, and Structuring of the Project

38. Screening, appraisal, and structuring are rated satisfactory. Screening refers to relevance of the Project in achieving ADBs strategic objectives, as defined in its country and sector strategy documents; and in complying with policies on private sector development, and social and environmental protection. The Project met these requirements to a high degree. By establishing a commercially viable and environmentally friendly LNG plant, the Project supported the country strategic program (CSP) objectives of removing impediments to the liberalization and growth of privately financed energy infrastructure in India. In the view of PLL management, ADBs appraisal was of a high standard, and the investment approval process was performed rapidly. The assumptions underpinning the Project have materialized largely as envisaged in the RRP. The primary weakness in the Project related to ADBs performance was the PCG, which proved not to be commercially viable. This was due mainly to unforeseen adverse movements in the market. 2. Monitoring and Supervision Quality

39. Monitoring and supervision quality was satisfactory. Monitoring appears to have been of a high standard. PSOD staff visited PLL headquarters and the plant site regularly, although most of these visits focused on arranging financing for the phase II expansion. The documents on the subscription agreement and insurance documents are in order. The main issue with the monitoring arrangements involved environmental and social safeguard policies, where regulatory reports were not supplied to ADB quarterly as stipulated in the equity subscription

11 agreement. Following a review of the regulatory reports submitted to the Government, the Operations Evaluation Mission (OEM) confirmed PLL compliance with regulations. E. ADBs Additionality

40. Additionality is defined as the extent to which something happens as a result of an intervention that would not otherwise have occurred in the absence of the intervention. The Project has been successful from the perspective of stimulating development, liberalizing the energy market, encouraging private sector investment, and creating a strong company that has had significant demonstration impacts. In discussions with the OEM, PLL management said ADB played a critical role in liberalizing the market before the investment. While the construction program was largely complete by the time PSOD participated, ADB helped mitigate investor and lender concerns regarding a new and untested product and technology in India, where locally available skills and experience were limited. ADB also helped facilitate corporate governance through the introduction of an independent private director to the board. ADBs direct board representative, who has important international experience, chairs the boards audit committee. 41. Offsetting this result, ADB was not able to pursue the pioneering issuance of a PCG equivalent to $65 million. As a result, ADB did not stimulate the development of the local bond market. This bond transaction never materialized due to adverse market movements that were beyond the control of the participants. In 2001, the International Finance Corporation had successfully issued PCGs to support the mobilization of local currency financing for several large Indian companies, such as Bharti Mobile Limited. Thus, the product appeared attractive and feasible. However, subsequent movements in interest rates meant that firms could access funds from the domestic market using a swap at less cost than issuing bonds in the local market. This price differential has persisted and continues to favor swaps over local bonds as a source of local currency. F. Overall Rating

42. The Project received an overall rating of satisfactory. The evaluation criteria were development outcome, ADBs investment profitability, ADBs operational effectiveness, and project additionality. Based on the analysis in Section II, the ratings are presented in Table 2.

12 Table 2: Evaluation of the Petronet LNG Limited Project Item Development Outcome Private Sector Development Business Success Economic Sustainability Contribution to Living Standards Environmental Performance ADBs Investment Profitability ADBs Effectiveness Screening, Appraisal, and Structuring Monitoring and Supervision ADBs Additionality
ADB = Asian Development Bank. Source: ADB Operations Evaluation Mission.

Unsatisfactory

Partly Satisfactory

Satisfactory X X

Excellent

X X X X X X X X X

43. Development outcome is rated satisfactory based on an assessment of the following five subcriteria: (i) private sector development was rated satisfactory, as the objectives of catalyzing private investment in a competitive natural gas industry are being achieved to a significant extent, and PLL has demonstrated strong corporate performance, though capital market development goals were not attained; (ii) business success is rated excellent, as the recalculated FIRR exceeds the WACC; (iii) economic sustainability is rated excellent, as the EIRR of 32.6% was higher than expected due substantial cost savings and incremental demand arising from improved availability of gas; (iv) contribution to living standards is rated satisfactory, as PLL has helped develop local infrastructure and create jobs, without any material resettlement or indigenous people issues; and (v) environmental performance is rated excellent, based on the substantial reduction in energy-related emissions, such as CO2, due to improved availability of gas offsetting the use of coal. In addition, the plant site has generated virtually zero emissions due to the high quality of the technology and strong management team, although some safety issues still are being resolved. ADBs second criterion, investment profitability, is rated excellent. ADBs operational effectiveness is rated satisfactory. Screening, appraisal, and structuring, as well as monitoring and supervision, have been of a high standard, aside from the limited follow-up on collecting outstanding environmental impact reports. ADBs additionality is satisfactory. While not participating until construction was almost complete, ADBs presence helped crystallize industry reforms, strengthen corporate governance, and support partial privatization of PLL. III. A. Project Issues ISSUES, LESSONS, AND FOLLOW-UP ACTIONS

44. Due to ADBs involvement in the Project only a few months before operations commenced, the relatively short period since operations began, and the robust business model, variations from the expectations presented in the RRP have been limited. The main differences were as follows:

13

(i) (ii) (iii)

(iv) (v) B.

The price of oil and natural gas has increased dramatically following ongoing geopolitical problems in the Middle East. GAIL has not completed the construction of the DahejUran pipeline. The breakwater was not constructed. It has been replaced with a new LNG storage tank as part of the phase II construction program, resulting in a cost saving. The Government has not divested its majority shareholding in BPCL. As a result, PLL continues to be majority state-owned. ADB did not issue its PCG due to unforeseen adverse market movements.

Lessons

45. Based on the developments outlined in Section II, ADB could improve its performance by considering the following factors when designing projects: 46. Private Sector Development. ADB played a central role in the liberalization and reform of the Indian gas sector, and then catalyzed a series of important PPP investments in LNG facilities. As such, the Project provides an excellent example of how ADBs Private Sector Development Strategy can work in practice. Some of the most important private sector development benefits involved discoveries of domestic gas by Indian private sector companies, independent of PSOD participation. An important issue that emerges from the analysis of private sector impacts is the long gestation period required for enabling environment reforms to flow through to tangible PSOD investments and loans. In many respects, these delays were necessary to provide the Government time to implement reforms before ADB and private investors could commit funds. A precondition for the investment was the certainty that the planned changes would occur within the industry. The sponsors did not perceive access to ADBs funding per se as the most important benefit of ADB participation. Rather, the sponsors were more interested in the leveraging effect of ADB involvement, even through a small equity participation. 47. Revenue and Cost Projections. The price forecasts for PLL gas in the RRP were based on an assumed price of $29 per barrel, well below the price of approximately $75 per barrel at the time of the OEM. Similarly, significant cost savings on capital expenditure were realized, even though ADB participation occurred only months before project completion. These adjustments highlight the random volatility inherent in commodity products, as well as the need for aggressive sensitivity analysesespecially for downside scenariosto ensure that credit risks are managed adequately. 48. Social and Environmental Impacts. The Government was well organized when dealing with social impacts, keeping risks associated with resettlement with the public sector agency, Gujarat Industrial Development Corporation. Similarly, GAIL retained the risks associated with the development of the gas transmission network, effectively eliminating any negative social and environmental impacts from construction and commercial performance. PLLs operations have had positive impacts through employment, with an increasing number of local staff being employed over time. Environmental operational impacts have been negligible due to the nature of LNG, and the associated technology that resulted in almost zero emissions. The safety of the mooring operations is the primary outstanding issue associated with externalities. Safety risk has very localized physical impacts. The more serious risks involve PLL compliance with commercial take-or-pay obligations, which probably would fall under force majeure provisions.

14 49. Ownership Structure. As envisaged in the RRP, a chain-type ownership structure would be adopted, allowing the Government, buyers, and a supplier to have an ownership interest in the facility that would help minimize commercial risks. In many cases, equity ownership can complicate buyer and supplier incentives unnecessarily. Ideally, reliance should be placed on input and output contracts wherever possible to minimize risks of conflicts of interest. Another important feature associated with PLLs ownership structure was an assumption in the RRP that the Government would divest its majority shareholding in BPCL, thereby handing majority ownership of PLL to private investors. Although the divestment has not occurred, it does not appear to have created a problem. However, international evidence suggests that a privatized PLL will achieve better commercial results over time. 50. Financial Structure. Indian banks have been prepared to lend to PLL on a secured basis due to the financial strength of the buyers and the high level of Government involvement in the Project. As the lead arranger and financier of PLL, the Government-owned State Bank of India raised the issue of how ADB participation adds value to Indian PPP infrastructure projects. The primary benefits relate to access to private sector funds. Despite having a relatively sophisticated banking sector, India still lacks access to sufficient long-term funds to finance necessary infrastructure projects. This makes private sector participation increasingly important, and ADB can play a central role in allaying investor and lender concerns. 51. Partial Credit Guarantee. The potential benefits arising from the application of a PCG were one of ADBs primary motivations for participating in the Project. However, the PCG was not used due to adverse movements in the market. At loan appraisal, international financial institutions, such as the International Finance Corporation, had used guarantees successfully to support local currency bond issues. Subsequently, however, corporate bond market activity was limited, and the market for raising local currency through the use of swaps became much more active. ADB has the capacity to participate in this market on favorable terms due to its AAA credit rating. C. Follow-Up Actions

52. No follow-up actions are required, although ADB is recommended to exit its equity participation as soon as practicable. The main development objectives of the equity participationi.e., allaying financiers concerns and strengthening governance provisionshave been largely achieved. ADB can exit safely through the share market. No outstanding social and environmental actions are required by ADB. Given the potential for substantial shifts in the market between ADBs approval and financial drawdown, a degree of flexibility needs to be incorporated in the structures presented in Board documents.

Appendix 1

15

PRIVATE SECTOR DEVELOPMENT INDICATORS AND RATINGS

Annotations and Ratings Potential Future Impact Assessed and Risk to Combined Impact Realization to Datea Impact Riskb Rate

Change Attributable to the PSO A. Beyond Company Impacts 1. Improved laws, frameworks, and sector institutions 2. Pioneering or increased private sector role in the countrys natural gas sector and more widely 3. Pioneering or enhanced competition (to state natural gas monopolies, early concession operators, or others) 4. Relative to investments, significant economic links to previously underserved regions and business sectors (including SMEs); and more productive employment for reached social groups for poverty reduction, including women 5. Pioneering or catalytic finance to enhance market funding prospects for more investments in the natural gas sector

Justification

4.0

4.0

4.0

4.0

4.0

4.0

4.0

4.0

ADB has played an important role developing the enabling environment for natural gas Private investment is occurring in LNG Private competition is being introduced into the LNG sector Project is helping to stimulate private investment in North West India

4.0

4.0

4.0

4.0

3.0

3.0

4.0

3.0

2.5

3.0

4.0

3.0

ADB could not use its partial credit guarantee to support a bond issue, although a subsequent follow-on ADB financing facility has been approved Leading-edge LNG technology introduced Standards compare with developed countries Excellent environmental, safety, and corporate governance Capital- rather than laborintensive

B. Direct Project Company Impacts 1. Know-how: internalized management and operational skills 2. Achieved standards of the company: (i) against global industry performance and service quality benchmarks (ii) in corporate governance, transparency, worker relations, health and social security 3. Direct employment impact in relation to the amount of investments

3.5

3.0

4.0

3.5

3.5 3.5

3.0 3.0

4.0 4.0

3.5 3.5

3.0

3.0

3.0

3.0

c 3.5 Satisfactory Overall Rating LNG = liquefied natural gas, PSO = private sector operations, SME = small and medium-sized enterprise. a Impact: excellent (4), satisfactory (3), party unsatisfactory (2), unsatisfactory (1). b Risk: low (4), modest (3), medium (2), high (1). c The calculation of the overall rating for private sector development impact is not arithmetic. Source: Draft Guidelines for the Preparation of Performance Evaluation Reports of Private Sector Operations.

16

Appendix 2

DEVELOPMENTS IN THE INDIAN GAS MARKET A. Overview of the Natural Gas Sector in India

1. Liquefied Natural Gas (LNG) is one of the fastest growing fuels in the world, with average annual usage rising about 8% over the past 5 years. Natural Gas is a clean and environment-friendly fuel that can comply with stringent emission standards in power generation and industrial processes. It is also used as compressed natural gas (CNG) in the transport sector, helping reduce vehicle emissions. In India, substantial reserves of natural gas have been discovered onshore and offshore. While the availability of gas is expected to improve, the demand for energy is expected to grow more quickly. At 160O C, natural gas becomes liquid and its volume shrinks by 600 times, facilitating its transportation for trade. 2. With crude oil prices at around $75 per barrel (BBL), LNG has emerged not only as a clean source of energy, but also as a cost-effective fuel. Several industries in the country are using more expensive liquid fuels (naphtha and fuel oil, low-sulfur heavy stock) as sources of energy and carbon feedstocks. The indigenous availability of natural gas is unable to meet the demand of natural gas, and the reserves are declining steadily. As such, the importation of LNG is increasingly important. India is strategically located close to the large gas reserves in the Middle East and the Asia-Pacific countries. These countries hold 70% of the worlds LNG liquefaction and export facilities. Globally, gas accounts for nearly 23% of commercial energy consumption. Natural gas accounts for only 9% of the Indian energy basket due to domestic supply constraints. The Government of India (the Government) is seeking to identify options to increase natural gas consumption within India. B. Demand and Supply of Natural Gas

3. Lack of access constrains the demand for natural gas. If additional supplies of LNG were made available within the country, through discoveries of further reserves and expansion of of pipeline distribution capacity, the use of gas could be much higher. Table A2.1 shows various supply scenarios based on a Government study, Hydrocarbon Vision 2025. Table A2.1: Future Gas Deficit Scenarios (MMSCMD)
A. Demand Scenario 1 Supply 1. As given scenario 2. Optimistic scenario Gap (as given) Gap (optimistic) B. Demand Scenario 2 Supply 1. As given scenario 2002 117 70 70 47 47 151 70 2007 166 58 64 108 102 231 58 2012 216 45 78 171 138 313 45 2020 322 36 84 286 238 391 36 84 355 307

2. Optimistic scenario 70 64 78 Gap (as given) 81 173 268 Gap (optimistic) 81 167 235 MMSCMD = million standard cubic meters per day. Source: Hydrocarbon Vision 2025.

Appendix 2

17

4. In 2005, the Ministry of Petroleum and Natural Gas (MOPNG) estimated in its annual report that the energy sector accounted for 69% of natural gas consumed in India, while the rest was used primarily as feedstock in the fertilizer and petrochemical industries. The energy and fertilizer sectors are allocated state-owned gas at subsidized prices, although they are free to purchase gas from private sources at market rates if they wish. The most rapid sources of growth between 2004 and 2005 are the domestic fuel sector (269%), followed by industrial fuel (16%) and petrochemicals (10%). Domestic fuel consumption is growing following directives from the Supreme Court of India to increase in the use of CNG as a fuel for the transport sector. Indraprastha Gas Limited (IGL) in Delhi and Mahanagar Gas Limited (MGL) in Mumbai are developing gas distribution projects for the supply of CNG and piped natural gas in these cities. IGL is catering to about 94,246 vehicles of different categories through 135 CNG stations. MGL has set up 105 CNG stations to service about 147,536 vehicles, mainly three-wheelers and cars. 5. The two critical supply constraints are inadequate reserves of natural gas and lack of distribution capacity. The geographic distribution of Indias gas reserves is as follows: (i) western offshore, 54%; (ii) onshore Gujarat region, 13%; (iii) onshore Andhra Pradesh region, 6%; and (iv) others, 27%. The western offshore area (Mumbai High Basin) supplies most of Indias gas. Assam, Andhra Pradesh, and Gujarat states also produce major volumes of gas, followed by Tripura, Tamil Nadu, and Rajasthan. About 60% of Indias natural gas is associated with oil. The south basin and Tapti fields in the western offshore area, the gas fields in the western offshore area, and the gas fields in Tripura and Andhra Pradesh Krishna Godavari (KG) Basin produce most of Indias non-associated gas. The majority of the western offshore gas supply, including Mumbai High Basin, is expected to gradually die out by 2020. 6. In terms of volume, Indias proven gas reserves at the beginning of 2004 stood at 0.85 trillion standard cubic meters (SCM). The Government has been actively encouraging private sector investment in exploration and development under the New Exploration Policy (NELP), which is used to tender concessions to firms in the public and private sectors. The NELP program has been successful. A recent gas discovery of more than 0.283 trillion SCM in the KG Basin by the private company Reliance Industries Limited (RIL) increased Indias reserves significantly, and more is expected to be found. Gujarat State Petroleum Corporation made an estimated 0.566 trillion SCM discovery in the KG Basin that is potentially the largest gas find in India. Other companies, such as Oil and Natural Gas Corporation of India (ONGC), also have found gas in KG Basin. RIL has discovered additional gas reserves in three Bay of Bengal wells off the coast of Orissa, where potential reserves could total 0.142 trillion SCM. In addition to natural gas reserves, the Government has developed a policy to extract methane trapped in coal seams that can be used as an energy source. Coal-based methane resources are estimated at about 820 billion cubic meters (BCM), with expected production of about 23 million standard cubic meters per day.1 7. The two national oil companiesONGC and Oil India Ltd (OIL)accounted for 79.66% of the natural gas production in the country, with ONGC accounting for the larger share. The private sectors share in natural gas production has increased from 2% in 1997 to 21.34% in 2005, and is expected to rise further as several NELP fields start yielding natural gas.

http://www.dghindia.org/cmb_listofblocks.html, last accessed on 7 November 2005

18

Appendix 2

Table A2.2: Company Production of Natural Gas (MCM)

Year Oil ONGC Private/JV Total 1995/96 1,433 20,875 331 22,639 1996/97 1,496 21,281 479 23,256 1997/98 1,670 23,050 1,681 26,401 1998/99 1,713 22,841 2,874 27,428 1999/00 1,729 23,252 3,465 28,446 2000/01 1,861 24,020 3,596 29,477 2001/02 1,619 24,041 4,054 29,714 2002/03 1,744 24,244 5,407 31,395 2003/04 1,880 23,584 6,491 31,955 2004/05 2,007 22,985 6,782 31,774 OIL = Oil India Ltd., ONGC = Oil and Natural Gas Corporation Ltd., JV = joint venture, MCM = million cubic meters. Source Ministry of Petroleum and Natural Gas (2005).

8. In addition to the shortage of domestic gas reserves, the Indian gas market has limited transmission infrastructure. It consists of small regional pipelines, and the HaziraBijaipur Jagdeshpur (HBJ) 2,300 kilometer (km) pipeline that carries gas from the offshore Mumbai High Basin to fertilizer and power plants in North West India. The capacity of the HBJ pipeline is about 1.18 billion cubic feet per day (bcfd), which is sufficient for about 45% of Indias gas consumption. The HBJ pipeline, operated by GAIL India Limited (GAIL), carries Petronet LNG Limiteds (PLL) LNG imports through the state of Gujarat. GAIL is expanding the DahejBijapur section of the HBJ pipeline; and building the DahejUran gas pipeline, which is scheduled for completion in 2006. GAIL also is developing the $4.4 billion National Gas Grid, which is expected to cover the entire country. The 8,000 km project will be implemented in phases over the next 67 years. GAIL intends to build and operate an east-to-west truckline linking Kakinada port in the Bay of Bengal to Hazira in the Arabian Sea. With the Government permitting private sector investment in gas transmission infrastructure, RIL intends to build a 1,400 km pipeline from Kakinada to Ahemdabad via Hyderabad and Uran in Maharashtra. The pipeline would transport RILs reserves in the KG Basin to the Gujarat power plants belonging to National Thermal Power Corporation. In addition, RIL plans to build a pipeline from Hyderabad on the east cost to Delhi. Several smaller projects also are being implemented, including (i) a 600 km pipeline from Visakhapatnam to Secundrabad in Andhra Pradesh; (ii) a 700 km pipeline from Managalore in Karnataka to Madurai in Tamil Nadu; and (iii) a 575 km pipeline that will connect PLLs Kochi LNG terminal to Kerala. 9. Despite the increasing private investment, recent discoveries of domestic natural gas reserves, and improvements in the transmission network, demand continues to outstrip supply. To help bridge this gap, some public and private sector companies are pursuing gas importation options. In 2004, PLL commissioned the first LNG terminal in India at Dahej, Gujarat. The PLL terminal has a capacity of 5.0 million metric tons per annum (MMTPA). In April 2005, a second LNG terminal with a capacity of 2.5 MMTPA was commissioned at Hazira, Gujarat by Royal Dutch Shell Group and Total Gaz Electricite Holdings of France, which are the joint owners and operators of the terminal. The Hazira plant sources gas from the spot market instead of using the conventional system of purchasing gas through long-term sales and purchase agreements. Few other LNG terminals have been planned along the east and west coast of the country. Details of LNG terminals in India are summarized in Table A3.3.

Appendix 2

19

Table A2.3: Details of Commissioned and Proposed LNG Terminals in India

Project and Developers Dahej LNG terminal (Petronet) Location and State Dahej (Gujarat) Capacity (MMTPA) 5 (to be expanded to 10) Supplier Qatar (5.0 + 2.5 MMTPA) Status Commissioned in February 2004, the terminal began commercial sales in April 2004. Expansion to be completed by 2008 Complete; commissioning delayed by contractual dispute Commissioned in April 2005 Project expected to be completed by 2008 Planned

Dabhol terminal (GE/Bechtel/MSEB)

Dabhol (Maharashtra)

5.0

Oman, Abu Dhabi

Hazira LNG (Shell)

Hazira (Gujarat)

2.5 (phase I), 5.0 (phase II) 2.5

Shell Portfolio In discussion

Kochi LNG (Petronet)

Kochi (Kerala)

Ennore LNG (IOCL, CPCL)

Ennore (Tamil Nadu)

2.5

Iran

CPCL = Chennai Petroleum Corporation Limited, GE = General Electric, IOCL = Indian Oil Corporation Limited, LNG = liquefied natural gas, MMTPA = million metric tonnes per annum, MSEB= Maharashtra State Electricity Board. Source: TERI (2005).

10. Developers are investigating the potential for importing LNG via pipelines from neighboring countries. Several pipelines have been proposed to serve the Indian market, originating from Iran, Myanmar, Bangladesh, and Turkmenistan. The most likely international pipeline is the 2,600 km overland pipeline connecting the South Pars field in Iran with the HBJ pipeline in India via Pakistan. In June 2005, the Government signed a $20 billion contract with Iran to import 5.0 MMTPA of LNG for 25 years, beginning in 2009. National Iranian Oil Company would supply this gas from its South Pars gas field. The destination ports for the gas in India are the Dahej and Kochi terminals. The negotiated price for the deal is $3.21 per million British thermal units (MMBTU). This price includes a fixed component of $1.20 per MMBTU and a variable component linked to the Brent price, which has been capped at $31 dollars per BBL.2 The current status of this deal is unclear, as Iran has asked for an increase in the price of natural gas and has sought to limit supply to lean gas that excludes various carbon components unrelated to energy content. C. Pricing and Regulation

11. In the gas sector, prices are both administratively and market based. ONGC and OIL sell gas from the pre-NELP blocks to GAIL under the administered pricing mechanism (APM). In 1997, the Government sought to achieve parity between fuel oil prices and gas, though this policy has been ineffective. As a result, gas sold under the APM continues to be allocated at prices substantially below market rates for gas and transmission costs. The APM price of gas for the North Eastern region is approximately 60% of the new price. The matter of fixing the producer price of natural gas has been referred to the Tariff Commission, a body under the Ministry of Commerce and Industry that is serving as a de-facto regulator. For gas produced under the NELP blocks, output can be sold at market-determined prices defined in the negotiated production sharing contracts and gas sales agreements.

Times of India. 2005. India, Iran sign $20-billion LNG deal. 14 June.

20

Appendix 2

12. Similarly, imported regasified LNG sourced from the PLL and Shell plants is sold at market-determined prices. PLL has signed an agreement with Ras Laffan Liquefied Natural Gas Company Limited (RasGas) of Qatar for the supply of 5.0 MMTPA of LNG for 25 years at a free on board (FOB) price of $2.53 per MMBTU for the first 5 years of operation, starting in 2004. After accounting for items such as shipping, customs duties, pipeline charges, regasification, and sales tax, the delivered price is $4.25 per MMBTU. After 2009, the fixed price will become a variable price for a 60-month transition period. The participating parties have agreed to an increase of $0.13 per MMBTU for each $1.00 increase in the price of oil above $20 per BBL. This formula does not have a ceiling, allowing the price of LNG to rise to more than $6 per MMBTU if the price of oil stays at more than $50 per BBL. At this stage, PLLs delivered gas price is very competitive relative to the Hazira terminal gas. Royal Dutch Shell, which has been promoting its Hazira terminal as a merchant terminal, sourced its first LNG consignment from Australias North West Shelf project at a price of $3.70 per MMBTU, which is significantly higher than PLLs purchase FOB price. RILs gas discovery in the KG Basin will affect the future competitiveness of LNG imports. RIL recently agreed to supply National Thermal Power Corporation a delivered consumer price of $2.97 per MMBTU in Gujarat, although this transaction is seen as a one off loss leader. 13. Demand for natural gas depends primarily on its competitiveness relative to other fuels, as well as the price absorption capacity of its primary users (power and fertilizer). The use of natural gas and LNG in the power sector depends on its competitiveness with respect to coal and liquid hydrocarbons, such as naphtha, low-sulfur heavy stock, and fuel oil (which are used sparingly). The eastern states of Bihar, Madhya Pradesh, and Orissa hold 70% of the countrys coal reserves. The pithead coal price in the east averages about $12 per ton, and the freight cost from east to west can add another $12 per ton. Given coals relatively high transport costs, the economics of gas for power generation differ from one area of the country to another, resulting in a differentiated electricity market. As a rough guideline, if natural gas is priced at $3.00$4.00 per MMBTU in the western and southern parts of the country, it can compete with coal. LNG is likely to be most competitive in these regions, especially if a power plant is close to the regasification terminal and transmission costs are avoided. For the fertilizer sector, the Government provides huge ($2.6 billion) annual subsidies. Many fertilizer plants use expensive fuel oil and naphtha, because they have little incentive to switch fuels under the Governments subsidy program. Recently, however, the Government has been promoting the use of natural gas as a feedstock in the production of urea, and plans to convert many fuel-fed plants to gas. As fertilizer imports are a viable long-term option, the netback of gas used in domestic urea production versus urea imports needs to be priced at about $3.00 per MMBTU to stay competitive. 14. Transportation fees charged by GAIL for delivering gas over its pipelines are regulated. The legislation establishing the Petroleum and Natural Gas Regulatory Board, enacted in April 2006, is designed to set up a regulatory body to oversee and regulate the refining, processing, storage, transportation, distribution, marketing, and sale of petroleum products and natural gas. The Governments gas industry policy lays out the role of the regulator in preparing a long-term plan for the gas pipeline network. The policy proposes that the regulator should adopt a nondiscriminatory approach when deciding on access arrangements for the gas pipeline, and should consider the common carrier principle to ensure equal opportunities for all users.

Appendix 3

21

REVIEW OF PETRONET LNGS OPERATIONS A. Background

1. In 1997, the Government of India (the Government) helped create Petronet LNG Limited (PLL) to develop and import liquefied natural gas (LNG) at various coastal locations. PLL was to bridge the large gap between the demand and supply of natural gas in the country. PLL is the first company in India and South Asia to import LNG and successfully set up a LNG regasification terminal. The 5.0 million metric tons per annum (MMTPA) LNG receiving and regasification terminal at Dahej, Gujarat state (the Project) has been constructed and commissioned in record time at a benchmark cost. During the buildup period in 2004, the Dahej LNG terminal operated at 50% capacity, but from 2005 onward the plant has been capable of operating at 100% capacity. Regasified LNG from Dahej terminal is supplying consumers in Gujarat and along the recently upgraded HaziraBijaipurJagdishpur (HBJ) pipeline, traversing the states of Madhya Pradesh, Rajasthan, Uttar Pradesh, Haryana, and Delhi. GAIL (India) Limited (GAIL) is constructing about 485 kilometers (km) of additional pipeline from Dahej LNG terminal to Uran in Mumbai. 2. The increased availability of gas has generated important benefits for the Indian economy. The Project has spurred market liberalization and commercialization of the LNG industry. PLLs customer base is broken down as follows: power sector, 70%; fertilizer, 15%; and others, 5%. As a result, the Project has had the greatest impact in the power sector, which uses expensive naptha ($15$18 per million British thermal units [MMBTU]) for generation. The fertilizer sector has benefited from the Project, as expensive and low-energy naptha has been replaced with natural gas in many cases to produce urea. Several industries have shifted to captive power generation systems based on natural gas, which is more efficient. These developments have freed up power for other sectors. In addition to economic benefits arising from increasing energy efficiency, natural gas utilization has generated environmental benefits by producing less carbon dioxide (CO2) emissions than other sources of energy and carbon feedstocks. Additional benefits could be realized in the future as companies, such as GAIL and Oil and Natural Gas Corporation Limited (ONGC), are able to extract high carbon components from the rich PLL gas, without lowering the energy content. This would provide low-cost inputs for sectors such as petrochemical manufacturing. The PLL plant has provided the Indian gas sector with much-needed technical expertise in the design, operation, and maintenance of LNG terminals. B. Description of Major Project Components

3. The PLL facility is based on a concession agreement signed with Gujarat Maritime Board, which provided a 99-year lease for a 58.6 hectare site, and a 30-year agreement to develop and use a port facility. The government of Gujarat had not approved the draft at the time of the Operations Evaluation Mission. PLL also signed a 25-year LNG supply contract with Ras Laffan Liquefied Gas Company (Rasgas), based in Qatar, in July 1999. The contract initiated construction of various facilities for suppliers and buyers of the LNG. Rasgas has developed offshore gas production facilities in the North field of Qatar, as well as a dedicated liquefaction train with 5.0 MMTPA capacity. It was commissioned to meet the requirements of the Dahej terminal, and became fully operational in March 2004. The North field of Qatar is the largest gas field in the world, which helps ensure the security of LNG supplies throughout the contract.

22

Appendix 3

4. PLL has signed two shipping time charter agreements with a consortium led by Mitsui OSK Lines for transportation of LNG from Qatar to Dahej for 25 years. Mitsui has constructed two special purpose vessels to transport LNG from Qatar to the Dahej LNG terminal in Gujarat for 25 years. Mitsui contracted Daewoo Ship Building and Marine Engineering Company, Republic of Korea, to construct the LNG tankers, which were completed on time and at agreed cost. PLL appointed a consortium consisting of PSA Marine Private Limited, Singapore, and Ocean Sparkle Limited, India, to operate the port at Dahej. The port operator, which is providing tugs, marine crafts, and crew at the Dahej port, is responsible for safe berthing of LNG tankers at the jetty and other related marine services. The port operator has formed a special purpose company, named Sealion Sparkle Port and Terminal Services (Dahej) Limited, to provide the services to PLL. Finally, the port operator has mobilized the required manpower, tugs, and boats at the site, and berthing operations are in process. 5. The construction of the LNG terminal at Dahej was executed through a lump sum turnkey engineering, procurement, and construction (EPC) contract issued by a consortium of companies led by Ishikawajima Harima-Heavy Industries Corporation Limited (IHI), Japan. The other members of the consortium are Ballast Nedam International BV-Netherlands, Toyo Engineering India Limited, Toyo Engineering Corporation, Itochu Corporation, and Mitsui Company Limited. IHI is one of the most reputable construction companies in the world in the field of LNG regasification terminals. PLL commissioned Indias first LNG receiving and regasification terminal at Dahej in February 2004. Following the arrival of the first LNG tanker at Dahej and the mechanical completion of the terminal facilities, the EPC contractor completed the commissioning in April 2004, allowing the commencement of commercial operations. Foster Wheeler Energy Limited was the project management consultant responsible for the regular review, monitoring, and execution of the Project according to the EPC contract. 6. The LNG port facilities include an approximately 2.5-kilometer (km) jetty and the equipment necessary to unload LNG from special purpose ships. The Dahej facilities also include two full containment LNG storage tanks, each with gross capacity of 160,000 cubic meters, and a gas recovery system for re-condensation of boil-off gas. Send out facilities include seven air-heated shell and two tube vaporizers (STV) and submerged combustion vaporizers (SCV). The STVs and air heaters with 112 fans have the capacity to evaporate 88.2 tons per hour of LNG. The STVs are heated indirectly through a glycol-water system, which circulates in a closed loop and uses the ambient air as a heat source. Most LNG plants use seawater for evaporation of the LNG. The traditional water gasification system was not adopted in Dahej, because the plant is located in an estuary where the seawater is muddy. PLL would have to go approximately 50 km offshore to obtain clean seawater for regasification, which would not be cost-effective. Each SCVs can process 100 tons per hour of LNG using hot water sourced from the waste heat of the gas turbine flue gases. Two of the three gas turbines are always in operation, while one is on standby. Auxiliary facilities include three 7.5-megawatt (MW) gas turbines in a captive power plant facility, and a high-tension backup power supply arrangement from the Gujarat Electricity Board. The only major technical deviation from the design reviewed at appraisal was the substitution of a full containment LNG storage tank for the construction of the proposed breakwater. The EPC contractor is building the new tank as part of the phase II expansion program. C. Plant Operations and Safety Aspects

7. The two special purpose LNG tankers deliver the LNG at the jetty that has been built specially for unloading these tankers. The jetty has three unloading arms and a return regasified gas line. The facility has one of the longest LNG jetties in the world, with about 2.5 km of

Appendix 3

23

pipelines for the transportation of the LNG from the jetty to the storage tanks. The two LNG tankers have a capacity of 138,000 cubic meters each, and they utilize a membrane technology to keep the gas cool in a liquid state. The water depth at the ship mooring is 16 meters maximum, and the tidal variation is 10.4 meters. 8. Qualified graduate engineers trained by Gaz de France (GDF), which is a stakeholder in PLL, manage and maintain plant operations. GDF, which is responsible for carrying out safety audits regularly, has signed off on PLL operations as efficient with boil-off gas half that of the designed values. The plant is operated in accordance with international practices and norms specified for LNG terminals. Safety is the primary issue associated with the plant. In response, GDF has recommended that unloading during the monsoon period be carried out under predefined parameters. These are related to local weather conditions, which should cover the wind speeds, wave height, and water currents that have caused difficulties during mooring operations. PLL has been advised to appoint a local weather consultant for this activity, and simulation exercises with the assistance of an international consultant have been recommended to define the safe limits for unloading during the monsoon period. D. Risk Mitigation

9. During the Project, the events that constitute critical safety risks at the LNG terminal are (i) a collision of LNG tankers with other ships, or LNG tankers running aground; (ii) an LNG leak during unloading; (iii) an LNG leak from safety valves at the top of the storage tanks; and (iv) major earthquakes. The likelihood of these events has been minimized through strict application of rigorous standards in the design and operations of the terminal, and through institutionalization of a standard emergency response plan and a disaster management plan. Safety aspects are incorporated in the design of the project facilities using well-established standards. The national design codes are the Oil Industry Safety Directorate OISD194. The design standards internationally adopted are the European standard, EN1473, the US National Fire Protection Association standard, NFPA59A, and British Standard BS7777. The design of the existing facilities adopted these standards. They also will be applied to the new facilities with some non-safety-related modifications to suit the site specificities, such as the choice of indirect LNG regasification using glycol water-air heating system instead of the conventional open rack vaporizers. The air heating system has proved to be environmental friendly, producing a significant volume of clean water from condensation of humidity in the air. 10. The two existing LNG storage tanks are full-containment tanks that are safer than the more conventional single- or double-containment tanks. In addition to safety considerations, fullcontainment tanks have the following advantages over single- and double-containment tanks: (i) higher operating pressure, thus reducing boil-off gas during unloading operation; (ii) loads of piping structure and accessories not transferred to the primary container; (iii) no risk of leaks from tank; and (iv) secondary container can withstand external impacts without collapse, and can hold LNG if it leaks from the primary container. For these reasons, the two new storage tanks under the phase II expansion also will be full-containment tanks. Several other safety measures adopted in the design of the existing LNG terminal will be incorporated in the phase II facilities. Some examples of the existing plant safety measures include (i) locating the isolation valve of the pig launcher station closer to the plant boundary to provide additional protection against backflow from the transmission network that could feed fires and damage the tank; (ii) providing a pressure sensor on the glycol side of the STVs to trigger LNG shutdown in the event of a leak; (iii) installing a rupture disk on glycol side (shell) for overpressure protection; and (iv) providing blast-proof construction in accordance with local regulations. The control room, administration building, and other inhabited buildings are constructed with minimal or no

24

Appendix 3

windows towards the production process, and their overall window area has been minimized. Firewater tank and pumps are located as far away from the process areas as possible. As the project site is in a region classified as earthquake class 3, the terminal facilities were designed based on the assumption of an earthquake-induced lateral movement once in 1,000 years. 11. The terminal has been designed to accommodate accidents due to fire and LNG vapor leakage, in accordance with the United States Environmental Protection Agency standard EN 1473. The thermal exclusion zone and the vapor dispersion zone were calculated for the following possible scenarios: (i) (ii) rupture of one of the unloading arms during discharge of LNG from the tankers, and release of LNG from the three relief valves on top of one of the tanks.

12. The thermal exclusion zone and the vapor dispersion zone were calculated using the models recommended in EN 1473 for the storage tank leak, and the models recommended by the USEPA for the unloading arm leak. The findings of the consequence analysis are summarized in Table A3. The exclusion zones in the case of the storage tanks are within the boundaries of the terminal complex. In the case of the unloading arms, the exclusion zones are within the distance between the jetty and the complex. Table A3: Summary of the Consequence Analysis
Rupture of Unloading Arms (meters) Thermal 700 Vapor dispersion 250 Source: Petronet LNG Limited estimates. Exclusion Zone Storage Tank Leak (meters) 77 57

13. PLL has prepared and institutionalized an emergency response plan (ERP) and a disaster management plan (DMP). The ERP prescribes actions and procedures to be taken when dealing with major releases, unignited releases, and fire and explosion emergencies. The ERP is supported by (i) gas detection, (ii) safety shutdown and fire protection systems, (iii) safety and security zones, (iv) ship and facility emergency response plan, (v) coordination with the Gujarat Maritime Board and the coast guard, and (vi) evacuation plans and procedures. The ERP will be revised to cover the expanded operations. The DMP prepared by PLL is effective in preventing and managing any incidents or accidents in and around the terminal complex, jetty, and waterfront. PLL has established and maintained suitable systems; employed or contracted skilled and trained personnel; and installed efficient communication equipment, as well as other equipment and facilities, required for prompt application at any stage of DMP procedures. PLL organizes periodic exercises and simulations with the port operator and LNG tanker crew based on various simulated accident scenarios. PLL will revise the DMP as appropriate to cover the expanded operations, in line with the Ministry of Environment and Forestrys conditions for environmental clearance. 14. For jetty operations, PLL has engaged an experienced port operator to provide services that include hazard prevention, as well as health, safety, and environment services related to jetty operations. With the assistance of the port operator, the Health, Safety and Environmental Unit is involved in prevention activities on the waterfront. PLL personnel have been trained extensively in firefighting at LNG terminals operating in France and Qatar. The port operator also has deployed trained personnel to manage the waterfront activities. The waste management plan complies with International Convention for the Prevention of Pollution of

Appendix 3

25

Ships. A mutual aid system is in place with other companies operating in the Dahej industrial estate. In the event of a major incident, the management team can call upon other companies in the area to assist within their resources and make them available as required. 15. To enhance safety further during unloading operations, wind speeds and wave heights in the vicinity of the jetty are monitored continuously, and the data are transmitted to a central unloading control room at the jetty. Emergency responses are prescribed for various wind and wave conditions, as well as LNG leaks; and procedures are established and ready for implementation. The jetty terminal is fully equipped with firefighting equipment. The waters around the jetty also are patrolled regularly to ensure security. These safety operations are outsourced to a qualified port operator. The Gujarat Maritime Board regulates and inspects regularly the emergency and safety measures. Terminal operations are centrally controlled by computer. A computerized control system continuously measures and monitors all process parameters, such as pressure, temperature, flow rate, and mass. The real-time data are processed by computer and interpreted to ensure efficient process control and safety. The computerized control system allows immediate identification and location of leaks in the terminal system. Emergency signals and alarms are sent out automatically for immediate response. E. Marketing and Sales

16. PLLs business model is based on back-to-back long-term contracts. The purchase of the 5.0 MMTPA of LNG imported from Rasgas over 25 years under a sales and purchase agreement has been tied to gas sales and purchase agreements (GSPA) with three offtakers: GAIL, Indian Oil Company, and Bharat Petroleum Corporation Limited (collectively referred to as the offtakers). Under the GSPA, PLLs sales obligation to the offtakers is completed on the delivery of regasified LNG to the GAIL pipeline at the Dahej terminal. From there, GAIL transports the gas through the HBJ pipeline at the offtakers risk. 17. While the offtakers take-or-pay obligations ensure a market for the entire production, some commercial risks remain. All the major participants in the Indian hydrocarbon sector have plans to enter the natural gas industry. In addition to Indian firms, multinational companies entering the Indian market are creating new competition. Improvements in exploration technology, and economies of scale in gas liquefaction and transportation, are helping to drive down delivered costs. Offsetting these concerns, the global price of LNG has increased due to rising costs of crude oil. Scarcity of gas in domestic and international markets will help underpin continued high prices. F. Construction Costs and Financial Projections

18. At the exchange rate of Rs45 per $1, project costs was well within the range of current international projects. For example, the Mitsubishi Flour Daniel LNG Terminal Project was estimated to cost approximately $885 million. Financial projections, based on conservative price projections and operating costs, indicate excellent financial returns to sponsors, as well as adequate security for debt financiers.

26

Appendix 4

REEVALUATION OF THE ECONOMIC INTERNAL RATE OF RETURN A. Methodology

1. The economic internal rate of return (EIRR) was recalculated for 20002028, covering 4 years of pre-operating activity (20002003) and 25 years of operations of the Project. Costs and benefits are measured using domestic prices, with traded items being adjusted by an exchange rate factor and expressed in constant 2006 prices.7 Figures were adjusted to exclude taxes and interest. However, they include capital costs of associated facilities, such as the expanded elements of the HaziraBijaypurJadgishpur (HBJ) pipeline. The shadow exchange rate used in the analysis was 1.1, which was the same as in the original assessment. B. Valuation of Benefits and Costs 1. Valuation of Benefits

2. Economic benefits arising from the Project have been estimated separately for the fertilizer and the power sectors, which are the major consumers of natural gas. Other gasconsuming sectors are transport and steel production. Benefits are based on: (i) Switched (non-incremental) demand or resource cost saving, which reflects the benefits derived from savings using liquefied natural gas (LNG) instead of naphtha. This figure is derived by using the supply market price, which is the cost of production at cost insurance freight (CIF) prices. Unmet (incremental) demand that is valued by using the demand price based on the free on board (FOB) prices, reflecting the price that consumers are willing to pay for the LNG product.

(ii)

3. Volume demand by end users, as verified from interviews with stakeholders,8 is shown in Table A4.1. Table A4.1: Demand Forecasts (MMSCMD)
Sector Fertilizer Power Demand Unmet demand = 10 MMSCMD Switched demand = 8 MMSCMD Switched demand = 7 MMSCMD

MMSCMD = million metric standard cubic meters per day. Source: Asian Development Bank estimates.

Benefits associated with environmental benefits of using clean gas rather than coal have been excluded from the analysis due to difficulties in quantifying them. However, these could be substantial, ranging from $4 million to $24 million per annum. GAIL (India) Limited and Indian Oil Corporation Limited.

Appendix 4

27

4. An important feature of these estimates is the combined demand from the fertilizer and power sector, which exceeds the 5.0 million metric tons per annum plant capacity at Dahej. This result raises two important points: (i) additional plant capacity is needed to meet the requirements of users in the fertilizer, power, and other sectors; and (ii) the switching of consumers from expensive alternatives, such as naphtha, will create demand for natural gas from existing suppliers. 1. Valuation of Costs

5. Financial capital costs were converted to economic costs by excluding taxes and interest during construction. Traded components were converted to the domestic numeraire by using a shadow exchange rate factor of 1.1. The capital cost included those costs associated with the LNG terminal and the expansion of the HBJ pipeline. 6. Besides capital expenditures, the valuation included operations and maintenance cost of the LNG terminal and expanded HBJ pipeline, with the latter accounting for about 2.0% of the capital cost of the HBJ pipeline. The valuation also takes into account the cost of imported LNG, net of duties. C. Economic Internal Rate of Return

6. The recalculated EIRR in 2006 prices is estimated to be 32.6% (Table A4.2), compared with the appraisal estimate of 23.0%. The higher EIRR is attributed to the substantial price gap between natural gas and naphtha, which contributed to higher resource cost savings (thus higher benefits) derived from switching to gas. Sensitivity analysis indicated that the EIRR is robust under a wide range of scenarios (Table A4.3).

28

Appendix 4

Table A4.2: Petronet LNG Limited Economic Internal Rate of Return (Rs million)

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

CAPEX of LNG Terminal (487.1) (4,824.7) (6,054.6) (10,954.6)

CAPEX of Associated Facilities (Expanded HBJ)

O&M Cost of LNG Terminal

O & M of Associate d Facilities

Cost of Imported LNG

Benefits

(24,207.2)

(1,062.4) (1,756.9) (1,761.1) (1,788.9) (1,840.0) (1,919.2) (2,101.9) (2,171.3) (2,206.0) (2,390.3) (2,484.4) (2,521.0) (2,735.1) (2,808.2) (2,881.0) (3,139.7) (3,226.2) (3,316.7) (3,625.0) (3,733.5) (3,837.9) (4,201.5) (4,317.6) (4,439.2) (4,870.4)

(484.1) (463.5) (450.0) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8) (434.8)

(17,335.0) (33,270.6) (33,286.1) (33,044.2) (36,506.4) (46,347.5) (54,338.8) (62,655.4) (47,688.7) (49,363.7) (50,724.9) (52,383.0) (53,954.5) (55,442.7) (57,254.5) (58,840.1) (60,760.6) (62,595.1) (64,322.5) (66,442.9) (68,269.5) (70,517.5) (72,653.8) (74,668.3) (77,127.5)

25,209.9 58,669.0 58,254.7 57,940.2 59,184.9 59,200.3 59,678.5 60,133.5 65,176.5 67,093.3 69,066.7 71,098.0 73,189.1 75,341.8 77,557.6 79,838.8 82,186.9 84,604.2 87,092.6 89,654.0 92,291.0 95,005.3 97,799.6 100,676.1 103,637.0 EIRR

Net Benefit (487.1) (4,824.7) (6,054.6) (10,954.6) (17,878.8) 23,177.9 22,757.6 22,672.4 20,403.7 10,498.8 2,803.0 (5,127.9) 14,847.0 14,904.5 15,422.6 15,759.2 16,064.8 16,656.1 16,987.4 17,424.2 17,765.3 18,257.5 18,710.2 19,042.9 19,748.8 19,851.5 20,393.3 21,133.8 21,204.4 32.6%

( ) = negative, EIRR = economic internal rate of return, CAPEX = capital expenditure, O&M = operations and maintenance, LNG = liquefied natural gas, HBJ= Hazira-BIjaypur-Jadgishpur. Source: Asian Development Bank estimates.

Appendix 4

29

Table A4.3: Petronet LNG Limited Sensitivity Analysis

Item Base Case 15% Increase in O&M Cost 20% LNG Price Increase 10% Decrease in Benefits All four adverse scenarios at the same time EIRR (%) 32.6 31.9 22.2 21.5 3.9

EIRR = economic internal rate of return, O&M = operations and maintenance, LNG = liquefied natural gas. Source: Asian Development Bank estimates.

30

Appendix 5

SOCIAL, ENVIRONMENTAL, HEALTH, AND SAFETY PERFORMANCE A. Petronet LNG Limited Facilities

1. Petronet LNG Limited (PLL) has set up a liquefied natural gas (LNG) receiving, storage, and regasification facility at Dahej, Gujarat state. The LNG terminal has a designed capacity of 5.0 million metric tons per annum (MMTPA) in phase I, with an expansion envisaged to 10.0 MMTPA in phase II. GAIL (India) Limited distributes natural gas from this terminal to consumers through a pipeline from Dahej to Vijaypur, which runs parallel to the existing HaziraBijaipur Jagdishpur (HBJ) pipeline. 2. At the Dahej site, the Gujarat Maritime Board allotted 55 hectares of land to set up the LNG terminal. The facilities at the existing Dahej terminal include: (i) 2.43-kilometer (km) jetty; mooring dolphins, breasting dolphins, unloading platforms, a gangway tower, walkway bridges. unloading facilities: LNG loading arms (3), LNG arm (1), unloading line (2), vapor return line, and de-superheater. LNG storage tanks: two tanks (full-containment type), each with 160,000 cubic meter (m3) gross capacity. boil-of-gas recovery system: cryogenic compressors (3); suction gas de-superheater and recondensor. send out facilities: low-pressure in-tank pumps. high-pressure in-tank: pumps, shell and tube vaporizers, submerged combustion vaporizers. auxiliary facilities: gas turbine generators3 units each of 7.6 megawatts (MW)); and a transmission line (220 kilovolt ampere from Gujarat Electricity Board). marine facilities:

(ii)

(iii) (iv) (v) (vi) (vii)

3. The terminal started commercial operations on 9 April 2004. The Operations Evaluation Mission (OEM) focused on the evaluation of activities in phase I of the construction and operation of the Dahej LNG terminal. B. Social Impacts

4. A public hearing is a mandatory requirement by Ministry of Environment and Forests (MOEF), before it can grant Environmental Impact Assessment (EIA) clearance. The Gujarat Pollution Control Board conducted the public hearing for phase I on 19 November 1999, and notices were published on 14 February 2001 in two newspapers. No objections were raised. 5. At the project site, some 15 unauthorized occupants were provided alternate plots of land by Gujarat Industrial Development Corporation (GIDC), an ex gratia payment for constructing new dwellings, and a sustenance amount of funding. PLL made the monetary payment to GIDC, which paid the occupants. 6. PLL is undertaking corporate social responsibility activities, such as constructing a temple, and contributing infrastructure for drinking water and roads. The company also has recruited local people to provide security services, firefighting, and green belt maintenance. Further, PLL has given the contract for housekeeping to a local person.

Appendix 5

31

C.

Description of the Environment

7. During construction of the terminal, the environmental impacts were limited. The EIA and environmental management plan suggested adequate preventive measures. In the current operational phase, the plant is meeting the environmental standards and conditions as prescribed by enforcement and regulatory bodies. The details on compliance are as follows: 1. Terrestrial Environment a. Air

8. Ambient Air Quality. An agency approved by Gujarat Pollution Control Board (GPCB) regularly monitors sulfur dioxide (SO2), nitrogen oxides (NOX), suspended particulate matter (SPM), and hydrocarbons and flammable gases in the plant premises. Ambient air quality impacts are found to be within the standards prescribed by GPCB. For example, in April 2006, the 24 hourly ambient air quality values at various locations in and around the plant premises (near main gate, near fire station, near tank 101, and near canteen) were well below the GPCB standards (Table A5). Table A5: Ambient Air Quality Values at PLL, Dahej (April 2006)
Std. No. 1 Pollutant Unit GPCB Limit Suspended particulate matter 500 g/m3 (SPM) 2 Oxides of sulphur (SO2) 120 g/m3 120 3 Oxides of nitrogen (NOx) g/m3 4 Hydrocarbon 160 g/m3 GPCB = Gujarat Pollution Control Board, g/m3 = micrograms per cubic meter. Source: Asian Development Bank estimates. Range of Ambient Concentrations 112145 1829 2534 2538

9. Stack Gas Emissions. The stack gas emissions from the gas turbine generators (GTG) in the terminal are constantly monitored, and are within the standards prescribed by GPCB. As the three GTGs run on natural gas, the emissions of SPM and SO2 are small. NOX is the only significant potential pollutant. To address this issue, the GTGs are equipped with lean-burn technology to control the amount of NOx emissions. The submerged combustion vaporizers for LNG gasification also operate on natural gas, and are a potential source of NOx emissions. However, they are used only occasionally during the winter months, which minimizes this risk. Their contribution to NOx emissions is small compared with the emissions from the GTGs. The stack gas emission monitoring results from the GTGs in April 2006 indicated SPM values of 39 milligrams per normal cubic meter (mg/Nm3), well below the GPCB limit of 150 mg/Nm3. Likewise, the NOX values were 20 parts per million (ppm), less than half the GPCB limit of 50 ppm; and the SO2 emissions were zero, compared with the GPCB limit of 100 ppm. b. Water

10. As PLL gets industrial water from GIDC, no groundwater is used. No wastewater is discharged outside the plant premises.

32

Appendix 5

c. 11.

Noise Level

Noise levels are generally within the standards (except at a few locations in the plant). d. Hazardous Waste

12. A small quantity of waste oil is generated, which is disposed of through a GPCBaccredited contractor. 2. Coastal Environment

13. As indicated by the high levels of suspended solids, the coastal water adjacent to the Dahej LNG facility is very turbid. The concentration of suspended solids, originating naturally from the dispersion of bed sediment in the water, varies widely. High tidal influence and strong currents mix the water column well. The overall productivity of marine resources is low, and the levels of phytoplankton pigments are markedly low. Considering the quantitative and qualitative nature of zooplankton, the area can be rated moderate to poor in secondary production. Consequently, the Gulf of Khambat has no active commercial fishing. 14. Potential impacts on the marine environment during the operational phase of the Project involve (i) an LNG spill, (ii) release of wastes generated by ships or port terminals, and (iii) large-scale release of fuel or chemicals due to accident or collision. Although an LNG spill would not cause serious damage to the marine environment, it would create considerable risk of fire and explosions. Major accidental spills of oil, though rare, have the potential to contaminate the marine environment. Such spills can occur due to accidents, such as ship or tanker collisions and ship grounding, which in turn are dependant on traffic density. Since the LNG tankers run on natural gas and not diesel oil, the potential oil spill from an LNG tanker would be small compared with that from ships running on diesel oil or from oil tankers. An appropriate traffic control scheme and adequate navigational aids would reduce the frequency of such encounters. PLL will participate in the traffic control management plan for the Dahej port and the Gulf of Khambat, which the Gujarat Maritime Board will prepare. 15. Due to unpredictable climatic conditions during the monsoon season, the original project design included a breakwater to reduce the potential for accidents while ships are mooring at the jetty. PLL has conducted some independent studies, which concluded that the breakwater was not essential for safe ship operations. Based on the recommendation of several consultants, PLL decided not to construct a breakwater at Dahej. Instead, it is constructing an additional LNG storage tank, which will provide the necessary operational flexibility during the monsoon season. While the decision not to build the breakwater will reduce environmental impacts, the marine safety issues at the jetty are being reviewed with assistance from Gaz de France (GDF) and other international consultants. D. Health and Safety

16. The comprehensive environmental impact assessment studies for the LNG terminal, which were carried out by the Institute for Petroleum Safety and Environment Management, Oil and Natural Gas Corporation Limited, and Water and Power Consultancy Services Centre for Environment, assessed the fire and explosion risks under different scenarios. The studies found that under most scenarios the impacts would be within the plant premises. As designed, the LNG installation is intrinsically safe. Except in a war-like situation, when the tank would leak considerably, the nearest inhabitants are not under threat. In addition, Sofregaz conducted a

Appendix 5

33

rapid risk analysis of the LNG terminal at Dahej for three different types of LNG storage tanks,9 and recommended a full-containment type tank. The impacts of gas release from the safety valves of the full storage tank showed that this scenario had no effect outside the battery limits of the terminal. 17. As these results show, apart from possible risks associated with the jetty, operating conditions are safe. To date, the Dahej LNG terminal has achieved 2.73 million accident free man-hours of operation since the start of operations. The National Safety Council, which conducted a safety audit of the plant in October 2005, made recommendations for improving the safety programs, procedures, and systems. GDF also carried out a safety audit of the Dahej terminal and submitted its final report in November 2005 with recommendations. In particular, GDF highlighted that the jetty remains one of the main safety issues for Dahej. GDF recommended that a review of the nautical procedures be implemented to ensure they are appropriate for the current jetty configuration. PLL has had three near misses in the past 2 years, which is higher than the global average of about 0.3 near misses per year. E. Mitigation Measures for Environmental and Safety Risks

18. Because LNG is a clean energy source compared with oil and coal, the Project improves the environment while meeting the rising energy requirements of the country. The LNG terminal has minimal environmental impacts. However, due to the nature of the product being handled, safety issues are a high priority. The Dahej terminal has adopted a variety of measures that are environmentally friendly and contribute to enhanced safety, including the following: (i) Terminal operations are centrally controlled by computer using a system that continuously measures and monitors all process parameters, and allows immediate identification and location of leaks in the terminal system. Emergency signals and alarms then are sent out for immediate response. An unloading control room is situated at the jetty to receive continuous data on wind speed and wave heights in the vicinity. Emergency responses to wind and wave conditions, as well as LNG leaks, are prescribed, and procedures for implementation are established. The jetty terminal is equipped for firefighting. Another important feature is the system for automatic disconnection of the unloading arm from the ship in case of an emergency. For jetty operations, PLL has engaged an experienced port operator to provide services that include hazard prevention, as well as health, safety, and environment services related to jetty operations. With the assistance of the port operator, the Health, Safety and Environment Unit is involved in prevention activities on the waterfront. The two existing LNG storage facilities are full-containment tanks that are safer than double-containment tanks. The tanks have other advantages in addition to safety, such as reduced boil-off gas during unloading operations (due to higher operating pressure), and less risk from ruptures and accidents. Due to the site conditions, instead of conventional open rack vaporizers, PLL has adopted an indirect LNG regasification system that uses a glycol water air

(ii)

(iii)

(iv)

(v)

Version dated 5 November 1998.

34

Appendix 5

heating system. The air heating system has proved to be environment-friendly, producing a significant amount of clean water from condensation of humidity in the air. PLL has started collecting this water for cleaning and plant irrigation. (vi) The fire protection and safety measures at PLL Dahej include spill detector, fire detector, gas detector, water curtain, and deluge spray systems. A mutual aid system is in place with other companies operating in the Dahej industrial estate.

(vii)

19. In accordance with legal requirements, PLL has prepared various management plans to handle an emergency situation. These plans are as follows: (i) PLL has prepared an emergency response plan (ERP) to mitigate potential damage to health and the environment from fires, explosions, and toxic releases. The ERP prescribes actions and procedures for dealing with major releases, unignited releases, and fire and explosion emergencies. The ERP also is supported by (a) gas detection, (b) safety shutdown and fire protection systems, (c) safety and security zones, (d) a ship and facility emergency response plan, (e) coordination with Gujarat Maritime Board and the Coast Guard, and (f) evacuation plans and procedures. An offsite emergency management plan was prepared in July 2003 for Dahej area (Vagra Taluka), though it needs to be updated. The local crisis group (chaired by the deputy collector) and the district crisis group (chaired by the district collector) were formed in the district in accordance with the Chemical Accidents (Emergency Planning, Preparedness, and Response) Rule 1996 under the Environment (Protection) Act 1986 to combat any disasters or emergency situations that might endanger the safety and health of public. PLL is a member of the Disaster Management Centre, Dahej. PLL has prepared an oil spill contingency plan for its Dahej marine terminal, which details the arrangements for responding to oil pollution incidents at the tanker jetty. It also shows the relationship of the plan to the National Oil Spill Disaster Contingency Plan, and to the district and regional Plans.

(ii)

(iii)

F.

Institutional Arrangements and Monitoring Program

20. The PLL Dahej terminal complies with legal requirements related to environment and safety. PLL has been reporting the status of its operations in accordance with regulatory standards to various government bodies, such as MOEF and GPCB, which monitor the conditions under which clearances are granted. As a proactive measure, PLL has had its Dahej operations audited, and obtained third-party certifications for environment, health, and safety. Reputable organizations also have conducted some additional safety audits, and have recommended improvements to PLL.

Appendix 5

35

21.

Specific legal compliance requirements are as follows: (i) MOEF, New Delhi cleared the EIA report for the Dahej terminal, subject to certain conditions. 10 Since then, PLL has been submitting compliance reports on conditions stipulated by MOEF to the regional office of MOEF at Bhopal. The Forests and Environment Department of the government of Gujarat also stipulated certain conditions for Coastal Regulation Zone clearance for construction of the LNG import terminal at Dahej. 11 PLL submits compliance reports to the state Forests and Environment Department every 6 months. GPCB provided a no-objection certificate in 200012 for setting up the LNG project, and subsequently gave a consolidated consent and authorization to operate in 2004,13 subject to certain conditions. The consents were issued under the Air Act 1981, Water Act 1974, and Authorization under the Hazardous Waste (Management and Handling) Rules 1989, and its subsequent amendments under the Environment Protection Act 1986. GPCB monitors compliance to ensure that the conditions stipulated under the consent are being met. PLL submits quarterly environmental monitoring reports, as well as an annual environmental statement to GPCB. The chief controller of explosives has provided licenses for liquid nitrogen storage and diesel storage, and provided a no-objection certificate for commissioning the LNG storage tanks. PLL has taken out a public liability policy.

(ii)

(iii)

(iv)

(v)

22. The Dahej LNG terminal received International Standards Organization (ISO) 9001 certification for quality management system in its first year of operation. The terminal also has received Occupational Health and Safety Management system 18001 certification, and ISO 14001 certification for its Environment Management System in 2005.

10 11

Letter dated 27 December 2000. Letter dated 29 September 2000. 12 Dated 2 February 2000. 13 Dated 28 September 2004.