GAIL, investors to benefit from new depreciation rate for gas pipelines

New Delhi, September 6, 2005 GAIL and the large number of investors will benefit from the approval accorded by the Department of Company Affairs (DCA) for change in the depreciation charge on the gas and oil pipelines. As against the present depreciation rate of 10.34 per cent per annum, the revised rate will be 3.17 per cent per annum based on the useful technical life of 30 years on a prospective basis from the 1st of April 2005. The move would benefit investors and enhance their wealth by rewarding them with higher returns due to the increase the book profit of the Company.

The new rate of depreciation follows GAIL’s efforts to eliminate the disparity in depreciation rates, considered for tariff calculation purpose and for book accounting purpose. Prior to this order, the depreciation rate for tariff calculations was 3.17% while the depreciation for book accounting was taken as 10.34%. Consequently, the books of accounts reflected a lower asset value than the actual value of the asset as per the true life span of 30 years for the assets. The parity in the depreciation rates would result in not only lesser provision towards book depreciation but also reflecting the actual book value of pipeline assets.

In its interim report, the Tariff Commission brought out the dichotomy in technical useful life of the asset which in turn led to different rates of depreciation to be charged in calculation of tariff vis a vis charging depreciation in the books of accounts. Taking into account a lower asset value, as per the books of accounts, while reviewing gas pipeline tariffs, the interim report had reflected a reduction in the tariffs of GAIL. The interim report did not take into cognizance that the actual capital recovery, was effected through the tariff over a longer time span of 30 years which was lower than what the books of accounts reflected. This led to under recovery of the cost of the asset as calculated in the tariffs.

This dichotomy in the treatment of depreciation triggered GAIL to pursue with the DCA and convince them that the true life of a pipeline asset is higher than that of normal plant and machinery and that the accounting depreciation rate for gas pipelines should be commensurate with the true life of the asset. GAIL was of the opinion that the useful life of the asset is much more and estimated to be around 30 years. International practices in developed gas economies also consider the life of pipeline to be over 30 years. GAIL’s views were endorsed by the Engineers India Ltd. (EIL) and Institute of the Chartered Accountants of India (ICAI), the apex body of technical and accounting expertise.

GAIL has also presented a new methodology, the Cost of Service Method, to the Tariff commission for pipeline tariff calculation. Unlike the earlier method, the Cost of Service Method is not only cost reflective and enables periodic review but also is the method adopted in many advanced gas economies. The method can remove the disparity between the recovery of the asset as depreciation as per the books of accounts and as considered for the calculation of the tariff. Besides, it would also allow easy, structured and transparent calculation of an integrated tariff required for the inter-state gas grid, which would eventually come up in the country over time. It is understood that the new methodology has been principally agreed and accepted

In China, 12 plants based on Shell Gasification Process are under different phases of construction and will be operations during the year 2006 onwards. The synthesis gas produced from these plants will be used for manufacturing fertilizers, methanol and hydrogen. There are strong similarities between India and China as both have large coal deposits and would need growing quantities of fertilizer and chemicals / petrochemicals for the growing domestic markets.

GAIL is taking initiative to bring modern technology to unlock the potential value of coal acreage suitable for coal gasification in India. The technology helps in reducing manufacturing costs besides replacing existing, older and environment unfriendly facilities.

GAIL will be using domestic coal to produce synthesis gas or ‘syngas’ by using Shell Coal Gasification Process (SCGP), which will used for the first time in India. SCGP has an inherent capacity of handling high ash content and hence is suitable for Indian coals.

GAIL plans to set up a Rs. 750 crore coal gasification project in Eastern India with coal handling capacity of 2000 tonnes per day to produce 3.4 MMSCMD of syngas. The industries in the eastern India which run on liquid fuel for their feedstock / fuel will save huge costs when they use synthesis gas which can be made available at US$ 3 per mmbtu.

GAIL’s focus in eastern India is primarily due to the availability of abundant amount of coal in West Bengal, Bihar, Jharkhand and Orissa. The identified locations for setting up the project are Haldia, Durgapur and Talcher. West Bengal Government is also very keen to revive the fertilizer plants and Chief Minister of West Bengal has assured GAIL of full support for setting up plants based on coal gasification technology.

Shell has carried out an initial Screening Study for GAIL, based on data of Indian coal which has high ash content and the outcome is encouraging. A Detailed Feasibility Report (DFR) by Uhde India Ltd. in collaboration with their parent company M/s Uhde Gmbh, Germany is expected to be ready by October 2005. The DFR will look into various possible end uses of the synthesis gas, availability, proximity of source and quality of coal and will facilitate a commercial decision for investment in coal gasification project.

GAIL is also in talks with Coal India Limited for jointly evaluating various Overground Coal Gasification Technologies/clean coal technologies available in the industry and for examining the suitability of these technologies for Indian coal. GAIL and CIL will evaluate the possibility of utilizing the product of Overground Coal Gasification for use in various industries as fertilizer, chemicals including but not limited to the production of petrochemicals.