Royal Dutch Shell, Reliance Power and Kakinada Ports will jointly build a floating terminal off the eastern coast of Andhra Pradesh to receive imported liquefied natural gas (LNG) and convert it into gas for supply, a project that could entail investments of $1 billion in the state's gas sector.

The project will start with a capacity of up to 5 million tonnes per annum (mtpa), which can be scaled up to more than 10 mtpa. It will be completed in 2014.

India has only two LNG terminals in India, both of them located on the west coast. There is no LNG terminal in south India though there is a huge unmet demand for gas in the region.

Gas majors like Petronet LNG, ONGC and GAIL have announced plans to set up similar LNG terminals in Andhra Pradesh, which has emerged as an attractive destination for LNG.

If LNG is regassified in a floating storage and regassification unit (FSRU) on Andhra Pradesh's east coast, gas will cost $15.68 per mmBtu. On the other hand, if gas is transported from the west coast, the delivered price should be $18.65 per mmBtu thanks to higher gas transport costs and additional taxes, said a recent feasibility study by Andhra Pradesh Gas Distribution Corporation.

Southern India lacks coal resources, depending on gas to fuel power plants. Due to falling gas production at Reliance Industries' KG D6 block, several plants in the south are running at low capacity, worsening the power shortfall.

As per data available with the Central Electricity Authority, the southern region faced electricity shortfall of 15.5% during April, the highest among all regions of the country.

While the FSRU is estimated to cost $500 million, developers must spend an equal amount to develop onshore facilities including gas pipelines.

R-Power said the project is expected to be completed by 2014 and the initial capacity can be doubled to over 10 mtpa in future. Gas imports through the terminal will also fire R-Power's 2,400 megawatt Samalkot gas-based power plant in Andhra Pradesh. Shell and R-Power will hold majority stake in the terminal company.

"The LNG receiving terminal in AP is of strategic importance to Andhra Pradesh and India," said JP Chalasani, CEO, R-Power. "We believe Shell, with its large LNG portfolio and experience in operating LNG terminals, will add immense value to the project."

The supply of natural gas in India would increase from 179 mmcmd in fiscal year 2011-12 to 279 mmcmd by 2017-18, Kotak Institutional Equities, a domestic broker, said in a report on May 17.

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