Enron's Dabhol Power project is now a rusty ghost town

Jul 06, 2002 02:00 AM

On a craggy hill overlooking a cove once used by gold smugglers, Enron set up a $ 2.9 bn dream enterprise -- what was to be the world's largest natural gas-fired power plant. Nine years and a slew of court battles later, the 1,700-acre (680-hectare) plant is a rusting ghost town with deserted roads and buildings. Its hospital, school, engineering institute, industrial sites and miles of mango orchards are eerily still. Several gas storage tanks -- each big enough to accommodate a Boeing 747 -- lie hollow.
Long before the Enron monolith crumbled in Texas, its troubles had started in India. The sole customer of its power project, the Maharashtra State Electricity Board, delayed and then refused to pay for the electricity. Enron, the energy-trading firm based in Houston, accused the utility of reneging on its contract. The utility countered that Enron was charging some of the highest rates in the world.

At its height, the power plant in Dabhol, 320 km (200 miles) south of India's industrial hubof Bombay, employed 15,000 people who bustled about in yellow helmets, constructing the last phase of the 2,184-MW plant in the western state of Maharashtra. It is Enron's largest overseas project, the biggest foreign investment in the country, and the showpiece of US economic relations with India.
The project was 90 % complete. It was producing electricity -- running on naphtha -- and was to convert to LNG supplied through India's biggest fuel terminal. But production and construction stopped in May 2001, and now only a few dozen men are left to guard the decaying empire.

What remains is Enron's unsecured debt of more than $ 1.5 bn to Indian financial institutions, and another $ 650 mm owed US lenders, which American taxpayers may end up reimbursing. Enron and its US partners, Bechtel and General Electric, want their assets sold for $ 1 bn.
But unloading Enron's Dabhol Power looks like a distress sale, especially since Enron filed for bankruptcy in the United States last December amid a scandal over its accounting practices and influence in Washington. The bankruptcy proceedings have not touched the India operations, which are mired in separate court suits in Bombay. A Maharashtra court is hearing rival complaints: The state utility says Enron's high power charges were not covered by the agreement; Enron says the utility's refusal to pay violated the contract.

Critics see Enron's experience in India as the saga of a big corporation that used political muscle -- and alleged bribes -- to win a lucrative contract for a power plant that never should have been built. They note the World Bank refused to finance the Enron project in 1993, calling it “unviable.” “The government was taken for a ride,” Madhavrao Godbole, a former federal home secretary who headed a Dabhol inquiry, told.
“Enron cheated India.... It's an outstanding example of how a multinational company should not get into an agreement with a developing country.” In Enron's view, the Dabhol plant was the victim of unexpected economic changes, and its India spokesman, Jimmy Mogal, rejects the view that Indian officials were hoodwinked. “No one had them signing the contract with a gun to their head,” he said. “The government of Maharashtra and the government of India have completely reneged on their international contracts, signed not once but twice.”

Enron has repeatedly denied allegations it paid bribes. It has never been charged with a crime in India. Mogal said the power costs soared for reasons out of Enron's control -- beginning with the sharp rise in the global prices of the naphtha used as fuel in the project's first stage -- and that this raised the tariff, or amount Maharashtra paid for the electricity.
“Naphtha prices went flying through the roof, and it impacted the tariff,” Mogal said. “Also, the rupee-dollar exchange rate changed. A tariff is a formula. It is never a fixed number.” As in most of India, the state utility was selling subsidized electricity to consumers -- charging 1.5 rupees (3 cents) per kWh for power purchased from Enron at 8 rupees (16 cents).
The Indian currency stood at 32 rupees to the dollar when the latest contract was signed in 1996. Today, a dollar is worth more than 48 rupees. Prices also shot up due to a formula that meant “the less you buy, the more you pay,” Mogal said. He said that by the time the plant shut down, the utility was only buying 40 % of the electricity produced, yet paying for the entire power production since it was the only customer.

The great advantage for Enron -- and the major complaint against it -- was a contract clause that required India's federal government to pay up in case of default by Maharashtra. Enron invoked the federal guarantee twice. New Delhi has said it would pay -- but only after the financial dispute is resolved.
US Ambassador Robert Blackwill argues that India's failure to pay makes potential investors in India nervous. “The Dabhol dispute feeds a chronic perception among the overseas investing community that India may not be ready yet for big-time international investment,” he said. “I hear frequent buzz from the United States that the sanctity of a contract may now be in doubt here, a concern that can spell death to potential investments.”

Still, according to India's Industry Ministry, foreign investment in the country is currently valued at $ 4 bn -- higher than before economic sanctions prompted by the country's 1998 nuclear tests. Meanwhile, allegations continue to swirl about how Enron influenced Indian politicians to ease its way through the bureaucracy. The allegations are widely believed, given that electrical power often plays a role in Indian politics.
Farmers sometimes get subsidized rates, and state governments rarely moving against powerful constituents who illegally tap into power lines. Rumours of corruption arose in 1995 when Enron executive Linda Powers told a subcommittee of the US House of Representatives that $ 20 mm had been spent “educating” Indians. Indian politicians and media alleged it was used to buy politicalinfluence.
“They bought over all the political parties... who were opposing them,” alleged Pradyumna Kaul, a management consultant whose Anti-Enron Front is waging a separate court battle to have the Enron contract voided.

The administration of US President George W. Bush took an active interest in Enron's situation in India. US government files show that Bush's aides prepared for him to talk about the company when he met Prime Minister Atal Bihari Vajpayee last November, but his spokesman said it didn't come up. Vice President Dick Cheney raised the issue a year ago with opposition leader Sonia Gandhi.
Critics blame both Gandhi's Congress party -- which governed India at the time it invited Enron to Maharashtra in 1992 -- as well as the state's main opposition party, the Hindu nationalist Shiv Sena. The Shiv Sena threatened to “throw Enron into the Arabian Sea” if voted into power. When it was, in June 1995, the party scrapped the contract -- but then renegotiated it to allow Enron to produce evenmore power after meetings with CEO Rebecca Mark.
“The truth is that those who negotiated the deal did not protect the interests of the state or the nation, and went on a signing spree, succumbing to Enron's pressure,” said Murli Deora, a senior Congress Party leader, referring both to members of his own party and the opposition.

Source: Associated Press
Market Research

The International Affairs Institute (IAI) and OCP Policy Center recently launched a new book: The Future of Natural Gas. Markets and Geopolitics.


The book is an in-depth analysis of some of the fastest moving gas markets, attempting to define the trends of a resource that will have a decisive role in shaping the global economy and modelling the geopolitical dynamics in the next decades.

Some of the top scholars in the energy sector have contributed to this volume such as Gonzalo Escribano, Director Energy and Climate Change Programme, Elcano Royal Institute, Madrid, Coby van der Linde, Director Clingendael International Energy Programme, The Hague and Houda Ben Jannet Allal, General Director Observatoire Méditerranéen de l’Energie (OME), Paris.

For only €32.50 you have your own copy of The Future of Natural Gas. Markets and Geopolitics. Click here to order now!


Upcoming Conferences
« June 2018 »
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28 29 30

Register to announce Your Event

View All Events