When Reliance Industries announced in 2002 it had struck some 11 trillion cubic feet (tcf) of gas in the Krishna-Godavari basin, it was akin to striking gold. India, a net fuel importer, seriously started to see a big cut in its energy import bill when Gujarat State Petroleum Corp. (GSPC), too, discovered another 22 tcf of gas in Cambay basin; Reliance Industries would revise the estimate of its reserves to 14 tcf.
For a nation that imports more than 80% of its crude oil requirements, here was the perfect alternative to polluting fossil fuels: natural gas, a clear, colourless, odourless, non-toxic, and non-corrosive fuel. Many thought that the clean fuel would replace the polluting ones in sectors like power and fertiliser. Its use in non-power sectors would reduce carbon dioxide (CO2) emissions and improve air quality by replacing higher CO2-emitting products like oil naphtha and pet coke in the industrial sector. It was also expected to replace diesel in transportation, and traditional biomass, LPG, and kerosene in the residential and commercial sectors.
In the end, hopes remained hopes. Reliance Industries’ gas finds did not turn out to be as abundant as initially estimated. And GSPC, which was staring at bankruptcy, had to be rescued by the country’s leading exploration and production player, Oil and Natural Gas Corp. (ONGC)—No. 1 on 2019’s Fortune India PSU 50 list—by acquiring it. Today, Reliance Industries is no longer only a major oil and gas player; after battling for years in vain for higher gas prices, it has turned its focus to telecom and entertainment. “The sector failed to realise the coveted status it aspired to, with domestic production stagnating for many years,” says Deepak Mahurkar, partner and leader, oil and gas, PwC India.
That is why the share of natural gas, which included both imported liquefied natural gas (LNG) and domestic gas—as a percentage of the country’s total energy basket—was just 6.18%, or around 54.2 billion cubic metres (BCM), in 2017. But that energy mix is set to change dramatically. Not just because the Narendra Modi government has set a stiff target of more than doubling the share of natural gas in the country’s energy mix to 15% by 2022, but also because it has set in motion various policies and regulations to help propel India’s transformation into a gas-based economy. However, achieving the target will require a huge increase in LNG imports. The country’s gas production will increase to only 75 BCM while consumption is set to rise to 159 BCM by 2035, according to the International Energy Agency.
As Sanjiv Singh, chairman of Indian Oil Corp, (IOC), No. 2 on the Fortune India PSU 50 list for 2019, puts it: “As the second-largest player in gas marketing, IOC is investing in natural gas infrastructure by way of LNG import terminals, cross-country pipelines, and city gas distribution [CGD] networks in a bigway. Investments close to ₹20,000 crore are being envisaged in CGD, which includes piped natural gas [PNG] for homes and industrial hubs, and compressed natural gas [CNG] for automobiles.” This amount will be spent over the next five-eight years, he says.
Karan Adani, CEO, Adani Ports and Special Economic Zone, says the most important among the significant steps taken by the Modi Government for economic growth is the development of gas pipelines in the southern and eastern parts of India. “It will not only create gas-related opportunities in the immediate hinterland, but also assume geopolitical significance,” he explains.
For countries that lack domestic gas reserves, importing LNG from countries like Qatar, the U.S., and Australia is an easy solution. LNG is natural gas, which is first liquefied at minus 161° Celsius so that it can be transported over long distances, either through specialised ships or in cryogenic tankers to user countries. But before it can be converted into PNG for homes or industry or used as CNG for automobiles, it needs to be regassified at a regassification terminal.
No wonder then that today, the biggest investments in the gas sector are in setting up storage and regassification terminals along the Indian coast. Currently, the country has four such terminals—Dahej and Hazira in Gujarat, Dabhol in Maharashtra,and Kochi in Kerala—with a total capacity of 30 million metric tonnes per annum (MMT-PA). Looking at the growing potential of this energy source, public and private sector players together are planning to add another 10 such plants in the next seven-eight years,taking the total capacity to 75 MMTPA. The list includes the first-ever 5 MMTPA floating storage regassification unit off the Jafrabad coast in Gujarat by Swan Energy and Japan’s Mitsui O.S.K. Lines at a cost of ₹6,000 crore.
Those in the LNG fray include public sector giants like IOC, GAIL (No. 8 on this year’s Fortune India PSU 50 list), Petronet LNG, GSPC,and Hindustan Petroleum (No. 7 on the PSU 50 list), which will be competing with the likes of Adani, Shell Gas B.V., Shapoorji Pallonji, andSwan LNG (a unit of Swan Energy) from the private sector. In fact, Shell, a subsidiary of Royal Dutch Shell, has bought out the 26% state of Total Gaz Electricité Holdings France in the Hazira LNG port to become 100% owners.“Like any competitive business, Shell continuously seeks opportunities to grow,” the company says. The move would allow Shell Commercial and operational flexibility over Hazira to maximise integrated value and offer creative customer value propositions, it adds. Other international factors, too, are helping the case for setting up LNG terminals in India. For one, the LNG market is “entering a long-term structural oversupply position with more liquidity and flexibility in LNG procurement”, experts say. The glut in the LNG market, according to experts, is mainly because two countries—Australia and the U.S.—plan to add another 100 MMTPA between 2017 and 2020.
Moreover, with Qatar announcing in July 2017 that it would expand its liquefaction capacity by 30% to 100 MMTPA by 2023,experts predict the oversupply in the LNG market may last well into the late 2020s. It is great news for countries like India with developing LNG markets because an extended period of low prices can help establish gas as the fuel of the future in a highly price-sensitive market, which is also deficient in gas-rich geology.
The LNG-surplus scenario in the past couple of years has transformed the market into one in which buyers are at an advantage. The days of hard bargaining for long-term contracts may have become a thing of the past. Today, most sale and purchase agreements are only for six-seven years or even shorter, with the number of spot market buys going up substantially. The reason: According to industry reports, LNG prices fluctuated between $9 per metric million British thermal unit (mmBtu) and $5.25 per mmBtu in 2017, withmany preferring to procure from the spot market. Such a scenario is very different from 2014 when 15-year contracts were the norm rather than the exception.
Indian players are now importing LNG through the tendering route, which not only gives them a wider choice of sellers and higher discounts but also destination flexibility so that importing nations can decide the unloading port of LNG cargoes. These can then be delivered close to the gas markets, reducing their logistics costs.
GAIL, for instance, has undertaken several innovative measures like destination flexibility and time swap of its long-term contracts with Sabine Pass Liquefaction and Dominion Energy Cove Point in the U.S. in a bid to get the best price and rejig its supply position. For instance, it swapped 60% of the 5.8 MMTPA of LNG contracted with a foreign player (whose name it did not disclose)in 2018 with an understanding to buy LNG cargoes from nearer home later to cut shipping costs. In addition, in 2017 GAIL hiredan LNG tanker, Meridian Spirit, at competitive rates to bring the scheduled cargoes from the U.S. coast.
The rapid development of gas infrastructure under the Modi government, too, has been a cause for much optimism. The biggest hurdle in transforming the country into a gas-based economy and developing vibrant gas markets has been the absence of last-mile pipeline connectivity between the source of gas and industrial and residential markets. A case in point is Petronet LNG’s Kochi terminal. It operatedat only 12.7% of its capacity of 5 MMTPA and handled only 14 cargoes in 2017-18 because of the absence of pipeline connectivity.
While the country already has some 16,470 km of gas pipelines carrying some 387 million metric standard cubic metre per day (MMSC-MD) in 2017, the announcements of the National Gas Grid and the Pradhan Mantri Urja Ganga gas pipeline project have boosted the confidence of the LNG players. The Jagdishpur-Haldia-Bokaro-Dhamra pipeline project will add another 2,655 km of pipelines by 2019-end and connect the pipeline-deficient eastern states with the rest of the country. This pipeline will have among its anchor customers Fertilizer Corporation of India’s Sindri And Gorakhpur plants as well as Hindustan Fertilizer Corporation’s Barauni plant. These three fertiliser plants are being revived by a consortium of public sector enterprises.
GAIL, India’s biggest gas transporter and pipeline player, has also been entrusted with the task of adding another 750 km of trunk pipeline connecting Barauni to Guwahati as an integral part of the Pradhan Mantri Urja Ganga Plan. The plan is to connect the entire country through a network of pipelines. To speed up the process, the government has already sanctioned ₹5,176 crore, or 40% of the capital cost of the National Gas Grid project of ₹12,940 crore. The pipeline—which originates at Jagdishpur (Uttar Pradesh) and terminates at Dhamra (Odisha) and Haldia (West Bengal)—will passthrough cities like Varanasi, Jamshedpur, Cuttack, and Kolkata, helping in setting up industrial hubs along the way. Five public sector units—IOC, ONGC, GAIL, Oil India (No. 13 on the PSU 50 list), and Numaligarh Refinery—have joined hands to extend the National Gas Grid by 1,500 km and connect the northeastern cities of Itanagar, Numaligarh, Dimapur, and Imphal.
The rush for gas has also been fuelled with the launch of CGD in various geographical areas (GAs), which ensures an additional source of revenue and a captive market for the players, which get exclusive access to it for eight years. In the ninth round of CGD bidding, Adani Gas, the city gas distribution arm of the Adani Group, has bagged 13 new GAs alone and nine more jointly with IOC.
With this, says Adani, the group is now active in 35 GAs and isset to become the country’s largest CGD company in the next few years. Singh of IOC, too, is optimistic: “Given the growth potential in the gas business, the company is aggressively taking part in various bidding rounds of gas.’’
In the first eight rounds of bidding, 91 GAs have been given out to 36 firms, which has meant that some 16,500 km of pipelines are already in operation and 4.2 million domestic consumers and 33,000 industrial and commercial consumers have already benefited from the use of PNG and CNG. And according to an estimate by the oil and gas sector regulator, the Petroleum & Natural Gas Regulatory Board (PNGRB), the entry of CNG and PNG in these areas is likely to attract an investment of ₹70,000 crore.
In a bid to fit in with the government’s strategy for increased dependence on gas, GAIL plans to increase its pipeline capacity. “GAIL aims to add 5,500 km of gas pipelines to the existing network and leapfrog to capacity augmentation by about 50% on the current base in the next three years in phases,” GAIL chairman and managing director B.C. Tripathi said in a statement to shareholders at the gas transmission company’s 34th annual general meeting in 2018. “Access to pipeline infrastructure will be critical to increase the share of natural gas in India’s energy mix to 15%,” says Adani.
A move is also on to set up a domestic gas hub where both LNG and domestically-produced gas will be traded by buyers and sellers to ensure a market-determined price of gas in India. So, gas prices will no longer be set by the government or through a formula based on prices in other gas markets.
To ensure that even non-pipeline owners have open access to gas transmission through the national pipeline network, the regulator has stringently upheld the common carrier and contract carrier policy, which allows third parties to access the network. In fact, in 2017 GAIL saw a 12% increase in third-party use of pipelines, and serviced all the 138 requests it got through the year. The government, too, has stepped in by asking GAIL, the largest pipeline owner and gas marketer,to unbundle its two businesses to avoid any conflict of interest.
Moreover, to ensure that customers using the new pipelines are not financially disadvantaged by high transmission tariffs, the GAIL chairman has mooted the idea of a pooled or unified tariff across seven existing pipelines. This works out to ₹57 per mmBtu. The impact of this will be a reduction in gas transmission tariffs for new lines and increasing tariffs on existing gas pipelines. For instance, the 1,414-km Dabhol-Bangalore Natural Gas Pipeline carrying 16 MMSCMD of gas, will have to increase its tariff to ₹57 per mmBtu from ₹40.83 under the uniform tariff pipeline policy. The decision is pending with the regulator.
However, the biggest development in the last couple of years is the development of small-scale LNG players since it reduces the time gap between the inception and the start of commercial operations. What has helped matters is the government’s decision to auction 44 discovered small and marginal fields in February 2016 and another 60 in 2018. While these fields were discovered some years ago by ONGC and Oil India, they were not considered viable to develop because of the limited quantity of oil and gas.Today, with cryogenic trucks at their disposal and CGD becoming a business, LNG players can actually take the gas to the doorstep of underutilised gas-starved industries, store it and use it when needed. It is also called providing LNG at the doorstep. This is why even these small unused fields now seem to have become economically viable.
Despite the positives, the gas market in India is far from perfect and will require some time to develop fully. First, the number of participants in the gas market—including gas consumers, producers and shippers—are not large enough for competitive forces to set in.
Second, gas prices are not market driven—domestic gas prices are lower than those of LNG—and hence imported natural gas is hardly used in price-sensitive industries like power. To attract more players, gas prices need to be market-driven. Third, the gas infrastructure is still inadequate; policies and regulatory reforms are still at a nascent stage, and it takes time to get various permissions.
However, if the policies and rules devised by the government fructify, it is only a matter of time before the gas markets attain maturity, leading to a cleaner, greener, and more efficient economy.
(This story was originally published in the February 2019 issue of the magazine)