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Ballooning appetite

Anilesh S. Mahajan        Print Edition: Apr 29, 2012

For the past six months, Ashok Kumar Balyan, Managing Director of Petronet LNG Ltd, has been working at a furious pace. He puts in at least 14 hours a day, travels 20 days a month and ensures all his employees are on their toes. Petronet, a joint venture in which public sector units have a large stake, was set up specifically to sew up contracts which would bring in liquefied natural gas (LNG) from across the world, as well as build terminals that would store it. With the need for more gas growing urgent, Petronet is feeling the pressure. "It is our time to grow," says Balyan. "LNG has a bright future in India."

Petronet is not alone. Most companies in the energy sector are working overtime, knowing natural gas use in India will balloon in the coming years. Consuming 165 million metric standard cubic metres per day (mmscmd) of natural gas, India is already its third biggest consumer in Asia, after Japan and South Korea, and is likely to equal South Korea's consumption by 2016, when it is likely to touch 380 to 400 mmscmd.

Natural gas has many advantages over fuels like coal and oil. "It is clean, more efficient and easy to handle," says Vandana Hari, Asia Editorial Director at global energy information research house, Platts.

"India is a huge market for gas, having diverse customers." Currently, around 127 mmscmd of gas used is produced within the country, while the rest is imported. But given the recent disappointments over domestic natural gas output - the steadily falling levels at the KG D6 basin in Andhra Pradesh, for instance - imports are likely to rise considerably in coming years. "The gap between gas demand and supply is increasing," says Balyan. The International Energy Agency (IEA) expects India's gas imports, currently at around 23 per cent of its total requirement, to rise to 50 per cent by 2016.

 Expensive resource

LNG, shipped from overseas, is much more expensive than domestically produced natural gas. The approximate prices of LNG and natural gas from different storage terminals

LNG
From Petronet's Dahej 7.5
From Petronet's Kochi* 13.2
From Shell's Hazira 10.3

NATURAL GAS
From ONGC/OIL 4.2
From RIL's KG D6 4.2
From RIL-BG's Panna-Mukta-Tapti 5.7
From various coal bed methane fields 6.8

Figures in $ per million metric British thermal unit (mmBtu)
*Expected
Source: E&Y analysis, Infraline


Natural gas from overseas can be transported in two ways: through long pipelines across international borders or in giant tankers by the sea. When carried in tankers, it has to be first cooled to minus 163 degrees Celsius, when it turns into liquid or LNG. Deposited at storage terminals, it is warmed back into gas (re-gasified) and supplied to industries. But pipelines are subject to geopolitical risks.

The Iran-Pakistan-India pipeline project, for instance, or the Myanmar-Bangladesh-India one, have both fallen through, while the fate of the Turkmenistan-Afghanistan-Pakistan-India pipeline hangs in the balance. LNG has thus become the preferred form for transportation.

At present, India has just two LNG storage and re-gasification terminals - Petronet's terminal at Dahej and Shell's at Hazira, both on the Gujarat coast - with a total capacity of 13.5 million metric tonnes per annum (mmtpa). But with a host of new ones on the anvil, storage capacity is expected to rise to 40 mmtpa by 2016.

R.P.N. Singh, Minister of State for Petroleum, told Parliament recently that in the last three years, India had bought LNG from countries as diverse as Qatar, the United Arab Emirates, Oman, Malaysia, Russia, Australia, Algeria, Egypt, Nigeria, the US, Norway and Trinidad and Tobago.

GAIL (India) Ltd, for example, has sealed two major contracts. In May 2009, it signed an agreement for 1.5 mmtpa of LNG for 20 years with energy giant ExxonMobil's Gorgon terminal in Australia. In December 2011, it sealed a deal with another energy behemoth, Cheniere, whose Sabine Park liquefaction facility in the US will provide 3.5 mmtpa of LNG for 20 years.

Hard at Work
GAIL has also opened an office in Singapore, the hub of LNG trade in Asia, to make striking deals easier. It has signed a memorandum of understanding with the Andhra Pradesh government to set up its own storage unit in the state. It also plans to build two float storage and re-gasification units (FSRU) in the Kakinada and Mahanadi basins of the state.

Vandana Hari, Asia Editorial Director, Platts
India is a huge market for natural gas, having diverse customers: Vandana Hari
Indian Oil Corporation Ltd (IOCL) is building a 2.5 mmtpa storage terminal at Ennore on Chennai's northern fringe. It is also reportedly in talks with Tata Steel and Larsen & Toubro (L&T), promoters of Dhamra port in Orissa, to build a smaller storage facility there. State-owned Ratnagiri Gas and Power Ltd's (RPGL) has nearly completed building its five mmpta storage facility at Dabhol, Maharashtra, and expects its first shipment of LNG in early April.

Petronet has finalised the location of another five mmtpa terminal at Gangavaram on the Andhra Pradesh coast. Its five mmtpa Kochi facility is almost ready, while the capacity of the Dahej terminal is being expanded to 15 mmtpa. What about LNG supply contracts? "Since things are at the negotiation stage, we are not in a position to divulge much," says Balyan. But he is pursuing them, even trying to buy equity stakes in some LNG companies overseas so that supply is guaranteed.

A joint venture between Gujarat State Petroleum Corporation (GSPC) and Adani Ports is building a five mmtpa terminal at the state's Mundra port, which is likely to offer between 15 and 25 per cent equity to the LNG provider to ensure steady supplies. "There are two more proposals for LNG terminals, one near Okhamandal and the other at Pipavav," says a top Gujarat government official.

An official from the JSW Group, which is building the Jaigarh port in Maharashtra, also confirmed plans to set up an FSRU there. The gas is likely to replace coal at JSW's power plants. Upcoming ports like Chara in Gujarat and Dighi in Maharashtra will also have small LNG storage units.

Reliance Industries Ltd's (RIL) joint venture with BP, called India Gas Solutions (IGS), too, is looking to either set up its own storage terminals or acquire a stake in some of those being planned, though it claimed not to have taken any concrete step as yet. "There is speculation all around, but we are still in the planning mode, nothing is final," says Bibhas Ganguly, Vice Chairman, IGS.

Since both the existing storage terminals are located in Gujarat, it is no surprise that the state consumes most of the LNG imported. About a third of the natural gas produced in the country is also sold to industries in Gujarat. But once the planned projects are completed, natural gas usage is likely to become much more evenly distributed, especially in the southern states of Andhra Pradesh, Karnataka, Tamil Nadu and Kerala.

But LNG storage facilities alone are not enough. They have to be complemented by a ecosystem of pipelines and related infrastructure. "You cannot transport gas beyond a distance on trucks," says Nitin Shukla, MD and CEO, Shell Hazira.

"You need a good network of pipelines." But plans for these are still at an incipient stage. There is no doubt talk of setting up integrated gas grids and promoting more city-based gas distribution systems.

Pricing and its Challenges The biggest challenge LNG importers will face, however, is pricing. Petroleum products cannot be sold at market rates in India, but are subject to a complex administered pricing system. Again, given the processes involved, imported LNG will always be much more costly than domestically produced natural gas. (See Expensive Resource, page 79.) Which industries should get which form of gas and how much? A committee to examine the issue, set up under the chairmanship of Planning Commission member Saumitra Chaudhuri, submitted its report last year, which is currently being examined by an empowered group of ministers (EGOM).

Before the report, there had been much talk of a 'price pooling mechanism' by which both domestic natural gas and imported LNG would be sold at the same price set by the government, an average of their market prices. While the Ministry of Power backed the idea, LNG importers opposed it vehemently, since it would have meant selling at nearly half the rate they are currently doing.

Nitin Shukla, MD & CEO, Shell Hazira
Between 2005 and 2010, businessmen in Gujarat saved USD 2 billion by switching over to gas: Nitin Shukla
But the Chaudhuri committee too has turned down the idea and instead suggested that natural gas be reserved for power and fertiliser units only, since these are priority sectors and prices they charge are regulated too. In particular, sectors not regarded as 'core' should not be supplied domestic natural gas, but should use only LNG.

Will industries buy LNG, when the price differential with natural gas is so high? Petronet's Balyan dismisses the question. "Why are we not looking at LNG price versus crude oil prices," he asks. "There are big industrial houses which might find it cheaper to buy our gas at higher prices than currently charged because it will be cheaper than LPG and diesel." B.C. Tripathi, Chairman and Managing Director, GAIL, agrees.

"There are many who want to shift from diesel, naphtha, kerosene and so forth," he says. Shell's Shukla maintains a key factor behind Gujarat's remarkable double digit growth in recent years, is the use of re-gasified LNG. "Between 2005 and 2010, businessmen in Gujarat saved $2 billion, by switching to natural gas," he says.

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