Core group outlines risks in Rs 22,000 cr gas import

The risks involved in the ambitious project, which proposes to set up an integrated chain of liquification plant overseas, transportation of gas and supply to the fertiliser units in India through pipelines, would need to be mitigated in order to enhance the financeability of the project, the report says.

Factors which could affect the viability of the project also include a breakdown or interruption during operation stage of the project, lack of demand for the endproduct, changes in statutory levies, suspension of project and risks to the project sponsors.

The report says that to mitigate the risk related to inadequate gas reserves, there should be a contractual commitment from the owner of the gasfield that in the event of depletion of gas reserves, the project would be provided access to alternative reserves.

It should be ensured that the gas field owners provide evidence of sufficient reserves to meet contractual obligations, allowing current and future verification of such reserves by reputed third parties and contractually prohibiting unacceptable dilution of such reserves through sales to future third parties.

The project should be so structured that the responsibility of ensuring timely commissioning lies with a single reputed engineering, procurement and construction (EPC) contractor having a past track record of implementing such projects on schedule.

The report further says to ensure that construction contracts have a fixed-price, date-certain andturnkey basis providing for liquidated damages, performance tests and warranties.

Apart from a delay in completion, a cost-overrun could also occur on account of currency mismatch in the sources and use of funds.

This could be especially true in the case where bulk of the financing would be in rupee and the EPC cost would be in hard foreign currency.

Unless long-term forward cover is made available, the options available for mitigating the risk would be limited to building in a high element of cost contingency while estimating the cost of the project and securing the financing for such inflated costs.

Given the national importance attached to this project, the currency requirement and fluctuation could be met through the Reserve Bank of India.

Operating risk of the project would depend on the quality of operating management, efficiency and smoothness of operations and previous experience of operator with the technology, it points out.

The mitigation of operation risk should be achieved by enteringinto firm operation and maintenance contracts with existing local operators, it says adding the contracts should have targets and penalties in case of inability to achieve targets.

The cashflows of the project would depend upon the demand for fertilisers as LNG is primarily to be used for production of fertilisers.

Fertiliser demand would, however, depend upon the policies of the government and any change in the prevalent retention pricing mechanism or the import policy with respect to fertilisers could lead to changes in demand.

Suitable assurances would be required from the government in this regard as changes could have a considerable impact on the cashflows of the project.