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High tax bogs down BG's India LNG project

British oil and gas major BG Group Plc said on Friday high tax and resulting weak demand for liquefied natural gas had slowed down development of its 5.3 million tonne per year import terminal on India's west coast.

The first phase of the LNG import terminal with a regassification plant and storage capacity of 2.65 million tonnes was scheduled for completion in 2005. British Gas pledged to invest $550 million in the project.

This week, however, British Gas emerged as one of eight companies to qualify to bid for another LNG terminal. It threw its hat in the ring for bankrupt Enron Corp's $2.9 billion power project south of Bombay. That nearly complete project includes a 2,184 MW power plant and adjoining LNG facility.

"We have not made any fresh investment (in the first project) after buying out the Indian partner because we have not been able to find buyers (for LNG). Further work would be undertaken only after finding buyers," Nigel Short, chief executive of BG's Indian unit, told Reuters.

British Gas India Private Ltd, the Indian subsidiary of BG Group, last August gained full control of an LNG project in Pipavav, buying out its domestic partner for an undisclosed sum.

Local media reported that BG paid 3.75 billion rupees to buy out the 42 per cent holding of Sea King Infrastructure Ltd, the local partner in the project.

Short declined to comment on that matter.

Short said power generating companies were finding LNG a costly fuel because of the high sales tax imposed on it in the western state of Gujarat where the terminal is to be built.

"This is one key issue impacting the economies of this project," he said.

The sales tax on LNG in Gujarat is 23 per cent, the highest of any Indian state.

Short also said the import tariff of 51 per cent on capital equipment for the LNG terminals was negatively impacting the economies of the Pipavav project.

"A thorough review of tariffs is required to make gas a potential fuel for the power sector," he said.

Short said it was doubtful whether the Gujarat government's plan to double power generation capacity to 10,000 MW in 10 years would be achieved.

British Gas has a presence in India's gas distribution and transmission sector through the majority-owned Gujarat Gas Company Ltd and it recently announced a deal to acquire Enron India's 30 per cent stake in the Panna, Mukta and Tapti offshore gas and oil fields.

Short said the government also had to put in place a regulatory framework to ensure a level playing field for new entrants into the country's gas sector compared with well entrenched players such as state-run gas utilities.

"We need to move the debate on regulatory framework further to ensure a level playing field for all stake holders," he said.

India's federal Petroleum Ministry is in the midst of preparing a regulatory framework for the gas sector to be in place after the administered price mechanism is dismantled in April 2002.

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