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How long will India

The ensuing IPO of Coal India Limited (CIL) is the best thing to happen to the Indian coal industry. CIL, a mammoth monopoly for several decades, will now be held accountable to scores of shareholders. After the nationalisation of the coal industry in the early 1970s, the coal sector has remained opaque under CIL, with minimal reforms compared to other energy sectors.

The CIL's advertising campaign for the IPO, which opiates us with a feeling of great coal-richness, is a powerful one. "We are the world's largest coal reserve holder" shouts the advertisement quoting from a Credit Rating and Information Services of India Ltd (Crisil) report. Crisil and some others including Credit Analysis and Research (CARE) have rated the IPO a Grade 5 on the basis of, inter alia, dominance of CIL in the Indian coal industry (read monopoly), high turnover, low cost of production and strong fundamentals.

The reports and advertisements convey that there are huge domestic coal reserves with CIL and the energy security of India is, and would remain, intact for decades to come. Though there are serious shortages of coal in India currently, this is a passing phase and, therefore, there is no cause for worry.

Are we really as coal-rich as made out by the advertisements? The facts seem to be at a variance with the claims made.

The fact is that instead of using an internationally acceptable procedure for reporting geological resources, the Geological Survey of India (GSI) continues to report the coal resource base annually on the basis of Indian Standard Procedure (ISP) code of 1956 vintage. ISP is a purely geological classification system, with total disregard to the economic or technical feasibility of extraction of the reported resources. Various categories of reserves (such as 'proved', 'indicated' and 'inferred') are based only on the density of exploratory boreholes drilled in the ground. The resources (and not reserves) as reported under ISP are cumulative and gross geological information, which includes even the coal that has been extracted and burned during the last couple of centuries of coal mining in India. Thus, this figure would continue to increase year after year and stands at 276.81 billion tonnes (BT) as on April 2010. However, being highly inflated, this figure cannot and should not form the basis for future energy planning for the country.

There is a range of numbers for coal reserves in India mentioned in the draft red herring prospectus (DRHP), filed by CIL, which is quite confusing. It quotes the Integrated Energy Policy Report of Planning Commission, (August 2006) wherein it is mentioned that "known coal reserves are projected to last for over 80 years at the 2006 levels of production", which again gives a picture of abundance of domestic coal resources.

Various sources in the recent past have estimated the country's total extractable reserves (including over 200-odd captive coal blocks allotted to private parties and others) to last for only 40-50 years. The Tenth Five-Year Plan estimated it at less than 18 BT in 2002. The Central Mine Planning and Design Institute estimated it to be less than 40 BT in 2001, later revised to 52 BT in 2005. Planning Commission estimated that at a 5% rate of growth of coal consumption, India's domestic coal reserves may last only for 45 years, which translates to about 50 BT. The Expert Committee on Road Map for coal sector reforms and the Integrated Energy Policy: report of the Expert Committee, indicate that India has an estimated 56-71 BT of extractable coal.

CIL in its DRHP has also posted a figure of 64.8 BT as the total coal resources available to it as on April 2010, as classified under ISP guidelines with geological reserves of proved, indicated and inferred categories being 52.55 BT, 10.3 BT and 1.94 BT, respectively. From the total coal resources of 64.8 BT, only 30.36 BT had been considered for mining studies (mine planning and feasibility studies) from which CIL finally estimates extractable reserves to be only 21.8 BT.

The meagre extractable reserves are the result of decades of cherry-picking by CIL. In its effort to maximise profits and cover up inefficiencies, CIL has been exploring and exploiting only shallow deposits, which is evident from the fact that almost 90% coal production comes from opencast mines from a depth of less than 200 metres. A GSI report shows that over 60% of gross geological resources lie within 300 metres. CIL has no plans for digging any deeper than 300 metres for more coal.

However, with burgeoning energy demand led by the power sector, CIL, in the near future, will be forced to explore and exploit deeper seams for maintaining its production levels. It will become essential for the 'world's largest coal producing company' to invest heavily in the very near future if it is to remain the numero uno. This would mean that future cost of coal production would be much higher compared to what CIL is currently incurring and with much reduced profits.

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