CHALLENGES FOR NATURAL GAS IN DEVELOPING ECONOMIES INDIAN SCENARIO

Transcription

1 CHALLENGES FOR NATURAL GAS IN DEVELOPING ECONOMIES INDIAN SCENARIO 1. INTRODUCTION 2) Chandan Dasgupta, Petronet LNG Limited 1) Sharma Suresh Chandra, Petronet LNG Limited Indian Energy basket is dominated by coal as a primary fuel, which constitute about 53% of total energy consumption, rest 35% is by oil leaving only 9% share for natural gas which is substantially low compared to the trends of gas consumption worldwide. International Energy Outlook 2002 has projected natural gas as highest growing fuel during the first quarter of 21st century, while demand of natural gas has been projected to grow at 3.2% worldwide, for India it is to grow at 6.1%. India - Hydrocarbon Vision-2025 report prepared by Government of India has spelt out the objective to encourage use of natural gas and ensuring adequate availability by mix of a domestic production, imports through pipeline and LNG. The growing energy requirement for developing countries like India during next 25 years is required to be addressed in the context of increasing import dependence. This calls for creating an optimal basket of commercial energy supplies considering the availability of domestic and imported energy supply options. The national tenth five year plan ( ) has projected and overall economic growth of 8% which may require energy consumption to grow at about 6% every year and the same growth rate is likely to continue for eleventh plan ( ) period. Currently, the energy import dependence for India is around 20% and it is expected that import dependence levels may further grow considering the level of energy consumption growth. The India-Hydrocarbon Vision 2025 report prepared by the Group of Ministers has given the highest priority to natural gas use where the share of natural gas in the energy basket is projected to grow from a level of 9 percent at present to about 20 percent by India is a large country and energy demand has been projected to grow higher to meet the energy requirement for the overall economic development of the country and natural gas will play an important role in meeting the future energy requirement. Government has recently in April 2002, dismantled the Administered Price Mechanism (APM) for the petroleum products and permitted a market price for the petroleum products sold in the country by different marketing companies. Government has also opened petroleum sector for private participation for exploration and production of oil & gas, refining and marketing of petroleum products etc. Some of the major Public Sector Undertaking (PSUs) are being privatised through disinvestment process to increase the competition in oil and gas sector by introducing new players. Natural Gas prices have also been indexed with the basket of Fuel Oil (FO) price parity and will reach 100% of FO price parity. The natural gas market in India has been also been opened for private participation, where private parties can explore, develop and market the natural gas. LNG import has been put under Open General License (OGL), where LNG developers can import LNG, regasify and market it. The natural gas market in India is certainly developing faster than other fuels and Government is formulating required policies for the accelerated development of this sector. 2. GROWTH OF OIL & GAS INDUSTRY The oil and gas sector has played a major share in the development of overall economy for the country. Share of oil has grown faster as it could be supplemented through imports. However, the natural gas supplies restricted mainly to the gas available from domestic production. This was responsible for limiting the share of natural gas to 9% in the energy basket. It has now been realized that the share of natural gas should increase in energy basket with the growing energy consumption. It is mentioned that the energy consumption in the country is growing with increased dependence on 1

2 imported sources of energy and it is important to create a right basket of imported and domestic energy sources where natural gas plays a significant role. Coal has continued to play a dominant role in meeting the overall energy requirement for the country since1950. The oil and gas industry has been the fastest and growing and efficiently managed industry in India during the last five decades. Government of India initiated the process of developing domestic oil and gas industry including exploration & production, refining and marketing of petroleum products through the Government owned National Oil Companies (NOCs). During the last 50 year due to the rapid development of oil and gas sector, the hydrocarbon sector has taken a dominant position in energy basket with a total share of 44%. The share of natural gas has also risen significantly during the last 20 years and today gas constitutes about 9% share in the energy basket. Entire share of natural gas in Indian energy basket is from domestic production. This share is further projected to grow during the years to come as the gas sector has been opened for private participation. Table 1 below gives the changing share of energy consumption in the country for the last 52 years. (% Share) Year Coal Oil Gas Hydel Nuclear INDIA-HYDROCARBON VISION 2025 Table-1: Share of Fuel Consumption Government of India has formulated India-Hydrocarbon Vision 2025 for the country. Hydrocarbon Vision 2025 prepared by Government of India focuses on the strategy for development of fuels like natural gas through domestic exploration, pipeline and LNG imports. It is presumed that the competition for gas export to India will build as large reserves of gas in neighboring countries like Iran, Bangladesh, Mynamar and Yemen etc. are yet to be monetized. Efforts are on to evaluate the viability of gas import through pipeline and LNG route in a country like India, which is closely placed to the large gas reserves in Middle East, Asia, and Asia Pacific countries. However, the emerging and developing economies are in the process of restructuring and as the market grows in these countries with the planned investments, the energy needs of these countries will increase. Natural gas being a viable and environment friendly fuel has been considered as the major fuel in the energy basket by countries like India. The growth of supplies of natural gas to these markets will depend on the capacity to absorb the volatility of energy pricing and various contractual terms. Both Buyer and suppliers have to make mutually agreeable strategies for the future development and growth of natural gas business for mutual benefits. The long-term adjustments of share of energy basket have been projected for the future energy supplies where natural gas imports and supply of domestic energy are given significant role Hydrocarbon Vision Strategy for Development of Natural Gas Timely and continuous review of gas demand and supply options to facilitate policy interventions. Emphasis on development on trans national gas pipelines through diplomatic and political initiatives. Import of LNG and encouraging domestic companies to participate in the LNG supply chain 2

3 Expedite setting up of regulatory frame work Rationalize duties and taxes on LNG imports and LNG projects. Import of natural gas through pipeline from Iran, Bangladesh and other gas rich countries. Maximize production through exploration in domestic basins. New Exploration Licensing Policy launched by Government in Oil and Gas equity overseas. 4. FUTURE GROWTH OF NATURAL GAS SECTOR Hydrocarbon sector in India has been the key driver of energy security in the country in recent times. While the demand for petroleum products have risen substantially, building security of supplies of natural gas is being given a large emphasis for the future energy requirements of the country. The broad policy objectives for the future growth of natural gas in the country as a fuel and feedstock are given below: (i) (ii) (iii) (iv) (v) (vi) (vii) New Exploration Licensing Policy to permit best fiscal benefits. Maximize natural gas production in domestic basins. Enhance share of natural gas in energy basket. Achieve near as zero impact on environment. Have a free market and promote healthy competition Promote natural gas in automotive and domestic sector. Substitution of liquid fuels with gas wherever feasible. Natural gas will play a vital role not only for providing energy security but also have to look after the environment concern due to global warming. The hydrocarbon vision document has addressed a variety of issues including enhancing the share of natural gas in the energy basket and improves the quality of petroleum products. Natural gas demand is likely to further grow during the years to come as per the India-Hydrocarbon Vision Large-scale development of natural gas in the country have been envisaged through domestic exploration and imports of gas by LNG/pipeline route. The projected share of various energy supplies as per India Hydrocarbon Vision 2025 is given in the table 2 below. Year Coal Oil Gas Nuclear Hydel Table 2: Growing Share of Natural Gas in Energy 5. DEVELOPMENT OF NATURAL GAS IN INDIA In early Seventies, the gas markets were localized around the oil and gas producing areas in West and North East part of the country where the production of associated gas was considered for utilisation for the nearby industries. Since than, the domestic gas production has increased from 1.44 billion cubic meters (BCM) in to 30 BCM in through gas discoveries in Bombay offshore basin by Oil and Natural Gas Corporation (ONGC), which produces more than two-thirds of total gas in the country. The natural gas produced by Oil & Natural Gas Corporation (ONGC), Oil India Limited (OIL) Joint Venture (JV) companies is being transported by pipeline infrastructure created by ONGC/OIL and GAIL India Ltd. GAIL today operates countries largest pipeline large network mainly in Western, Northern & Eastern part of the country. The main cross-country HBJ gas pipeline system was commissioned by GAIL to transport large volumes of gas to Western, Central and Northern parts of India. As the domestic gas produced by ONGC/OIL was priced on cost plus basis concept, the allocations of natural gas to various industries were made by the Inter-ministerial committees of 3

4 various Government departments considering the requirement and development of critical sectors like power and fertilizer, sponge iron, chemicals & petrochemicals, domestic and other industries. The allocations were made on economic merits (imputed economic value) of the proposals, keeping in view the availability of gas and the potential gas market in the region. Natural Gas is predominantly used in power generation and production of fertilizers. The end use pattern for natural gas currently in India is given in the pie diagram. As can be seen from the pie diagram, the power and fertiliser sector hold about 72% of natural gas consumption leaving 20% for other industries like sponge iron, petrochemicals, chemicals, domestic, transport etc. The value added fractions like ethane (C1), methane (C2) and propane (C3) are extracted for the purpose of petrochemical feedstock and LPG (C3-C4) for domestic consumption as a fuel for cooking, With the growing urbanisation and environment concerns the share of natural gas in domestic transport and industries is likely to grow rapidly during the next one decade. 8% 14% 35% 6% 37% Power Fert. Spnge Iron Shrinkage & Int. Conp. Industrial 6. DEMAND FOR NATURAL GAS The future demand for gas is strong, because many large consumers are not getting adequate quantity of natural gas required by them for full plant capacity. Additionally, certain power and fertilizer plants are planning capacity expansion. The gas use in transport sector based on environmental considerations, made considerable inroads, mainly in the metro cities of Mumbai and Delhi. Similar retail penetration of gas in residential, commercial and small industrial segments has also been encouraged. Though these gas market segments currently represent low volume end-users, considering the size of cities in India with population density, growing urbanization, greater emphasis on cluster and multi-storied housing complexes and growth of the automobiles, these are also expected to generate considerable gas demand over a period of time. Power sector provides a large market for gas on account of likelihood of large capacity additions (8000 MW/year) in the Indian Power Sector to meet the growing energy demand as well as to manage the peak load requirements. There is a large deficit for availability of natural gas for the existing gas based power plants and the shortfall of gas is normally supplemented by the use of naphtha, which is costly and not as efficient as gas. Once the LNG is available regasified LNG will replace the naphtha in power sector. Gas is emerged as the most preferred route for power generation in view of its easy handling and the economic and environmental superiority vis-à-vis other alternative fuels. The Fertilizer industry is the other major natural gas user sector in the country. There is a large requirement of natural gas for existing fertilizer plants and expansion of existing capacities. Currently about 45% of urea production in the country is based on the naphtha and FO as a feedstock. The urea produced with naphtha and FO as a feedstock is very high cost product and Government has to subsidise the urea for sale in the farm sector. It is proposed that all fertiliser plants using naphtha and FO as feedstock should switch over to the LNG. The demand for other sector, which is currently using liquid fuels, will also grow faster as the more volume of gas is made available to the 4

5 industry. The assessment of current natural gas allocations, additional demand and potential demand is given below in the table 3. Fertilizer Power Sponge Iron Others (MMSCMD) Internal use/ Total Shrinkage Gas Linkage Additional demand Potential demand TOTAL Table 3: Current Demand Level of Natural Gas As a preferred fuel with benign environmental qualities, gas is poised for spectacular growth in the country. The India-Hydrocarbon Vision 2025 has projected the demand of gas to increase from around 150 million standard cubic meters per day (MMSCMD) in to 391 MMSCMD in Projection of natural gas demand as per the Hydrocarbon Vision 2025 is given below in the table 4: Year Power Fertiliser Others Total Demand Table 4: Natural Gas Demand 7. SOURCING NATURAL GAS IN INDIA Sourcing natural gas from domestic production is the highest priority for the country. To encourage domestic production Government of India launched New Exploration Licensing Policy (NELP) to award blocks for exploration & production for oil and gas. Projects on import of natural gas both through pipeline and LNG route is under consideration of the Government due to the large inventory of gas reserves in neighbouring countries. The large gas reserves in Middle East countries are obvious potential supply sources for India due to the transportation advantages, particularly on the West Coast. North field in Qatar is the biggest gas field in the World and thus the country has a large potential for development of these gas reserves for emerging markets like India. With such capabilities Qatar can become one of the largest supplier of LNG for India, besides other suppliers from Middle East. Iran is also in the process of developing the large stranded gas reserves in the South Pars field for gas supplies to India. Pipeline Supply from Iran and Bangladesh hold immense possibilities. Various options for import of natural gas and location for LNG terminals are at various stages of implementation. 7.1 Domestic Exploration Activities 70 blocks have been offered for exploration and production to various companies onshore, offshore and deep-water offshore areas. The work programme of 1 st NELP offer has shown significant results where Reliance Industries has discovered large gas reserves amounting to 7 Trillion Cubic Feet in deep water block on East Coast of India. Several other discoveries on West Coast by Cairn Energy and ONGC have also been made. The work program for 2 nd round of exploration bidding has entered into 2 nd phase and may yield good results. 22 blocks were awarded in the 3 rd round of exploration bidding 5

6 Round Year Blocks Total Area Remarks awarded (sq.kms) I ,31,870 Drilling Started Initial Success on East Coast II ,68,350 Drilling Started III ,63,576 Blocks Awarded. PSC signed Table 5: Exploration Blocks under NELP 7.2 Pipeline Imports Projects-India Several gas import project through pipeline are under consideration since last few years. The Iran India pipeline, Bangladesh-India pipeline projects are under active consideration. A joint venture company consisting of NOCs has been formed to expedite the Bangladesh India gas pipeline project. The feasibility for Iran -India pipeline project is being worked out. ONGC Videsh Limited (OVL) and GAIL India Limited are participating in an exploration block in Mynamar, which is considered to be highly prospective. It is proposed to finalise these projects expeditiously. The table below gives details of pipeline gas import projects. SN. Project Onshore/ Offshore 1 Bangladesh On land India 2 Myanmar - India Offshore (~600 Kms) 3. Iran India Onshore/ offshore Status New JV Company formed in India (GAIL-IOC-ONGC). Market study initiated Highly prospective block with gas reserves TCF. Indian companies (OVL, GAIL) partners Under Feasibility Study Table 6: Pipeline Gas Import Project 7.3 LNG Projects-India Several LNG projects are under consideration of the Government for import of LNG. However, some projects have made significant progress. The Petronet LNG Limited a joint venture company promoted by major NOCs has made a substantial progress in this regard. Creation of Petronet LNG Limited was approved by Government with the participation of NOC s, LNG supplier, strategic partner and others like consumers and public. The formation of Petronet LNG Limited was mainly to provide a lead in LNG import and to create the security of natural gas supply for existing consumers. IOC, ONGC, GAIL and BPCL (NOC s) hold 50% equity, 10% equity has been taken by GDF in Petronet LNG Limited, while, 10% equity is likely to be taken by Rasgas (Qatar) and balance by consumers and financial institutions. Petronet LNG Limited for the first time in the history of LNG business tied up LNG supplies with RasGas through a global competitive bidding route. M/s IHI of Japan awarded EPC contract for Dahej project to a consortium lead. The other member of consortium are BNI, Toyo Engineering, Mitsui & Itochu Corporation. Two LNG storage tanks of 148,000 cubic meters capacity are being built. Major construction of the projects is in the final stages of completion. The major equipments have arrived and are being synchronized. 70% of the construction at West coast Dahej project has been completed. The project is to be mechanically completed by December

7 Petronet LNG Limited signed Ship Building & Time Charter Contract in March 2001 with consortium of Mitsui OSK, K-Line, NYK & SCI for construction of 2 ships of 138,000 cubic Meters capacity. These ships are being constructed at Daewoo shipyard in Korea. The first ship will be delivered in December 2003 and the second ship in December 2004 considering the build up of LNG supplies to Dahej project. RasGas has also awarded the EPC contract for construction of 4.7 MMTPA liquefaction train in April 2001 to match the delivery schedule of LNG to Dahej terminal. IOC, GAIL & BPCL will market re-gasified LNG from Dahej project. IOC & BPCL hold 80% of liquid fuel market share in Indian Market while, GAIL holds 90% of gas market in the country. Most of the existing power & fertilizer consumers of gas will be taking re-gasified LNG, which will be supplied to them by integrating existing pipeline network. GAIL will do transportation of regasified LNG from Dahej project and it is in process of developing required transportation capacity by integrating the existing pipeline network. The new LNG terminals besides Petronet 5 Million tones LNG project under construction on West Coast are Shell s LNG terminals at Hazira, which has begun construction recently. The proposed LNG terminal by British Gas at Pipavav (West Coast), LNG terminal by Indian Oil Corporation (IOC) with Petronas at Kakinada on East coast is under active consideration. The revival of Dabhol power project is being taken up. A list of LNG projects either under construction or active consideration in India is as follows. LNG Developer Capacity Status Project (MMTPA) Dahej Petronet LNG 5 70% completed. All activities tied up. To be completed by Dec.2003 Kochi Petronet LNG 2.5 Pre project activities completed. Hazira Shell 2.5 Construction started Dabhol Enron/MSEB % completed. Revival to begin soon Kakinada IOC/Petronas 2.5 Feasibility being carried out. Pipavav British Gas 2.5 Feasibility being carried out Table 7: LNG Terminals in India 8. PROJECTED SUPPLY OF NATURAL GAS Working Group of Petroleum and Natural Gas for 10 th plan ( ) has estimated the Gas availability of 146 million standard cubic meters per day through domestic production, LNG imports and pipeline import of natural gas. It is estimated that the end of 10th plan would implement about 3 to 4 LNG projects. The pipeline imports from Bangladesh / Iran also assumed to be functional for the delivery of natural gas. As per the estimates worked out by the group about 146 MMSCMD of gas will be available through imports and domestic production. The new gas discoveries in West coast and East coast of the country may add supplies of natural gas by The break-up of gas availability from domestic production LNG and pipeline gas import is given below in the table. (MMSCMD) Source Domestic LNG Imports Gas Imports Total Table: 8: Projected supply of Natural Gas 7

8 8. NATURAL GAS PRICING IN INDIA The gas prices were brought under the administrative pricing mechanism (APM) in 1987 to ensure adequate return on investment to the gas producers as well as transporters. Accordingly, Government of India took over the responsibility of fixation of gas price as well as of the pipeline transportation tariff on the major HBJ pipeline system. This pricing mechanism also brought uniformity in gas prices irrespective of the end use as well as uniformity of gas price for the entire users en route major Hazira-Vijaipur-Jagdishpur (HBJ) pipeline. The prices were revised upward periodically until The gas prices are now progressively linked to the price of the basket of low sulphur and high sulphur fuel oil, with the objective of establishing 100% FO parity with international prices. As of now there are multiple producer prices applicable to ONGC, joint venture companies and private producers of natural gas in the country. The private gas producers are permitted to sale natural gas to the consumers at the market opportunity price, which is currently higher than the price of natural gas fixed for NOCs. Table 9 below gives the FO linked prices of natural gas for the NOCs in the country. Year % Of FO price Gas price at Landfall US$/MMBTU Gas Price along major pipeline US$/MMBTU % % % Table 9: Price Of Natural Gas in India Government of India is planning to permit 100% of FO price parity of natural gas to the gas producing NOCs. Government of India has already permitted private parties producing gas to charge the market price of natural gas. The market price or the fuel opportunity price is under consideration of the Government because of the fact that the Government has envisaged the large-scale imports of natural gas. The natural gas market in the country will develop gradually as the natural gas prices become market competitive. 9. REGULATION FOR NATURAL GAS The Indian gas sector is fully open for the private sector participation including foreign participation. Import of gas has been put under Open General License (OGL), where any private party can import Gas/LNG and regasify and market it to the consumers. Government is also in the process of giving full price parity to the domestic gas produced by the national oil companies. Private companies producing natural gas are permitted to charge the market price of gas, though the volumes marketed by them is not very large. Currently, taxes and duties attract high proportion of project cost for capital goods imported for project construction and also about 30% duties and sales tax is levied on imported LNG. These taxes consume alarming proportion in view of volatility in Oil & LNG prices. Rationalization of Sales tax on LNG/imported gas is necessary for the development of natural gas sector in the country. There is need for grant of infrastructure status for this sector and to avail fiscal incentives, tax holidays for the development of new LNG project. With the objective of further promoting the development of the natural gas/lng sector and to provide for regulation in the monopolistic components of the business such as pipeline transportation and to ensure a level playing field, the Government is in the process of placing a gas regulatory framework, which would cover natural gas/lng sector. Specifically, on the LNG sector, the 8

9 Government also to announce an integrated LNG policy covering regulatory, shipping and the taxation aspects. Suitable empowerment of the regulatory body to ensure transparency and verifiability of the costs of re-gasification, distribution and marketing of LNG as well as to ensure compliance with safety standards will be required. Government will have a say in the location of future LNG projects, keeping in view the existing infrastructure capacities, regional requirements and imbalances. It is intended that all the gas/lng businesses will seek authorization from the regulatory body for conducting the business. Government of India has already cleared the formation of regulatory body to handle such issues in gas sector. The bill is likely to be passed by the parliament shortly. 10. GAS SECTOR IN DEVELOPING ECONOMICS - ISSUES A large and developing country like India, which has complex problems of managing 100 billion people where food subsidies is the inherent part of social obligation of Government. It is a difficult process to move from a Government controlled regime to market-determined regime unless adequate market infrastructure exists. Government of India took initiatives to deregulate and dismantle the APM in petroleum product sector in Petroleum sector has now been fully deregulated and the crude oil and petroleum products prices have been made market determined. It has been smoothly done in phases during the period 1997 to 2002 to facilitate for market to gradually absorb the changes in price. Gas Sector, which was also deregulated for private participation in India is also moving towards market determined price mechanism. There has been number of new gas discoveries by private parties during the last five year and some of them have been put on production. Producers are charging price close to full fuel oil price parity. The giant gas discovery in East coast deeper offshore by Reliance would also set a new market price dynamics. New LNG and pipeline projects will further add more gas for energy needs in India. It appears that as the market grows, the natural gas is likely to replace the high cost petroleum products and create a new demand of its own as per the projections made by the government Initiatives have been taken up by the Government to make the large gas consumers sectors like power and fertiliser sector market competitive during the next 3 to 4 years time. In power sector many of the State Electricity Boards have been restructured and privatised. As power sector is a concurrent subject in the country where both state and central sector projects are involved, government has established both central and state sector regulators for electricity sector. Government also has a proposal for phased dismantling of subsidies in fertiliser sector by The report by Expenditure Reforms Commission gives a road map for dismantling the fertiliser sector prices in phased manner. 11. CONCLUSION Developing a secured efficient and environment friendly energy supply system during 21 st century is one of the biggest concern of developing nations like India. The efficient, environment friendly and reliable energy supplies would be the key to growth of Indian economy. The liberalization of market will play a significant role for enhanced development of strong and competitive gas industry in the country. Government has taken bold steps to deregulate the oil and gas sector and further dismantling the administered price. Natural gas is going to be one of the major sources of energy to fuel the Indian economy during the 21 st century. The Indian energy market is under the evolving stage and the market would take some time to adjust to the new price dynamics of deepwater, piped gas and imported LNG. The support of gas exporting nations would also be required during the marketbuilding phase. As India stands competitive to receive gas through pipeline route the ways and means to be found that how LNG can be brought at competitive price to various locations for meeting the gas demand. The energy market in India is in the process of transformation from controlled price to market determined price and various initiatives are being taken by the Government of India to make the market transparent and investor friendly for the benefit of new players. Natural gas market is a growing and evolving market in India and in the background of energy security natural gas is poised to play a significant role for the economic development of the country during the first quarter of 21 st century. 9

10 Keywords: Hydrocarbon Vision-2025, Energy Share, Gas Demand, Administered Price Mechanism, Fuel Oil Price parity, LNG import projects, pipeline gas import, regulatory framework, Petronet LNG Limited, Government of India. 12. REFERENCES 1. Natural Gas Development Plan India 1998, Bechtel Consulting, London Economics CEPMLP TERI 2. Report of the Group on India, Hydrocarbon Vision 2025, Report of the Sub Group on Natural Gas Availability, Utilization and Distribution, 10 th Five Year Plan, October Rationalizing Fertilizer Subsidies. Report of Expenditure reforms commission, Ministry of Finance, Government of India,