CEDIGAZ INSIGHTS #30 THE FUTURE OF NATURAL GAS IN CHINA AND INDIA CRITICAL DRIVERS AND CHALLENGES NOVEMBER 2018 ARMELLE LECARPENTIER

Transcription

1 #30 NOVEMBER 2018 CEDIGAZ INSIGHTS THE FUTURE OF NATURAL GAS IN CHINA AND INDIA CRITICAL DRIVERS AND CHALLENGES ARMELLE LECARPENTIER

2 CEDIGAZ DATABASES DRAW YOUR OWN ANALYSES FROM COMPREHENSIVE RAW DATA Designed for gas professionals with little time on hands, CEDIGAZ databases allow to dig into detailed and accurate data. Advanced browsing and reporting features help focus on what is important for business research. Data visualization with graphs and charts, standard or customized reports contribute to a better understanding of the market situation. And it can be easily shared with teams thanks to Excel exports. Ranging from global overviews, to data dedicated to LNG and underground storage facilities, CEDIGAZ databases take market analyses a step ahead. Annual Gas Indicators by Country Include reserves, gross and marketed production, reinjection, flaring, consumption, imports and exports and infrastructure Covering 120+ countries from 1950 to now Simply the reference database for gas experts Contracts Long-term LNG supply contracts Long term pipeline gas supply contracts Europe Evolution of EU gas supplies 600 Trade Statistics on Bilateral Gas Flows Annual pipeline gas flows Annual LNG flows Monthly LNG flows and prices Planned and Existing Infrastructure LNG liquefaction plants LNG regasification plants Underground gas storage facilities e LNG (net imports) Libya (pipeline) Algeria (pipeline) Norway (pipeline) Russia Indigenous production

3 TABLE OF CONTENTS EXECUTIVE SUMMARY CHINA MEDIUM AND LONG TERM NATURAL GAS OUTLOOK Recent trends in the national energy mix Prospects for China s energy mix Prospects for China s natural gas demand Prospects for China s gas supply INDIA MEDIUM AND LONG TERM NATURAL GAS OUTLOOK Recent gas market developments Prospects for India s energy mix and the role of natural gas Prospects for India s natural gas demand Prospects for India s natural gas supply The expansion of infrastructure is a key enabler for natural gas expansion CEDIGAZ, November

4 LIST OF TABLES TABLE 1: CEDIGAZ CHINA MEDIUM AND LONG TERM OUTLOOK MAIN ASSUMPTIONS... 9 TABLE 2: PROSPECTS FOR CHINA S GAS DEMAND BY SECTOR (BCM) TABLE 3: CEDIGAZ INDIA MEDIUM AND LONG TERM OUTLOOK MAIN ASSUMPTIONS TABLE 4: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (1) TABLE 5: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (2) TABLE 6: PROSPECTS FOR GAS SUPPLY IN INDIA TABLE 7: PROSPECTS FOR LNG INFRASTRUCTURE DEVELOPMENTS IN INDIA LIST OF FIGURES FIGURE 1: RECENT TRENDS IN CHINA S ENERGY MIX... 7 FIGURE 2: RECENT TRENDS IN CHINA S GAS SUPPLY... 8 FIGURE 3: CHINA LONG TERM OUTLOOK MAIN TRENDS... 9 FIGURE 4: CHINA S ENERGY MIX IN FIGURE 5: CHINA S ENERGY MIX IN FIGURE 6: EVOLUTION OF CHINA S GAS DEMAND, FIGURE 7: VARIATIONS IN GAS DEMAND ( ), TOP 10 COUNTRIES FIGURE 8: PROSPECTS FOR CHINA S GAS DEMAND BY SECTOR (BCM) FIGURE 9: PROSPECTS FOR CHINA S GAS SUPPLY (BCM) FIGURE 10: CHINA S GAS NETWORK FIGURE 11: RECENT EVOLUTION OF INDIA S ENERGY DEMAND BY FUEL FIGURE 12: INDIA S SECTOR WISE NATURAL GAS CONSUMPTION DURING FIGURE 13: HISTORIC EVOLUTION OF INDIA S GAS SUPPLY (BCM) FIGURE 14: INDIA LONG TERM OUTLOOK MAIN TRENDS FIGURE 15: INDIA S ENERGY MIX IN FIGURE 16: INDIA S ENERGY MIX IN FIGURE 17: REGIONAL CGD GAS CONSUMPTION FIGURE 18: 9 TH BID ROUND GAS FIGURE 19: PROSPECTS FOR INDIA S GAS DEMAND BY SECTOR (BCM) FIGURE 20: PROSPECTS FOR INDIA S GAS SUPPLY (BCM) FIGURE 21: INDIA S NATURAL GAS FIELDS AND INFRASTRUCTURE CEDIGAZ, November

5 EXECUTIVE SUMMARY The Future of Natural Gas in China and India Critical Drivers and Challenges Accelerated reforms and focused policies aimed at increasing the role of gas and renewables in the energy mix combine to improve the natural gas demand outlook of China and India. In this report, the International Association CEDIGAZ provides its revised medium and long term outlook for natural gas demand and supply in these two key markets and analyses the main drivers and challenges surrounding these prospects. Projections on global primary energy demand and the structure of the energy mix are based on assumptions on the evolution of the world economy, population, energy and environmental policies and technological improvements (energy efficiency, development of renewables ). According to the latest prospects of CEDIGAZ, energy consumption is expected to grow by 26% up to 2040, as the extent of the economic growth is mitigated by significant improvements in energy efficiency. This scenario, which incorporates national energy plans 1, highlights the growing role of natural gas as a key transition fuel towards an increasingly renewable based, efficient and sustainable energy system. The transition to a lower carbon mix accelerates under this scenario, with non fossil fuels accounting for more than half of the incremental energy demand over Virtually all the growth in world energy demand comes from fast growing emerging economies. China and India will stand as the largest growth markets for energy. More than two thirds of the global energy demand growth is explained by India (30%), China (21%) and other emerging Asian markets (16%). Gas stands as the fastest growing fossil fuel over (+ 1.4%/year) and increases its relative share in the world primary energy supply from 22% in 2016 to 24% in 2040, overtaking coal (22%) by this horizon. India and China both start with coal intensive fuel balances but will experience total opposite trends in coal consumption over the outlook period. The consumption of coal declines strongly in China. However, it continues to grow at significant pace in the power sector in India, although coal s share in power generation falls to the profit of renewables, and to a lesser extent, natural gas. As natural gas in China and India hardly competes with coal on a cost basis, the substitution from coal to gas requires a strong support of policies and a fast pace of reforms. Past natural gas developments since 2000 in these two markets show very different trends, which attest to the key role of policy measures to support gas demand and supply. In 2016, the penetration of gas in the energy mix of these two countries was among the lowest in the world, illustrating a strong potential for future gas expansion in every consuming sector. The main natural gas demand drivers in these two markets will be the economic expansion, the urbanization, as well as energy and environmental policies. Indeed, both of these countries face the same environmental challenges, namely to reduce air pollution, particularly in urban areas. China and 1 Some National Energy Plans are viewed with caution by Cedigaz and key targets can be delayed when considered too challenging. CEDIGAZ, November

6 India s signing of the Paris Agreement should support the role of natural gas in their countries energy mix. Local policies also strongly support the development of natural gas in cities. In Cedigaz Scenario, substantial domestic production growth and the expansion of pipeline and LNG infrastructure will bolster growth in gas consumption across various sectors in India and China. Cedigaz prospects for gas demand in these countries are among the highest in the forecast ranges of the different institutions. Cedigaz integrates the objectives of China s national energy plans. However, for India, natural gas demand projections and the share of gas in the energy mix fall short of the government s ambitious targets. Cedigaz Scenario is also based on favourable assumptions as regards the advancement of market oriented reforms in both the gas and electricity sectors. Cedigaz projections show a strong growth of almost 5%/year in natural gas demand in these two countries by 2040, during which natural gas will expand its share in the energy mix, against the background of a massive deployment of renewables, specifically wind and solar. In the short term, industry and city gas distribution are expected be the most important drivers to growth, but there is also major potential upside in gas demand for power generation (China) and transportation in a longer term perspective. China and India are expected to be the fastest growing gas markets worldwide in volume terms, playing a growing role on the global natural gas market. Together, these two countries will account for 40% of the future growth in both the global natural gas and LNG demand and will respectively become the second and sixth largest gas consumers. The paradigm transformation in the Indian and Chinese energy patterns will increasingly influence and shape the global natural gas market. China s role in determining gas prices will become essential. As indigenous production will not keep pace with the fast growing demand, imports will grow strongly. In this context, China and India will seek to enhance the diversity, the flexibility and the affordability of natural gas supply. LNG will play a key role in this respect as the pricing, commercial and contractual conditions continue to evolve in a rapidly growing global LNG market, which is also becoming more competitive. LNG demand is expected to grow especially fast in the short term, backed by the ramping up of LNG regasification capacities and the existence of abundant LNG supplies. Uncontracted LNG imports will gradually grow in the longer term to meet the growing gas demand. The role of domestic gas (including unconventional gas) and pipeline imports (China) will be also increasingly important to cover domestic demand. The expected growth of the Chinese and Indian gas markets and their supply security are contingent on the mobilization of massive investments to develop new fields and new transportation infrastructure. The implementation of an appropriate regulatory framework is crucial to promote investments and gain industry confidence. Another main challenge will remain the affordability of natural gas supply, because of the strong competition from cheap coal and more and more renewables, especially in the Indian context. In this regard, government policies have yet to clarify the future positioning of natural gas in the power generation mix in relation with the other fuels, including coal and renewables. Recent reforms have started to provide good incentives for the natural gas investors in China and India. These countries have become the central points of the Asian gas market attractiveness, as they hold potential in offering significant business opportunities for industry players. CEDIGAZ, November

7 1. CHINA MEDIUM AND LONG TERM NATURAL GAS OUTLOOK 1.1. Recent trends in the national energy mix China is playing a growing role on energy markets, accounting for around half of the growth in global energy demand since However, the country has experienced a slowdown in the growth of its energy demand in recent years, from an annual average of more than 8% between 2000 and 2010 to 3.3%/year since This trend illustrates the structural changes in the economy, which is shifting from the energy intensive industrial sectors to the service sector. It should be pointed out that the national policy has strongly promoted energy efficiency. Energy intensity in China declined by almost 3%/year over the period , although a high potential still remains The structure of the energy mix is progressively shifting away from coal, and, to a degree, oil to cleaner sources of energy, including natural gas. Coal consumption has even continuously fallen over the period , down 1.4%/year, despite a recent slight recovery Natural gas demand has surged by more than 12%/year between 2010 and In parallel, the share of natural gas in the energy mix has increased from 2% to 7%. FIGURE 1: RECENT TRENDS IN CHINA S ENERGY MIX (MTOE) Source: Cedigaz, IEA China has been increasingly dependent on imports to meet its booming gas demand. Import dependency rose tremendously from 15% in 2010 to 39% in In recent years, the role of pipeline gas in gas supply has declined to the profit of LNG, in a context of a fast growing flexible and spot LNG supply. The dependence on LNG imports rose from 14% in 2015 to 17% in 2016 and 22% in 2017, while that of pipeline gas imports flattened at around 17% amid commercial issues with Turkmenistan. China has a fast growing impact on the international natural gas trade. In 2017, it overcame the United States to become the world s third largest natural gas importer, accounting for 8% of international natural gas flows, behind Germany (11%) and Japan (9%). In terms of LNG imports, it eclipsed South Korea to become the second largest LNG buyer after Japan. Natural gas consumption during the first ten months of 2018 increased by 16%, while imports were up by 33% over the period. LNG imports in particular surged by more than 40% over the period. CEDIGAZ, November

8 FIGURE 2: RECENT TRENDS IN CHINA S GAS SUPPLY (BCM) Pipeline imports LNG imports Production (F) Source: Cedigaz (September 2018) 1.2. Prospects for China s energy mix Projections on primary energy demand to 2040 are based on assumptions on the evolution of the world economy, population, energy and environmental policies and technology (Table 1). Energy consumption in China is expected to grow by 0.9%/year between 2016 and 2040, as the extent of the economic growth is mitigated by significant improvements in energy efficiency ( 3.5%/year decline in energy intensity). The long term goals of China s energy policies are to build a more secure, sustainable, diverse and efficient energy system. Driven by supportive energy and environmental policies, the use of lowcarbon fuels rises strongly during the projection period, especially for power generation. China has taken immense strides towards developing renewable energy sources and is by far the world s largest market for solar PV and wind power today. The country has deployed more renewable power generation capacity than any other country. According to the International Energy Agency (WEO 2017), wind and solar PV totalled an electrical capacity of 226 GW in 2016, 30% of the world total, and accounted for 5% of power generation. With average costs falling below those of new gas fired generation, solar PV is rising particularly fast, with capacity surging 80% in 2016, to an estimated 77 GW (WEO 2017). In Cedigaz Scenario, China alone accounts for more than a quarter of the global growth of renewable energy (bioenergy and hydro included) over the projection period. China meets commitments for non fossil fuels to reach 15% of the national primary energy mix by 2020 and 20% of the energy mix by 2030, as it is set out in its NDCs for the Paris agreement. In 2040, non fossil fuels are forecast to represent more than 25% of the total energy mix. Under the Paris agreement, China has committed to peak its CO2 emissions by 2030 or sooner, to reduce its carbon intensity by 60 65% by 2030, against a baseline of China has already met its 2020 carbon intensity target, three years ahead of schedule. CEDIGAZ, November

9 TABLE 1: CEDIGAZ CHINA MEDIUM AND LONG TERM OUTLOOK MAIN ASSUMPTIONS Economy GDP growth of 4.5%/year ( ). Demographics Zero population growth ( ). Environment INDC commitments (reduction of carbon intensity by 60 65% by 2030, against a baseline of 2005). Energy Policy National Energy Plans & FYP Infrastructure Technology Supply availaibility Pricing Line D from Central Asia from th and 5th West East Gas Pipeline. Russia China Pipeline (Eastern Route) from Western Route Pipeline Project to be postponed indefinitely. Only current and approved technologies. Rapid improvements of economics of REN. Energy efficiency improves significantly. Unconventional gas as the fastest growing supply source post Development of vast conventional gas resources, tight gas included. Growing role of spot LNG in gas supply. Accelerated evolution towards market pricing. CO2 price of $40/tonne ($2016) in Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 FIGURE 3: CHINA LONG TERM OUTLOOK MAIN TRENDS %/year Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 CEDIGAZ, November

10 Official authorities have recognized that natural gas has a vital role to play in complementing renewable energies. Natural gas is the biggest beneficiary of the 13 th Five Year Plan ( ), which is the first white paper on the development of natural gas. Total gas supply capacity is expected to rise to 360 bcm by The gas accessibility ratio of urban residents reaches 50% 55% and gasification vehicle reaches 10 million by this horizon. The FYP has prioritized natural gas for industry (in replacement of coal) and for power generation as gas fired power generation capacity is set to increase strongly to 110 GW in 2020 (+ 44 GW). The primary objective of the government, which is unveiled in Policy documents 2, is to raise the share of natural gas in the energy mix to 10% in 2020 and 15% in In Cedigaz Scenario, natural gas demand is expected to rise by 5%/year to 650 bcm up to Natural gas accounts for more than 15% of energy consumption in 2040, compared to only 6% in FIGURE 4: CHINA S ENERGY MIX IN 2016 FIGURE 5: CHINA S ENERGY MIX IN 2040 Source: CEDIGAZ Medium and Long Term Natural Gas Outlook Energy Supply and Consumption Revolution Strategy ( ); Notice on Accelerating the Use of Natural Gas (June 2017); 2018 Energy Work Guideline (February 2018). CEDIGAZ, November

11 1.3. Prospects for China s natural gas demand While natural gas in China is not cost competitive with coal 3, the substitution from coal to gas requires a strong push of the relevant authorities, as well as financial incentives. It is worth noting that recent political measures under the Blue Skies policy have given a strong momentum to China s gas demand. These include the followings: Policy driven reduction of end user prices to encourage coal to gas switching. A powerful drive for coal boiler conversion to natural gas (targets set on a national level, and then translated to local targets) for the industrial and residential/commercial users. The new anti smog plan for , which suggests efforts to clean up air pollution are intensifying. The focus is on coal burning facilities in more and new provinces than the previous plan, which have now to replace coal by cleaner fuels like gas and renewables. New residential connections Target to increase penetration from 35% to 85%. Incentives to increase the use of CNG/LNG for transport (gas prices discounts). Reinforced Northern China air quality measures, including the winter clean heating plan. In August 2018, a draft government plan was published indicating it wants nearly 4 million more households in the key northern Beijing Tianjin Hebei economic zone to ditch coal for heating before cold weather sets in. Price Reform Policy to incentivise investments in gas storage (NDRC, 2016). Market based rates were introduced for storage services & storage gas sales. FIGURE 6: EVOLUTION OF CHINA S GAS DEMAND, Index 2010=100 Source: Cedigaz (September 2018) China s gas pricing reform is evolving towards market pricing. In 2016, prices were deregulated for fertilizer producers. In August 2017, baseline city gate price was reduced by USD 0.4 MBtu. In Fujian, city gate pricing regulation was abolished. The West East Pipeline (WEP) gas will not be subject to government set benchmark price but will be negotiated and determined exclusively by seller and buyer. In the short term, the aim is to remove the regulated non residential city gate prices 3 According to the IEA WEO 2017, the carbon price needs to reach a level of $90 170/t by 2025 for gas fired power plants to displace generation from the existing large fleet of new and efficient coal plants. CEDIGAZ, November

12 nationwide. In May 2018, the National Development and Reform Commission harmonized wholesale residential gas price levels to be at the same level as non residential prices starting June, 10. This represents an important step towards national market pricing and eliminating cross subsidies between customers. Next reforms focus on breaking supplies monopolies and regulate midstream tariffs. There is no efficient Third Party Access (TPA) to NOC pipelines and LNG regasification terminals today. Unless China sets up strong and efficient TPA rules, it will be hard for private players to gain access to infrastructures. Some steps have been taken recently with the establishment of pipeline rates for major transmission lines and the government intends to create a national pipeline company. The final step of market liberalization, establishing a reliable and liquid gas hub, will thus take time. Recent gas market developments attest to the strong influence of the aforementioned policy measures on gas consumption. Chinese gas consumption strongly accelerated in 2017, when it jumped 15%, with LNG imports leaping 46%. Natural gas was the fastest growing fossil fuel, raising its share of the primary energy mix from 6% in 2016 to 7% in This year 2018, the numbers look just as strong: During the first ten months of 2018, the country consumed 16% more gas than it did in the same period in The NEA issued guidance in February 2018 instructing the gas supply industry to prioritise the construction of the infrastructure needed to push the share of gas in the energy mix up to 7.5% by the end of the year. In Cedigaz Scenario, China alone accounts for more than 30% of the global incremental gas demand between 2016 and China becomes the second largest gas consumer in the world as soon as 2025, only surpassed by the United States. FIGURE 7: VARIATIONS IN GAS DEMAND ( ), TOP 10 COUNTRIES Unit: Bcm Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 Natural gas demand is expected to record significant growth across all sectors (Figure 8). China s gas demand is expected to grow the fastest in the short and medium term, driven by economic growth, urbanization and coal to gas switching policy. Every sector contribute to this gas surge, but the main driver will be the ongoing switch from small coal fired to natural gas fired boilers for industrial and CEDIGAZ, November

13 residential use, as well as the growth of natural gas as a feedstock for the petrochemical and fertilizer industry. So far, the focus on air pollution has not been sufficient to drive gas generation except in some prosperous provinces. In the longer term, there is still major potential upside in demand across all sectors, particularly power and transportation, which are relatively undeveloped. In the power sector, natural gas has a major role to play in facilitating the integration of a larger share of variable renewables in peak or intermediate loads. The government has proposed three main development directions for natural gas power generation in the future (Notice on Accelerating the use of gas): one is to accelerate the construction of natural gas peaking power stations, the second is to vigorously develop natural gas distributed energy (DE) projects, and the third is to develop natural gas cogeneration in key areas of air pollution prevention and control. The ongoing reform of the power sector and the establishment of a market for ancillary services, such as peaking generation, will promote natural gas generation. In the transportation sector, the demand growth will be mainly driven by the use of LNG for longdistance transportation of passengers and goods, and as bunker fuel in river and coastal transportation. The expansion of LNG use for road and marine transportation is strongly encouraged by government policies. FIGURE 8: PROSPECTS FOR CHINA S GAS DEMAND BY SECTOR (BCM) Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 TABLE 2: PROSPECTS FOR CHINA S GAS DEMAND BY SECTOR (BCM) Power generation Industry, feedstock and energy Residentialcommercial Transportation Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 CEDIGAZ, November

14 1.4. Prospects for China s gas supply China s gas supply will comprise a growing portion of LNG in the short and medium term. The expiry of existing contracts combined with a strong LNG demand growth will result in rising uncontracted LNG demand. This latter is forecast to reach 53 bcm in 2025 and 125 bcm in The dependence on LNG imports is expected to rise from 17% to 27% from 2016 to The year 2017 already highlighted some urgent needs for LNG regasification capacity expansion, especially in the North. China s regasification capacity was estimated at 54 mtpa at the end 2017, while under construction projects represented a total capacity of 35 mtpa. The increase in regasification capacity, combined with growing utilization rates of terminals, will support the future growth in LNG imports. These latter should be increasingly backed by flexible and short term LNG, whose role will expand on the global market. In the first ten months of 2018, LNG imports surged more than 40% from the same period of the previous year, reaching 55 bcm, while pipeline imports grew 24% to 44 bcm. Aside from LNG, the Chinese state council is targeting aggressive increases in domestic gas production among other mechanisms to improve the country s supply security. It is noteworthy that domestic gas production has recently strongly increased. In the first ten months of 2018, natural gas production climbed 6% from the same period of the previous year. The state plans to continue subsidizing shale gas production to boost gas output. The subsidy will continue in the 14th five year plan in , and tight gas output will also start being subsidized in the period. China has rowed back on earlier unconventional output targets amid limited growth so far. The country looks likely to miss its target of 30 bcm of production by However, from 2025, unconventional gas (including tight gas) is likely to become the largest source of domestic supply growth and will play a key role in improving the security of supply and mitigating import dependency. According to Cedigaz forecasts, shale gas production rises from 8 bcm in 2016 to 35 bcm in 2025 and 90 bcm in These forecasts assume oil price as high as $80/bbl which is required to boost the necessary investments. FIGURE 9: PROSPECTS FOR CHINA S GAS SUPPLY (BCM) Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 CEDIGAZ, November

15 In the long term, growing pipeline gas imports in China will put the country in a unique strategic position, as it will benefit from a well diversified natural gas supply. Pipeline imports to China are expected to grow strongly after 2020 due to incoming Russian pipeline gas (Power of Siberia pipeline) and the additional flows via line D of the Central Asia China pipeline, mainly from Turkmenistan. Expansion and accessibility of the gas supply infrastructure (including domestic pipelines and underground gas storages) are key enablers for the expected growth in gas and LNG demand. China s industries are often geographically dispersed around China s large conurbations, highlighting the need for infrastructure availability to unlock this growth potential and bring more natural gas to the industrial centers. As domestic gas supply has been insufficient to meet surging gas demand, and due to insufficient infrastructure, China has experienced severe gas shortages in recent winters. Natural gas supply shortage are worst in the North, but have spread to central China and in the East. China s coal to gas switching policy has created gas shortage issues for city gas companies throughout the year, not just in winter. Due to limited LNG regasification capacity in the North, state companies have diverted gas from other regions to the North, placing the South in a gas shortage situation too. What is needed are new pipelines feeding both importing and domestic gas to northern China. Some local pipes in the north have also yet to be built. As the seasonality of gas demand has increased, there is an acute lack of gas storage capacity, amid cost issues. Chinese companies have been reluctant to invest in more pipelines or gas storages when midstream profits have been lower than upstream profits (northwest). In the past, China s gas demand growth has been underestimated, which has not incentivised investments in infrastructure. Beijing is accelerating plans to build more import, pipeline and storage infrastructure, but this is unlikely to be finished in time for winter The government also wants the three NOCs to increase pipeline connectivity and improve LNG distribution by trucking more LNG from the South to the North. Increasing investment in key pipelines, LNG import terminals (notably in the North) and gas storage (with very ambitious plans announced by NOCs) are expected to solve the shortage issue in the medium term FIGURE 10: CHINA S GAS NETWORK Source: Cedigaz CEDIGAZ, November

16 2. INDIA MEDIUM AND LONG TERM NATURAL GAS OUTLOOK 2.1. Recent gas market developments India is the third largest energy consumer in the world, after China and the United States. India s energy consumption has more than doubled since The national energy mix is largely dominated by coal, which accounted for 45% of total energy consumption in 2016, followed by oil (25%) and bioenergy (22%). India is the second largest coal consumer in the world, after China. It is also the 3 rd largest country for power generation (after US and China). Thirteen states (mainly in the western and southern region) contribute to more than 80% of the annual energy consumption. Most of the states have transcended from power deficit to surplus situations thanks to a rapid build up of coal power capacities Coal accounts for 76% of power generation and its demand has escalated in the past few years, to the detriment of other fuels, especially natural gas and hydro, which encountered problems of supply access. Growth in coal consumption by the power sector has been strongly driven by the policy of the government in order to cope with growing electricity demand. In addition to a strong push to increase coal production in the country, the government has been encouraging the massive installation of new coal fired power plants, whose capacity reached 230 GW at the end Unprecedented coal based generation capacity additions were strongly led by the private sector. Renewables (hydro included) shared almost 30% of the overall capacity mix in Power generation from renewables was estimated at 217 TWh in 2016, making India the 7 th largest renewable power generator in the world. Natural gas represented only 5.5% of the energy mix in Gas mainly substitutes or complements oil products rather than coal, especially in the industrial sector, including fertilizers. The fertilizer industry is the biggest natural gas user, accounting for 30% of consumption, followed by power (23%). The role of gas in the power sector is limited to meeting peak demand and load balancing needs. There has been a 42% decline in gas production over , which was due to sub optimal performance of the KG D6 block and delays in development of other gas assets. The decline of maturing fields has been further exacerbated by lower than expected outcome of the New Exploration Licensing Policy (NELP) rounds and limited exploration activity. Natural gas demand began to fall after Problems of affordability, accessibility and reliability of gas affected natural gas development in many parts of the country. Natural gas demand fell by 4.8%/year on average between 2010 and Natural gas consumption declined strongly in the power sector, but continued to grow in the other segments. The power sector saw its share in total gas consumption falling from 47% in 2010 to 31% in 2015, while the share of industry (including energy and feedstock) progressed from 44% to 58%. The residential commercial sector also increased its share from 6% to 8%, while transportation kept a marginal share of 3%. CEDIGAZ, November

17 FIGURE 11: RECENT EVOLUTION OF INDIA S ENERGY DEMAND BY FUEL (MTOE) Source: IEA (WEO 2017) From 2010 to 2015, the growing supply deficit affected large gas consuming industries. The pricesensitive power sector, in particular, was unable to absorb expensive LNG imports. However, the fertilizer sector, which is strongly subsidized, has been able to maintain low fuel costs by using natural gas. On the other hand, the introduction of lower domestic gas prices has helped the government to reduce direct subsidies to the sector. The strong reduction of gas use for power has led to a considerable amount of stranded capacity (estimated at around 14 GW in 2017). This situation was mainly caused by two reasons: Gas cannot compete with low priced domestic coal in power generation, given the system of merit order dispatch whereby the cheapest electricity is dispatched first. This is particularly the case given the absence of an explicit disincentive to coal use, such as a carbon tax set to high enough levels. Electricity tariffs to end users are regulated by state governments who have autonomy over electricity policy. So, end user tariffs have been on average 20% below the cost of supply in many states, making any pass through of higher priced gas difficult. FIGURE 12: INDIA S SECTOR WISE NATURAL GAS CONSUMPTION DURING Source: Ministry of Petroleum and Natural Gas CEDIGAZ, November

18 The fall in domestic production and low price affordability of imported LNG in the power sector has resulted in gas fired power plants remaining under utilized. The average Plant Load Factor (PLF) of natural gas power plants stood at 26% in April As domestic production of natural gas is not sufficient to meet the country s gas demand, the government allocates domestically produced gas based on Domestic Gas Allocation Policy. It is noteworthy that the power sector falls fifth in the priority. As the country has been unable to create sufficient natural gas infrastructure to meet the growing gas demand, India has boosted its LNG imports, which accounted for 46% of natural gas supply in 2017, compared to 18% in India is the fourth largest LNG importer, after Japan, China and South Korea, and accounts for 7% of the global LNG trade. The country began importing LNG from Qatar in 2004 and has since gradually increased its imports from this supplier to 16 bcm in 2016, 60% of total LNG imports. Qatar s RasGas is India s biggest longterm supplier of LNG, with three long term contracts totalling contracted volumes of more than 12 bcm/y. In addition, India relies on spot and short term LNG supplies from a variety of suppliers, the biggest of them is Nigeria. It is estimated that spot and short term purchases accounted for a volume of more than 13 bcm in 2016, around half of total LNG supply. Indian LNG importers actively sought supply from various new LNG sources and have signed several short and long term purchase agreements in the past few years. India has agreements with Australia s Gorgon LNG, several US terminals (Sabine Pass, Cameron, and Main Pass) and with some global LNG portfolio aggregators such as Shell and Gazprom. In June 2018, the first LNG cargo from Russia was delivered to the Dahej terminal in Gujarat. Supplies have also recently started from the US. Cheniere Energy has a 20 year supply agreement with GAIL from the Sabine Pass liquefaction facility. The agreement, signed in 2011, was for the supply of 3.5 mtpa. Over the last three years, GAIL and Petronet have reworked contracts with suppliers from the Middle East, Russia and Australia, reducing the negotiated price and increasing delivery flexibility. 70 FIGURE 13: HISTORIC EVOLUTION OF INDIA S GAS SUPPLY (BCM) LNG imports Production (F) Source: Cedigaz (September 2018) CEDIGAZ, November

19 2.2. Prospects for India s energy mix and the role of natural gas Energy today is considered a crucial sector to achieve India s development ambitions, support its expanding economy and meet the needs of what is soon expected to be the world s most populous country. The National Energy Policy (NEP) set out national energy objectives and the strategy to meet them. The time span of the NEP ( ) helps lay the foundation for India to match the energy consumption parameters of developed countries over a long period. The country is running one of the largest and most ambitious renewable capacity expansion programs in the world. The country s renewable energy installed capacity has more than doubled in the last five years. The growth momentum of renewables is likely to be maintained in the coming years. Both wind and solar energy tariffs are now less than the conventional sources. Introduction of competitive bidding has helped the renewable energy tariffs to achieve grid parity. The government has drawn a roadmap to bid out 30 GW of solar and 10 GW of wind capacity in the financial year 2019 and 2020 respectively. The Ministry of Petroleum also plans to achieve a 175 GW renewable energy capacity by FY2022 (of which 100 GW from solar and 60 GW from wind), from roughly 57 GW in FY2017 (+ 23 GW/y). This capacity is expected to rise to 275 GW by 2027, representing an average annual addition of 20 GW. Need for energy security has climbed, in parallel with energy supply growth and economic expansion. India has taken actions to increase energy supply, enhance energy efficiency and reduce import dependency. Energy efficiency is envisaged as an affordable imperative for sustainability. Among key efficiency measures, the Ujala Program was launched to promote use of energy efficient appliances by residential users (distributed about 770 million LED bulbs, 20 million pump sets over last 2 3 years). In Cedigaz scenario, India s energy intensity in 2040 is half the level of The energy landscape in India is experiencing a paradigm shift and the potential for future growth of energy demand, including gas, is enormous. The energy consumption per capita is only around one third of the global average, indicating significant scope for future growth. In Cedigaz Scenario, India s energy demand rises by 3.2%/year from 2016 to India contributes for the largest share, 30%, of the growth in global energy demand. In 2040, the country will account for 11% of global energy use, against 7% today. There are many estimates for India s long term gas demand, given different assumptions. India s future energy mix and the role of gas is a function of the interplay of various factors, including economy and demographic trends, coal and renewable policies, the regulatory framework, pricing and cost competitiveness of gas, climate change commitments, and the development of supply infrastructure (Table 3). This latter is a fundamental determinant of India s gas outlook and Cedigaz Scenario incorporates favourable prospects in that respect. India s gas demand is forecast to grow by 5%/year between 2016 and 2040, while energy demand rises by more than 3%/year. Coal accounts for around half of the future growth in energy demand up to 2040, followed by oil (26%) and gas (11%). The share of gas in the energy mix is expected to grow from 5% in 2016 to 8% in However, this remains short of the government targets. CEDIGAZ, November

20 TABLE 3: CEDIGAZ INDIA MEDIUM AND LONG TERM OUTLOOK MAIN ASSUMPTIONS Economy GDP growth of 6.1%/year ( ). Demographics Population growth of 0.9%/year ( ). Environment INDC commitments (reduction of emissions intensity of GDP by 33 35% over 2005 levels, by 2030). Energy Policy Policy & Regulation Infrastructure Technology Supply availability The official 15% gas share target is not achieved. 2022/2027 Renewables Targets not entirely achieved. Growing role of gas in the energy and power mix. Favourable policies to incentivize players and attract investments. Broader electricity reforms post Advancement of upstream reforms. Rapid development of downstream infrastructure and import facilities. TAPI & Iran Pakistan India pipeline post Only current and approved technologies. Rapid improvements of economics of REN. Current trends in energy efficiency. Steady gas production growth post Significant expansion of foreign and private investment. Pricing Growing role of free market pricing in the gas and electricity sectors. Growing role of spot LNG in gas supply. Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 FIGURE 14: INDIA LONG TERM OUTLOOK MAIN TRENDS %/year Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 CEDIGAZ, November

21 FIGURE 15: INDIA S ENERGY MIX IN 2016 Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 FIGURE 16: INDIA S ENERGY MIX IN 2040 Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 In the past, energy policies have failed to implement adequate regulatory reforms which were necessary to increase natural gas supply and expand the role of natural gas in the energy mix. However, this situation has evolved and there is now a more concerted push to expand the role of natural gas in the energy mix. India has begun implementing oil and natural gas pricing reforms since 2013 to stimulate sustainable investment and help lower subsidy costs. CEDIGAZ, November

22 2.3. Prospects for India s natural gas demand Recent positive signals impacting the development of natural gas Several recent positive developments point to a changing and more robust outlook for natural gas demand in India. Improvement in the economic prospects of the country Strong economic growth should continue, driven by a thrust on manufacturing. India s GDP growth rebounded to 7.3% in 2014 and 2015, and 7.1% in In Cedigaz Scenario, GDP growth is projected at 7.5%/year over This positive outlook now hinges on strong fundamentals, like urbanization, expanding population and a favourable investment climate. Current urbanization level hovers at 33%. It is expected to approach 50% by Recent recovery in natural gas demand and supply In 2016, India experienced an exceptional rise in LNG imports (+ 41%), and a rebound in gas demand (+ 9%). In 2017, India s gas demand is estimated up 3.3% and natural gas production returned to growth (+ 4%), reversing a prolonged decline since its peak of 52 bcm in For 2018, natural gas consumption is expected to be up 6%, to 62 bcm. These developments mark an important turning point for the country s gas sector and indicate that the gas demand situation is changing. Revival in policy activity around the reconsideration of gas s role in the energy mix. The government intends to raise the share of natural gas in the energy mix to 15% in It also plans to double LNG import capacity in the short term, illustrating the intention to shift India to a gas based economy. In Cedigaz Scenario, the 15% target is not achieved over the projection period, as it is considered very challenging given the current energy and climate policies. However, focused actions aimed to meet this target can potentially reduce the share of coal and oil in the energy mix, to the profit of gas and renewables. Recent revision of pricing guidelines for gas produced domestically. In March 2016, the Ministry of Petroleum and Natural Gas announced the decision to liberalise natural gas prices for discoveries in high pressure, high temperature reservoirs, and deepwater and ultra deepwater areas. Following these changes, oil and gas companies will be able to freely sell their natural gas in the market subject to a price ceiling defined as the lowest price of 1) imported fuel oil prices; 2) weighted average of alternate fuels; and 3) LNG import prices. The price will be revised every six months. Alongside price reforms, the government also introduced fiscal regime changes, moving to a revenue sharing model with the aim of increasing transparency, reducing potential for disputes and lowering administrative costs. At the beginning of October 2018, the Indian government has raised prices for gas produced by statecontrolled upstream firms by 10% to US$3.4/MBtu under the framework of a pricing formula CEDIGAZ, November

23 implemented in October Prices for supply from deepwater and unconventional fields increase by 13% to $7.7 MBtu from $6.8 MBtu. The prices are on a gross calorific basis. The price hike began on 1 October 2018 and will last for a 6 month period. This move will in turn increase the margins for national producers such as Oil and Natural Gas Corporation (ONGC) and Reliance Industries (RIL) but is also expected to translate into higher prices for compressed natural gas (CNG), piped natural gas and in turn result in higher costs for electricity production. This price hike is the highest level since October 2015 to March 2016, when the price reached US$3.8/MBtu. The last hike occurred in April September 2018 and set prices at US$3.1/MBtu from US$2.9/MBtu in the previous months. However, the increase still leaves prices for conventional supplies at less than a third of the cost of imported LNG. The discovered Small Fields Policy and Bidding Round ( DSF Bid Round ) The DSF Bid Round was launched in 2016 in order to develop and commercialize production from the already discovered small fields, marking an important milestone towards a new growth era of the production of natural gas in India. Forty six contract areas consisting of sixty seven fields spread across nine sedimentary basins were offered in the first bidding round. INDC Commitments and environmental policies to increase gas usage The targets are on reducing the emissions intensity of GDP by 33 35% over 2005 levels, by Access to Gas as Clean Fuel has been a top priority post signing of COP21. The environmental objectives also comprise the creation of an additional carbon sink of billion tons of CO2 through new forest cover. Moreover, the intention to reduce urban pollution is clearly mirrored by government initiatives such as increasing gas usage and replacing diesel with CNG in public transport and LNG in M&HCV. In addition, the 9 th City Gas Distribution Bidding round is a strong initiative which will increase gas usage and address urban pollution across the country. The implementation of an ambitious renewable capacity target As mentioned on page 19, renewable energy is at the forefront of growth in capacity addition. India s environmental targets submitted at COP21 include an aggressive plan to expand its renewable generation capacity, aiming to generate 40% of electricity from non fossil fuels by 2030 with the help of technology transfer and low cost international finance. Should the renewables targets not entirely be met in the next ten years, this opens up potential further opportunities for power gas. Natural gas has an important role to play in parallel with the massive expansion of renewables as it is considered a very efficient and flexible energy source, with start up times of 40 minutes compared with 5 7 hours for inflexible coal, and minimum output limits of 15 30% compared with 40 60% for inflexible coal. CEDIGAZ, November

24 An intensive awareness of the need to curb air pollution in India states and cities, especially visible in the transport sector. Policy and programmes to encourage CNG based taxis and buses, provide solid basis for a continued expansion of gas in the transport sector. Several political measures have been taken recently: introduction of cleaner / alternate fuels like gaseous fuel (CNG, LPG etc.) universalization of BS IV emission standards from 2017; leap frogging from BS IV to BS VI fuel standards from 1st April, 2018; collection of Environmental Protection Charge on more than 2000 CC diesel vehicles; notification of National Ambient Air Quality Standards; setting up of monitoring network for assessment of ambient air quality; and issuance of directions under Section 18(1)(b) of Air (Prevention and Control of Pollution) Act, 1981 and under Section 5 of Environment (Protection) Act, As regards LNG fuel for transport, the Kochi LNG terminal remains India s sole LNG bunkering facility for marine vessels. The Ministry of Shipping reports Inland Waterways Authority of India (IWAI) has entered into an agreement with Petronet LNG Ltd that will see additional bunkering facilities as well as the introduction of LNG fuelling stations for heavy duty land transport. Early plans proposed several new facilities would be operational before the end of An LNG bunkering facility is being planned at Ghazipur terminal. Political initiatives to increase gas usage in the power and fertilizer sectors There have been political initiatives to revive the stranded gas based capacities in the power and fertilizer sectors and make imported LNG affordable. In the power sector, the government had provided subsidy through a reverse bidding scheme, to allow stranded power assets to operate at 30%. The Reverse Bidding Scheme (subsidy) for utilization of gas power generation capacity was enacted in 2015 but is now closed. In the fertilizer sector, the government aims to increase urea production by 3.7 million metric tonnes per year by FY2019 through gas pooling policy (uniform delivery cost by averaging domestic and LNG/gas prices). This measure was also implemented in The new Hydrocarbon Exploration and Licensing Policy (HELP) In March 2016, the Indian Government introduced its new Hydrocarbon Exploration and Licensing Policy (HELP), which aims to boost upstream investment, by offering pricing reforms and marketing freedom, for deep water gas and coal bed methane gas (CBM). Additionally, HELP aims to promote upstream participation by allowing investors to select their own blocks for exploration, through an Open Acreage Licensing Policy (OALP), and by revising E&P operator s production sharing contracts. HELP has already yielded significant progress in boosting domestic gas production and will likely provide greater incentives for companies to invest in India s deepwater fields. HELP forms part of a government strategy to double India s oil and gas output in the next five years. In January 2018, under the HELP and OALP Bid Round 1, the Ministry of petroleum and natural Gas published a Notice inviting offers (NIO) for Exploration and Development of Oil and Gas Blocks, which spread over 60,000 sq km, for unexplored acreage in India. Based on the Expression of Interest (EOI), which was received between July 2017 and November, 15, 2017, a total of fifty five blocks, which include 46 on land blocks, 8 shallow water blocks and 1 deep water block, are on offer through the CEDIGAZ, November

25 International competitive bidding process. The company Vedanta Limited has won the majority 41 out of 55 oil and gas blocks, followed by Oil India (9 blocks) and ONGC (2 blocks). GAIL and BharatPetroResources won one block each. The offered blocks are mostly located in the northeastern state of Assam and the western state of Gujarat and Rajasthan. Cedigaz Scenario assumes that domestic production will gradually grow after 2018, as a result of upstream reforms. Increase in domestic gas production will strengthen India s gas demand growth potential. ONGC and Reliance have been incentivized to spend billions of dollars on eastern offshore blocks after the government reformed domestic pricing. The higher price for deepwater and unconventional fields applies to only a meagre proportion of Indian production, although it is likely to gain relevance as deepwater investment increases. BP and Reliance are spending $6bn on three projects in the deepwater Krishna Godavari basin that will produce 35 Mm 3 /d of gas. The growing importance of market based gas pricing International LNG trade (including spot LNG), which is expected to be a major source of additional supply, will support the development of a competitive wholesale market, based on gas to gas competition. However, this latter also requires significant regulatory and institutional reforms. The Petroleum and Natural Gas Regulatory Board (PNGRB) that oversees natural gas related policies issued in April 2018 a tender to hire advisory services to launch a natural gas trading hub where natural gas can be traded, and supplied through a market based mechanism instead of multiple formula driven prices. India plans to establish a gas trading hub by December Officials believe this hub will help narrow the gap between domestic prices and higher import gas prices. PNGRB is now seeking a consultant to develop a regulatory framework for the exchange. The development of a gas hub is intended to provide the right price signals to investors so that gas could increase its share in the energy basket but this is expected to take time as liquidity is lacking: Crucial sectors like city gas distribution, power and fertilizers get priority access to domestic production, with little left for trading. In addition, around half of LNG imports are still brought in under long term contracts. Another issue is the government interference. For the Indian exchange to work, natural gas prices should be liberalized, but that raises social issues and political challenges as rates of industries, like fertilizers and power, are capped by the government to protect consumers. A new wave of significant downstream regulatory reforms The government plans to split the marketing and distribution businesses of state owned pipeline company Gail, and ordering LNG terminals to open a fifth of their capacity to third parties. PNGRB is considering a new distribution tariff system to make pipeline lines profitable and broaden the consumer base. Recent policy measures to expand infrastructure These measures include: Capital Grant for Transmission Pipelines to connect Eastern India New LNG terminals North Eastern gas grid LNG as a transport fuel for M&HCVs/Ships/Railways CEDIGAZ, November

26 2.3.2 Prospects for natural gas development by consuming sector According to Cedigaz, India s gas demand is expected to grow by 5.6%/year over This growth slows down to 4.5%/year over due to a slower economic and demographic growth, an accelerating expansion of renewables and also the development of more efficient thermal plants. Natural gas consumption is forecast to more than triple from 56 bcm in 2016 to 175 bcm in India s gas demand is expected to record the fastest growth in the short and medium term, driven by the industrial (including fertilizer) and City Gas Distribution (CGD) sectors, which are less price sensitive and benefit from priority access under the government allocation policy. Developments in pipeline and regasification infrastructure will help unlock LNG imports for India s industrial sector, particularly in the south and east. Natural gas will displace liquid fuels in particular. The government is encouraging self sufficiency in the fertiliser industry (food security), which is poised for rapid expansion in the short and medium term. Therefore, Cedigaz expects robust growth of 5.4%/year of natural gas demand in Industry from now to 2025, driven by the fertilizer sector. Other factors such as the growth of India s refining sector, setting up of chemicals and petrochemical parks and other similar industries would significantly add to gas demand in the coming years. Coal and renewables are expected to contribute for the bulk of the growth of power generation in the next five years. India s draft National Electricity Plan has envisaged an addition of 4.3 GW of gasbased capacity that has already been developed as of 2017, but there is no new capacity addition thereafter. From a short term perspective, the current low PLF of coal fired power plants means that they could easily increase their production without any investment in new coal fired capacity. The electricity price in India is regulated, making it harder for LNG to compete with cheaper domestic gas or domestic coal. However, Cedigaz expects an acceleration of gas demand in the power sector after 2022, assuming a more competitive wholesale market, which means an improvement of the regulatory framework and a gradual deregulation of power prices. Broader electricity reforms and increased electricity tariffs will be essential in order to give incentives to local distribution companies. The future growth in power gas demand is also contingent on the growth of domestic production. An explicit disincentive to coal use, such as a coal tax set at high enough levels, would be necessary to trigger a large scale substitution of coal towards cleaner fuels and/or more probably, to allow rising electricity demand to be met exclusively by cleaner fuels. A tax was introduced on coal production in 2014, but is not enough to encourage coal to gas switching. It is estimated, for instance, that at a wholesale gas price of $5/MBtu, the tax per tonne of coal would have to be around $20/tonne, as opposed to $6/tonne in However, such measure, which would induce a large scale coal to gas switching, seems politically difficult and is not envisaged in Cedigaz Scenario. The natural gas share in the power generation mix is expected to remain limited, as the government is strongly promoting green energy sources, such as wind and solar. It is likely that natural gas fired capacity will remain an instrument to reduce power shortage and balance intermittency. The government is strongly promoting the use of natural gas in the residential sector as an alternative to LPG and biomass as cooking fuels, as well as in the transport sector, where there is large scope for growth. In order to put thrust on development of City Gas Distribution (CGD) network for securing the un interrupted supply of cooking and transport fuel to public at large, the Government has accorded the priority in domestic gas allocation to PNG (Domestic) and CNG CEDIGAZ, November

27 (Transport) segments. The government has decided to meet 100% demand of CNG and PNG sectors through supply of domestic gas. Further, GAIL has been authorized to supply 10% over and above the allocation to meet any fluctuation in demand. Domestic gas has also been diverted from non priority sectors to meet the additional demand for city gas distribution networks. At present, CGD sector is consuming around 4 bcm of indigenous domestic gas for CNG and PNG sector. There is approximately 3 bcm of imported Re gasified Liquefied Natural Gas (RLNG) by Commercial and Industrial segment of CGD sector. Consumption in these sectors is currently small relative to that in power and fertilizer, but is expected to post the strongest growth in percentage terms up to 2025, driven by increased penetration and new Geographical Areas (GA) allotments. The CGD sector has witnessed interest from multiple private players. In May 2018, India has held its first road show outside the country to expand city gas distribution. This new auction of licenses, the ninth for city gas, would almost double the area covered by local distribution systems. GAs provide access to vast untapped areas in Eastern and Southern India. PNGRB has invited bids for city gas projects in 86 areas accounting for 29% of the population. City gas projects have so far been rolled out in 91 areas covering 19% of the population. The 91 GAs, which are operated by 36 companies, total over 4 Mn Domestic PNG connections and 3 Mn CNG vehicles. This licensing round, which attracted over 400 bids from both state owned and private companies, was oversubscribed, which may support growth in the country s aggregate demand. Changes in bidding parameters will continue to drive gas market development. FIGURE 17: REGIONAL CGD GAS CONSUMPTION FIGURE 18: 9 TH BID ROUND GAs Source: PPAC, Feb 2018, PNGRB CEDIGAZ, November

28 Natural gas demand in the residential and commercial sector is forecast to rise by 6.7%/year over and 3.8%/year over While this sector enjoys priority access, distribution companies can pass their costs to retail customers (unlike for instance the power sector), thus making investments in gas distribution a more viable business than for other sectors. India aims to connect 10mn households by Nearly half of the existing 3.6mn household connections are in Gujarat state, where two of the country s four LNG terminals are based. The expansion of the pipeline grid will support demand for LNG imports. Natural gas demand in the transport sector is expected to almost double up to India already has the fifth largest natural gas fuelled vehicle fleet in the world. CNG is now prevalent in around 11 (out of 29) Indian states, with many cities mandating its use in public transport (taxis, auto rickshaws and buses). The Indian Supreme Court gave the sector a boost when in late 2015 it mandated that all Delhi taxis must convert to CNG and registration of new diesel vehicles in the city will no longer be allowed. Growth in this sector is severely constrained by infrastructure. India s Petroleum Planning & Analysis Cell reports that as at December 2017, there were million natural gas vehicles (NGV) but only 1,282 CNG filling stations. The number of stations has increased by just 379 since CNG infrastructure (March 2017) is disproportionately skewed towards three states: the National Capital Territory of Delhi (421 stations), Gujarat (396 stations), and Maharashtra (245 stations). In order to promote the CNG services in the country, the Government has issued guidelines for making available domestic gas to the City Gas Distribution entities for meeting the entire requirement of CNG for transport segments. TABLE 4: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (1) BCM Year Power generation Industry, feedstock and energy Residentialcommercial Transportation Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 TABLE 5: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (2) BCM Year City Gas demand Fertilizer demand Non fertilizer industrial demand Power demand Grand Total (F) Source: Cedigaz (September 2018) CEDIGAZ, November

29 FIGURE 19: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (BCM) Source: CEDIGAZ Medium and Long Term Natural Gas Outlook Prospects for India s natural gas supply India will have to both rely on LNG and domestic production to meet its growing gas demand. In the short term, LNG imports are anticipated to grow the fastest, because of relatively abundant and lowpriced LNG supply expected for and the timeframe for bringing new fields on stream, as well as the progressive nature of the new fields production ramp up. Indeed, most commercial upstream gas projects have been delayed in recent years owing to supply costs in the context of a low price environment. However, domestic production is expected to grow gradually post 2018, driven by new developments in the eastern and western offshore basins. Additionally, with pricing freedom announced for coal bed methane (CBM) gas, Cedigaz expects strong interest in developing CBM blocks. Increasing gas prices post 2025 will support domestic unconventional production, as shown in the figure below. FIGURE 20: PROSPECTS FOR INDIA S GAS SUPPLY (BCM) Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 CEDIGAZ, November

30 India has four existing LNG receiving terminals (Dahej, Hazira, Dabhol and Kochi), established on the west coast. Although their combined nameplate capacity is 30 Mtpa on paper, there are complications, particularly at Dabhol and Kochi terminals, that limit the amount of LNG that India can actually receive. Dabhol (5 mmtpa) lacks a breakwater facility, and has to shut down during the monsoon season (July September). Kochi (5 mmtpa) lacks evacuation pipelines, and has a utilization rate of under 10%. The LNG effective import capacity needs to expand rapidly. The completion of new projects that are currently under construction on the eastern and western coasts, including the Mundra (5 mmtpa), Ennore (5 mmtpa) onshore LNG terminals and H Energy s Jaigarh FSRU, will play a critical role as Indian LNG demand is poised for significant growth in the next years. Operations are also under way at existing facilities to enhance their output. The completion of a breakwater project at Dabhol, along with pipeline connection at Kochi, will see these terminals operate at full capacity. India s nominal regasification capacity is expected to double to around 60 Mtpa in the next four years (Table 7). TABLE 6: PROSPECTS FOR GAS SUPPLY IN INDIA (BCM) %Import Production LNG imports Pipeline imports Consumption Dependence % % 2018 (F) % % % % Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018 TABLE 7: PROSPECTS FOR LNG INFRASTRUCTURE DEVELOPMENTS IN INDIA Existing State Capacity (Mtpa) Coast Dahej Gujarat 15 West Hazira Gujarat 5 West Dabhol Maharashtra 5 West Kochi Kerala 5 West Under construction State Capacity Coast Start up date Mundra Gujarat 5 West 2019 Jaigarh LNG Maharashtra 4 West 2019 Ennore Phase 1 Tamil Nadu 5 East 2019 Digha FSRU Odisha 3 East 2020 Dahej Phase 3 Gujarat 2.5 West 2020 Jafrabat Gujarat 5 West 2021 Dhamra Odisha 5 East 2021 Source: Cedigaz (September 2018) CEDIGAZ, November

31 2.5. The expansion of infrastructure is a key enabler for natural gas expansion Along with the increase in LNG import capacity, the expansion of the pipeline network is essential to provide the country wide access to gas. India s gas pipeline infrastructure is relatively under developed. In 2016, the country onshore pipeline network totalled over 16,065 km and had a total capacity of around 140 bcm/year. As of September 2016, average pipeline capacity utilisation was only 40%. Pipeline distribution is uneven across the country, which shows strong regional imbalances, as it is concentrated in the north and west. Around 40% of pipeline infrastructure is concentrated in two western states (Gujarat and Maharashtra). Five north eastern states, and the eastern, southern and central regions have limited to no pipeline infrastructure. In comparison, India s gas reserves are largely concentrated in the eastern and western offshore basins. Pipeline projects under construction have faced delays due to the difficulty in anchoring final customers, problems in the process of land acquisition, financing concerns and a lack of clarity around the downstream regulatory framework. Insufficient pipeline infrastructure and some underutilized parts of the network have been key obstacles to the Indian gas market development. The lack of an integrated national system is a major constraint on gas market development. Therefore, new infrastructure investment will be crucial for the expansion of gas markets in India. Prospects for natural gas demand in India is closely connected to integrated infrastructure planning, and regulation at national level on network access, as the development of downstream infrastructure is coupled with import facilities. Coastal areas and industrial centers that can be connected to LNG reception terminals constitute the cornerstone of India s gas market expansion. FIGURE 21: INDIA S NATURAL GAS FIELDS AND INFRASTRUCTURE Source: CSR (2017) In order to develop gas grid infrastructure across the country, about km long additional pipeline network have been identified. Out of the envisaged km additional gas pipeline, PNGRB/GoI has already authorized entities to construct about km long pipelines and same is CEDIGAZ, November