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SUMMER INTERNSHIP REPORT

REVIEW OF INTERNATIONAL COAL LINKAGE

AND

STUDY OF FUEL SUPPLY AGREEMENT (FSA) COAL

AT

UNDER THE GUDANCE OF

Mr. U. Gautam Nayan , DGM , Power Plant, JSL

Ms. Farida Khan, Senior. Fellow, CAMPS, NPTI

SUBMITTED BY:

PRATYUSH KUMAR RAY

ROLL NO - - 59, REGD. NO - - 12NPTI0075

MBA – POWER MANAGEMENT

NPTI Complex, Sector-33, Faridabad – 121003, Haryana

Affiliated to,

MAHARISHI DAYANAND UNIVERSITY,ROHTAK

AUGUST, 2013

C A P T I V E P O W E R P L A N T (2 X 125 MW)

JINDAL STAINLESS LIMITED

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ACKNOWLEDGEMENT

At the outset, I am highly obliged to Mr. S.K Choudhary, Principal Director (CAMPS) NPTI,

Mrs. Manju Mam, Director NPTI, and Mrs. Indu Maheshwari, Deputy Director,

NPTIwho gave me the opportunity to do summer internship in a pioneer organization like Jindal

Stainless Limited .I would again like to thank my internal Guide Mrs. Farida Khan for helping me

and guiding me throughout my project.

I first thank Mr BIVASH GHOSH, HOD, POWER PLANT, JSL, for giving me the opportunity to

work on such an insightful project.

I would like to extend my thanks to Mr. SMRUTI RANJAN NAYAK, DGM, POWER PLANT,

JSL for support during this project.

A special vote of thanks to Mr. U. GAUTAM NAYAN, DGM POWER PLANT, JSL and

also my project guide for his support and guidance during this project.

I also record my sincere thanks to MR. G.V RAKESH, AGM, MATERIALS, JSL for his guidance

during this project.

I would like to extend my thanks to Mr. ASHOK RATH, AGM, HR, JSL for support during this

project.

Special thanks to Mr. A.K. SINGH, AVP, JSL for his constant support and guidance during the entire

course of my project at Jindal Stainless Limited.

I also give my immense pleasure to thank the entire staff of J i n d a l S t a i n l e s s L i m i t e d for

their immeasurable cooperation necessary for carrying out project related work.

I also extend my thanks to all the faculties in CAMPS (NPTI), for their support and guidance in my

project.

Thank you all for being there for me always.

PRATYUSH KUMAR RAY

NPTI, FARIDABAD

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DECLARATION I, PRATYUSH KUMAR RAY, Roll No: - 59, Class of 2012-2014, M.B.A – Power

Management, of the National Power Training Institute, Faridabad, hereby declare that the

Summer Training Report entitled

“REVIEW OF INTERNATIONAL COAL LINKAGE AND STUDY OF FUEL SUPPLY

AGREEMENT (FSA) COAL”

It is an original work and the same has not been submitted to any other institute for the award of

any degree.

A Seminar presentation of the Training Report was made on 4th of September, 2013 and the

suggestions as approved by the faculty were duly incorporated.

Presentation In-charge Signature of the Candidate

(Faculty)

Counter signed:

Principal Director,

N.P.T.I Faridabad

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EXECUTIVE SUMMARY As a student of MBA in Power Management from National Power Training Institute, I got an

opportunity to do my summer internship in Jindal Stainless Limited (Captive Power

Plant) , which is principal player in s teel sec tor and also maintains i ts capt ive power

plant for catering i ts dai ly needs and supply excessive generat ion to the grid .

During the period of my internship, I got the opportunity to work on two projects. First part of

my project is Review of International Coal linkages and the second part is a study project which

is Study of Fuel Supply Agreement (FSA) Coal.

PART 1-REVIEW OF INTERNATIONAL COAL LINKAGE

The objective of the Project is to study about the various sources of coal in the world which is

feasible for import to India. Based on that, the study focuses on the existing importing countries

like Indonesia, South Africa, Australia, Russia and evolving options for importing countries like

Mozambique and Botswana.

Based on various factors the study will be helpful in choosing the right place to go for investment in

coal assets around the world.

The present (June 2013) installed capacity of Indian power plant is 226GW, of which around

132GW is from coal based thermal power plant1. Nearly around 60% of the generated power is

from coal based power plant. The main source of the coal for the TPP is domestic coal. But due to

various reasons the availability of domestic coal and their linkages to power plant is been critical

nowadays.

Because of that the TPP has to rely on International coal. There are lots of countries are in options

for importing coal to India. But some of the constraint in the International coal is the deciding factor

for the source of import ing.

1 SOURCE : CEA

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The constraints are regulations related to coal in the importing countries, Infrastructure in

the importing country, logistics, supply chain management, and the price fluctuation in the

International market and Indian port infrastructures.

This project will give the detailed study and the analysis of economic feasibility of importing coal

from Indonesia, Australia, South Africa, Russia, Botswana, Mozambique to Indian TPP.

PART 2-FUEL SUPPLY AGREEMENT (FSA) COAL

The objective of the project is to study about the Fuel Supply Agreement (FSA) coal with all its

terms and conditions. And the FSA is analyzed ion accordance to the FSA signed by Jindal Stainless

Limited.

Also analysis is done on the new FSA with the pros and cons and the feasibility of a company to

enter into the new FSA.

The various options for a power plant to procure coal for its consumption are also discussed.

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LIST OF ABBREVIATIONS

ACQ Annual Contracted Quantity

BU Billion Units

CCL Central Coalfields Limited

CEA Central Electricity Authority

CERC Central Electricity Regulatory Commission

CIL Coal India Limited

CPP Captive Power Plant

COD Commercial Date of Operation

DISCOMs Distribution Companies

EDR Economic Demonstrated Resources

FDI Foreign Direct Investment

FSA Fuel Supply Agreement

GCV Gross Calorific Value

IEGC Indian Electricity Grid Code

Kcal/Kg Kilocalorie per Kilogram

MoP Ministry of Power

MCL Mahanadi Coal Fields

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TABLE OF CONTENTS

Certificate……………………………………………………………………………i

Acknowledgement…………………………………………………………………...ii

Declaration…………………………………………………………………………...iii

Executive Summary………………………………………………………………….iv

List of Abbreviations…………………………………………………………………v

PART 1 (REVIEW OF INTERNATIONAL COAL LINKAGE)

1. Introduction…………………………………………………………………..……….2

2. Objective of the Project………………………………………………………………3

3. Scope of the Project…………………………………………………………………..4

4. Importance of the Project……………………………………………….…………….5

5. Organization Profile…………………………………………………….…………….8

5.1. JSL in India…………………………………………………………………9

5.2. JSL Worldwide…………………………………………………….………..9

5.3. Products of JSL……………………………………………..……………..10

6. Key Regulations in Importing Countries……………………………………………11

6.1. Indonesia…………………………………………………………………..11

6.2. Australia……………………………………………………………………14

6.3. South Africa………………………………………………………………..15

6.4. Mozambique……………………………………………………………….15

6.5. Botswana…………………………………………………………………..15

6.6. Russia………………………………………………………………………15

7. Research Methodology……………………………………………………………….17

8. Study of Feasibility of Import………………………………………………………..19

8.1. Indonesia……………………………………………………………………19

8.1.1. Coal Reserve………………………………………..……………19

8.1.2. Coal Brand…………………………………….…………………19

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8.1.3. Transport………………………………………………………….21

8.1.4. Geography & Climate…………………………………………….24

8.1.5. SWOT Analysis………………………………………………….25

8.2. Australia……………………………………………………………………26

8.2.1. Coal Reserve……………………………………………………..26

8.2.2. Coal Quality………………………………………………………27

8.2.3. Transport………………………………………………………….28

8.2.4. Geography & Climate…………………………………………….32

8.2.5. SWOT Analysis…………………………………………………..33

8.3. South Africa………………………………………………………………...34

8.3.1. Coal Reserve………………………………………………………34

8.3.2. Transport…………………………………………………………..35

8.3.3. Geography & Climate……………………………………………..36

8.3.4. SWOT Analysis……………………………………………………37

8.4. Mozambique………………………………………………………………….38

8.4.1. Coal Reserve……………………………………………………….38

8.4.2. Transport…………………………………………………………...39

8.4.3. Geography & Climate……………………………………………..39

8.4.4. SWOT Analysis…………………………………………………….40

8.5. Botswana……………………………………………………………………..41

8.5.1. Coal Reserve……………………………………………………….41

8.5.2. Geography & Climate………………………………………………42

8.5.3. SWOT Analysis…………………………………………………….43

8.6. Russia…………………………………………………………………………44

8.6.1. Coal Reserve………………………………………………………..44

8.6.2. Transport……………………………………………………………46

8.6.3. SWOT Analysis…………………………………………………….47

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9. Indian Ports & their Infrastructure…………………………………………………….49

10. Conclusion……………………………………………………………………………51

11. Recommendation……………………………………………………………………..55

12. Limitations…………………………………………………………………………….56

13. Result & Discussion…………………………………………………….…………….57

14. Future Scope Of Project………………………………………………………..…….58

PART 2 (STUDY OF F.S.A COAL)

1. Fuel Supply Agreement………………………………………………………………60

1.1 Contents of FSA……………………………………………………………..60

2. FSA w.r.t Jindal Stainless Limited……………………………………………………61

3. Coal Cost Analysis……………………………………………………………………63

4. Acquiring Coal For JSL……………………………………………………………….64

5. Analysis of Coal mix…………………………………………………………………..69

5.1. Methodology………………………………………………………………….69

6. Overview of new FSA………………………………………………………………….70

6.1. Terms and Conditions……………………………………………………...…72

6.2. Cause of Opposition………………………………………………………….73

6.3. Govt. Intervention…………………………………………………………….74

6.4. Conclusion on new FSA……………………………………………………...75

6.4.5. Recommendations………………………………………………….76

7. Modifications in the new FSA (August)………………………………………………..77

Bibliography………………………………..…………………………………………….78

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PART I

REVIEW OF INTERNATIONAL COAL LINKAGES

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INTRODUCTION

The conventional resource which is available in this world next to oil and gas is

Coal. But Oil & Gas is mainly contributing to the automobile sector. Due to the cheaper

cost, coal has been mainly used for steel and for electricity generation. Coal has been

mainly classified in to two types which are coking and non-coking coal. Coking coal has

been mainly used for steel production and non-coking coal has been mainly used for

power generation. In India we have more than 250 billion tonnes reserves are available,

which stands the fifth largest reserve in the world after USA, Russia, China, Australia.

Even though the available reserves are quite sufficient to meet our domestic demand, but

the present scenario has put up in in a situation to go for coal procurement from the

international market. With the present consumption scenario, the existing reserves will

come for next 100 years. So in order to extend the lifetime of existing reserve, we have to

follow the strategy of what USA is following for their Oil reserves. That is first use

others resources and then use your own resource.

Directly or indirectly the problems in the domestic coal market is making the power

promoters to go for overseas coal mine acquisition. Economically the overseas coal is not

comparable with the domestic, as the coal price in the Indian market is fixed by the

government and it is three times cheaper than the international coal. In spite of the

constraints, so many Coal based Thermal power plants are starving for their fuel due to

various constraints like strict environmental rules, poor railway infrastructure.

India is having a coastal line of 7517 km, so this is giving a geographical advantage

for us to have a imported coal based power plant nearby to our coastal area.

The major coal exporters in the world are Australia, Indonesia, Russia, Colombia, South

Africa, USA and China. But the cost associated in transporting the coal to India is

deciding factor to shortlist the main feasible countries from the options.

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OBJECTIVE OF THE PROJECT

The objective of the project is to find out the best country for importing coal to India. As

the problems in the domestic coal is increasing day by day, so rely on imported coal by the

Indian thermal power plant is an unavoidable factor. The project will give the detailed

feasibility analysis of importing coal from the major coal importing countries like

Australia, Indonesia, South Africa, Mozambique, Russia and Botswana.

Not only the internal problems of the coal importing countries, but also the Indian port

scenario also a key factor. So the project is to study about the Indian port scenarios also.

The second objective is to study the Fuel Supply Agreement (FSA) Coal.

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SCOPE OF THE PROJECT

The project is to find out the best resource for importing coal to India. There are lots of

countries are available for importing coal to India. But not all countries are economically

viable for India. As India is covered mainly with water and the cost of transporting bulk

volume through sea is the cheapest mode of transportation.

So the coal importing country should also have good sea connectivity. So based on

that the eligible countries for India is Australia, Russia, Mozambique, South Africa,

Indonesia, Botswana. The scope of the project is limited to these six countries only.

Further the Indian ports and the types of vessel which transport coal will also be key

economic factor. So the project also covers the study on Indian port scenario and various

vessels available for the logistics.

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IMPORTANCE OF THE PROJECT

Coal reserves have been distributed worldwide. In India we are having a very huge

resource of around 250 billion tonnes. In spite of this huge reserve, still our Indian TPP is

starving for their fuels.

As per CEA the power plant has to maintain a minimum stock level of 15 days for Pithead

based TPP and for other TPP it varies from 20 to 30 days depends upon their distance

from the power plant. But still out of the 85 operational coal based TPP, ten TPP are

running at a critical stock level of less than 7 days. And Nine TPPs are running at a super

critical stock level of less than 4 days2.

During the fiscal year 2012-13, the country has lost a generation target by 43.2 BU. Out of

this the loss of generation due to shortage of coal is 7 BU, and loss of generation due to

poor quality of coal is 7.7BU3. So the problem due to coal contributes around 35% of the

gap in generation target.

The main problem in the supply demand gap in the domestic coal is due to

Most of the coal mining areas are announced as No-go4 areas by Ministry of

Environment & Forest

Insufficient Rail wagons and Rail infrastructure

Poor Loading/unloading infrastructure

Operational Inefficiencies & coordination issues

Sudden increase in demand

2 SOURCE: CEA- DAILY COAL STOCK LEVEL REPORT

3 SOURCE: http://www.cea.nic.in/reports/yearly/energy_generation_12_13.pdf

4 No-go- It’s an area where coal mining is prohibited due to environmental concern.

5 SOURCE: http://www.cea.nic.in/reports/articles/thermal/advisory_blended_coal.pdf

http://www.cea.nic.in/reports/yearly/energy_generation_10_11.pdf

http://www.cea.nic.in/reports/articles/thermal/advisory_blended_coal.pdf

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Because of the above reasons the supply demand gap of thermal coal for the fiscal year

(2011-12) was 50 million tonnes. The projected gap for the current year (2012-13) is

84 million tonnes and it will increase to 230 million tonnes by (2017-18).

As per Notification issued by CEA dated 19th April-20115, all power generating

companies, power project developers, power equipment manufacturers are advised to

design the boilers for all future indigenous coal based TPP shall be made that the boilers

and its auxiliaries shall be designed for blend ration by weight of 30:70 (or higher)

imported/high GCV coal. The station facilities shall also be designed for handling,

unloading and blending of imported/high GCV coal.

Based on the above facts and in order to meet the clauses made in the PPA by the

power developers with buyers, it has been clearly visible that in future the Coal based TPP

has to rely on International coal in order to meet their deficit.

As India is covered by water on three sides, the seaborne trade of coal is the viable

option to meet the supply deficit from the domestic coal. As logistics is the main

deciding criteria to pick the importing options among various countries. But in focus of

long term we have to consider various other factors also into consideration.

The constraints involved in the deciding factor are regulations related to coal and the

investment in the importing countries, Infrastructure in the importing country, logistics,

supply chain management, and the price fluctuation in the International market and Indian

port infrastructures.

Based on the above criteria the following study will give the detailed analysis of importing

scenario from the country

Indonesia

Australia

South Africa

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Mozambique

Botswana

Russia

And their comparative analysis between these six countries and in respect to the Indian

port scenario.

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ORGANISATION PROFILE

The Jindal Group is a US $ 15 billion conglomerate which over the last three decades has

emerged as India’s one of the most dynamic groups.

Founded in 1952 by late Shri O.P Jindal, a first generation entrepreneur, it is today a

leading steel producer, with interests spanning across the spectrum, from mining ore to

manufacturing value added steel products.

“Where others saw walls, He saw doors”

Late Shri O.P Jindal

The present Chairman of the group is Mrs. Sabitri Jindal. Currently the group is basically

classified into four groups and each one of the group giant is looked in by one of the four sons of

Late Shri O.P Jindal. The four sons run the business separately without competing against each

other.

Fig: The Jindal Group Companies’ List

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JSL in India

Established in 1970 Jindal Stainless Ltd. is India’s largest Steel conglomerate. In India JSL has it

manufacturing units at Hisar in Haryana, Jajpur in Odisha, and Vizag in Andhra Pradesh.

One of the fully integrated stainless steel plant of Jindal Stainless is in the eastern part of India

located in the state of Odisha. The plant comprises of 250,000 tons per annum of Ferro Alloy’s

facilities and 1 million tons per annum of stainless steel making facilities with modern technology

and equipment sourced from Siemens VAI, SMS Siemag and Andritz Sundwig. This complex with

captive power generation is scalable up to 3.2 million tons per annum of stainless steel making,

which will make it the world’s largest stainless steel facility at single site.

To run the steel plant at Kalinga Nagar, Jajpur in Odisha JSL has a captive power plant of 250 MW

capacity comprising of 2 units of 125 MW each.

JSL WORLD WIDE

In year 2004, Jindal Stainless Ltd took over Stainless Steel division of PT. Maspion, Indonesia to

ensure a strong presence in this fast growing nation. PT. Jindal Stainless Indonesia (PT. JSI) is the

only producer of Stainless Steel in Indonesia. It is an internationally certified organization – ISO

9001:2008: Quality Management System, AD 2000 W0: Pressure Equipment (Germany),

PED/97/23/EC: Pressure Equipment (EU), which is capable of producing all the cold rolled grades

– 200, 300 and 400 series - of stainless steel.

At the time of takeover, total capacity of PT. JSI cold rolling plant was 60,000 MT per year and a

running production of around 1800 MT per month. In a span of 9 years, the plant has evolved into

a 150,000 MT per year capacity and a running production of around 10,000 MT per month. After

taking over the facility, in 2005, significant upgrade and revamping of electrical system of Z-1

Rolling mill from analogue to Digital drive and PLC was done. In 2006, PT. JSI started to plan for

capacity upgrades to 150,000 MT.

10

PRODUCTS OF JSL

The main products of Jindal Stainless Limited are:

Slabs

Blooms

HR coils

CR coils

Plates

Coin blanks

Precision Strips

Blade Steel

Stainless Steel Plumbing

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BRIEF OF KEY REGULATION IN COAL IMPORTING

COUNTRIES

KEY REGULATION IN INDONESIA

In January 2009, the GOI, after years of aborted efforts, finally passed a new mining law,

officially known as Law No. 4 of 2009 on Mineral and Coal Mining (Law 4/2009)

SALIENT FEATURES OF NEW MINING LAW

Mining can only take place in zones designated by the national government as open for

mining (Wilayah Pertambangan or WP). Mining zones can be of three types:

Mining business areas (Wilayah Usaha Pertambangan or WUPs), which are areas

open to private businesses on a competitive tender basis;

Community mining areas (Wilayah Pertambangan Rakyat or WPRs), which

are reserved for community mining activities; and

State reserve areas (Wilayah Pencadangan Negara or WPNs), which are areas

reserved for the strategic national interest and reserved for government-owned

corporations

New mining authorizations for private companies will be in the form of mining permits

known as Izin Usaha Pertambangan (IUP) with separate IUPs issued for exploration (IUP

Eksplorasi) and for production (IUP Operasi Produksi).

Exploration permits can only be issued through a transparent commercial tender.

However, once a company is awarded such a permit, it is guaranteed the right to an

IUP Operasi Produksi (production permit) without needing to go through a new

tender as long as it has fulfilled the terms of its exploration permit.

Within nine years of commercial production, foreign investment companies holding

mining licenses will be required to divest a minimum of 20 percent of the issued

capital of the IUP or IUPK holder to Indonesian nationals.

12

Each coal producer has to meet the Domestic market obligation (DMO) that is a

percentage of coal production each coal producer has to make available for the domestic

market. Every calendar year the DMO will be varying and the percentage of DMO will

be decided by the Ministry of energy and mineral resource. The DMO will never exceed

35 percent of the producer’s total production.

If the sellers are unable to arrange the sale of their DMO quantities with a stipulated

time, then they will be allowed to sell it in the export market.

The new mining law has made mandatory to sell the coal at the Government fixed

reference price. The reference price will be fixed by the government for every month.

The Indonesian coal price reference has been derived from the following procedure. First

the bench mark price has been decided. The Bench mark price is the simple average of

The Barley Jonker Index( Now Known as NEX Index), which reports spot

prices of New castle Index.

The Global COAL Newcastle Index (gcNEWC), which is also a Newcastle

linked spot price index.

The Platts Indonesia Coal Index for spot sales of coal with a CV of 5900 kcal/kg.

The ICI 6500, which is produced by Argus Media in partnership with an

Indonesian organization called Coalindo, for spot sales of coal with a CV of 6500

kcal/kg.

After establishing this ―benchmark price, reference prices are then calculated for eight

reference coals, which represent more than 80 percent of the coal that is currently

being produced in Indonesia.

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SALIENT FEATURES OF FDI POLICIES6

The FDI may be established in the form of either.

Joint venture between foreign capital and domestic capital owned by

Indonesian citizens, and/or Indonesia legal entities

Straight investment, in the sense of that the entire capital is owned by foreign

citizens and/or foreign legal activities

Business license is granted to the FDI Company for a period of thirty (30)

years since the commencement of commercial operation.

A joint venture company may carry out business activities categorized as important to

the State and serving the public, such as ports, generation and transmission as well as

distribution of electricity for public use, telecommunications, shipping lines, airlines,

potable water, public railways, atomic energy reactors and mass media. A Straight

investment company is not allowed to participate in the above business. The

Indonesian partner's shares in the joint venture company shall be at least five percent

(5%) of the total paid-up capital of the company upon its establishment.

The corporate tax in Indonesia is 25 cent.

The royalty charges are for Open cut mines it is 3 to 7 percent depends upon the quality of

coal and for underground it is 2 to 6 percent depends upon the quality.

6 SOURCE: http://www2.bkpm.go.id/file_uploaded/lawreg.php.htm

http://www2.bkpm.go.id/file_uploaded/lawreg.php.htm

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KEY REGULATION IN AUSTRALIA7

The foreign investment policy provides for Government scrutiny of many proposed

foreign purchases of Australian businesses and properties. The Government has the

power under the Foreign Acquisitions and Takeovers Act 1975 (the Act) to block

proposals that are determined to be contrary to the national interest. The Act also provides

legislative backing for ensuring compliance with the policy.

Under the Act, a foreign person is

a natural person not ordinarily resident in Australia;

a corporation in which a natural person not ordinarily resident in

Australia or a foreign corporation holds a controlling interest (that is, a holding of

15 percent or more);

a corporation in which 2 or more persons, each of whom is either a

natural person not ordinarily resident in Australia or a foreign corporation, hold

an aggregate controlling interest (that is, a total holding of 40 percent or more);

the trustee of a trust estate in which a natural person not ordinarily resident

in Australia or a foreign corporation holds a substantial interest; or

the trustee of a trust estate in which 2 or more persons, each of whom is

either a natural person not ordinarily resident in Australia or a foreign

corporation, hold an aggregate substantial interest.

A substantial foreign interest occurs when a single foreigner (and any associates) has 15

per cent or more of the ownership or several foreigners (and any associates) have 40 per

cent or more in aggregate of the ownership of any corporation, business or trust.

The corporate tax in Australia is 30%.

The royalty charges are different for Queensland and New South Wales. For Queensland

it is 7percent where the value of the coal produced does not exceed $100/tonne and

10% on the value of the coal exceeding $100/tonne. And for New South Wales the

charges are for open cut mining 8.2%, underground mining-7.2%, and deep

Underground mining 6.2%.

7 SOURCE: http://www.firb.gov.au/content/other_investment/other_investment.asp

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KEY REGULATION IN SOUTH AFRICA

The corporate tax in South Africa is 28 percent. And the royalty charges for coal is depends upon

the percent of ash content and it is 3% for the coal having less than 15 % ash content and 1% for

coal with greater than ash content

KEY REGULATION IN MOZAMBIQUE

The corporate tax in Mozambique is 35 percent and the royalty charges for the coal is 3 percent of

the sale value.

KEY REGULATIONS IN BOTSWANA

The Ministry of Mineral, Energy and water Resources held a Coal Roadmap Pitso on the 31st January

2012 under the theme “Botswana Coal Roadmap- Laying Future Coal Development”The Pitso[22] was

mainly aimed at providing a clear transparent view of the Government’s intentions for the

development of the coal resources thereby giving investors more confidence around their long term

strategy and implementation plans and also to enable investors to engage with government

constructively on the development of the Coal Roadmap and to create a partnership between Govt. and

Stakeholders to develop a coal road map.

KEY REGULATIONS IN RUSSIA Russia Development aid for coal industry Russian Prime Minister Vladimir Putin pledged ~US$8Bn in

development aid for coal industry by 2030.[29]

[Kuzbassrazrezugol (KRU), Russia’s 2nd largest thermal coal producer is supplying its coal to European

and Asian countries, and accounting for over 25% of the country’s total coal export.

[29] SOURCE: http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/commodity-insights-

bulletin/Documents/thermal-coal-q1-2012-April-2012.pdf

[22] SOURCE: PITSO Energy Initiative by Govt. of Botswana http://www.mmewr.gov.bw/pitso/energy/

16

Minutes of Meeting of Coal India with Russian Government:[33]

The 5th meeting of the Working Group on Mines & Metallurgy was held in

Moscow on 8-9 October, 2009.

Securing of Coking as well as Thermal Coal deposits in Russia; Russia requested India to

send specific information on Volume demand and qualitative requirement of Coal.

M/s. Zarubezhugol has expressed their interest to continue work on the Indian investments

into the coal industry of Russia and also expressed their interest in export of non-coking and

coking coal.

Giproshakht and VNIMI have requested the Indian side to expedite the signing of

Memorandum on Cooperation between Giprosphakht and VNIMI with CMPDIL

The Working Group noted the readiness of Zarubezhugol and Giproshakht to train the

Indian experts on a contract basis in the research and design institutes on modern

technologies of designing of coal (underground and coal open-pit mining), designing and

manufacture of the modern mountain-mine equipment, for acquaintance with modern

technologies for both OC and OG mining.

[33] SOURCE : http://coal.gov.in/fc.htm#CO-OPERATION_WITH_RUSSIA

17

METHODOLOGY

The aim of this project is to study about the main coal importing countries to India which is

Indonesia, Australia, South Africa and Mozambique. The Project will give the brief idea

about the regulatory aspects related to coal industry, the country’s foreign investment policies,

details of coal reserves and their quality, their infrastructure details, port capacity.

RESEARCH STRUCTURE

18

So here in our research the research problem is to find out the optimal solution to meet the

supply demand gap in domestic coal. So for this we have to go for coal from abroad. So our

research problem is to find out the optimal place to go for imported coal.

As the heart of project is main involved in the data’s related to the above aspects. The data

collected for the project is a combination of primary data as well as secondary data. The

primary data has been collected from the various websites belongs to the country’s government

and their ministry. And the secondary data has been collected from various research paper related

to coal, ports.

Once the data has been collected for the various coal importing countries, the data related to

Indian port infrastructure has been collected from ministry of shipping and various other websites

which are related to the ports.

Once the data has been collected, then the procedure for analysis has to be started. Once the

analysis has been done then we have to make a SWOT analysis for each country. Then analysis has

to be done in the manner by comparing the various aspects between the countries and with respect

to the Indian port scenario.

19

STUDIES OF COAL SOURCE & FEASIBILITY OF IMPORT

INDONESIA

COAL RESERVES

Indonesia is having a resource of 104.16 billion tonnes, out of which the economically

recoverable reserves are around 18.78 billion tonnes.

The major coal fields in Indonesia has been distributed in two Islands which are:

Kalimantan ( East Kalimantan & South Kalimantan)

Sumatra

8 SOURCE:GEOLOGICAL RESOURCE CENTRE - INDONESIA

20

The Kalimantan province is having reserves of 7.15 billion tonnes and the Sumatra Island is

having reserves of 11.15 billion reserves.

At present most of the coal productions are happening in Kalimantan province only and the

coal exporting also happening in these province only.

Indonesia‘s coal resources and reserves are mostly sub-bituminous (4500 – 5800 kcal/kg, gar)

and lignite-grade coals (<4500 kcal/kg, gar).

In Indonesia around 62 percent of the coal reserves are of the quality of medium quality (5100-

6100 kcal/kg), 24 percent of low quality( less than 4100 kcal/kg), 13 percent of high

quality(6100-7100 kcal/kg) and 1 percent of very high quality ( greater than 7100 kcal/kg).

21

COAL BRANDS IN INDONESIA

The main coal brands in Indonesia for which the bench mark price has been decided by the

government as per earlier mentioned procedure are as follows. The prices will be changing monthly.

Coal Brand

(Basic Coal Brand)

GCV

(GAR)

TM

(GAR)

Total

Sulphur

As

h Gunung Bayan I 7,000 10 1 15

Prima Coal 6,700 12 0.6 5

Pinang 6150 6,200 14.5 0.6 5.

5 Indominco IM East 5,700 17.5 1.6 4.

8 Melawan Coal 5,400 22.5 0.4 5

EnviroCoal 5,000 26 0.1 1.

2 Jorong J-1 4,400 32 0.3 4.

2 Eco Coal 4,200 35 0.2 3.

9

SOURCE: The Directorate General of Mineral, Coal and Geothermal, Ministry of Energy and

Mineral Resources, Republic of Indonesia

PORT AND INLAND TRANSPORTATION FACILITIES

As Indonesia is filled with Islands, the transportation of coal through Tug pulling barge is

common system. The Infrastructure in Kalimantan is in very good stage compared to Sumatra,

as Kalimantan accounts for more than 75 percent of the coal production in the country.

The following kind of practices is followed by the existing coal producer to shift the coal from the

mine to the port for export.

Coal transport from the mine stockpile to a barge port is either by truck or by OLC, or by barge

down either the Barito or the Mahakam River and on to a transshipment facility.

A major Kalimantan producer would likely adopt a mine-to-barge port delivery system that

uses (i) large diesel-powered shovels having bucket capacities of up to 34 m3 for overburden

removal;

22

(ii) mega- dump trucks, with capacities for transporting 185 tonnes of overburden or coal

per haul, for purposes of transporting the overburden to a reclaim storage area and coal to the

mine stockpile (iii) large trucks with carrying capacities from 60 t to 240 t per journey for hauling

the coal from the mine stockpile to a barge port or in a few cases to a fixed land port; and (iv)

flat-top barges pulled by a tug with the barges having carrying capacities ranging from 3 kt to 12

kt. Barging coal down either the Barito or the Mahakam river is a relatively low-cost method of

transporting coal when compared with the cost of truck transport. It’s possible to operate

barges up to a maximum capacity of 15,000 tonnes, 24 hours a day, year-round.

With respect to coal transshipment facilities, Kalimantan‘s coal exports are currently being loaded

onto seagoing vessels at six land-based ports, with a coal handling capacity of around 50 to 80

mtpa, and as of December 2008 at 34 floating transshipment facilities, with a coal handling

capacity of around 1709

mtpa. These transshipment facilities range in size from small floating

cranes with rated capacities of 3 to 5 mtpa to more advanced floating facilities that can handle up to

15 mtpa.

The Kalimantan floating facilities are located at 10 offshore anchorages while Sumatran

coal producers have access to two offshore anchorage areas.

The advantages of Barge and Transshipment facilities are

1. Low cost compared to the Trucks

2. Shorter gestation period to build Floating Transshipment facility compared to Port

3. Through Floating facility we can able to load

4. Low capital cost

5. Easily expandable to meet the growing demand.

Apart from the transshipment facilities, Indonesia is having a good port infrastructure also and

most of the ports can able to handle higher capacity ships.

9 SOURCE:www.coalspot.com

http://www.coalspot.com/

23

The following are the major coal handling ports10 in Indonesia.

EAST KALIMANTAN COAL HANDLING PORTS

Port name Capacity tonnes/day

Balikpapan Coal terminal 30,000-40,000

Bontang Coal terminal 40,000

Tanah Merah Coal terminal 40,000

Tanjung Bara coal terminal 70,000-80,000

Teluk Adang 8,000-12,000

Teluk Apar 8,000-10,000

Muara Berau/Muara Jawa 8,000-10,000

Muara Pantai 12,000-20,000

Tarakan 8,000-10,000

SOUTH KALIMANTAN COAL HANDLING PORTS


North Pulau Laut 35,000-40,000

South Pulau Laut 35,000-40,000

Jorong anchorage 8,000-12,000

Sebuku anchorage 8,000-12,000

Muara Satui anchorage 8,000-12,000

Taboneo anchorage 8,000-20,000

Tanjung Petang anchorage 8,000-12,000

SUMATRA COAL HANDLING PORTS


Kertapati Jetty 5,000-6,000

Muarasabak (anchorage) 6,000-7,000

Pulau Baai 6,000-7,000

Tarahan Coal Terminal 25,000-30,000

Teluk Bayur port 8,000

10 SOURCE: The Port details are from websit www.coalspot.com and www.worldportsource.com


http://www.worldportsource.com/

24

GEOGRAPHICAL LOCATION AND CLIMATIC CONDITIONS

Compared to other coal importing countries, Indonesia is the closest one to our Indian ports both in

east coast as well as west coast.

The sea distance from Indonesian port to various ports in India11 is given below

T

he extreme variations in rainfall are linked with the monsoons. Generally speaking, there is a

dry season (June to October), influenced by the Australian continental air masses, and a rainy

season (November to March) that is the result of- Asia and Pacific Ocean air masses.

Apart from the rainfall, the constraints like tsunami and earth quake is also a concern, as these

change in climate will affect the coal production and its associated activities like loading,

transportation and the turnaround days for the ships.

11 SOURCE: http://ports.com/sea-route/

http://ports.com/sea-route/

25

SWOT ANALYSIS FOR INDONESIAN COAL

26

AUSTRALIA

COAL RESERVES

Queensland and NSW account for almost all of Australia‘s coal production and all of its exports.

Although these two states are contiguously located, significant differences exist between their coal

industries with respect to (a) the types and quality of coal resources available

Geoscience Australia estimates that Australia had, as of December 2009, black coal EDR of

43.8 billion tonnes with the bulk of those reserves located in Queensland (58 percent) and NSW

(38 percent)12

. Both states also accounted for 96 percent of Australia‘s 2008 coal exports.

Australia has about 7% of the world's economically recoverable black coal and ranks fifth behind

USA (31%), Russia (22%), China (14%) and India (8%).

Recoverable economic demonstrated resources (EDR) in 2009 increased 11.5% to 43.8 gigatonne

(Gt) due mainly to significant increases at Blackwater, Dawson, Goonyella, Hail Creek, Peak

Downs, Saraji, Wandoan, Mount Arthur, Oaklands North and Ulan. These increases offset large

decreases at New Acland, Moranbah South and the Hunter Valley Complex. Queensland (58%)

and NSW (38%) had the largest share of recoverable EDR in Australia. The Sydney Basin (31%),

Bowen Basin (35%) and the Surat Basin (9%) contain most of the recoverable EDR in Australia.

In 2009, the recoverable paramarginal demonstrated resources (PDR) increased about 17% to

1.8Gt, mainly because some new underground thermal coal deposits were considered too

small to be economic. The recoverable subeconomic demonstrated resources (SDR) remained

decreased about 13% to 5.9Gt because some deposits were considered not to be in the identified

category. The recoverable inferred resources increased 17% to 78.2Gt. Large increases in inferred

resources occurred at Saraji East, Rolleston, Mount Arthur, Ulan and United. Many new deposits

with inferred resources were identified, including Galilee (Linc), Galilee (Liberty), Merivale,

Sarum, Blackall and Doyles Creek

12 SOURCE:

http://www.australianminesatlas.gov.au/education/fact_sheets/coal.jsp#black_resources

http://www.australianminesatlas.gov.au/education/fact_sheets/coal.jsp#black_resources

27

COAL DEPOSITS

Most of the coal reserves are located in Queensland and New South Wales. And the coal mines

are mostly located within a span of 500 km from the major exporting ports. In Queensland The

export- quality black coal, especially steam coal resources, can be found throughout the state

and in particular in the Surat and Galilee basins located inland from the Bowen Basin.

QUALITY OF COAL

Australia is having the world’s richest coal resources. Compared to the other major coal

resourcing countries , Australia’s coal GCV value ranges from 5800 kcal/kg to 7100 kcal/kg.

28

Quality specification of NSW steam grade coal

Coal Quality

Parameter

Sou

the

rn

W

est

er

n

Hunt

er

New

castl

e

Gunn

edah GCV(kcal/kg) As

GAD

675

0

66

00

6810 676

0

7050

GCV(kcal/kg) As

GAR

639

0

62

20

6360 633

0

6515

Total moisture(%) 6.4 8 9.1 8.5 9

Inherent moist(%) 1.1 2.6 2.7 2.3 1.5

Ash(%) 19.

5

20.

4

13.5 15.1 17.5

Volatile matter(%) 20.

8

28.

7

32.7 30.6 26.8

Total sulphur(%) 0.4

5

0.5

5

0.6 0.6 0.65

MAJOR NEW COAL FIELDS

The major growth in the mining of Australia is the development of two new coal fields which are

Surat basin

Galilee basin


The government of Queensland owns the four coal ports through three government corporations

The Port Corporation of Queensland, which owns and operates the ports of Abbot Point and Hay

Point. The Gladstone Ports Corporation, which owns the Port of Gladstone &The Port of Brisbane.

The major coal importing ports in Queensland13 are

Port Name Present Capacity in mtpa Expansion

Plans in mtpa Abbot Point 25 50

Brisbane 30 No activities

Dalrymple Bay 85 26

Gladstone 79 25

Hay Point 44 11

The Port of Abbot Point is owned and operated by the North Queensland Ports Corporation Ltd.

(NQPC), a government-owned corporation.

13 SOURCE: http://www.pcq.com.au/weipa.cfm

http://www.pcq.com.au/weipa.cfm

29

The Port of Gladstone is owned and operated by the Gladstone Ports Corporation (GPC), a

government- owned corporation previously known as the Central Queensland Port Authority. The

port of Gladstone is having two coal importing terminals which are Barney Point Coal Terminal with

a throughput capacity of 7 mtpa and RG Tanna Coal Terminal with a 2008 throughput capacity of

72 mtpa. To meet industry needs for additional coal handling capacity, GPC is supporting the

development of a new coal terminal, known as the Wiggins Island Coal Export Terminal

(WICET), within the Port of Gladstone. WICET will be operational by 2013 with an initial capacity

of 25 mtpa.

Port of Hay Point: The Port of Hay Point is owned and operated by the North Queensland

Port Commission (NQPC). It consists of two separate coal terminals

Hay Point Coal Terminal (HPCT), which is owned and operated by the BHP Billiton-Mitsubishi

Alliance (BMA) and handles only coking coals, has a nameplate capacity of 44 mtpa. Dalrymple Bay

Coal Terminal (DBCT), which is a leased by Babcock & Brown Infrastructure (BBI) from

the Port Corporation of Queensland (PCQ) (renamed as NQPC) and is currently rated at 85 mtpa

nameplate capacity.

The major coal importing ports in New South Wales14 are

Port Name Present Capacity in mtpa Expansion

Plans in mtpa Newcastle-Kooragang Coal

Terminal

77

Newcastle-Carrington Coal

Terminal

25

NewcastleCoal Infrastructure

Group (NCIG) terminal

30 66

Port Kembla 18 No Activities

NSW is limited to one very large coal port—the Port of Newcastle. This limitation is partly due to

the topography of the state, which has a coastal mountain range that separates the coal mines of

the Hunter Valley from the coast until Newcastle. Port Kembla, which handles both steam and

coking coals, provides some ―back-up‖ port capacity. But it has a very limited nameplate capacity

of 18 mtpa and does not have room for further expansion. The Port of Newcastle is government

owned through the Newcastle Port Corporation. Government oversight is provided by the Ministry

14 SOURCE: http://www.kemblaport.com.au/ & http://www.newportcorp.com.au/site/index.cfm

http://www.kemblaport.com.au/

http://www.newportcorp.com.au/site/index.cfm

30

for Ports and Waterways, the Ministry of Finance, and the Treasurer‘s Office. Within the Port

of Newcastle, there are two coal terminals—the Kooragang Coal Terminal with a 2010

nameplate capacity of 77 mtpa and the Carrington Coal Terminal with a 2010 nameplate capacity

of 25 mtpa. The government of NSW plans to increase the port‘s coal handling capacity by

adding a third coal terminal known as the Newcastle Coal Infrastructure Group (NCIG) terminal.

The first stage of the NCIG terminal achieved commercial operation in late 2010 with an initial

coal handling capacity of 30 mtpa.

NSW‘s only other significant coal handling port is Port Kembla with a nameplate capacity of 18

mtpa. And it will remain same up to 2020 as this port doesn’t have space for expansion.

In order to connect the new coal mining fields in Surat and Galilee, two new railway projects are

going on. This project will be helpful to connect the new coal mining fields in to the

existing railway infrastructure.

The development of a new 210 km rail line, known as the Surat Basin railway project, which

will be constructed between the mine at Wandoan up to the existing Moura-Gladstone line.

Hancock Coal and Waratah Coal are leading the development of the coal deposits Galilee Basin.

The North missing link is to connect the north Goonyella and New lands. This link will give

the connectivity to watanga coal fields to the Abbot Point coal terminal.

The Surat basin railway will give the connectivity from the Wandoan coal fields to the existing

railway line of Moura to The Port of Gladstone.

The development of this two new railway link will increase the inland transportation capacity of the

Australian Rail Infrastructure.

31

RAILWAY EXPANSION FROM EXISTING TO PLANNED QUEENSLAND

COAL MINE FIELDS

32


Compared to other coal importing countries Australia is the farthest one from the Indian Ports.

Out of Queensland & NSW, Queensland ports are closer to Indian Ports by an approximate

distance of 700 to 850 Nautical miles.

The Sea distance from Australian ports to various ports in India15 is given below



33

Recently the climate conditions in Australia are changing quite abnormally. Last year there was a

heavy flood in Queensland. It has made most of the coal mines to shut their production, which

has hampered the coal export from Australia.

SWOT ANALYSIS FOR AUSTRALIAN COAL

The mining resource rent tax or Resources super profit tax and carbon tax policies are in the

draft format and it couldn’t be implemented by the Australian government due to strong

opposition in the parliamentary and from the coal producers. But due to the climate change and due

to the commitment made by the Australian government to reduce the carbon emissions from the

present level, the carbon tax may be implemented in the nearby future.

34

SOUTH AFRICA

COAL RESERVES

As per BP statistical survey 201016

South Africa’s economically recoverable coal

reserves are estimated at 30 billion tonnes. It holds the world’s 3.5 percent reserves. 96 percent

of reserves are bituminous coal; metallurgical coal accounts for approximately 2 percent and

anthracite another 2 percent. Production is mainly steam coal of bituminous quality. The

majority of South Africa’s reserves and mines are in the Central Basin which includes the

Witbank, Highveld and Ermelo coalfields.

Coal seams are relatively thick and close to the surface, which allows for low-cost mining; a

quarter of South Africa’s bituminous coal is between 15-50 m below the surface and much of the

remainder between 50-200m. Half of reserves are in seams 4-6m thick and a further third in

2-4m seams (Petrick Commission, 1975). Approximately half of production comes from opencast

mines, and the balance from underground mines. Ash contents vary, but are high and can range

up to 65% in the Waterberg field. Export grade coals generally require washing so that their ash

content does not exceed 15%. Heating values of export coals of around 6200 kcal/kg, net as

received, were common, but average values are declining and some export coals are now

around 5900 kcal/kg. Sulphur contents are generally between 0.6-0.7percent.

16 SOURCE: http://www.bp.com/sectiongenericarticle800.do?categoryId=9037183&contentId=7068609

http://www.bp.com/sectiongenericarticle800.do

35

About 51 percent of South African coal mining is done underground and about 49 percent is

produced by open-cast methods.17

The coal-mining industry is highly concentrated with five companies accounting for 85

percent of saleable coal production. The companies are BHP Billiton, Anglo coal, Sasol,

Exxaro Limited are accounted for 85 percent of the saleable coal production.

All coal mining in South Africa is undertaken by private companies. The main coal port at

Richards Bay is also controlled by private shareholders. However, the railways from the mines

to the ports are controlled by a state-owned monopoly, Transnet.


South Africa’s export coal is transported via rail from the central coal basin to Richards Bay on

the East Coast. The national state-owned rail monopoly, Transnet, owns and operates a dedicated

coal track from Witbank to the sea, a distance of 580km. The double line is bi-directionally

signaled and fully electrified. Two 100-wagon trains are coupled to form one 200-wagon

train at Ermelo, in Mpumalanga, typically using CCL-type wagons.

The Waterberg coal field is 1050km from the coast and does not yet have a dedicated coal rail

link to Richards Bay.

There is an apparent lack of planning and investment coordination between Transnet,

coal producers and ports. As the RBCT name plate capacity have been increased to 91Mtpa

but the Transnet capacity is at the level of 68 mtpa. Transnet is undertaking feasibility studies on

expanding the coal link to Richards Bay, initially to 81 Mtpa by 2014/5 and thereafter to 91 Mtpa.

Anglo, BHP and Xstrata were the major shareholders in RBCT with export allocations of 19.8,

17.95 and 15.05 Mtpa respectively, accounting for three-quarters of the terminal’s capacity. The

balance

of the export allocations were held by Optimum, Total, Sasol, Kangra, Siyanda, Exxaro

17 SOURCE: http://www.energy.gov.za/files/coal_frame.html

http://www.energy.gov.za/files/coal_frame.html

36


South Africa is close to the west coast of India.

The sea distance between the Richards bay coal terminal and various major ports18 in India

are illustrated in the following graph

18 SOURCE: http://ports.com/sea-route/he following graph


37

SWOT ANALYSIS OF SOUTH AFRICAN COAL

38

MOZAMBIQUE

COAL RESERVES

Mozambique is one of the African country located near to South Africa is having a small

amount of coal which are yet to be explored. After the end of civil war 1993 the country has a

stable government and the country is moving in the developing path.

The coal reserves in Mozambique are mainly distributed in the Tete province which is located

at the center of Mozambique. So far three major coal fields has been identified in the Tete

province which are

Benga coal field

Moatize coal field

Zambeze coal field

According to National director of Mines, Mozambique, there is a possibility of coal reserve

in the Maniamba basin in Lago district, in the northern Mozambican province of Niassa.

Still the proper geological data about the coal reserves in Mozambique is not available.

Tete Province

39


Mozambique is having 600 km rail connectivity from the Tete province to Port of Beira. The

Port of Beira is having a name plate capacity of 12- 13 Mtpa. There was a plan to expand the

port capacity and the railway infrastructure to 25 to 33 Mtpa by 2025

The Government of Mozambique has signed an MOU for the construction of 900km rail link

from the Tete province to the Port of Nacala.

The major ports in Mozambique are port of Beira and port of Nacala.

There will be a possibility of inland water transportation to transport the coal from central basin

through Zambezi River to the port chinde. This route is of 525km distance. Initial feasibility

report has shown that, it’s feasible to transport through the river.

The complete feasibility study is being undertaken by Riversdale mining company and their

results will be published soon. If the inland water transportation gets implemented, then the

inland transportation charges will come down and it will make the cost of coal cheaper

compared to the other coal importing countries.


Compared to South Africa, Mozambique is approximately 600 nautical miles closer to our

Indian ports. This will make an approximate reduction of $2 to $3 in the freight charges. This

is an added advantage for importing coal from Mozambique.

The sea distance from major Mozambique ports to Indian ports19 are given below



40

and the approximate travelling time between Mozambique ports to Indian Ports are

SWOT ANALYSIS OF MOZAMBIQUE COAL

41

BOTSWANA

COAL RESERVES

Coal is one of the major primary energy sources known in the world, and in Botswana it has over the

decades remained the only fossil fuel resources known to exist in the country

Botswana coals form part of the vast Permian Gondwana Coals preserves in the extensive Karoo

Basins of the Southern Africa, which developed during the late Carboniferous to early Jurassic

times. The Karoo basins hosts all the coals deposit in the region. In Botswana coal is hosted in

sedimentary deposit assigned to the Karoo Super group and are largely preserved in the centrally

located Kalahari Karoo Basin that also extends into south eastern Namibia and Western.

Price of Botswana Coal: 90 -100 $/Tonne(Price from Argus Media)

http://www.argusmedia.com/Coal/Argus-McCloskeys-Coal-Price-Index-Report

42

Geographical Location:

Mozambique is approximately 600 nautical miles closer to our Indian ports. This will make an

approximate reduction of $2 to $3 in the freight charges compare to South Africa. Distance of

Ports[25] from Mozambique in Nautical Mile

43

SWOT ANALYSIS

44

RUSSIA

COAL RESERVES

Russia also officially known as the Russian Federation is a country in northern Eurasia.[20] It is a

federal semi-presidential republic, comprising 83 federal subjects. In 2011, Russia produced 336.3

million ton[26] of coal. This represents 4% growth over the 2010 total (323.3 million t) and thus

2011 became the year of a record level in coal production in post-Soviet Russia. Some 90% of the

output was provided by just the 18 largest players in the industry, demonstrating the concentrated

nature of the Russian coal mining business. Since the early 2000s Russia benefits the status of coal

net-exporter. Russia became the world’s # 3 coal exporter (after Australia and Indonesia) – with

approximately 11% in global coal trade. Prior to 2009 Russia’s coal export was oriented mainly EU

– with 73.4% share. Main Russian Coal Basins[27] are:

[26] SOURCE: World Coal Organisation – www.worldcoal.org

[27] Russia Coal Reserves: http://www.hiilitieto.fi/File/20cf94ee-85f7-4a11-be82-

b2693147b0eb/Seminaari+2011_The+Future+of+Coal+in+Russia_Butenko.pdf

http://www.hiilitieto.fi/File/20cf94ee-85f7-4a11-be82-b2693147b0eb/Seminaari+2011_The+Future+of+Coal+in+Russia_Butenko.pdf

http://www.hiilitieto.fi/File/20cf94ee-85f7-4a11-be82-b2693147b0eb/Seminaari+2011_The+Future+of+Coal+in+Russia_Butenko.pdf

45

46

47

48

SWOT ANALYSIS

49

INDIAN PORTS

India has a long coastline, spanning 7517 kilometers. It is serviced by 13 major ports (12

government and 1 corporate) and 187 notified minor and intermediate ports.

Out of the 13 major ports Chennai, Kolkata, Mumbai are not handling coal due to various

reasons. The following are the various types of vessels available for sea transportation.

Almost all the major ports and minor ports in India can able to handle Panamax vessels. Only

few ports like Mundra, Dhamra, Gangavaram, Krishnapatnam can have the infrastructure to

handle the capacity of Capsize vessels.

20 DWT- Deadweight tonnage- It’s the measure of how much weight a ship can carry safely

The advantage over Panamax over capsize vessels are

It can carry huge volume, so number of trips will be less

Approximately there will be a reduction of $4 to $8 in freight charges.

50

DEVELOPMENT IN INDIAN PORT INFRASTRUCTURE

Compares to west coast, more number of new ports are coming in the east coast of India. This

will give the added advantage for the people who are planning to import coal from Australia.

As per the new maritime agenda announced by the shipping ministry, the following

developments have been planned for the future

small ports in every 30km all along the coastal line

To increase the draft of all major ports to 17 meters, so that it can handle capsize

vessels

As per the plans announced in maritime agenda, the capacity at 13 major ports is likely to

increase to 1459.53 million tonnes by 2020 from the present level of 616.73 Million Tonnes.

The capacity at non- major ports is poised to increase by 2020 to 1660.02 Million Tonnes

from the present level of 346.31 Million Tonnes.21

And for the costal based power plant there is an option to have their own jetty with in their

plant premises. This will allow the vessel to unload directly into the plant with the help of

Belt conveyer system.

21 SOURCE: http://shipping.nic.in/writereaddata/l892s/Chapter%2012-43613492.pdf

http://shipping.nic.in/writereaddata/l892s/Chapter%2012-43613492.pdf

51

CONCLUSION

Coal is widely dispersed throughout the world. But the best feasible countries for importing

India are Indonesia, Australia, South Africa, Mozambique, Russia and Botswana. Out of this six

countries ranking is difficult as each country is having their own pros and cons.

As India is having two coast which is east coast and west coast, the suitable country will be

depends on the port location in India. For our analysis purpose we have taken Paradip,

Vishakapatnam and Ennore on the east coast and Mormagoa and Mundra on the west coast.

There are certain constraints in the decision making of the importing options. The constraints are

Freight charges,

Quality of coal,

Regulatory aspects

Consistency of delivery.

QUALITY OF COAL

Australia is having the richest quality of coal compared to the other three countries. The

next best country is Mozambique, which is having coal of quality ranging from 5800 kcal/kg to

6200 kcal/kg. Then comes South Africa, but South Africa coal needed washing as it is having

higher ash content. So washing will give a homogenous product and it gives further reduction in

the freight charges. Indonesia is having the least quality of around 4200 kcal/kg to 5800 kcal/kg.

And this coal is having a high moisture content of around 25 to 40 per cent. This moisture can

be removed with the help of dryer. But it is subject to the feasibility. For the UMPP in

krishnapatnam the coal has been imported from Sumatra of similar quality

without drying.

52

FREIGHT CHARGES

The sea distance of various ports to our Indian ports are given below

Note: Distance in Nautical Miles & 1 Nautical Mile =1.852 km

From the above graph it has been clearly seen that for any ports in India regardless of East coast

or west coast, the shortest distance is Indonesia. So importing coal from Indonesia will have

the least freight charges. Particularly from the Sumatra Island will be the good option from

Indonesia.

53

Apart from Indonesia, the next least distance for most of the ports in India is from

Mozambique. Mozambique will be a Best option for the west coast.

The distance from South Africa to western Indian ports are almost equal to Australia to western

Indian Ports. Australia is having two coal exporting stateside i.e. Queensland and New

South Wales. , Queensland is closer to India compared to New South Wales.

REGULATORY ASPECTS

The regulatory is the common problem for all the countries. Most of the countries introduce

attractive regulatory policies during their developing stage. And once they have attained their

target level in that particular sector, in order to protect the domestic players, they will make

strict regulations for the foreign players.

This kind of experience has been faced by the investors in Indonesia. As during the recession

period the Indonesian government has announced attracting offers to invest in their coal mine.

But once they have achieved their target they have changed their policies.

CONSISTENCY OF DELIVERY

In view of consistency, Australia is the only country which can able to deliver for a long time,

Because Australia is having ample amount of reserves. As per the present consumption pattern

the coal reserves in Indonesia will last for another 18 to 20 years. South Africa is good

resources but the inland transportation facilities are the biggest constraint. Right now

Mozambique is not having a good infrastructure, but they have made a target to attain a

capacity of 55 million tonnes by the year 2025.

COAL PROCUREMENT

The coal can be procured in three ways from the international market which are

Spot Market

Long term bilateral Contract

Acquisition of own mine

54

SPOT MARKET

As the spot market prices are fluctuating every month and we won’t have the assurance of

quantity, so spot market is suitable for small volume, and it suits for the small power plant.

The spot market will give the assurance of quality only. We can get the right quantity at the

right time. Moreover the prices in the spot market are continuously fluctuating. An organization

to make strategy in the fuel security. They should not rely on spot market

LONG TERM BILATERAL CONTRACT

Long term bilateral contract is a mutual agreement between two parties with certain

terma and conditions. So in the terms and conditions Long term bilateral contract will give the

assurance about the quantity and quality, but the prices have to be renegotiated, when there is a

huge difference in the market price.

MINE ACQUISITION

So, for a power producer in order to secure the fuel for a long term purpose in terms of quality,

quantity and price, the only option is to go for his own mine from any of the above said

countries. For small power producers if it is not possible to acquire a complete mine, then they

can go for joint venture or they can acquire some stake from any of the existing mines,

and once the plant have been operationalized they can go far a complete acquisition.

So, for mine acquisition based on the above study, a final analysis has to be done by a physical

field visit and then we have to take a decision.

55

RECOMMENDATIONS

Coal will remain a major source of fuel especially for power generation. Coal sector in India has

shown consistent growth but the demand supply mismatch is a major concern. For a thermal power

plant like JSL CPP which is suffering from coal shortage issue need to look for wider options to

secure coal supply. Some of the recommendations which can be listed out from the research done

are:

Most of the Indian Thermal Power plants are looking for getting imported coal from

countries like Indonesia, South Africa. These countries are having enough coal reserves

but recent regulations and governmental policies are coming as a roadblock in the way.

As per research done, new coal importing destinations like Botswana, Mozambique

should be a preferable thought.

African countries like Mozambique, Botswana are taking relevant regulatory measures

like COAL ROAD-MAP in order to promote the coal trade across their nations giving

positive and green signals for the Indian thermal power plants.

Moreover for JSL, African countries like Mozambique and Botswana will be quite a

viable options as far as sea distance and days in transit concerned w.r.t the ports on the

eastern coast of India.

To secure coal supply on a long term perspective, JSL CPP should look for acquiring

coal linkages in African countries unlike in countries like Indonesia where they are

putting restrictions of divesting a minimum of 50% stake with the domestic companies.

56

LIMITATIONS OF REPORT

There can be some limitations of the research report that can come as a hindrance on the securing

the aforesaid target of securing fuel supply. These are:

and various pricing heads affect the final price of coal.

-developed countries and

thus the regulations as well policies are not clear.

affect coal imports from these countries.

their policies and regulations can be influenced by

big business houses.

57

RESULTS AND DISCUSSION

Indian Thermal Power plants will not be able to fulfill their coal requirement for adequate

generation of electricity. Although FSA has come out as silver lining from dark clouds but the

situation is still critical. Keeping these things in mind, calculations has been done as follows

compensation analysis for Indian thermal power plants is put forward. It has come to notice that in

spite of facing shortfall of coal to power plants, CIL has to bear a negligible amount of compensation

as shown in Annexure 1.

mance of any power plant. As JSL CPP will be

facing coal shortage from its own linkages, so in order to fulfill the coal requirement, there are 3

options which can be looked by Indian thermal power plants like Coal from E-Auction, Coal from

open market and Coal from various coal exporting countries. Various percentages of coal mix has

been taken (As shown in Annexure -2). Thus after calculating the landed cost of the coal to the

thermal power plants, per unit fuel cost has been put forward. From the calculations it is quite clear

that if Indian thermal power plants will look for more imported coal, this will ultimately led to

increase in the fuel cost.

58

FUTURE SCOPE OF PROJECT

As per analysis, Coal will be the main stay of energy for India for the next to 15-20 years. So

securing the coal supply is the most crucial factor at this point of time. If one thinks on a long term

scenario, this project has a wider scope of fulfilling the fuel shortage especially coal for any Indian

Thermal Power Plant. This project can be further used to do a detailed analysis for various countries

of the world having sufficient amount of coal reserves.

Moreover this report can be extended in studying the effect of coal import on the company’s

financial condition and thereby making it more competitive in the current power sector scenario.

59

PART II

STUDY OF FUEL SUPPLY AGREEMENT (FSA) COAL

60

FUEL SUPPLY AGREEMENT

FSA stands for Fuel supply Agreement. As per New Coal Distribution Policy (NCDP) [17] Coal

supplies are governed by legally enforceable agreements between the seller (coal companies) and

the consumer under specific terms and conditions.

As far as Jindal Stainless Limited is concerned, it signed its FSA with Mahanadi Coalfields Limited

i.e. MCL.

Contents of Fuel Supply Agreement

1. Interpretation rules and defined terms

2. Period of agreement

3. Security Deposit

4. Quantity

5. Compensation for short delivery and lifting

6. Level of delivery

7. Level of Lifting

8. Deemed delivered quantity

9. Performance incentive

10. Quality of Coal

11. Declaration of Common Grade/Re-declaration of Grade by seller

12. Assessment of Coal at loading end

13. Weighment of Coal.

14. Operation and Maintenance of Weighment system

15. Method of Order Booking and delivery of coal

16. Transfer of Title to goods.

17. Price of Coal.

18. Compensation

19. Overloading and under loading.

[17]: Ministry of Coal: http://coal.gov.in/policy181007.pdf

61

20. Modalities for billing, claims and payments.

21. Interest of delayed payment

22. Suspension of coal supplies

23. Settlement of Disputes

24. Termination Of contract/Agreement

25. Force Majeure.

26. Schedule and Annexure

27. Savings

28. Bank Guarantee Format

Fuel Supply Agreement Aspects w.r.t Jindal Stainless Limited (JSL)

Period of Agreement:

FSA was signed between JSL and MCL, Mahanadi Coalfields Limited (Subsidiary of CIL

Ltd.) on 7th June, 2007.

The Agreement has been signed for a period of 20 years and after completion of 5 years,

either party can approach for review of the agreement.

Security Deposit:

The purchaser is required to submit a security deposit equivalent to 6 % of the basic price of

grade of coal that is taken into consideration while signing the agreement.

Quantity:

The Annual Contracted Quantity of coal to be supplied will be 52.1 lakhs per tonne from the

seller mines.

Monthly scheduled quantity will be 1/3rd of the quarterly quantity.

62

Coal Quantity greater than 80% but less than 100 % has to be supplied by the supplier to the

purchased. Failing to provide the aforesaid quantity will acquire a compensation of 0.01 %

of the failed quantity of the coal.

Quality:

Seller should make adequate facilities not to supply coal less than 2200Kcal/Kg (GCV).In

case seller supplies such quantity of coal, purchaser should limit price of coal to Re 1/tonne.

E Grade coal is to be supplied to JPL with GCV Values ranging from 4300-4600,4600-

4900,4900-5200

Method of Order Booking:

Purchaser should submit the order for the next month at least 7 days prior to the

commencement of next month either by road or by rail.

Modalities for Billing, Payments, Claims:

The purchaser shall make advance payment for a month in 3 installments separated by 10

days stating from day 1 of the month.

A purchaser should issue irrevocable letter of credit to the seller.

Adjustments for Coal Quality/Grade: Analysis of Coal Quality should be supported with

relevant documents related to

Total Moisture (%)

Equilibrated Moisture (%)

Ash (%)

GCV (Kcal/Kg)

Force Majeure Conditions & Termination of Agreement

In case of Force Majeure conditions, affected party has a time limit of giving 90 days prior

to the termination of the agreement.

63

In case there is any change in the material, then purchaser has the power to terminate the

agreement within 30 days.

Benefits to CIL i.e MCL Benefits to Customer(JSL)

1. Assured market for the coal due to loyal

customers.

1. Assured supply of Contracted quantity of

coal uniformly as per agreed dispatch

schedules enforced by bonuses and penalties.

2. Better Planning and Monitoring of Quality,

Production and Dispatches due to the prior

knowledge of quality and quantity of coal to

be supplied.

2. Supply of committed grade of coal

enforced by bonuses and penalties.

3. Scope for maximizing sales revenue by

earning bonuses due to better performance

3. Customer can avoid the repetitive

processes, delays and costs involved in

procurement of coal.

COAL COST ANALYSIS & EFFECT ON GENERATION COST

Coal & CIL

COAL is the most important and abundant fossil fuel in India. It accounts for 55% of the country's

energy need.[17] The country's industrial heritage was built upon indigenous coal With hard coal

reserves around 246 billion tonnes, of which 92 billion tonnes are proven, Indian coal offers a

unique ecofriendly fuel source to domestic energy market for the next century and beyond. Under

the provisions of the Coal Mines (Nationalization) Act 1973, only public sector companies can

mine coal. The coal industry was reorganized into two major public sector companies, namely Coal

India Limited (CIL) which owns and manages all the old Government-owned mines of National

Coal Development Corporation (NCDC) and the nationalized private mines and Singreni Colliery

Company Limited (SCCL) which was in existence under the ownership and management of Andhra

Pradesh State Government at the time of the nationalization.

64

Acquiring of Coal for JSL( Jindal Stainless Limited)

JSL can acquire the coal through one of the following options:

Acquiring of coal through its FSA (Fuel Supply Agreement) with CIL i.e MCL.

Acquiring of coal by importing from Indonesia and Australia

Acquiring of coal through open markets or E-Auction.

65

Coal Acquiring through FSA:

JSL has already signed FSA with MClL for fulfillment of its coal requirement for its both units of

2 x 125MW i.e. 5.21 MT. The Linkages of coal demand is primarily done with the objective of

planning of coal supplies, keeping in view indigenous coal resources as well as the need to supply

fuel of appropriate quality to the consumers and at the same time making the most economic use

of the available capacity for production and of coal.

Coal by

Import

Coal From E-

Auction

Coal From

Open Market

Linkages from

MCL

Full fillment

of Coal for

Jindal

Stainless

Limited

66

Acquiring Coal from E-Auction:

E-Auction of Coal may be defined as the buying of Coal from the collieries which comes under the

surveillance of CIL.CIL Launched a new E auction scheme on 18.10.2007 called E-Auction

Scheme 2007[20]. 10% of annual production of CIL is marked for e-auction. In India, two

organizations have the prime responsibility for carrying out the E-Auctioning of Coal like

1. MSTC India

2. Coal Junction

1.)MSTC India:

MSTC Stands for Metal Scrap Trade Corporation Limited. It is a Mini Ratna Category-I PSU under

the administrative control of the Ministry of Steel, Government of India. As on date,MSTC has two

major portfolios of business. Its e-auction portals namely,www.mstcecommerce.com/auctionhome/

and www.mstcecommerce.com have become

popular tools for transacting business over the internet in a transparent manner

2.) Coal Junction:

coal junction is m-junction's coal sales division which enables the entire coal buying community in

India to buy coal through the Internet. Coal-junction conducts e-Sales on behalf of Coal India

Limited (CIL) and its subsidiaries.

[20] SOURCE: Coal India Ltd http://www.coalindia.in/Documents/e-

Auction/FORWARD_9_Apr_09.pdf

67

Kinds of E-Auction:

1. Forward E –Auction

2. Spot E-Auction.

Forward E –Auction:

Objective:

Coal distribution through forward e-Auction is aimed to provide access to coal for such coal

consumers who wish to have an assured supply over a long period, say one year, through e-auction

mode so as to plan their operation etc.

Earnest Money Deposit:

All interested registered consumers shall be required to deposit in advance non- interest bearing

EMD with respective service provider for such an amount as would cover 10% of the reserve price

(of a forward e-Auction concerned) in terms of basic price of coal exclusive of taxes, duties and

other charges as

If the buyer fails to deposit the coal value for at least 50% of the monthly scheduled

quantity then such deposit shall not be accepted.

Spot Auction:

Spot Auction is also another type of coal auctioning started by CIL in accordance with the

Forward Auction. As forward auction is conducted quarterly, there is not any restriction as far as

Spot E auction is concerned. Moreover in case of Spot E auction, The Bidder shall offer his Bid

price (per tonne) in the increment of Rs.10/- (Rupees ten) during the Normal e-Auction period.

During the extended period of first two (2) hours, the Bidder shall offer his Bid price in the

increment of Rs.20/-. Beyond this extended period of two hours the bid price increment would be

Rs. 50/- (Rs.Fifty) only.

68

Benefits of E Auction:

The benefits are briefly stated as under

Total transparency in coal marketing.

Equal treatment to all the categories of customers without any discrimination.

Buyers getting coal of their choice in respect of source, grade, size/mode.

Buyers can purchase coal from anywhere in the country.

New consumers, snapped consumers and consumers seeking additional coal over & above

their FSA quantity could buy coal under this scheme.

Tendency of diverting coal to secondary market at a premium is greatly reduced, if not

fully eliminated.

No quota/linkage/sponsorship needed for purchase of coal.

Option for depositing money for registration/EMD on-line.

Analysis of Coal Mix on the Per Unit Fuel Cost:

As per FSA, CIL is deemed to supply 80% of the coal to CLP India group but due to various

complications arising out of this, CIL will not be able to supply more than 50-55% of the coal as per

the recent notification released by CIL. Owing to this various cases have been taken for fulfilling

the shortfall requirement.

69

Methodology Used:

A. Components of Coal Cost are:

Base Price of Coal: The price of Coal as disclosed by CIL on its website

Clean Energy Cess: The Tenth Schedule to the Finance Act, 2010 prescribes a statutory rate

of cess of Rs.100 per tonne for all three categories, namely, coal, lignite and peat.; As per

Annexure 2A its Rs 50/MT

Stowing Excise Duty: Every owner, agent or manager of a coal mine is supposed to

provisionally assess the duties of excise levied on the total raw coal dispatched in a given

month and pay the same into the treasury. The remittance is credited to the Central Govt. in

a special account; As per Annexure 2A its Rs 10/MT

Surface Transportation Charge(STC): As per Annexure 2A,its Rs 77/MT

Crushing and Sizing Charge.

Loading Charge

Fixed Royalty[21]

70

Excise Duty of Basic Price, Sizing charge and Surface Transportation Charge.

CSE of 2 % is also added on the Coal Cost

B. Components of Total Logistics Cost are :

Basic Freight: Indian Railways has divided various commodities under various classes like

Class 100,110,120,130,140,150,160,170,180,190.For Coal Freight rates, under class 150 is

taken into consideration.

Busy Seasonal Charge: Indian Railways has increased the Busy Seasonal Charge in March

2011 notification from 7% to 10 % in lieu of heavy traffic during some particular time of the

year.

Development Surcharge: Accordingly Indian Railways has also increased the Development

Surcharge from 3% to 5%.

C. Sampling and Analysis Cost:

This is the cost involved in carrying out various sample tests of coal and thus adding

A+B+C will give the total Landed cost of coal.

Various Different Mixes of Coal has been taken like 70 % from CCL (FSA Linkage), 10-

15% from imported coal market like South Africa, Indonesia, and remaining %age from E-

Auction and open Market.

Then Weighted Average Cost has been calculated owing to the corresponding GCV value

available after mixing with all qualities of coal.

Per Unit Fuel Cost has been calculated accordingly with different mixes of Coal as shown in

the sheets below.(Please Refer Annexure -2)

71

As we know that Imported coal has high GCV value so that particular coal cannot be mixed

directly with the other available quality coal, so in order to cope with this problem blending

of coal will done to reduce the effective GCV of coal to a acceptable level.

The above calculation has been described in Annexure 1 & 2.

[21] Royalty: A payment made for the use of property, especially a patent, copyrighted work,

franchise, or natural resource.

72

OVERVIEW

India’s power sector has been witnessing challenges in recent times, with the country’s power

deficit at around 8.5 percent1. The demand for electricity is continuously growing, driven by high

economic growth and increased rural electrification; however, supply is unable to keep pace with

demand primarily due to a fuel shortage. Currently, more than 50 percent2 of India’s installed

generation capacity is coal-based. Over the last five years, the demand for coal has been growing at

an average rate of 8–9 percent annually as compared to a 5–6 percent increase in domestic

production3. This has widened the demand supply gap, leading to growing dependence on imported

coal. In 2011–12, the country imported around 100 million tons of coal (including thermal and

coking coal) 4.

The shortage of coal is not only affecting operational plants but is also raising concerns around the

viability the viability of future power projects. The lack of coal linkages is making it incrementally

difficult for power-generation companies to raise capital for their proposed thermal plants. Further,

as per recent reports, the Government of India is likely to lower the country’s power capacity

addition target for the Twelfth Five Year Plan from 1,00,000 MW to 75,000 MW5 as a result of fuel

shortage.

FSA : key terms and challenges associated with implementation

To ensure fuel security to coal-based power producers, the Indian Government issued a presidential

directive to CIL in April 20126, asking it to sign fuel supply agreements (FSAs) with power

companies. The following are the key characteristics of FSAs, proposed by the CIL:

Criteria: FSAs will be signed with power plants that have entered long term power purchase

agreements (PPAs) with distribution companies, commissioned between April 2009 and December

2011. In the next round, CIL will sign FSAs with those plants scheduled to be commissioned by 31

March 2015.

73

Duration: The FSAs will be signed for a period of 20 years and will be reviewed after every five

years.

Commitment and penalties: The FSAs will be signed with 80 percent of assured contracted

quantity (ACQ) of the committed coal supply. In the event of supply falling short of 80 percent,

CIL has to pay a penalty at 0.01 percent of the value of the shortfall quantity. Further, this penalty

clause is said to be applicable only after three years of signing the contract; this means that for the

first three years, CIL will not be obliged to supply the contracted quantity.

Coal imports: If CIL cannot meet demand through domestic supplies, it can meet the shortfall

through imported coal. If the buyer agrees to accept the imported coal, CIL will import coal for

power companies and supply it at the unload port on a cost-plus basis, including service charges.

Thus, CIL would not be responsible for the transportation of imported coal from the port to the

project site. Additionally, if a customer does not accept imported coal, CIL would not be liable to

pay any penalties.

Force majeure clause: The new FSAs - along with existing force majeure events such as natural

calamities, strikes and mine fires - includes additional force majeure circumstances to cover the

risks arising from third parties. Additional conditions include the global shortage of imported coal,

lack of response to enquiries, the breakdown of equipment, delays by contractors, power shortages,

and obstruction in the transportation of coal, from pithead to sidings, by agitations/mob-

violence/riots.

Power plants covered under the new FSA are expected to be at a disadvantage over plants that are

supplied coal as per existing FSA. Many power-generation companies have raised concerns over the

terms of the new FSA and are not willing to sign the contract with CIL. As on 18 June 2012, only

27 of all planned 48 thermal power units have entered the long-term fuel supply agreement.

Power producers are opposing the new FSA due to the following reasons:

In the new FSA, the penalty rate is very low (0.01 percent as against 10–40 percent in the existing

FSA). Therefore, it may be possible that CIL, instead of meeting demand requirements, prefers to

pay penalty.

74

In the case of partial supplies from CIL, power producers have to either operate at a relatively low

plant load factor (PLF) or use expensive imported coal. At current international coal prices, the cost

of power generation from imported coal (assuming a 70:30 mix between domestic and imported

coal) is around 40 percent higher than a plant solely based on domestic coal.

The addition of new force majeure conditions would allow CIL easy exit options from the

agreement.

Government intervention to resolve the issue between CIL and power companies

To strike a middle ground between CIL and power companies, the Prime Minister Office (PMO)

has intervened and suggested a revision to CIL’s new FSA to address the concerns of all

stakeholders10.

Commitments: The Government concurs with CIL’s demand and agrees to lower fuel supply

commitment of 65 percent for first three years as against 80 percent prescribed earlier. Further, in

the fourth year, the supply has to increase to 72 percent followed by 80 percent in the fifth year of

the agreements.

Penalties: The Government also proposed an increase in penalty, from 0.01 percent to 20-40

percent, depending on the level of supply shortfall below the level agreed upon (65 percent).

Other clauses: The PMO has also asked CIL to remove the three-year moratorium on penalty,

review the force-majeure clauses, and modify clause terms that allow CIL to review and amend

delivery levels every five years.

The proposed changes are acceptable to some power producers, and the NTPC has agreed to sign

FSA with the revised terms. However, the Ministry of Power is not willing to accept the 65 percent

commitment level and has said that banks are not accepting the 65 percent trigger level as against

the earlier directive of 80 percent supply assurance. The CIL board is yet to take a final decision on

the revised terms of the FSA.

75

VIEWS ABOUT THE NEW FSA

The presidential directive to CIL is a small step forward towards the resolution of the country’s fuel

problem. However, this step alone cannot plug the gaps, as aggregate demand from all proposed

FSAs and letter of assurance (LoAs) is likely to exceed the CIL’s current and near-future coal

production. By 2015, CIL is expected to see a shortfall of around 80 million tonnes11, thus limiting

CIL’s ability to meet growing demand. Further, to bridge this gap, the PMO has suggested that CIL

reduces its e-auction quantity and divert e-auction coal to the power sector. While this measure will

likely help increase coal supply to the power sector, it may be regressive step as it will adversely

affect small coal consumers and CIL’s profitability.

The following measures could help resolve India’s coal shortage:

Build CIL’s coal import capability: CIL is primarily a producer and has little experience

in importing large quantities of coal. Yet, given the growing dependence on imported coal,

CIL need to build its import capabilities. Initially, CIL could import coal with the help of the

MMTC and STC and gradually develop the capability and infrastructure (logistics) import

large volumes of coal.

To increase imported coal acceptability, CIL could consider the price-pooling of imported

coal with domestic coal and supply coal to power companies at an average price. This could

help lower the cost disparity among power producers. However, for this mechanism to be

efficient, the pooled price should be available to only those power plants that have coal

linkages with CIL and are not based on imported coal.

Increase power tariffs to make imported coal affordable: There is a need to increase

power tariffs for the end consumer to make imported coal-based power plants economically

viable. Further, the government should address the issues of power plants that are stuck with

low price PPAs and their fuel cost has increased considerably due to

76

regulatory changes in coal exporting countries such as Indonesia and Australia. To protect

these developers, the government could allow at least a partial ‘pass-through' of fuel costs

for projects awarded under tariff-based competitive bidding. This would increase end-

consumer prices but help in avoiding stranded capacities and is necessary to retain private

players’ interest in the power sector.

Enhance domestic coal production: To increase productivity from existing fields, it is

important to deploy the latest technology and professional assistance. Further, there is need

to accelerate the process of land acquisition and environmental clearances, to increase the

total area under exploration. Further, the government could adapt the NELP model (used for

oil and gas blocks bidding) and allow global mining majors to participate instead of limiting

the bidding to only end users (such as steel, cement and power plants).This route, along with

much needed investment, can be expected to bring global technology and capabilities to the

Indian mining sector.

Thus, to resolve the power crisis, the government should take a holistic approach -

considering the interest of various stakeholders, eliminating roadblocks to increased

domestic coal production and allowing generation companies to pass high-fuel costs on to

end consumers.

77

MODIFICATIONS IN THE NEW FSA BY CIL (AUGUST 2013)

Coal India (CIL) has modified its fuel supply agreement to allow a third party to collect samples

and determine the quality of the dry fuel. The modified provision will be effective after third-party

sampling starts, CIL said. It replaces a system of sampling and analysis that was to be conducted

jointly by the buyer and the seller of coal.

“Samples of coal shall be collected by third party by manual method during each of the shifts and at

each of the delivery points for determining the quality of coal,” the state-owned company said

on its website. The third party is an agency that will collect, prepare and analyse coal samples at

loading points, it added. Samples of coal will be collected in the presence of representatives of the

seller ( Coal India ) and the purchaser.

“In the event for any reason whatsoever third party sampling and analysis could not be conducted,

joint sampling and analysis shall be carried out by the seller in presence of the purchaser at the

loading end. “In the event the purchaser fails or declines to participate in the process of sampling

and analysis by the designated third party…such failure or refusal of the purchaser shall not be

considered a ground for disputing the result submitted by the third party, which will be binding on

both the parties,” Coal India said.

78

BIBLIOGRAPHY

1. http://www.cercind.gov.in/

2. http://www.jindalstainless.com/

3. http://shipping.nic.in/

4. http://www.coalspot.com/

5. http://www.australianminesatlas.gov.au/

6. http://iis-db.stanford.edu/pubs/22953/WP_93_Lucarelli_revised_Oct_2010.pdf

7. http://iisdb.stanford.edu/pubs/23082/WP_100_Eberhard_Future_of_South_African_Coal.pdf

8. http://iis-db.stanford.edu/pubs/23156/WP_101Lucarelli_Australia's__Black

Coal_Industry.pdf

9. http://www.argusmedia.com/

10. http://www.platts.com/

11. http://www.coal.nic.in/

12. http://infrastructure.gov.in/ppt2_ports.pdf

13. http://www.jcoal.or.jp/publication/seminar/pdf_for_hp_indonesia_s/Coal%20Policy_english.

pdf

14. http://www.powermin.nic.in/

15. “Power Supply Position”, Central Electricity Authority, April 2012- March 2013

16. “Installed Generation Capacity” , Central Electricity Authority, April 2013

BP statistical review, 2013

17. “Coal Imports”, Press Information Bureau,14 May 2013

18. “Government may lower power generation target for 12th Plan”, Livemint, 7 February,

2012

19. “Presidential directive to CIL on supply to power cos”, Financial Express, 4 April 2012

20. “Coal India signs fuel supply pacts with 27 power units”, Economic Times, 18 June 2012

http://www.cercind.gov.in/

http://www.jindalstainless.com/

http://shipping.nic.in/


http://www.australianminesatlas.gov.au/

http://iis-db.stanford.edu/pubs/22953/WP_93_Lucarelli_revised_Oct_2010.pdf

http://iis-db.stanford.edu/pubs/23082/WP_100_Eberhard_Future_of_South_African_Coal.pdf

http://iis-db.stanford.edu/pubs/23156/WP_101

http://www.argusmedia.com/

http://www.platts.com/

http://www.coal.nic.in/

http://infrastructure.gov.in/ppt2_ports.pdf

http://www.jcoal.or.jp/publication/seminar/pdf_for_hp_indonesia_s/Coal%20Policy_english.pdf

http://www.jcoal.or.jp/publication/seminar/pdf_for_hp_indonesia_s/Coal%20Policy_english.pdf

http://www.powermin.nic.in/

79

21. “Power secy to discuss developers’ concerns over FSA with coal min”, Financial Express,

10 May 2012

22. KPMG in India Analysis, considering the difference between domestic and international

coal prices and calorific values

23. “PMO Intervention To Help End FSA Deadlock Soon”, Business world, 04 July 2012

24. KPMG in India Analysis, taking into consideration expected demand from all sectors and

CIL production estimates

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