Validation Report Reference Number: XVR 2013-28 Project Number: 39921 Investment Number: 7245 December 2013 India: Dahej Liquefied Natural Gas 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 – Bharat Petroleum 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 (India) Limited IOCL – Indial Oil Corporation Limited KFW – KFW Bankengruppe LNG – liquefied natural gas 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. 2 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. 3 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.