Quality check: CIL empanels additional 3rd-party agencies

Last month, the government had announced its plan to bring in a new regime for sampling and testing of the dry fuel from January 1 to ensure supplying quality coal to consumers.



With quality determination of fossil fuels posing as a challenge to the government, the state-owned CIL has roped in additional third-party agencies to do the job. "CEA (Central Electricity Authority) has recommended empanelment of additional third-party sampling agencies in pursuance to which... agencies are being empanelled in addition to the existing third-party agencies," Coal India said in a letter. The agencies are Allied (India), Shree Coal Research LLP, Mitra SK Pvt Ltd, R V Briggs & Company Pvt Ltd, CIL said. Coal Secretary Anil Swarup had earlier termed the quality of coal as "an area of concern". Last month, the government had announced its plan to bring in a new regime for sampling and testing of the dry fuel from January 1 to ensure supplying quality coal to consumers. The move is aimed at putting an end to controversies like the one between NTPC and the coal behemoth on the quality front. "The new regime for sampling and testing of coal is to become operational from 1st January, 2016," Swarup had said. "Testing of quality will ensure the customer pays for the quality that is determined independently...coal will also be crushed before supply from January 1." Samples for coal quality analysis will be collected by select agencies as per BIS norms, the Secretary had tweeted, adding that "results will be available within 18 days". Coal India  Ltd (CIL), which accounts for about 80 percent of the domestic dry fuel production, supplies coal to power and other utilities.

Cairn to seek $ 700 mn compensation from govt

In a letter to Finance Minister Arun Jaitley, Cairn disputed the Rs 10,247 crore tax notice sent to it on alleged capital gains made on a 2006 internal reorganisation of its India business saying no tax was due even if the retrospective amendments to Income Tax Act are applied.



British energy firm Cairn Energy has said it will seek about USD 700 million in compensation from the government for the loss of value of its shareholding in Cairn India  suffered since their attachment nearly two years ago over a tax dispute. In a letter to Finance Minister Arun Jaitley, Cairn disputed the Rs 10,247 crore tax notice sent to it on alleged capital gains made on a 2006 internal reorganisation of its India business saying no tax was due even if the retrospective amendments to Income Tax Act are applied. "Even though the transactions undertaken by the Cairn PLC Group companies as part of the Group Reorganisation should not have even been considered as potentially subject to taxation in India, as they occurred outside of India, there would not have been any taxation owed in connection with such transactions even if they had taken place within India as they did not result in any real income earned by the Cairn Energy PLC Group," company chief executive Simon Thomson wrote. The Income Tax Department says Cairn Energy allegedly made a capital gain of Rs 24,503.50 crore in 2006 while transferring all its India assets to a new company, Cairn India, and getting it listed on the stock exchanges. Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for USD 8.67 billion, still holds 9.8 percent stake in Cairn India. But it has been barred by the IT Department from selling this stake. The company has initiated arbitration seeking quashing of the tax notice and compensation for the loss of value of its holding in Cairn India. "At current oil prices, the billion dollar stake in Cairn India is significantly reduced and compensation at the moment would be around USD 700 million," a company spokesperson said. Thomson told Jaitley that the application of the retrospective amendments to Section 9 of the Income Tax Act to Cairn constitute a violation of the UK-India Bilateral Investment Treaty. "...even if the retrospective amendment did apply to Cairn (which is denied), no amount could be quantified as income that would be liable to tax in India," he wrote. Cairn said it had in 2006 undertaken a group reorganisation in the manner mandated by applicable Indian laws, regulations and procedures established by authorities such as SEBI, RBI and FIPB. As part of the exercise, shares of nine subsidiaries were transfered to a newly incorporated company, CUHL in Scotland. These were then transferred to Cairn India Holdings Ltd, a company incorporated in Jersey. In the final step, an Indian company was incorporated, Cairn India Ltd on August 21, 2006.

Let us talk a little bit about natural gas prices. Will natural gas prices also decline more and what is the trend that you are noticing over there?

There are two things in the liquefied natural gas (LNG) market, the global gas market. You have one, the fundamentals look pretty sloppy, in that you have somewhat temperate growth expectations for Asia, the key market whilst at the same time, you have the onset of US and Australian LNG exports about to hit the market. So, you have pretty lousy supply-demand fundamentals while you have the additional negative impact of oil price and a lot of global gas or LNG term contracts priced relative to oil. So, as oil drops, that drags down the price that someone pays for an LNG cargo that is linked to oil, so it has that double negative impact, so we are pretty low in terms of global gas prices. There is still some scope to head lower particularly with this extremely temperate weather that we have been having, but similar to oil yes, we may go lower, but we are already at very low levels. So, the magnitude of the move may not be massive on the downside.

So, in that case, what is your range for Brent in the first quarter of 2016 and what is the average?

We see a low USD 40’s for the first quarter and low USD 40’s again for the second quarter. And the WTI Brent spread, we have very narrow USD 1-2 in the first quarter of 2016. So, similar prices for outright WTI as well. 

So, how much worse can it get for crude. When do you think crude will bottom-out in terms of both levels and time?

It is a difficult question, it is definitely conceivable that you can have crude going below USD 30 a barrel, likely West Texas Intermediate (WTI), it is not going to be able to stay there for any sustained period of time, because of the harm that it is going to do to corporate and sovereign producer balance sheets. However, you can get there because cash costs or operating costs are kind of the operandis around USD 30-35 a barrel. But, you also have things such as foreign exchange (FX) depreciation. You just look at the ruble, the Canadian dollar, the peso, the riyal, they are doing some of the work to shield some of the producers. You also got high de-commissioning costs that have also offset some of the initial cash costs. So, you could definitely go through that USD 30 barrel mark. 

When that could happen? 

The first half of next year continues to look the kind of sloppiest period for the oil market, particularly the end of the first quarter, when refinery maintenance is about to start globally, but particularly in Europe and as well in North America. So, if that happens and you start to see crude need to be placed on a tanker, then that is the scenario where you can see oil dip below USD 30, so I do not think we are necessarily at the bottom yet, but we are not going to be able to sustain this level of low prices for that much longer. 

All that news is already known for a goodish bit. Both the demand and supply factors that you mentioned – slow global demand, Iran supply and shale gas. Have they all not been factored in adequately?

I think in part, everyone expects Iran to come back with somewhere between 3,000 and 5,000 barrels a day. The Iranians themselves think one million barrels a day in 12 months, but that seems unlikely. So, all these things have been factored into people’s oil balances, but it is difficult to square that this is not going to tip the balance in the physical oil market where things are looking pretty bearish right now. And part of the reason you go lower is because the time spreads having to weaken incrementally further to pay for the cost of storage. And as I said before, with the weather, you are just not having any supportive news flow coming for oil markets and so, you continue to just grind lower with perhaps, cash costs being potentially needed to bring the market back into balance.

First, what is pulling crude down so relentlessly in the last few weeks ?

It is just the continuation of the fact that supply remains outpacing demand. And as a result of that, when your S is greater than your D, you are going to have to put that oil somewhere and that oil ends up going into homeland inventories. And what you are seeing now, even at these lower prices, you are not yet bringing the supply demand relationship back into balance. So, your supply is not slowing down fast enough and your demand has not been high enough to re-address that balance. Hence, you are putting an increasing amount of oil into storage and as a result of that, that is weighing on both the flat price and the time spreads of crude whilst the very recent development of this extremely temperate winter that you are having as a result of El Nino, particularly in North America and Europe that is just hitting desolate demand as well. It is just a continuing rumbling of the bearish fundamentals in the crude market.