As India battles to meet its ever growing energy demands, gas might just be the answer. With conventional resources depleting by every passing minute, India?s move towards becoming a gas-led economy may give a much needed lifeline to the nation. Going by the projections, the ratio is likely to shift towards gas (65:35) in the next two years and gas is expected to play a paramount role in the fertiliser and power sectors. Given that in 2009-10 the demand would be 225 million metric standard cubic metre Per Day (mmscmd) while supply would be 168 mmscmd implying a demand supply gap of 57 mmscmd there are cardinal issues that need to be addressed. Even as the finance minister proposed the introduction of seven year tax holiday for natural gas production from NELP VIII blocks, the industry remains disappointed as it was expecting a clarity on tax holiday for all blocks auctioned in NELP I to NELP VII. Further, the June 15 judgment by the Bombay High Court, asking Reliance Industries (RIL) to supply 28 (mmscmd) of KG D6 gas to Reliance Natural Resources (RNRL) at $2.34 per million british thermal unit (mmbtu) for 17 years in a private family MoU between Ambani brothers, has added an interesting angle to the gas economics of the country. The judgment brings to the fore if the Bombay High Court order derails the government gas utilisation policy to priority sector and raises questions about the right of the government to use its natural resources in larger public interest. The order also raises the question if India is heading for a dual pricing of gas production.
The perennial need
Given the paradoxes, the current gas demand and supply scenario is interestingly poised. India has a huge demand for natural gas and it accounts for around 9 % of the energy mix while globally gas accounts for 24% of the global energy mix. According to the data available with the petroleum ministry, India?s gas demand is set to increase from 179 mmscmd in 2007-08 touch 280 mmscmd by 2011-12. At consumption level of 280 mmscmd, gas would account for 14% of India?s energy mix by 2012. In 2009-10 the demand would be 225 mmscmd while supply would be 168 mmscmd implying a demand supply gap of 57 mmscmd. Also, India will continue to be a net importer of crude oil, relying on imports for 75% of its energy needs and this dependency is expected to increase to 90% by 2025. Oil consumption is expected to increase by 3-4% per annum to 2012, implying demand of 3.23 mn barrel per day by the end of 2012. The import requirement would be 2.30 million barrels per day by 2012. Similarly, gas consumption is likely to rise to 58 billion cubic meter in 2012 from 40 billion cubic meters from 2007.
The recent Mckinsey report, Gas in 2020: A Perspective, points out, ?Demand for gas in India would surge by 9 to 10% annually to about 115 to 135 billion cubic meter (BCM) by 2020.? However, the current projects indicate that indigenous production would increase to 55 BCM by 2012. But in the longer term, indigenous gas alone may not be able to fulfill India?s consumption needs and pipelines would play an important role in bridging this gap. The Iran-Pakistan-India (IPI) project (32 BCM) and Myanmar-India pipeline (12 BCM) could provide 40 to 45 BCM of gas. Any further delay in the pipeline projects would increase LNG imports between 40 to 90 BCM by 2020.
For gas to play a major role in fulfilling India?s rising power requirements and meet the power deficit important steps will have to be undertaken. To meet its power deficit of about 140 GW at peak in 2017, India would need to build 55 GW of additional peaking capacity. Hydro plans can satisfy 20 to 30 GW of peak power demand by 2017. The balance would need to be produced by alternatives like gas. The expected tariff of peaking power in excess of Rs 5.50/Kwhhr could support a gas price of around $12 per million british thermal unit (Mmbtu).
Gas consumption is also quite uneven in India. The western region comprising of Maharashtra and Gujarat and northern region consisting of Rajasthan, Uttar Pradesh, Delhi and Haryana lead in the gas usage at 42.7% and 30.5% respectively. However, southern, central, eastern and north eastern regions not only lack enough gas supply but also the necessary infrastructure. It is also evident that most of the increase in gas demand would come from power, fertiliser, city gas distribution (CGD), steel, refineries and the industrial sectors. It will replace dependence on liquid fuel and naphtha in the days to come. As of now, RIL has entered into gas sale purchase agreement for the supply of 18 mmscmd gas to the power sector and 14 mmscmd to the fertiliser sector. KG D6 gas would increase India?s GDP by $103 billion and it will substitute 7% of oil consumption in 2009-10 and about 10-11% in 2011-14. According to Goldman Sachs and Citibank, with current import bill at $335 billion in the current fiscal, gas is expected to save about 3%, resulting in savings to the tune of $9 billion.
More importantly, India?s current account deficit would improve by 0.20% of GDP by end of the fiscal and would improve by 0.60% of GDP by 2013-14. With the GDP at $1.3 trillion in 2010, savings would be around $2.6 billion. More importantly, during last seven rounds of New Exploration Licensing Policy (NELP), India has received investment proposals of well over $15 billion in the exploration for hydrocarbons.
Since its advent in 1999, NELP has given 68 oil and gas discoveries in Cambay Onland, North East Coast and Krishna Godavari deep-water areas, totalling over 600 million tons of reserves. In the NELP VIII, the government has offered 70 oil and gas blocks. According to the directorate general of hydrocarbons, of the 70 blocks, 24 are deep-sea blocks, 28 shallow water blocks and 18 onland blocks.
The vital links
Experts opine that poor gas transportation infrastructure has been a major hurdle in the development of a full natural gas market in India. The finance minister?s proposal to develop a blueprint for long distance gas highway leading to a National Gas Grid is quite important especially when the country can expect more gas from exploratory fields of RIL, ONGC, Cairns, and GSPC.
Akhil Sambar, Senior Manager, Ernst & Young says, ?The government could look at public private partnership (PPP) model for putting together the proposed gas grid. This is all the more important when there is a liquidity crunch. IIFCL can also play a major role in financing the gas grid project.?
State-run GAIL India, country?s largest gas transporter with 7,700 km of pipelines, has launched an investment drive of Rs 18,000 crore for laying five pipelines of 5,500 km and to upgrade existing trunk lines to take fuel from gas fields and import locations to consumers. The company hopes to clock pipeline transportation revenues of Rs 5,800 crore by end of 11th plan (2011-12). These pipelines will add to its gas transportation capability to 280 mmscmd from around 175 mmscmd. Further, Reliance Group and Gujarat State Petronet Ltd (GSPL) have also proposed substantial investments for the establishment of gas transmission infrastructure. However, industry players expect clarity on regulatory issues relating to pipelines, open access and distribution in order to develop the gas market.
Moreover, GAIL India has set up a subsidiary for city gas distribution (CGD) and CNG corridor business. The subsidiary will undertake distribution and marketing of CNG as fuel for vehicles, piped natural gas (PNG) for domestic, commercial and industrial purposes and auto LPG as fuel for transport vehicles. The company will also invest in building CNG corridors and carry out allied retail business activities at CNG, auto LPG retail outlets within cities and along the highways. It will also strike alliances with gas producers and strategic partners for implementation of city gas projects. Sambhar opines that eventually CGD will take off as it will benefit the government and reduce the subsidy burden.
KPMG in its recent oil & gas overview states, ?Given the commencement of production from RIL?s KG Basin fields, the scheduled commencement of Cairn India?s production and the potential development of the discoveries announced by GSPC and ONGC, the E&P sector is poised to see considerable activity in the near future. This could mean an increased interest in exploring India?s hydrocarbon potential by foreign players. However, the economic downturn and the consequent cut-back in capital expenditures by some players as well as some ambiguity on freedom to market oil and gas and the applicability of tax concessions for the production of natural gas could serve as a dampener.? The KPMG overview adds that the promise offered by certain acreages, particularly off India?s east coast the KG and Mahanadi Basins, means that the prospects for the growth of the upstream sector remains bright. It is expected that this is also likely to have a positive spin-off effect on the provision of off-shore services.
Given that India will continue to face gas shortage mainly on account of the ever increasing mismatch between demand and supply. The government can ease the pressure by also exploring the options of transnational gas supply. Sambar concludes ?Procurement of gas from Myanmar can be taken up on a priority basis.? This will be important especially when the implementation of India-Pakistan-Iran and Turkmenistan- Afghanistan – Pakistan-India pipelines will be laid. How the government traverses the transnational route is the big question now.
Gas transmission infrastructure
Pipeline length to double from 5,826 km to 13,685 km in the 11th five-year plan
•The current gas grid for the transmission of gas will not be adequate to meet the future supply of natural gas. Hence, the regulator has made the development of pipeline infrastructure a top priority.
•Companies like GAIL, Reliance Group and GSPL have planned huge capital expenditures to establish gas transmission infrastructure.
•We expect the growth of pipeline infrastructure to be synchronised with supply and demand timelines. (Nacquuarie report)
State owned agency GAIL India Ltd owns about 7,700 kms of pipelines and has authorisation for another 5,500 kms. The new authorisations includes the 600 kms Dadri-Bawana-Nangal pipeline, the 2000 kms Chainsa-Jhajjar-Hissar pipeline, the 2,000 kms Jagdishpur-Haldia pipeline, the 1,400 kms Dabhol-Bangalore pipeline and the 1,100 kms of Kochi-Kanjirrkod-Bangalore. All these pipelines are likely to be operational in phases from year 2011 to 2012.
In addition RGTIL owns authorisations for about 2800 kms of pipelines.
These include:
•Kakinada-Haldia (1100 kms)
•Kakinada-Chennai (445 kms)
•Chennai-Bangalore-Mangalore (600 kms)
• Chennai-Tuticorin (670 kms)
Besides this, the pipelines for which expression of interest has been published are:
•GAIL: Central India Pipeline (Vijayawada to Vijaipur, about 1,100 kms)
•GSPL: Kakinada – Bhilwara (on similar route to GAIL?s proposed pipeline)
•GSPL : Mehsana -Bhatinda (about 1000 kms)
For these pipelines, the public consultation process has been completed.
•PNGRB held meeting with respective entities (Central India)
•Route, capacity of Pipeline to be finalised, and bids are yet to be invited.
Areas lacking gas infrastructure
Northern Region J&K, Himachal, Punjab, Part of Haryana, Uttarakhand
Western Region Parts of Maharashtra
Central Region Rajasthan, parts of MP, Chhattisgarh
Eastern Region West Bengal, Orissa, Jharkhand
Southern region Kerala, Karnataka
North -Eastern region Parts of Assam, Meghalaya, Sikkim , Arunachal Pradesh, Manipur
According to the data available with the petroleum ministry and GAIL India
Missing Links -Approximately 3,500 kms- Pipelines to remote areas
•Barauni-Guwahati – Approx. 760 kms
•Thane-Nashik-Nagpur Approx. 750 kms
•Paradip (Mahanadi Basin) – Raipur/ Bhilai – Approx. 710 kms
•Kota-Jaisalmer – Approx. 600 kms
• Amritsar-Jammu (J&K Connectivity) – Approx. 210 kms
•Chandigarh-Parwanoo (Himachal Connectivity) – Approx. 75 kms
•Hissar-Ganganagar-Bhatinda – Approx. 250 kms
Total Pipeline length required to be laid way exceed 6,000 kms (Incl the EOl Pipelines) which would need capex of Rs 30,000 crore.