Expected output plunge at KG D6 to starve gas-based power plants

A crisis is looming over India?s gas-based power industry with the assessment that Reliance Industries? KG D6 field output might fall steeply, leaving just a tenth of the gas currently allocated for the sector. The drastic decline in output will leave the bulk of the RIL gas-based power generation capacity of 6,790 MW idle and starve all new plants.

Based on RIL?s inputs to the regulator, the Union power ministry has assessed that the expected sharp fall in production from the field, which accounted for more than a quarter of the country?s total gas output in 2010-11, would leave just 3 million metric standard cubic metre per day (mmscmd) of gas for the power sector by 2013-14. This is just a tenth of the KG D6 gas allocated to the sector under the current policy, given the capacities being created in the sector and the demand from other sectors. Obviously, the steep fall in the field output would render these capacities idle.

With 3 mmscmd of gas, only 625 MW of electricity or 9% of the installed capacity of 6,790 MW meant to be run on D6 gas, can be generated.

Even when almost the entire allocated RIL gas (32 mmscmd) was available to the sector, these power companies were using only 70-75% of their capacity as the clean fuel is being rationed among various priority sectors such as fertilisers, city gas distribution and LPG extraction units.

India has infrastructure to produce about 16,640 MW every year using natural gas, of which about 5% is powered by costly imported liquefied natural gas (LNG). Most of these plants are already running at lower than their rated capacity due to gas shortage. Further decline in output will impact almost all major power sector companies such as NTPC, Lanco, GMR, Torrent, Essar, Tata, Reliance and GVK. Many of these projects were stranded even before RIL?s KG D6 started producing gas.

Power companies are also in the precarious position that they cannot switch to LNG on a massive scale without the consent of state electricity boards, the principal buyers. With SEBs already facing financial constraints, agreeing to a higher tariff would not be easy for them.

An RIL spokesperson refused to comment for this story.

?Companies will have to resort to expensive spot market purchase of gas that will affect their margins,? said Association of Power Producers (APP) director-general Ashok Khurana. APP comprises Reliance Power, Tata Power, Adani Power, JSW Energy and Jindal Power.

As per the power ministry assessment, power sector will get 9 mmscmd of Reliance gas in 2012-13 as RIL is expected to produce 27.6 mmscmd, compared to the close to 37 mmscmd it is producing at present.

Allocation to the sector will fall to 3 mmscmd in the subsequent year when the production is expected to fall to around 22 mmscmd. As the government is unlikely to cut allocations for fertiliser and LPG sectors (given their high-priority status), power sector will likely face the heat.

The shortfall will not only impact existing gas-based capacity but also have a bearing on future projects. Power ministry has sought extra 55 mmscmd of gas for new projects of 14,000 MW over the next five years while fertiliser ministry wants 64 mmscmd extra over the same period.

RIL?s production had gone up to 60 mmscmd in March 2010 and was expected to go further up to 80 mmscmd but production fell unexpectedly, leading to a dispute between the company and the government.

The petroleum ministry and the regulator Director General of Hydrocarbons (DGH) feel gas output is falling as RIL has not drilled enough wells. But the company is of the view that geological changes in the reservoir, the fastest to reach production after discovery anywhere in the world, are beyond its control. KG D6 is also the first ultra-deep water block in India to reach production.

RIL is also of the view that it would have been in a better position to arrest the decline if regulatory clearance for developing a few satellite fields around the producing D1 and D3 fields in the D6 block had come on time. RIL received the approval in January this year, 26 months after it had made the application in November 2009, said an informed source.

An NTPC official said their gas-based plants were already running at a low plant load factor (PLF or capacity utilisation) of 50-60% and a reduction in KG D6 gas could marginally impact some of their projects receiving small quantities of the fuel. But a fall in D6 production could offset any expected gain from a court ruling awaited on NTPC?s disputed gas purchase deal with Reliance for its Kawas and Gandhar expansion projects.

NTPC took RIL to the Bombay High Court in 2005, complaining RIL was not honouring a contract to sell 12 mmscmd of gas to its Kawas and Gandhar expansion projects in Gujarat for 17 years at $2.34 per unit, below the government set price of $4.2 per unit. The matter is pending in Bombay High Court.

The oil ministry is now contemplating ways to curtail RIL?s recovery of field development costs from the gas sale proceeds, even as the company has slapped an arbitration notice on the government to pre-empt such a possibility. Higher field development cost has apparently led to lesser than expected profit share for the government as production has not gone up correspondingly.

The ministry has also sought clearance from a group of ministers led by Pranab Mukherjee for a new road map to regulate natural gas supplies. As per this, even priority consumers won?t be spared supply cuts if gas output falls further.

About 52 mmscmd of gas is needed to meet the needs of all the priority consumers and with the projected reduction in supplies, there would be only a small quantity of gas available to sectors like power, city gas distribution and LPG extraction units after meeting the 15 mmscmd requirement for the fertiliser sector. The KG D6 output accounted for a quarter of all gas produced in the country in 2010-11.