NTPC Clarifies Issues Related to Gas Supply Contract with RIL

It is to be informed that recently certain issues relating to NTPC’s gas supply contract with RIL (Reliance Industries Ltd) have been raised in the media. In this connection, NTPC would like to inform you the following:

1. NTPC is a customer-focused power utility and it very well understands the impact of fuel price in the overall cost of electricity and always makes efforts to source fuel at competitive price. NTPC had planned to add 2600 MW capacity at its existing gas power plants at Kawas and Gandhar during the 10th Plan (2002-2007). As per NTPC’s investment policy, approval of the Board is accorded when availability of fuel is ensured for the life of the plant. Accordingly, NTPC invited International Competitive Bids (ICB) through RFQ and RFP process for sourcing RLNG / Natural Gas in the year 2002.

The bid process involved the following steps viz. ‘Expression of Interest’, ‘Request for qualification’, (hereinafter referred to as the RFQ”), ‘Request for Proposal’ (hereinafter referred to as the “RFP”), ‘Letter of Intent’, (hereinafter referred to as LoI) ‘Letter of Acceptance’ (hereinafter referred to as LoA) and, inter alia, entering into the ‘Gas Sale & Purchase Agreement’ (the “GSPA”) by NTPC for fuel supply of Natural Gas. The RFP contained the agreements in the draft form, which were to be signed by the successful bidder with NTPC.

2. After the bid evaluation process including unconditional acceptance of the GSPA, including liability clause in the event of default of supply of gas, (as amended prior to the submission of the revised financial bids), the bid of Reliance Industries Ltd. (“RIL”) was accepted on 16th June 2004 and Letter of Intent (LOI) was issued to RIL for supply of 132 trillion BTU per annum (12 MMSCMD approx) natural gas at a price of US$ 2.34/MMBTU on NCV basis at landfall point for a period of 17 years after opening the final price bid in May 2004 against an International Competitive Bidding (ICB). Price bid was submitted by all bidders without any condition.

3. After the placement of LOI and its acknowledgement by RIL, a contract came into existence with draft of GSPA already finalized during bidding process. RIL instead of executing the GSPA sought to reopen the GSPA by seeking major changes in its terms & conditions and to thereby dilute the very complexion of the contract. This was unacceptable to NTPC.

4. As NTPC insisted upon RIL for executing the GSPA as per the draft finalized during bidding process, RIL instead of honouring the contract and executing the GSPA unilaterally modified the GSPA in December, 2005 and signed and forwarded the same to NTPC for countersigning. These unilateral changes were unacceptable to NTPC and were unfavourable to customers. NTPC in these circumstances was constrained to file a suit against RIL for specific performance in the Bombay High Court.

5. Though the trial of the civil suit which was filed in December, 2005 had commenced and the matter was at the stage of cross examination of witness in February 2009, RIL filed in February, 2009 the chamber summons for amendment of its pleadings and it is the appellate order in these proceedings that has been challenged by NTPC in the Hon’ble Supreme Court on 5th September 2009.

NTPC would like to put on record that there has not been any delay on its part. Further, NTPC is also taking the case at appropriate Government fora for safeguarding the NTPC’s interest effectively. All the actions in the ongoing suit against RIL are being taken by NTPC, as per the legal advice from AGI/SGI.

6. NTPC is a long-term player in the field of power sector and works on corporate ethics. For NTPC, fuel pass through means protection of long-term interest of its customers by sourcing of fuel at the most competitive price and NTPC always strives hard for keeping the fuel price at the lowest possible – whether coal or gas. NTPC with this objective of getting gas at the most competitive price and fuel security went for ICB.

7. As per the LoI dated 16th June 2004 placed by NTPC on RIL, the delivered price of gas considering the commodity price of US$ 2.34/MMBTU works out to US$ 3.30 / MMBTU. The price has now been fixed as US$ 4.20 / MMBTU (landfall price) by the Government without prejudice to the NTPC case. The delivered price, after including transportation charges, will work out to be US $ 6.67 / MMBTU. The variable cost of power considering US$ 3.30 / MMBTU is Rs. 1.07 / kWh and with US$ 6.67 / MMBTU it works out to be Rs. 2.17 / kWh, (Difference of Rs. 1.10 /kWh)

The expansion project of 2600 MW at Kawas & Gandhar will generate 19.36 Billion kWh of electricity in a year. The total savings in a year for purchase of this electricity by DISCOMs / SEBs will be around Rs. 2,130 Crores per year. For 17 years, it works out to be around Rs. 32,000 Crores and will directly benefit the consumers.

8. NTPC has been facing shortfall of 8-9 MMSCMD for operating its existing gas plants at 90% PLF. As against this, the gas allocated from KG D-6 was only 2.67 MMSCMD. Therefore, NTPC has been trying to source gas from various available sources keeping in view the market situation and the interest of consumers to make available maximum power. There is no truth in any statement saying that NTPC is buying costlier gas since it is a pass through for NTPC. NTPC has already been procuring spot RLNG at competitive rates from market through tenders and without any take or pay liability. Since there is no take or pay liability clause, generation of power from spot RLNG is done as per the schedule given by the beneficiaries and the beneficiaries who do not schedule power allocated to them have no financial liability on account of spot LNG. In order to avoid prejudice to NTPC’s claim under the suit against RIL in the Hon’ble Bombay High Court, on legal advice received, the allocated gas has not been taken for existing gas based power stations at Kawas and Gandhar and instead NTPC is agreeable to take this gas for its NCR stations at Anta, Auraiya, Dadri and Fridabad for which NTPC has approached the Ministry of Power on 26th May 2009 and 17th June 2009.

Supply of gas at US $2.34 / MMBTU will not only ensure cheaper power but also more power to customers by full capacity utilization under merit order scheduling, which will be in the interest of all consumers.

NTPC stands committed to protect the long-term interests of its customers and enhancing value for its shareholders.