Industry favours doing away with Customs duty on LNG

Expectations are running high that this Budget may tweak the import duty on liquefied natural gas (LNG). A move, which will not only benefit the importers, but also consumers from power, sponge iron, and fertiliser sectors.

However, whether the Finance Minister, Mr Pranab Mukherjee, will actually respond to the oil & gas industry demand will be known on March 16. Making their case stronger the industry has been stating that the shift to natural gas is also happening because of high crude oil and coal prices, coupled with decline in the domestic gas output.

The Government had on June 26 last year withdrawn import duty on crude oil. In line with the benefit given to imported crude oil, the same may be extended to imported gas which is more clean fuel and is used in highly subsidised and priority sectors such as power and fertilisers, the argue.

Sources said the industry expects the Government to abolish the import duty on LNG. A five per cent customs duty is charged on import of LNG and no credit is allowed for the customs duty. Thus, this goes into cost, which is ultimately passed on to the customers.

According to guesstimates, the two existing terminals and soon to be commissioned Dabhol terminal (March end) will receive around 250 LNG cargoes and the customs duty at the existing rate will be around Rs 2,500 crore. The customs duty is on the value of the product, and the price of LNG has been fluctuating.

At present, the two operating LNG terminals in the country — Petronet LNG's Dahej terminal and Shell's Hazira terminal — are importing about 13 million tonne (mt) annually. While Petronet's terminal is running at excess capacity of around 11 mt (terminal capacity is 10 mt), Shell is running at full capacity (of 3.6 mt) and is also in the process of increasing it to 5 mt.

Also new terminals are coming up — Petronet's Kochi terminal (5 mt) and Dabhol LNG terminal (5 mt) — which will lead to further rise in imports. Domestic gas output has been on a decline with the production from the country's largest gas fields Reliance Industries-operated steadily falling after hitting a peak of 60 mscmd in end 2009. The gas availability in 2012-13 is expected to be 180-190 mscmd up from 166 mscmd, at present.

Out of this, 166 mscmd — 120 mscmd is from domestic sources and 46 mscmd is imported gas. However, the imported gas quantity in the energy mix is expected to hit 64 mscmd in 2012-13.

Sources say that besides demand, the availability of imported also depends on price and tie-up with the suppliers. With no significant increase expected in the next two-three years, the existing the companies are depending on imported gas. Besides, the long, medium term contracts, the importers are also looking at the spot market.