Commercial Coal Mining: New Beginning in India

30052020
                                                                            -  Rajesh Deoliya
[rajeshdeoliya@gmail.com] 
Background:


India imported about 208 million tonne of coal in year 2017-18 ( source: Energy Statistics, 2019, Ministry of Statistics and Programmed Implementation, Govt of India) which included coking and non coking coal. The increased energy consumption and poor quality of coal is contributing to rise of coal Import. India is importing low grade coal too to meet requirement of thermal power plants and other end users. Though India produced about 729 million tonne of coal in year 2019-20.(source: https://coal.nic.in/ content/ production-and-supplies), still there is strong need of augmenting domestic coal production to reduce coal import. 
Ministry of Coal (MoC), Government of India time to time notify coal mines for allocation. In a statement in Loksabha, government on 09.03.2018 informed that 82 coal mines have been allocated by way of auction / allotment under the provisions of the Coal Mines (Special Provisions) Act, 2015 and the Rules made thereunder. Out of the 82 coal mines, 31 coal mines have been allocated through e-auction.

The specified end use condition viz power generation, cement, Iron and steel, captive power plant etc; in grant of coal mines have prevented the bidders in participating in the bidding process. One reason was complexity in getting statutory permissions and clearances and other being large investment. It was found better to fulfill coal requirement by paying cash for imported coal or to get from E_auction of coal from coal mines directly. Hence, operating a coal mine is not considered a good idea in India.  A solution to this problem is sought by MoC through amendments in the rules by deleting specific end use condition. Further, MoC vide order dated 28.05.2020 brought out methodology for coal mine/block auction


To attract investment in coal mining, the government is preparing on various fronts to attract investment, a recent amendment through the Environment (Protection) Amendment Rules, 2020 dated 21.05.2020 shall be taken as a positive step where the condition of use of coal having less than 34 percent coal ash, in Thermal Power Plants for generation of power is substituted by more pragmatic, emission based criteria in which the Thermal Power Plants to follow emission norms set by pollution control boards. In the same EPA amendment, 2020 distance for transportation of coal pithead to TPP is also scrapped. Such supportive amendments may bring good investment which will further contribute to local economy and employment. The expected reduction in coal import, due to production from auctioned commercial mines, may be seen as a step towards "Atmnirbhar Bharat" (i.e Self Reliant India).


Omission Of End Use Clause:
In the Mineral Law Amendment-2020 dated 13,March,2020 the end use clause mentioned in the section 4 (3) of the Coal Mines (Special Provisions) Act, 2015  is omitted which states following:

4 "(3) Subject to the provisions of section 5, the following persons who fulfil such norms as may be prescribed, shall be eligible to bid in an auction of Schedule II coal mines and Schedule III coal mines and to engage in coal mining operations in the event they are successful bidders, namely:––
(a) a company engaged in specified end-use including a company having a coal  linkage which has made such investment as may be prescribed.
Explanation.––A “company with a coal linkage” includes any such company whose application is pending with the Central Government on the date of commencement of this Act;
(b) a joint venture company formed by two or more companies having a common specified end-use and are independently eligible to bid in accordance with this Act;
(c) a Government company or corporation or a joint venture company formed by such company or corporation or with any other company having common specified end-use."
Since above section 4(3) is omitted there is no specified end use, now all the coal mines or coal blocks will fall in commercial mines category.

  

Type of Coal Mines for auction:
The MoC order informs that the mines, proposed for auction, will be a mix of fully explored mines where coal reserves are defined by closed spaced prospecting work and partially explored mines where coal reserves are not explored fully and after detail exploration part of coal resources may be converted into coal reserves. The successful bidder has to launch a detail exploration programme in the coal mine area for optimization of coal reserves for better grading, economical mining operations, identification of geologically weak structures, rock characteristics, estimation of ground water management etc. in modern technological perspective.
Volume wise also there will be a mix of coal mines in the upcoming coal auction so that small and big mine can be operated. The auction process will thus have good scope for small and big investors. However those interested to participate in partially explored coal mine blocks should take cautious decision, as these mine blocks will be having G-2 and G-3 category of exploration that means after details exploration though the reserves may increase but if geological complexities like faults have found than the mining operations may become complex and in some cases uneconomic also.  



Bid Parameter:

The bidding will be an ascending forward auction, with a floor percentage of revenue share at 4 percent. The bidders will be required to submit bid at 0.5 percent increment viz 4.5,5.0,5.5……9.5,10 after 10 percentage the incremental value will reduce from 0.50 percentage to 0.25 percentage like 10.25,10.50 till the closing of bid. The revenue will be shared  to the  government on monthly basis for production of coal as per its price fixed by government based on certain formula which takes into consideration Highest price offered, total quantity of coal for which royalty is calculated, actual or notional price of coal ( Notional price will be available from National Coal index (NCI)), volume of coal for different grade of coal, District Mineral Foundation Contribution, taxes, levies, contribution to National Mineral Exploration Trust



Incentives in Revenue Sharing :
The upcoming coal mine auction has provision of incentives for early commencement of production in the coal mine:
A rebate of 50 percent on revenue share would be allowed for coal production till the actual stipulated time of production. That means for a mine, scheduled for production on 31st December,2022 if starts producing  on 30th November,2022 in such case the successful bidder will get benefit of paying only 50 percent of actual due payments for production of coal as per the calculation formula ( which will, most likely be part of tender document or separately provided) and from 1st January,2023 onward the successful bidder will be paying 100 percent of revenue share offered by him at the time of bidding. There is no exemption in statutory payments.
However, since the commencement of mining operation depends upon several conditions like land acquisition, permissions and clearance; it would be interesting to see benefit of incentives on early commencement of mining operations.  



Upfront Amount:
The upfront amount shall be 0.25 percent of the total geological reserves of the coal mine with upper capping, which is good. For coal mines having geological reserves upto 200 million tonne, the upfront amount will be INR 100 crore  while for a coal mine with geological reserves above 200 million tonne, the upfront amount paid to the government will be INR 500 crore. The upfront amount is quite high as a bidder should have sufficient financial strength to arrange finances for such huge upfront payment (to be paid in 4 installments). However, upon commencement of production 50 percent of this upfront amount on yearly basis can be adjusted in revenue sharing, if desired by successful bidder.  



No Restriction of Sale of Coal:
The most attractive feature of upcoming coal auction is that there is no restriction on sale of coal. The successful bidder is free to sell coal in any manner as decided by him. The bidder, can utilize coal for captive consumption like power generation, gasification, liquefaction and export of coal. Here the bidder has advantage as he will get good matrix of buyers so he will get revenue based on the quality of coal produced.

Conclusion:

The auction for commercial coal mining is likely to attract bidders who will see demand –supply gap as an opportunity for investment. However, the high value of upfront amount and delay in permissions and clearances may be hindrance because these issues are prevailing since long and unsorted. The non-co-operation from local community for coal mining is big problem which has to be taken care of by the respective state governments.  

***



Disclaimer: 

The views expressed here are of writer only and do not belong to any organization, associated with.

Comments

P K Dwivedi said…
Well explained in very simple language. Nice analysis of govt move on coal mine auction process and expected impact as well as hindrances.
Unknown said…
Hi sir,
Nice explanation, sir will this removal of captive conditions augment the investment of private parties unless a better technological aspects in future to increase the quality of existing coal? By which the imports might reduce?
Dear SIr, we expect some investment bcoz the bidder has many option to sale coal which earlier was restricted to end users only. However, the high upfront amount may prevent small investors.
Thanks for valuable information.

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