Validation Report

Reference Number: XVR 2013-28 Project Number: 39921 Investment Number: 7245 December 2013

India: Dahej Liquefied Terminal Expansion Project

This is a redacted version of the document that excludes information that is subject to exceptions to disclosure set forth in ADB’s Public Communication Policy 2011.

Independent Evaluation Department

ABBREVIATIONS

ADB – Asian Development Bank BPCL – Corporation Limited EIA – Environmental impact assessment EIRR – economic internal rate of return EPC – engineering, procurement, and construction contract ESHS – environment, social, health, and safety FIRR – financial internal rate of return GAIL – GAIL () Limited IOCL – Indial Oil Corporation Limited KFW – KFW Bankengruppe LNG – MMTPA – metric tons per annum PLL – Petronet LNG Limited SIEE – summary initial environmental examination TCA – time charter agreement XARR – extended annual review report

NOTE

In this report, “$” refers to US dollars. “Rs” refers to Indian Rupees.

Key Words adb, emissions, environmental impact assessment, evaluation, ied, india, libor, liquefied natural gas, lng, vlaidaiton, energy

The guidelines formally adopted by the Independent Evaluation Department on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report.

In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area.

PROJECT BASIC DATA

Project Number: 39921 XARR Circulation Nov 2012 Date: Investment Number: 7245 XARR Validation Date : Dec 2013 Project Name : Dahej Liquefied Natural Gas Terminal Expansion Project

Country : India Approved Actual ($ million) ($ million) Sector : Energy Total Project Cost : 336.0 296.9 Cofinanciers : Indian lenders ADB Financing : Loan 150.0 150.0

Approval Date: 30 Aug 2006 First Disbursement: 11 Jul 2008 Final Disbursement: 17 Feb 2009 Signing Date of 27 July 2007 Commercial 15 Jul 2009 Facility Agreement: Operations Date: Project Officer s: Name Location From : To : K. Fukuya ADB headquarters 2006 2007 S. Chakraborty ADB headquarters 2008 2010 S. Gupta ADB headquarters 2010 2012 S. Shah INRM 2012 2013 Validator : B. Harrison, Peer Reviewer: L. Hauck, Senior Evaluation Consultant Specialist, IED2 Quality Reviewer: H. Feig, Lead Director: H. Hettige, IED2 Evaluation Specialist, IED2 ADB = Asian Development Bank; IED2 = Independent Evaluation Department, Division 2; XARR = extended annual review report.

I. PROJECT DESCRIPTION

A. Project Background

1. Petronet LNG Limited (PLL) owns and operates a liquefied natural gas (LNG) import and regasification terminal at Dahej, Gujarat, India. The Asian Development Bank (ADB) invested Rs6.52 billion for a 5.2% equity to build the first phase of this terminal. 1

2. The terminal is based on a build–operate–transfer structure under a 30-year concession ending 30 December 2035 when the port will be transferred to Gujarat Maritime Board. PLL will own the regasification facility for 90 years. The terminal started its commercial operation in 2004 and reached its production capacity in 2005.

3. In August 2006, the Board of Directors of ADB approved a direct loan of Rs6.75 billion for the Dahej Liquefied Natural Gas Expansion Project to expand the terminal’s capacity from 5.0 million metric tons per annum (MMTPA) to 7.5 MMTPA and later to 10.0 MMTPA. 2

1 ADB. 2004. Report and Recommendation of the President to the Board of Directors: Proposed Equity Investment and Partial Credit Guarantee to Petronet LNG Limited for the Dahej Liquefied Natural Gas Project in India . Manila. 2 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Petronet LNG Limited for the Dahej Liquefied Natural Gas Terminal Expansion Project in India . Manila.

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4. The ADB loan is supported by a partial credit guarantee from KFW Bankengruppe.

5. PLL is a publicly listed company in India. Current shareholders are GAIL (India) Limited (GAIL) (12.5%), Oil and Natural Gas Corporation Limited (12.5%), India Oil Corporation Limited (IOCL) (12.5%), Bharat Petroleum Corporation Limited (BPCL) (12.5%), Gas de France Suez (10%), ADB (5.2%), and the public (34.8%). 3

6. The project aligns with the ADB energy strategy of promoting clean fuels, the creation of energy infrastructure for sustainable growth, and promoting private sector investment in the energy sector.

B. Project Features

7. The project is a successful public–private partnership operating under a 30-year build– operate–transfer concession agreement with the Gujarat Maritime Board and the expansion is a demonstration of the success of the financial and legal elements of that structure that support projects of this nature. The terminal’s original design facilitated the expansion from 5 MMPTA to 10 MMPTA LNG. Additional facilities in the expansion include third and fourth LNG storage tanks, additional compressor for boil-off gas recovery, additional send-out facilities, and two additional gas turbines.

8. Construction. The expansion project was implemented under fixed price turnkey engineering, procurement, and construction contracts (EPC). The EPC for the third tank was awarded to Ishikawajima-Harima Heavy Industry Co., Ltd (IHHICL) and for the fourth tank to a consortium of IHHICL, Toyo Engineering India, Toyo Engineering Corporation, Itochu Corporation, and Mitsui and Company.

9. Gas supply. PLL is obligated to purchase 7.5 MMPTA LNG under a 25-year sales and purchase agreement with Ras Laffan Liquefied Natural Gas Company (II) in Qatar. The purchase price was fixed at $2.53 per 1 million BTU (British Thermal Unit) for the first 5 years and, thereafter, the LNG price fluctuates with the Japan-oil cocktail price of crude oils with a cap and a floor based on the average price over the immediately preceding 60 months. PLL also has a 20–year gas sale and purchase agreement with Mobil Australia Resources Company Pty for a further 1.44 MMTPA LNG. 4

10. Transportation. Transportation is carried out under long-term time charter agreements (TCAs) to transport the LNG from Rasgas, Qatar, to Dahej. The original project had two tankers (Disha and Raahi) dedicated to its transport and signed one TCA for each tanker. For the expansion, following an international competitive bid, a third TCA was signed to add a third dedicated tanker (Aseem) . The vessels are managed, operated, and maintained by Shipping Corporation of India, which also has a 29.1% shareholding in the consortia that own Disha and Raahi . PLL has a 3% stake in Aseem.

11. Off-take. PLL has a 25–year sale agreement with GAIL (60%), IOCL (30%), and BPCL (10%) for the supply of LNG. The off-takers are obliged to purchase at a pass-through price on a take-or-pay basis.

3 See PLL website 9/16/13 at http:www.petronetlng.com/ 4 PSOD. Monitoring Report (Annual): For Loan and Guarantee Transactions–Corporate Risk Rated NSO, 1–9 December 2012.

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C. Progress Highlights

12. The expansion project at Dahej achieved early completion in March 2009 and began commercial operation in July 2009 with nameplate capacity of 10 MMTPA at a total project cost of Rs15.70 billion (within the projected cost of Rs15.80 billion and ahead of the original September 2009 target date).

13. The expansion was completed without interfering with the productive capacity of the existing facility and with minimum shutdown time to tie in the new facilities.

14. With the expansion, PLL operations at Dahej increased rapidly to exceed the 10.0 MMTPA in 2012. In addition, PLL was developing a second terminal at Kochi, Kerala in parallel with the works being done in Dahej. The Kochi terminal was funded through a consortium of Indian lenders, the International Finance Corporation, and Proparco. In May 2007, the ADB loan was restructured from all limited sources financing for the Dahej expansion into a corporate loan with the Dahej and Kochi lenders to rank pari passu in the combined cashflow waterfall and security package.

15. PLL continues to expand operations at Dahej with the award of two EPC contracts for the construction of a second LNG jetty to mitigate associated risks of increasing port operations and to increase the capacity beyond 10.0 MMTPA at the terminal. Completion is expected in late 2013.

II. PROJECT EVALUATION

A. Development Outcomes and Impacts

1. Private Sector Development

16. The extended annual review report’s (XARR) rating for private sector development was excellent . The XARR stated that industry statistics show India as one of the world’s largest consumers of gas, having a significant supply–demand gap with domestic supply falling well short of demand, and a need to import gas either as LNG or piped to meet demand. PLL was set up to address the supply–demand gap and was the first private company in India to import LNG and the expansion from 5.0 MMTPA to 10.0 MMTPA at Dahej contributed to reducing the supply–demand gap. Significant deregulation has occurred in the energy sector since the original project inception. Further development of LNG plants in India has followed.

17. The XARR stated that PLL has been a leader in setting benchmarks at international standards in the development, management, operation, and expansion of its LNG facilities. There has been significant transfer of know-how and skills through the technical and management assistance provided by GDF International Limited at the outset, which has continued through the expansion under a technical assistance agreement between GDFI and PLL. During the 3–year construction stage for the Dahej expansion, an average of 800 construction personnel worked at the site, reaching a peak of 2,070 workers during June–July 2008. At corporate level, PLL increased its staff by 30% to reach 313 employees in March 2012.

18. The XARR also recognized the demonstration effect of the project with two other LNG terminals developed in India by Shell—one at , Gujarat and another at Ratnagiri, Maharashtra.

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19. The validation agrees with the XARR rating of excellent for private sector development. The expansion project (as well as the additional terminal at Kochi and now the additional jetty at Dahej to optimize capacity) is a clear demonstration of the success of the private sector development that PLL has brought not only to the industry but also in the form of job creation and the introduction of private sector best management practices. The additional LNG terminals developed by another sponsor in India also show the wider impact of the project.

2. Business Success

20. The XARR rated business success excellent noting that the expansion has been a significant contributor to the overall performance of PLL and that its performance for fiscal year (FY) 2009–2012 exceeded appraisal forecasts. Sales of natural gas were 28% higher than estimated and net income increased by 268% during the period. There were no material supply, operation, or off-take issues during the period. PLL has minimized supply risk with the long-term Rasgas supply contract and minimized market risk with the long-term off-take agreements with GAIL, IOCL, and BPCL. There has been a steady increase in LNG deliveries during FY2009– 2012 period with the terminal exceeding nameplate capacity of 10 MMTPA in FY2012. Annual terminal sales increased over the same period with 548 trillion British terminal units sold in FY2012.

21. The XARR noted that PLL was compliant with both its historic and projected debt service ratio covenants, and are above the 1.1 times covenanted. The debt-to-equity ratio is less than 2.33:1 The XARR calculated the financial internal rate of return (FIRR) of the project and compared it to the weighted average cost of capital.

22. This validation agrees with the XARR presentation of financial results and to the FIRR and weighted average cost of capital calculations and concurs with XARR rating of excellent for business success. The FIRR exceeds the weighted average cost of capital by a larger margin than the minimum threshold required for an excellent rating.

3. Contribution to Economic Development

23. The XARR rated the project’s contribution to economic development excellent based on its estimation of an economic internal rate of return (EIRR) which is greater than the 20.0% EIRR required for an excellent rating. The estimation is said to be conservative and exclusive and excludes some nonquantifiable benefits, such as the positive environmental benefits of using clean and efficient fuel sources. The XARR did not contain a downside sensitivity analysis. For a consistent approach with the report and recommendation of the President this should have been included. This validation concurs with the EIRR calculation and, therefore, concurs with the rating of excellent for contribution to economic development.

4. Environment, Social, Health, and Safety Performance

24. The XARR rated the environmental, social, health, and safety (ESHS) performance satisfactory. The expansion project was Category B for environment and Category C for involuntary resettlement and indigenous peoples. The XARR stated that the initial terminal project was rated Category A for environment and environmental and social impacts were largely addressed at the time of initial project. A summary initial environmental examination (SIEE) was prepared for the expansion project based on an existing environmental impact assessment (EIA) and two updated EIAs. The project was implemented within the boundaries of the existing site and no land acquisition was required and the project is not within areas

5 inhabited by indigenous peoples. The project had no significant impacts during construction. The emission of nitrogen dioxide from the additional gas turbines was the only cumulative environmental impact identified in the SIEE. However, it was recognized that a clear-burning technology adopted by the project minimize emissions by the additional gas turbine generators to levels acceptable under international standards.

25. The XARR also discussed the well-defined corporate social responsibility program of PLL. The company undertakes socioeconomic development programs to supplement efforts to meet the needs of the community with the objective of community self-reliance in areas generally around its Dahej and Kochi work centers. These programs are mostly in the areas of education, civil infrastructure, health care, sports and culture, as well as community entrepreneurship. It operates a risk assessment framework and comprehensive health and safety regime. The XARR also noted the strong management teams, strong corporate governance practices in line with regulatory requirements, and the high standard of public disclosure and transparency. 5

26. This validation agrees with the satisfactory rating for environmental, health, social, and safety performance of the project. All ADB environmental and social policy requirements appear to have been met through the SIEE and EIAs that were prepared and the PLL management’s commentary on environmental and social matters in its 2012–2013 Annual Report supports this conclusion. 6

5. Overall Development Impacts and Outcomes Rating

27. The overall development impacts and outcomes rating of excellent is agreed by this validation. There are four subcriteria supporting this development impact rating: (i) private sector development (rated excellent ), (ii) business success (rated excellent ), (iii) economic development (rated excellent ), and (IV) environment, social, health, and safety performance (rated satisfactory ).

B. ADB Investment Profitability

28. The XARR rated investment profitability satisfactory . The XARR stated that the direct loan of Rs6.7 billion has an 11.5–year tenor, inclusive of a 3.5–year grace period. The loan has a partial credit guarantee from KFW. No payment defaults have occurred.

29. The ADB investment profitability rating of satisfactory is agreed. The criterion for a satisfactory rating in investment profitability is that the loan margin should be 0.9 times that of comparator margins. With the benefit of the KFW partial credit guarantee and the aggressive prevailing pricing in the Indian market at the time of transaction the loan meets the criteria for satisfactory rating. The XARR also noted the value appreciation of the ADB equity stake in PLL, but this could not be considered for the investment profitability evaluation of the loan for the expansion. These investments are required to be evaluated separately.

5 See PLL 15th Annual Report , 2012–2013. 6 While environmental safeguard requirements were generally followed, the potential costs associated with economic impacts arising from any tanker collision or grounding on surrounding fishing communities were not quantified in the EIA.

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C. ADB Work Quality

1. Screening, Appraisal, and Structuring

30. The XARR rating for screening, appraisal, and structuring was excellent . The XARR stated that the project met the ADB strategies relating to country, energy sector, private sector development, sustainable infrastructure, and environmental protection. The project also directly builds on the work done by ADB with the government on policy supporting private sector entry into the LNG sector. The success of PLL is a leading example of successful implementation of private–public partnership in infrastructure development. The expansion has performed well and builds on the earlier work done by ADB. The rating of excellent for screening, appraisal, and structuring is agreed by this validation.

2. Monitoring and Supervision

31. The XARR rating for monitoring and supervision was satisfactory . The XARR did not directly discuss the details of the monitoring mission or the covenant compliance checks, but did note that site visits were made and the loan was in compliance.

32. This validation notes that annual monitoring reports were prepared in December 2010, February 2011, and December 2012 and these were reviewed in order to consider the monitoring and supervision rating. Also noted is the fact that there is an officer of the Private Sector Operations Department in the India Resident Mission who facilitates monitoring when needed. The satisfactory rating for monitoring and supervision for the expansion project is agreed.

3. Role and Contribution

33. The role and contribution of ADB was rated satisfactory. The XARR again noted that the project supports the ADB energy sector strategy of promoting a shift to cleaner fuels. It also supports the promotion of private sector participation in the energy and infrastructure sectors.

34. This validation also notes the long-term commitment to the LNG sector made by ADB through the policy dialogue that preceded the original project plus the expansion project. The involvement of ADB in the project also brought KFW into the project and provided comfort to subsequent lenders on further projects undertaken by PLL. The rating of satisfactory is agreed by this validation.

4. Overall Work Quality

35. Based on the above, the XARR has rated overall work quality satisfactory . This validation agrees with rating.

D. ADB Additionality

36. The XARR rated ADB additionally excellent . This validation agrees with the excellent rating for ADB additionality for the expansion project. The XARR stated that ADB provided long- term fixed rate local currency financing at a time that this was not available in the Indian market. Its participation in the loan introduced KFW to the financing by way of a partial credit guarantee. The XARR also noted that the management of PLL advised the XARR mission that the role of ADB was catalytic in attracting international financiers to the other projects it has undertaken.

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The XARR made an additional point about ADB role on the board of PLL, but this is considered to be outside the direct activity of the loan for the expansion project and does not factor the validation’s concurrence with the excellent rating.

E. Overall Assessment

37. This validation agrees with the XARR overall project rating of highly successful with development outcome and ADB additionality being rated as excellent.

Table 1: Overall Ratings

Reason for Disagreement and /or Criteria XARR IED Review Comments Development outcomes and impacts 1. Private sector development Excellent Excellent 2. Business success Excellent Excellent 3. Economic development Excellent Excellent 4. ESHS performance Satisfactory Satisfactory Overall Development outcomes Excellent Excellent and impacts Rating ADB Investment profitability Satisfactory Satisfactory ADB Work quality 1. Screening, appraisal, and Excellent Excellent structuring 2. Monitoring and supervision Satisfactory Satisfactory 3. ADB role and contribution Satisfactory Satisfactory Overall ADB Work Quality Satisfactory Satisfactory ADB Additionality Excellent Excellent Overall Assessment Highly Highly successful successful Quality of XARR Satisfactory ADB = Asian Development Bank; ESHS = environmental, social, health, and safety; IED = Independent Evaluation Department; XARR = extended annual review report. Note: From May 2012, the Independent Evaluation Department has replaced categories for evaluation rating and criteria labeled “partly” or “less” by “less than” (e.g., “partly satisfactory” to “less than satisfactory,” and “less successful” to “less than successful”) to improve clarity of this third category within a four-point scale. Source: ADB Independent Evaluation Department.

III. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons

38. This validation concurs with the lessons identified in the XARR from this highly successful project.

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B. Recommendations

39. No further addition to the recommendations given in the XARR.

IV. OTHER ASSESSMENTS AND FOLLOW-UP

A. Monitoring and Evaluation Design, Implementation, and Utilization

40. This validation has no additional data to present.

B. Other Aspects

41. None was identified.

C. Data Sources for Validation

42. Data sources for this validation include the following documents:

(i) XARR, Dahej Liquefied Natural Gas Terminal Expansion Project, 14 November 2012; (ii) Monitoring Report (Annual): For Loan and Guarantee Transactions–Corporate Risk Rated NSO, 1–9 December 2012; (iii) A Summary Initial Environmental Examination, Proposed Dahej Liquefied Natural Gas Terminal Expansion Project (India), 1 August 2006; (iv) Report and Recommendation of the President to the Board of Directors: Proposed Loan to Petronet LNG Limited: India Dahej Liquefied Natural Gas Terminal Expansion Project, August 2006; (v) Memorandum: Private Sector Operations Department, 19 May 2006; (vi) PLL 15th Annual Report, 2012–2013 ; (vii) PLL website: http:///www.petronetlng.com/announcement.aspx (viii) India Energy website https:www.indianenergysector.com/oil-gas/lng-liquefied- natural-gas-terminals-in-India (ix) Monitoring Report (Annual): Dahej LNG Terminal Expansion Project, December 2010; and (x) Memorandum: Office of Risk Management: Annual Monitoring Report, 10 February 2011.

D. Comments on XARR Quality

43. The XARR was well written and logical in approach. It was internally consistent and provided sufficient information to support the assessments and ratings made. Overall, the quality of the XARR was satisfactory .

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Table 2: Extended Annual Review Report Quality

Less than Excellent Satisfactory Unsatisfactory Satisfactory Quality and completeness of

evidence and analysis to X substantiate ratings Consistency with XARR Guidelines

(Project Administration Instructions X 6.07b) Plausibility of assumptions underlying economic and financial analyses,

including calculations of EIRRs, X

FIRRs, and assumptions on project sustainability Quality of lessons identified and

recommendations X Clarity and internal consistency of the

XARR X Overall Assessment X EIRR = economic internal rate of return, FIRR = financial internal rate of return, XARR = extended annual review report. Source: ADB Independent Evaluation Department.

E. Recommendations for Independent Evaluation Department Follow-Up

44. None.