No major reduction in LNG pricing post-budget: Infraline

Dimple Verma
10 March 2003

New Delhi: Budget 2003-04 had reduced the customs duty on capital goods for LNG plants from 25 per cent to 5 per cent. But now, Infraline research has done a thorough analysis of the impact of the reduced customs duty on capital goods on the final gas pricing, and believes that there will not be any major reduction.

The proposed change in the customs duty may not shave off more than $0.05-0.08 per MMBTU (US dollars per million British thermal units) for the gas customers. According to an analysis by Infraline research, due to the reduction in the customs duty the change in the delivered price shall come down from $4.96 per MMBTU to $4.88 per MMBTU only.

As per the estimates of the ministry of petroleum and natural gas, the regassification charges are estimated to be in the range of $0.65. Out of these regassification charges, if 60 per cent goes towards the recovery of the fixed cost and the balance towards the operating cost, the fixed recovery component works out to $0.39.

Approximately 60 per cent of these charges are on account of capital equipment and the balance is on account of other construction material and services. The capital equipment cost works out to $0.39 * 0.6 = $0.234. This capital equipment charge already factors in the effective current custom duty of around 50.8 per cent. The price prior to custom duty works out to $0.155.

In the post-budget scenario, the effective custom duty is 26.67 per cent, which means that the new custom duty shall be $0.0414, thereby implying the regassified price of $0.5736 per MMBTU. The difference of $0.65 and $0.5682 gives a saving of around merely $0.764/MMBTU. The entire details of the final calculations are available at www.infraline.com/LNGSceneraio.xls.

About the current rate of taxation, Gujarat Infrastructure Development Board says the effective sales tax on LNG is 22 per cent, and the effective tax is 34.2 per cent. On a more optimistic scenario, if the Gujarat government reduces the sales tax to 12.5 per cent then the prices shall come down by $0.40-$.50 per MMBTU.