LNG and Power Sector Opportunities and Concerns

B. PradeepKSEB Officers’ Association

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Background LNG terminal being commissioned in Kochi

Initial capacity 2.5 mmtpa; ultimate capacity 5 mmtpa

Laying of Gas pipeline network in Kochi in final stages

Gas pipeline to Mangalore and Bangalore under execution

Gas pipeline to Kayamkulam planned MoU between GAIL and KSIDC for City Gas

distribution etc GSA between Petronet and Exxon-Mobil for

supply of 1.44 mmtpa from 2015; FOB price 14.5% * JCC KSEB Officers' Association

Natural gas in power sectorClean fuelLower Carbon footprintSeen as “bridge fuel” until transformation to

renewable energy is technically and commercially viable

Operational flexibility in responding to sudden changes in demand

Suitable as peaking station suitable for integration with infirm renewable power

Scope for decentralised plants at load centers

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Opportunities in power sector Proposals under various stages include

1200 MW project at Puthuvypeen 1050 MW project at Brahmapuram 1050 MW Kayamkulam expansion 1200 MW project at Cheemeni Conversion of 350 MW Kayamkulam Stage I Conversion of 165 MW BSES plant at Kochi

Total natural gas requirement for these projects will be around 25 MMSCMD or 6.25 mmtpa – higher than terminal capacity

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But, Some hard factsInadequate Long term tie-up for LNG supply to

terminal only for a fraction of the capacity (1.44 mmtpa against

capacity of 5 mmtpa) Price linked to crude oil price (Japanese Custom Cleared

crude price) Will commence only from 2015

LNG supply at spot prices Price is volatile; presently floating between 12 – 17 US$

per mmbtuThus there is no firmness in quantum or price for the

supply at Kochi terminalThe situation is entirely different from that at Dahej

terminal (price stability ensured through floor & caps in pricing formula)KSEB Officers' Association 5

Some hard factsUnfavorable commercial conditions

“Take or Pay” even when LNG becomes unaffordable due to flaring up of crude oil prices

The technical advantage of “operational flexibility” lost due to inflexible commercial conditions

Planning Commissions observations By 2016-17 the import dependence of gas is expected to

increase to 28.4% from 19% in 2010-11 Unless the pricing issue is resolved, the scope of using LNG in

the price sensitive power sector is remote The high prices prevalent in LNG trade in Asia-Pacific region

can potentially kill the goose that lays the golden eggs Thus in the 12th plan capacity addition of 2539 MW only is

planned for the country as a whole using Natural Gas & LNG, that too as peaking stations alone (instead of base load stations)

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Increase in Power Purchase cost Power procurement cost has abnormally

increased in Kerala in the backdrop of abnormal increase in fuel cost (Naphtha,

LSHS, Coal etc) de-licensing of generation sector through

Electricity Act, 2003 Imperfections in market revision of operation norms by CERC for

central sector stations and No major hydro projects being

commissioned

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Increase in Power Purchase cost of KSEB

(Source: True up orders, ARR&ERC orders and ARR & ERC filings)

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2004-0

5

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0

2010-1

1

2011-1

2

2012-1

3

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Power Purchase & fuel cost in Rs Cr

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Power purchase cost VS Revenue

Purchase cost is overtaking revenue from tariff

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2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Power purchase cost vs Revenue

Power Purchase & fuel cost

Revenue from tariff and sale outsideR

s in

Cr

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LNG as replacement fuelOne of the reasons for the above situation is increase in

cost of Naphtha power Existing capacity of Naphtha stations

Kayamkulam – 350 MW, BSES – 165 MW; Total – 515 MW

Annual generation from these stations were restricted between Zero and 1200 MU against a potential of 3600 Mus

Conversion of fuel Per unit cost will come down - from present Rs 11 to

about Rs 7 per unit (considering crude price of 100 US$ per barrel); but is still higher than present average retail tariff – Rs 4.38 per unit

Thus, conversion to facilitate generation at current level could be beneficial, but any additional generation may be counter productive

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LNG for new plants Energy demand in Kerala for 2013-14 is estimated as

22,117 MU, which is to be met by KSEB stations – 6,837 MU; Central Generating stations – 10,236

MU; Small IPPs in Kerala - 196 MU; Traders - 3,628 MU; Kayamkulam + BSES - 1,220 MU

Total power purchase cost is estimated as Rs 7,083 Crores The demand is expected to increase to 26,584 MU by

2016-17 and to 32,895 MU by 2020-21 Additional energy required – 10,778 MU Additional power purchase cost will be about Rs 9,200 crores if

the additional power is met from new LNG plants (FC Rs 1.5 + VC Rs 7)

The revenue of KSEB for 2013-14 is estimated as Rs 8,000 cores only

Power purchase cost will increase by 130% (at current prices) to meet increase of 48% in power procurement quantum

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Impact of change in crude priceKochi LNG price is directly linked to Crude price

Between 2003 and 2012 crude price has increased at 16% annually.

Between 2003 -08 the increase was at 27% and between 2009-12 the increase is at 22%

LNG Projects considered are Puthuvypeen 1050 MW and Brahmapuram 350 MW alone

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Present cost At current prices

At 10% At 15% At 22%0

2

4

6

8

10

12

14

Change in pooled power purchase cost due to change in crude price

at 10%, 15% and 22%

Rs/

Unit

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Risk Mitigation Clearly Kerala cannot absorb such costly power in

huge quantum – reducing the quantum is important LNG plants as peaking stations

Peak demand is estimated to become 6093 MW by 2011-12 Additional capacity required to meet the peak demand is

about 3000 MW; at a plf of 85% LNG plants will deliver about 22,000 MUs

Whereas the additional energy requirement is about 11,000 MUs only

If capacity to the tune of 1000 – 1500 MW is created or contracted for base load operation the energy demand could be more or less met

Such base load stations may be on Coal and balance energy and capacity may be met from LNG plants

This could limit the exposure on LNG to the tune of 2000 – 3000 MUs

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Risk MitigationAllocation of Domestic Natural Gas

Kerala not being endowed with any natural resources like Coal, Natural Gas etc and development of hydro projects is hampered due to environmental concerns has eligibility to get priority allocation of domestic natural gas, once gas pipeline infrastructure is in place

Due to price stability to certain extent, Kerala shall seek for domestic natural gas allocation for power projects on Swap basis

Gas price pooling Pooling the price of LNG with domestic natural gas could

bring down the cost as well as create some stability in price Kerala shall seek gas price pooling to ensure utilisation of

LNG facilities

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Gas prices in different marketsDomestic natural gas

APM gas - 4.2 to 5.25 US$ /mmbtu Pre NELP fields – 3.5 to 5.73 US$ /mmbtu NELP fields - 4.2 US$ /mmbtu

LNG imported in India Qatar Gas (Dahej) - 9 US$/mmbtu Other term contracts - 6.97 to 9.06 US$ /mmbtu Spot LNG - 12 to 17 US$ /mmbtu Gorgon gas (Kochi) - 16 US$ /mmbtu at current crude price

International prices Henry Hub (US) - 3 to 4 US$ /mmbtu NBP (UK and Europe) - 6 to 7 US$ /mmbtu JCC based (Japan) - 14 to 15 US$ /mmbtu Canada - 3 to 4 US$/ mmbtu

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Kochi Terminal landed in a disadvantageous position

The suppliers of Gas to be sensitised on the price factor

Globally the link between Crude price and Gas price is being broken (Dr C. Rengarajan Committee report 2012)

Our proposed power projects shall not be tied down with commercially unviable contracts for gas supply

But the highly urbanised Kerala context provides a great market for LNG as a substitute fuel through city gas distribution (domestic & commercial sectors) network, automotive fuel etc – piped gas

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Looking forward Gas based projects has a major role to play in our power

supply landscape LNG terminal is a game changer – connecting Kerala to

the Natural gas market; ship route as well as pipe route In view of the present commercially unfavorable contracts

for supply of Gas, Kerala shall cautiously tap the market The strategies may include

Seeking domestic natural gas allocation on swap basis Seeking pooled prices for gas Limiting exposure to LNG by going for peaking stations

initially Work along with GAIL/Petronet etc to tap North American

market and other potential markets Gradually move away from the crude price linkage

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THANKS

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