Does another ill-fated overseas Indian coal adventure loom?

Bob Burton

When the India-Africa Forum Summit kicks off in New Delhi next Monday India’s largest power generator, the National Thermal Power Corporation (NTPC) is hoping the meeting will open doors for deals on coal mines in Africa.

NTPC, a publicly-owned utility which generates one-quarter of India’s electricity, is on the hunt for cheap coal projects which can supply at least some of the fuel for its fleet of coal-fired plants.

NTPC also has ambitious plans for as much as 36,500 megawatts (MW) of new coal power stations scattered across India. Some of these are NTPC’s own projects, some joint ventures with Indian Railways and others joint ventures with the publicly-owned Steel Authority of India. (As is always the case with big lists of proposed coal plants, a substantial chunk will never eventuate for lack of capital, land, water, public support, demand or economic viability.)

According to a report in the Financial Express, an Indian news site,

“NTPC’s plan to get coal blocks in Africa under bilateral pacts imitates a similar strategy by state-run Coal India, the world’s largest coal producer, which is looking at such options in South Africa and Indonesia. Coal India’s only foreign assets so far are two coal blocks in Mozambique, which it got under bilateral pacts between New Delhi and Maputo.”

For much of the last decade it has been standard fare for Indian companies – both privately and publicly-owned – to hype potential investments in overseas coal projects in the expectation they would supply cheap coal to coastal power plants.

The dominant thinking was that – with international coal prices rising rapidly and faced with domestic supply constraints – Indian “energy security” necessitated stitching up deals on yet-to-be-developed thermal and metallurgical coal projects in Indonesia, Mozambique and Australia. Indian power generation companies decided the sensible business strategy was to buy coal mines to supply their own plants. “Backward integration” as NTPC describes it.

Many of these projects were based on heady coal boom optimism that demand and prices would only keep on going up or, at worst, stay high. High coal prices would therefore justify big debt loads to buy assets. High prices were also essential to justify loading companies up with even more debt to expand existing projects or build the infrastructure to get new coal mines connected to the coast and international markets.

The unstated ethos of the high-rolling coal companies seemed to be ‘what could possibly go wrong?’

Plenty as it turned out.

Coal India’s Mozambique plans turn sour

If Coal India’s Mozambique expedition is the template for NTPC’s high hopes for overseas coal projects, then it warrants examination.

Back in May 2006 the governments of Mozambique and India reached agreement to promote bilateral cooperation in the development of coal resources. This smoothed the way for the April 2009 granting of exploration rights to Coal India over two coal blocks in Tete province in Mozambique.

Coal India had high hopes for the project, stating that it would “start mining the block within six months” and proclaiming that “preliminary surveys” suggested the areas contained “1 billion tonnes” of coal.

The hype had little substance to it.

Two years later Coal India’s Mozambique subsidiary, Coal India Africana Limitada, said it was worried about the lack of infrastructure to get any coal to the coast and then back to India. Without a viable railway, it was reluctant to spend funds on social programmes it had promised.

By 2012, without the promised spending on the social programmes, the Mozambican Government was becoming agitated and insisting the promises of social spending commitments be honoured. Coal India conceded the point and the following year promised to spend US$42-million on social projects, including industrial vocational training.

But by then, the commencement date for the project had slipped further from the initial plan of late 2012 to 2015, assuming the export infrastructure existed. By mid-2013 Coal India announced another intensive drilling program and re-iterated its plan to complete its analysis of the results by 2014. Then it would develop its plans and seek permits with the aim of commencing mining in mid-2015. But before long the 2015 commissioning date had become 2016-2017.

The commissioning date never came.

As the project soured, anonymous Coal India officials complained that the project was delayed “because the Indian government’s own interest in the African region hijacked what was a completely commercial deal for us.” In other words, geo-political manoeuvring with a coal project as the bait was being used even though there was no longer any commercial logic to the project.

But once in, Coal India found it hard to extract itself.

Over six years after having first got the exploration licences, Coal India opted to relinquish three-quarters of the area it had rights to. One Coal India official soberly reported that, after the company had spent US$80 million dollars on an exploration program, “yields could not be even categorized as coal.”

In short, the project was a dud with the company having spent US$80 million to find dirt.

Nor was Coal India’s Mozambique project the only Indian company which made a bad bet on overseas coal projects.

A raft of other Indian companies – including Adani, Reliance Power, Jindal, Lanco and GVK – have all experienced major problems with their overseas coal adventures spanning   Indonesia, Mozambique and Australia.

Adani’s Carmichael mine in Australia has faced huge community opposition which has coincided with the downturn in the global thermal coal market. Now – despite support from state and federal Australian governments – Adani can’t find any significant friends in banking circles. Reliance Power has announced its wants to dump its Indonesian coal prospects and focus on solar power in India. Jindal has been losing money at its Mozambique mine while debt-laden Lanco and GVK have blown hundreds of millions on thermal coal projects in Australia which are going nowhere.

Unfriendly coal

NTPC itself has some experience of overseas projects going sour.

In August 2010 NTPC entered into a Memorandum of Understanding with the Bangladesh Power Development Board (BPDB) to develop the 1320 MW Rampal power plant near the Sundarbans World Heritage Area. The project has encountered strong opposition from the local communities, been challenged in the courts, triggered the Norwegian sovereign wealth fund to divest from NTPC and alarmed the World Heritage Bureau.

While NTPC-BPDB’s joint venture company is named the Bangladesh-India Friendship Power Company, the proposed power plant has done little to build community harmony.

Last weekend, a peaceful five-day march from Dhaka, Bangladesh’s capital, to the Sundarbans protesting against the proposed plant was attacked by baton-wielding police and supporters of the project. Media reports suggest that at least 25 people were injured as a result of the attack.

The brutal treatment of the marchers prompted the Dhaka Tribune to note in an editorial:

“The police are entrusted to be impartial and to protect people’s right to peaceful protest. They should not be hindering these basic constitutional rights by blockading marchers. Of most concern are reports that local police had obstructed marchers in tandem with stick-wielding government supporters, and that several demonstrators, on Saturday, were injured by a police baton charge. It is completely unacceptable that police should have appeared to have been colluding with counter demonstrators to try and obstruct a perfectly peaceful march.”

NTPC’s pursuit of more overseas deals may well be every bit as controversial as its project in Bangladesh or every bit as hopeless as Coal India’s Mozambique adventure.

Indeed, there is every reason to believe that the hype about NTPC’s latest interest in African coal is just a reflection of the Indian Government’s desire to use coal hype for a little diplomatic posturing ahead of next week’s India-Africa Forum Summit.

After all, back in early 2012 the Wall Street Journal earnestly reported

“State-run power producer NTPC Ltd. is exploring opportunities in Africa to get coal blocks under bilateral pacts between India and mineral-rich countries in the continent as it looks to secure fuel for its expanding local capacities.”

The world has moved on a long way since the coal boom heyday of   just a few years ago.

Around the world coal projects routinely encounter strong resistance from residents and farmers concerned about the impact on land, water and air quality. Coal projects have fallen out of favour with investors, insurers and international banks. The global coal market is now so over-supplied that new projects are redundant and – especially where they require costly new infrastructure such as railways and ports – hopelessly uncompetitive.

NTPC itself knows that the energy landscape it faces is changing phenomenally fast. Just this week it was reported that NTPC has appointed KPMG to revise its long-term corporate plan to take account of factors such as the Indian government’s ambitious push to increase renewable power supply, and solar in particular. NTPC itself has plans to install 10,000 MW in utility-scale solar capacity and buy power from a further 15,000 MW of privately-owned solar capacity.

Indeed solar costs are falling so fast that Deutsche Bank now estimates that solar in India has already reached ‘grid parity’, with the prices from the next solar auction likely to be well below the cost of power based on imported coal.

Where the notion of “energy security” of a decade ago was premised on countries scouring the globe and stitching up deals for potential coal, oil and gas deposits, it now revolves around more effectively harnessing the freely available sun and the wind.

Perhaps KPMG will gently suggest to NTPC that “energy security” starts at home with solar and wind, not abroad with coal.

Bob Burton is the Editor of CoalWire, a free weekly bulletin on global coal industry developments. (You can sign up for it here.) Bob Burton’s Twitter feed is here.