Market Development in India

Reviewing the Strategies for Natural Gas 2030

Rajeev Mehrotra

GAIL(India) Limited

New Delhi

India

Abstract:

Rising crude prices and concerns for climate change have provoked countries into adoption of cleaner and cheaper fuels. The acceptable choice in this regard has been natural gas which has abundant reserves. Gradually, it has become a tradable commodity in the international market, although certain issues still remain related to its tradability. India’s consumption of natural gas is rising rapidly in line with the rise of energy consumption in the country fuelled by the booming economy. Inclusive growth strategies have been mooted by Indian Government to meet the fast paced growth required in developing infrastructure and a framework for development of natural gas as the fuel of choice for the end user. This paper attempts to place on record the status of natural gas scenario in India with strategies being/required to be adopted for attaining energy security by 2030.

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Contents

Abbreviations _______________________________________________________________________ 6

Background _________________________________________________________________________ 8

Demand for natural gas _______________________________________________________________ 8

Gas Markets in Asia _________________________________________________________________ 10

Natural Gas in India 2009 _____________________________________________________________ 11

Government initiatives towards market development ______________________________________ 15

Regulatory framework _____________________________________________________________ 16

New Exploration Licensing Policy____________________________________________________ 20

Foreign Direct Investment __________________________________________________________ 20

Natural Gas Pipeline Policy _________________________________________________________ 21

Gas Utilisation Policy ______________________________________________________________ 22

Setting up of LNG Plants ___________________________________________________________ 22

Pricing __________________________________________________________________________ 22

Strategy for CNG and City Gas ______________________________________________________ 23

Challenges_______________________________________________________________________ 24

INDIA 2030: Energy Needs ____________________________________________________________ 24

End- Users_______________________________________________________________________ 29

India's LNG Portfolio ______________________________________________________________ 29

Development of Gas Marketing Hub/ Gas culture in India ________________________________ 32

Key Drivers of Natural Gas in 2030 _____________________________________________________ 35

Court directives towards environmental concerns ______________________________________ 37

Energy Intensity and Energy Efficiency _______________________________________________ 37

Energy Efficiency and Demand Side Management ______________________________________ 37

Development of Infrastructure_______________________________________________________ 40

Financing________________________________________________________________________ 41

Technology Induction______________________________________________________________ 41

Create a Central Administration for Energy ____________________________________________ 41

Development of National Gas Grid ___________________________________________________ 41

Recently Built Infrastructure ________________________________________________________ 42

LNG Terminals ___________________________________________________________________ 43

Issues and concerns_________________________________________________________________ 44

Price of LNG _____________________________________________________________________ 44

Demand Management______________________________________________________________ 44

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Leverage India’s buying power to obtain global E&P projects_____________________________ 44

Creation of strategic alliances in the hydrocarbon sector ________________________________ 45

Pricing __________________________________________________________________________ 45

CNG as an alternative to LNG _______________________________________________________ 46

Financing________________________________________________________________________ 46

Technology ______________________________________________________________________ 46

The LNG option ___________________________________________________________________ 47

Way Forward _______________________________________________________________________ 47

References_________________________________________________________________________ 48

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List of Figures

Figure 1 World: Proven Reserves ....................................................................................................................9 Figure 2 Country Comparison: Production and Consumption..........................................................................9 Figure 3 2008: Total energy consumption & natural gas consumption (mtoe) .............................................11 Figure 4 India: Per capita energy consumption..............................................................................................12 Figure 5 India: Natural Gas Production vs. Consumption ..............................................................................13 Figure 6: India’s gas industry structure ..........................................................................................................15 Figure 7 Primary Energy Consumption ..........................................................................................................25 Figure 8 India: Fuel-wise current installed capacity (MW)..............................................................................25 Figure 9 Delivered Energy Consumption by fuel in India ...............................................................................26 Figure 10 World natural gas production by region and country .....................................................................27 Figure 11 India: Gas Outlook..........................................................................................................................30 Figure 12 Imports as Share of Non-OECD Natural Gas Consumption by Country, 2006-2030 ....................32 Figure 13 Average annual percentage change in natural gas consumption by region/country 2006-2030..33 Figure 14 Delivered Energy Consumption in India by end-user sector 2006-2030 .......................................35 Figure 15 Scope for energy conservation ......................................................................................................39 Figure 16: Existing/ Authorised/ Proposed Gas Pipelines..............................................................................42 Figure 17 Delivered Electric Power in India by Fuel: 2006 & 2030...............................................................44

List of Tables

Table 1 Primary Energy Consumption (mtoe) ..................................................................................................8 Table 2 Natural Gas Pipeline Networks .........................................................................................................10 Table 3 Development of National Gas Grid: GAIL’s existing infrastructure ...................................................13 Table 4 Government Estimates of Gas Consumption by Sector (BCM) ........................................................14 Table 5: Institutional and legal framework for natural gas industry ................................................................17 Table 6: Regulations for CGD .......................................................................................................................18 Table 7: Regulations for Pipelines..................................................................................................................19 Table 8: FDI Policy in oil and gas sectors ......................................................................................................21 Table 9 Fuel-wise Economics for Power ........................................................................................................23 Table 10 Methodology followed in other countries.........................................................................................23 Table 11: Overall Demand Supply Balance - XI Plan.....................................................................................26 Table 12: Demand Scenario for Natural Gas – India .....................................................................................28 Table 13 Gas Market Trends –A look back and forward................................................................................34 Table 14 Potential for Savings by Industry & Transport sector ......................................................................38 Table 15 Additional P/L Infrastructure ............................................................................................................43 Table 16 LNG Supply Outlook in XI Plan .......................................................................................................43

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Abbreviations

AGCL Assam Gas Company Ltd., Guhati

AGL Avantika Gas Ltd. Indore

APM Administered Price Mechanism

BCM Billion Cubic Meters

BGL Bhagyanagar Gas Limited, Hyderabad

Capex Capital expenditure

CBM Coal Bed Methane

CCGT Combined Cycle Gas Turbines

CGD City Gas Distribution

CHPs Combined Heat & Power Plants

CUF Common User facility

CNG Compressed Natural Gas

DGH Director General Hydrocarbons

DPPL Dabhol –Panvel Pipeline

DUPL Dahej Uran Pipeline

DVPL Dahej- Vijaipur Pipeline

E&P Exploration & Production

EIA Energy Information Administration

EOR Enhanced Oil Recovery

FDI Foreign Direct Investment

FO Fuel Oil

GAIL GAIL(India) Ltd. earlier Gas Authority of India Limited

GGCL Gujarat Gas Company Ltd.

GDP Gross Domestic Product

GGL Green Gas Limited, Agra

GOI Government of India

GPA Gas Purchase Agreement

GREP Gas Rehabilitation & Expansion Project

GSA Gas Sales Agreement

GSPCL Gujarat State Petroleum Corporation

HPCL Hindustan Petroleum Corporation Ltd.

GTL Gas-to-liquids

IEA International energy Agency

IGL Indraprastha Gas Limited , Delhi

IOCs International Oil Companies

IPCL Indian Petrochemical Corporation Ltd.

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IPP Independent Power Producer

JCC Japan Crude Cocktail or Japan Custom Clearance

JV Joint Venture

K-G Basin Krishna-Godavari Basin

Kgoe Kilograms of Oil Equivalent

Kwh Kilo Watt Hour

LNG Liquefied Natural Gas

LSHS Low Sulphur Heavy Stock

MMBtu Million British thermal units

MGL Mahanagar Gas Limited Mumbai

MNGL Maharashtra Natural Gas Limited, Pune

MOPNG Ministry of Petroleum and Natural Gas

MTOE Million Tonnes of Oil Equivalent

MW Megawatt

NELP New Exploration Licensing Policy

NGHP National Gas Hydrates Programme

NOCs National Oil Companies

Non-OECD Countries Include Non-OECD Europe & Eurasia, Russia, India, China, Middle East, Africa, Central & South America, others in Europe & Asia.

NYMEX New York Mercantile Exchange

OECD Organisation for Economic Co-operation & Development

ODA Official Development Assistance

OIL Oil India Limited

PNG Piped Natural Gas

PPP Public Private Partnership

PNGRB Petroleum & Natural Gas Regulatory Board

PPA Power Purchase Agreement

PSC Production sharing contract

RGTIL Reliance Gas Transportation Infrastructure Limited

RBI Reserve Bank of India

ROW Right of Way

VAT Value Added Tax

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Market Development in India: Reviewing Strategies for Natural Gas 2030

Background

1. The world is currently witness to shift in the focus of economic development from the ‘developed countries’ to the transition economies and developing economies. Naturally, the pace of growth in these economies is now outstripping that of the developed economies. Projections1 show that the most rapid growth in energy demand from 2006 to 2030 is likely to take place in nations outside the Organization for Economic Cooperation and Development (OECD). Total non-OECD energy consumption is expected to increase by 73% in the International Energy Outlook (IEO) 2009 reference case projection as compared to a 15% increase in energy use among the OECD countries. Table 1 shows the primary energy consumption of select countries.

Table 1 Primary Energy Consumption (mtoe)2

S. No. Countries Consumption (end of 2008) % of Global Consumption 1 USA 2299.0 20.4% 2 China 2002.5 17.7% 3 Russian Federation 684.6 6.1% 4 Japan 507.5 4.5% 5 India 433.3 3.8% 6 World 11294.9 100%

Demand for natural gas

2. Given the competitive edge that natural gas has over other conventional fuels, its consumption is likely to grow further. As per the IEO 2009, world’s total natural gas consumption is likely to increase from 104 trillion cubic feet (tcf) in 2006 to 153 tcf in 2030. Coupled with the fact of rising oil prices and perils of climate change, natural gas is emerging as the fuel of choice since it is relatively clean and has abundant reserves. Based on 2009 estimates, Gas has a Reserve-to-Production ratio of 60.4 years, in contrast with Oil’s Reserve–to-Production ratio of 42 years. Figure 1 below shows world’s proven reserves.

3. With world oil prices rebounding from their early 2009 level, as the world economy recovers from the current downturn, and then continuing to grow in real terms through the end of the projection period, consumers opt for comparatively less expensive natural gas for their energy needs whenever possible. As a result, natural gas remains a key energy source in the industrial sector and for electricity generation. The industrial sector currently consumes more natural gas than any other end-use sector, and this is expected to remain true in the reference case through 2030, when 40 per cent of the world’s natural gas supply is used for industrial purposes. Electricity generation accounts for 35 percent of the world’s total natural gas consumption in 2030, up from 32 percent in 2006.

1 EIA/IEO 2009 2 BP 2009

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Figure 1 World: Proven Reserves3

Data: BP Statistical Review 2009

North America

8.9

7.31

19.6

14.6

75.943.3

15.39

South and Central America

Europe

Africa

Middle East

Russia

Asia Pacific Region

Proven reserves: 185.02 Trillion Cubic Meters

Current proven gas reserves equivalent of 60.4 years gas consumption (level 2008)

4. To meet the projected growth in demand for natural gas, the world’s producers will need to increase annual production in 2030 to a level that is 49 trillion cubic feet higher than the 2006 total. Much of the increase in natural gas production is expected to come from the non-OECD countries. In the IEO2009 reference case, natural gas production in the non-OECD nations in 2030 is 41 trillion cubic feet higher than in 2006, accounting for about 84 per cent of the total increase in world supply. By region, the Middle East, non-OECD Europe and Eurasia, and non-OECD Asia each supplies about 20 per cent of the increase. Africa, which is an important source of new natural gas production, provides 15 per cent of the total world increment. India’s consumption would increase from 1.3 tcf in 2006 to 3.9 tcf in 2009. Figure 2 shows a country comparison of production and consumption of natural gas.

Figure 2 Country Comparison: Production and Consumption4

3 Source: BP 2009 4 Source: BP 2009

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Gas Markets in Asia

5. Post World War II and particularly in the last decade, regional economic cooperation has increased worldwide including the Eastern part of Asia. In this regard, Asia with a population of 4 billion is the largest region in world. Ancient civilizations, rich culture, vast natural resources and booming Asian economies have increased its significance. However, gas has played a relatively insignificant role in the development so far. There are 4 reasons why gas has remained under utilized in Asia.

(i) Historically, Asian economic development & growth have been fuelled by coal & petroleum. Asia lacks a pre-existing gas-user culture of the kind in North America & Europe where infrastructure was provided long ago to provide light and later heat. Asia, on the other hand developed its centralized energy infrastructure later, when electricity distribution systems were used to meet most energy needs, so it lacked gas distribution system upon which modern gas could be build.

(ii) Secondly, as gas is difficult to transport, it requires greater investment in infrastructure in terms of pipelines as compared to oil or coal projects. This has deterred low income economies seeking rapid economic growth and prompted them to go for easier, smaller investments using oil. The IOCs have also preferred developing oil for same reason – it brings quicker returns on investment and it is easier to market. This explains why international gas markets are underdeveloped.

(iii) Thirdly, Asian markets are away from wealthiest demand centres and without integrated markets and easy means of transportation, consumption is constrained.

(iv) Fourthly, unlike oil, there is no international gas market to which Asian countries can link their domestic natural gas prices.

6. Table 2 below shows natural gas pipeline network in select countries.

Table 2 Natural Gas Pipeline Networks5

S.N Select Countries Natural Gas Pipeline length (kms)

1 USA 1,834,138

2 France 155,943

3 India 10,600

4 Pakistan 56,400

7. Japan, Korea and Taiwan have been importing LNG since a long time. China plans 50,000 km of gas pipelines and has signed numerous transnational pipeline deals with neighbouring countries. In addition to the above, other Asian economies where there is emerging gas demand are Indonesia (38 BCM), Malaysia (30.7 BCM), Pakistan (37.5 BCM), Thailand (37.4 BCM) etc.

8. There are many fora for regional cooperation including ASEAN, BIMSTEC, SAARC etc. However, no structure seems to be in place within Asia to focus on co ordination of policy measures on critically important issue of energy.

5 MOPNG & Ernst &Young in Economic Times 11th July 2009

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Natural Gas in India 2009

9. Although India experienced a growth rate of 6.6 per cent in 2008-09, the economy grew at an average growth rate of over 9 per cent during the last 3 years. The Global Development Report released in June 2009 envisages India to edge out China by growing @ 8 per cent on an annualised basis as compared to the latter’s 7.7 per cent. To deliver a sustained growth rate of 8 per cent through 2031-32 and to meet the lifeline energy needs of all citizens, through safe, clean, economical and environmentally sustainable manner, India needs a power generation capacity of nearly 8,00,000 MW from the current capacity of around 1,60,000 MW inclusive of all captive plants. Figure 3 below shows the natural gas consumption of select regions/countries vis a vis India.

Figure 3 2008: Total energy consumption & natural gas consumption (mtoe)6

72.6 84.4 35.7 37.2 436.8

2002.5507.5 240.1 433.3 3981.9

China

Japan

Korea

India

Asia‐Pacific

Total  Energy Consumption (end of 2008)

Natural  Gas  Consumption ( end of 2008)

10. Utilization in India started with supply of natural gas to power and fertilizer sectors through the HVJ which led to significant gas production in late 80’s. Despite the big increase in production between 1975 & 1990, a gap between domestic demand and supply began emerging in early 90’s. In 1994, Government awarded first joint Venture field with operator and ownership to JVs in partnership with state oil companies. Owing to the lukewarm response to the above initiatives, Government unveiled the New Exploration Licensing policy and so far Government has awarded a total of 203 blocks to domestic and foreign companies in the seven rounds of bidding under this program.

11. Despite being the 5th largest energy consumer, per capita energy consumption in India is amongst the lowest in the world. This can be seen from the select country comparison shown in Figure 4 below.

6 Source: EIA/IEO 2009

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Figure 4 India: Per capita energy consumption7

Per capita energy consumption in Kgoe

7890

1320

3880

4150

490

1120

1780

USA

China

UK

Japan

India

Brazil

World

12. GAIL(India) Ltd., the wholly government-owned company for transmission and distribution of natural gas, has successfully laid around 6,800 km of cross country and city gas pipeline network with over 400 CNG dispensing stations catering to over 0.4 million vehicles running on CNG, around 0.6 million of domestic, 25,000 commercial and more than 700 industrial connections. RGTL has 1440 Km of East-West Pipeline and GSPCL has 1130 km of pipelines, other pipelines include those to city gas distribution. In order to focus on future development of city distribution networks in other cities in a planned and focused manner for future CGD Projects, GAIL incorporated its wholly owned subsidiary – GAIL Gas Ltd. in May 2008. GAIL Gas Ltd has ambitious plans of setting up 230 City Distribution companies in various states as well as CNG corridors throughout the country so as to effectively spread the city gas distribution business. Table 3 below shows GAIL’s existing infrastructure.

7 Source: EIA Key Statistics

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Table 3 Development of National Gas Grid: GAIL’s existing infrastructure8

Pipeline Design capacity

(MMSCMD)

Length

(kms)

Avg present flow

(MMSCMD)

HVJ/GREP 33.4 3100 29.5

Dahej –Vijaipur P/L 23.9 650 22.0

Gujarat & Rajasthan 19.5 1000 3.5

Mumbai 23.6 140 11.0

Dahej-Uran/ Dabhol-Panvel Pipelines 12.0/12.0 750 4.0

Krishna Godavari Basin 15.99 835 6.5

Cauvery Basin 8.66 256 2.90

Tripura 2.26 60 1.43

Assam 2.5 9 0.70

TOTAL 153 6800 82

13. The status of production and consumption of natural gas in India is shown in Figure 5.

Figure 5 India: Natural Gas Production vs. Consumption9

*CAGR for multi-year periods, year-on-year growth otherwise

8 GAIL: Gas Availability and Pricing GAIL’s Perspective (presentation 7.3.09) 9 Source: MOPNG

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14. The sector-wise consumption of natural gas in India is depicted in Table 4 below.

Table 4 Government Estimates of Gas Consumption by Sector (BCM)10

Industry 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08* % of total

Energy purposes

Power generation 10.51 11.478 12.099 11.878 11.963 12.037 35.1

Industrial fuel 2.939 3.099 3.569 3.780 3.205 3.324 9.7

Tea plantation 0.191 0.142 0.142 0.151 0.17 0.160 0.5

Domestic fuel 0.654 0.093 0.323 0.075 0.443 0,039 0.1

Internal consumption of gas industry/LPG shrinkage

5.409 4.865 4.944 5.048 5.034 5.618 16.4

Others 0.136 1.263 0.231 1.120 0.04 1.258 3.6

Total energy use 19.767 20.94 21.238 22.052 20.855 22.436 65.4

Non-energy Purposes (%)

Fertilisers 7.955 7.889 8.173 7.762 8.497 9.822 28.6

Petrochemicals 1.027 1.128 1.236 1.175 1.377 1.432 4.2

CNG - 0.001 - - - - -

Others 1.215 0.948 0.038 0.036 0.639 0.638 1.8

Total Non-energy use 10.197 9.966 9.447 8.973 10.513 11.892 34.6

Grand Total (energy+non-energy)

29.964 30.906 30.775 31.025 31.368 34.328 100.0

Energy Purposes (%) 66.0 67.8 69.3 71.1 66.5 65.4 -

Non-energy Purposes (%) 34.0 32.2 30.7 28.9 33.5 34.6 -

* Provisional Note: excluding gas supplied to CGD Companies like IGL, MGL and BGL and for Sponge Iron

15. The flow-chart below (Figure 6) and the table below show India’s gas industry structure which is dominated by public sector entities.

10 Source: MOPNG

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Figure 6: India’s gas industry structure11

Gas Sector Players

Gas Production/ Gas Processing Gas Transmission, Distribution & Marketing supply

ONGC, OIL GAIL, ONGC, OIL GAIL, ONGC, OIL

Private Companies /JV

Other Companies: GSPL, AGCL, TNGCL Agartala, IGL

Delhi, MGL Mumbai, GGL Agra, MNGL Pune, BGL Hyderabad, AGL Indore,

GAIL Gas Ltd. NOIDA,

PMT Consortium (ONGC+BG+RIL),

Cairn, GSPC

Other Players

Name of Company Name of Cities

Gujarat Gas Company Limited Surat, Bharuch, Ankleshwar

Adani Energy Limited Ahmedabad, Vadodara

Siti Energy Moradabad

Hindustan Petroleum Corporation Ltd. Ahmedabad

Sabarmati Gas Ltd. Gandhi Nagar

Gujarat Stated Petroleum Corporation Ltd. Hazira, Rajkot, Surendranagar

Assam Gas Ltd. Town of Assam (PNG only)

Vadodara Municipal Corporation Vadodara (PNG only)

Haryana City Gas Distribution Ltd. Gurgaon

Great Eastern Energy Corp. Ltd. Asansol

Government initiatives towards market development

16. Government of India has been actively making policy changes and thereby acting as an enabler for attaining energy security for the country. The Central Government Budget for 2009-10 provides tax benefit for capital expenditure (except land, goodwill, etc) for development of the gas sector. It also proposes to develop long distance gas highways leading to a National Gas Grid to facilitate transportation of gas across 11 Gas in India 2008

15

the length and breadth of the country. It envisages an investment of Rs 30,000 Crores (USD 6 billion) in the next 5-7 years and a cess of $ 0.2 per MMBTU to fund the project.

Regulatory framework

A. Legislations

17. The following legislations are in place:

ort, transport, storage, production, refining and blending of

(ii) f exploration and mining

(iii) ential Commodities Act, 1955 makes provisions controlling the production, supply and

(iv) ining

(v) isition of Right of User in Land) Act, 1962 provides for

(vi) nd other Maritime Zones Act,

(vii) ules, 1976 regulates storage, ports of receipt, transportation by water, land,

(viii tural Gas Regulatory Act 2006, which introduces Regulator and the ocess

(i) The Petroleum Act, 1934 regulates imppetroleum (which includes liquid hydrocarbon or mixture of hydrocarbons).

The Oilfields (Regulation and Development) Act,1948 regulates the grant oleases.

The Essdistribution of certain essential commodities which include petroleum and petroleum products.

The Petroleum and Natural Gas Rules, 1959 regulates the grant of exploration licences and mleases in respect of petroleum and natural gas and conservation and development thereof. It also specifies area and terms of grant of licence.

The Petroleum and Minerals Pipelines (Acquthe acquisition of right of use in land for laying pipelines for the transport of petroleum and minerals. It also provides for acquisition by Centre Government for companies.

The Territorial Waters, Continental Shelf, Exclusive Economic Zone a1976 regulates the exploration and exploitation of resources of the continental shelf and exclusive economic zone.

The Petroleum Rpipelines and right of way.

) Petroleum and Napr of regulations for oil and gas downstream activities like pipeline transportation, distributions, marketing, etc.

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B. Institutional & legal framework

18. The institutional and legal framework governing the natural gas industry is summarised in Table 5.

Table 5: Institutional and legal framework for natural gas industry

S. No.

Name of the Institution

Functions Remarks

1 Ministry of Petroleum and Natural Gas (MOPNG)

Regulation of exploration, production, development, allocation and pricing of gas

Apex policy making body

2 Directorate General of Hydrocarbons (DGH)

Regulates upstream industry and is involved in issue of licences & Production Sharing Contract (PSC) with both the state owned enterprises and private sector.

Established in 1993 to ensure ‘correct’ reservoir management.

3 Oil Industry Safety Directorate (OISD)

Formulates and coordinates implementation of series of self regulatory measures aimed at enhancing safety in Oil & Gas Industry.

Technical Directorate under MOPNG

4 Petroleum & Natural Gas Regulatory Board (PNGRB)

Regulates downstream industry including transportation, distribution, and marketing of natural gas.

To ensure fair trade and competition amongst entities; registering standards and authorizing entities for specified activities, declaring common or contract carriers and regulating access to such carriers and CGD networks; regulating transportation rates for common or contract carriers; laying down technical/safety standards; preventing restrictive trade practices.

5 Petroleum India International

Provides Technological & Manage-rial expertise to companies abroad

Consortium of IOCL,HPCL,OIL,IPCL, BRPL established in 1986

6 Engineers India Limited (EIL)

A Public Sector Undertaking under MOPNG, started with the core area of engineering and related technical services for the oil & gas industry.

Has now diversified to provide engineering & design services to number of infrastructure projects.

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C. Regulations for Pipelines and City Gas Distribution (CGD)

19. Infrastructure in gas business can be classified into city gas distribution and cross country pipelines.

20. Regulations laid down by PNGRB for CGD cover areas such as authorisation for entities to lay, build, operate or expand city or local natural gas distribution networks and determination of tariffs. The regulations for pipelines, apart from authorising entities to lay, build, operate or expand city or local natural gas distribution networks also relate to access code for common carrier and contract carrier natural gas pipelines and affiliate code of conduct for entities engaged in marketing of natural gas and laying, building, operating or expanding natural gas pipelines. Some of the draft regulations which are under consideration pertain to fostering fair trade and competition amongst entities by sharing of Infrastructure, codes of practices for emergency response and disaster management plan and technical standards and specifications including safety standards for natural gas.

21. PNGRB has laid down the following regulations for CGD and pipelines:

Table 6: Regulations for CGD

S. No.

Regulation Issued on Details

1 Authorising Entities to Lay, Build, Operate or Expand city or local Natural Gas distribution networks

19, March 2008

• Lays down criteria for authorising entity to lay CGD network

• To cover all consumers who consume less than 50000 SCMD of gas

• Lays down detailed procedure for award of CGD network

2 Exclusivity for City or Local Natural Gas Distribution Network

19, March 2008

• Define exclusivity period, service obligations by the authorised entities and penalties arising out of failure to meet service obligations

• Provides for exclusivity of infrastructure for 25 years after which they can reapply for blocks of 10 years subject to satisfactory performance

• Exclusivity of 5 years for Marketing subject to satisfactory performance for the defined service obligations

3 Determination of Network tariffs for city or local Natural Gas Distribution networks and Compressor charges for CNG

19, March 2008

• Network tariff and compression charges for CNG are determined by considering a reasonable rate of return (procedure for the same is defined)

• Similarly the network tariff for PNG is defined

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Table 7: Regulations for Pipelines

S. No.

Regulation Issued on

Details

1 Authorising Entities to Lay, Build, Operate or Expand City or Local Natural Gas distribution networks

06, May 2008

• Stipulates that entities desirous of laying pipeline needs to submit EOI to PNGRB whereupon PNGRB checks if an existing pipeline has spare capacity etc. before going with an open advertisement thereafter accepting or rejecting the EOIs

• Lays down technical and financial criteria for authorising entity to lay the pipeline network

• Lays down detailed procedure for award of pipeline network

• pipeline tariff is determined using the same formula as that in CGD Network (procedure for the same is defined)

2. Access code for common carrier and contract carrier Natural Gas Pipelines

17, July

2008

• Lays down procedures for entity operating a pipeline to add new or abandon exiting entry point

• Defines the service obligations of the entity to Shipper, Operation and Maintenance of facilities.

3. Affiliate code of conduct

for entities engaged in marketing of Natural Gas and laying, Building, operating or expanding Natural Gas Pipelines

17, July

2008

• To minimise the potential for minimising cross –subsidisation between regulated and non-regulated marketing of natural gas, protect confidentiality of consumer information.

• To treat all other entities engaged in marketing of Natural Gas in same non-discriminatory manner as it treats its affiliates.

22. Some of the draft regulations presently under consideration of the Government are:

• Draft Regulation on fostering fair trade and competition amongst entities by sharing of Infrastructure:

In October 2008, PNGRB issued a draft regulation on fostering fair trade and competition amongst entities for sharing of infrastructure to avoid unnecessary drain of financial resources on in fructuous investments. This is to remove/minimize any kind of impediment to competition amongst various entities. Once the Board declares an infrastructure as Common User Facility (CUF), it is mandatory for the entity controlling the infrastructure to share it with other entities under a mutually agreed CUF sharing agreement. The right of first use will generally be given to the entity controlling the infrastructure provided it is not detrimental to the consumer interests in terms of getting petroleum/ petroleum products or natural gas at competitive prices. After the controlling entity uses the infrastructure as per its requirements, the spare capacity will be shared amongst other entities. The Board has further stipulated guidelines towards procedure for seeking sharing of the infrastructure, compensation mechanism and periodic compliance reporting by the controlling entity to PNGRB.

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• Draft Regulation on codes of practices for emergency response and disaster management plan:

In November 2008, PNGRB issued a draft regulation on codes of practices for emergency response and disaster management plan (ERDMP). These regulations once notified by Board shall be applicable to:

• Refineries, Gas processing, LNG installations

• Pipelines for natural gas, propane, Butane and hydrocarbons which remain in gaseous state at normal temperature and pressure

• Petroleum product pipelines, commercial petroleum storage, bottling installations, LPG receiving storage , handling facilities including propane and butane

• City or local Natural Gas distribution facilities, dispensing stations, transportation of petroleum products by road.

• Draft Regulation on Technical Standards and Specifications including safety standards for Natural Gas

In November 2008, PNGRB issued a draft regulation to cover pipeline design, materials and equipment, welding, fabrication, installation, testing, operation and maintenance and corrosion control of Natural Gas pipelines, including safety requirements of gas pipelines. Board will monitor the same either directly or indirectly by an accredited third party through separate regulations on as third part conformity assessment.

New Exploration Licensing Policy

23. The New Exploration Licensing Policy (NELP) was implemented in 1999 by the Government to boost hydrocarbon exploration in the country. The Government has held seven rounds and bidding for NELP VIII is expected to commence shortly. Some of the salient features of the NELP regime are:

• Award of licenses through International Competitive Bidding; no acreage to be awarded on nomination basis, even to India’s National Oil Companies (NOCs);

• 100% FDI is allowed; • an internationally competitive fiscal regime and no signature, discovery or production bonus; contract

assures fiscal stability and full repatriation of profits abroad; • participation through unincorporated JVs and no oil industry development cess or customs duty; • up to 100% cost recovery is allowed; • freedom to market oil & gas in domestic market; • low-to-moderate royalty rates between 5 to 12 %and special concessions for deepwater blocks; and • option to amortize exploration and drilling expenditure over a period of 10 years from the date of

commercial production.

Foreign Direct Investment

24. Foreign Direct Investment (FDI) policy relating to the oil and gas sector has evolved over the years to reflect the intention of the policy makers to deregulate the sector in order to encourage competition by providing a level playing field to all market players. Case in point is the introduction of NELP which evaluates both public and private E&P companies using the same set of parameters. A liberal license award

20

policy, possibility of transition towards an Open Acreage Licensing Policy (OALP) and the execution of work program commitments on blocks awarded to inward investors in the recent NELP rounds is expected to increase manifold the share of FDI to the total investments in India’s E&P sector. The introduction of the VAT regime and likely compliance with Trade Related Intellectual Property Rights will attract more FDI into the country, more so in the R&D related to the sector. The FDI policy related to the oil and gas sector is summarised in Table 8.

Table 8: FDI Policy in oil and gas sectors

Particulars Latest Position Oil Exploration 100% Automatic – No Approvals required Petroleum Product Pipeline Sector 100 %Automatic – No Approvals required Natural Gas/LNG Pipeline 100 % Non-Automatic – Approvals required from Foreign

Investment Promotion Board, Govt. of India. LNG is on the OGL

Natural Gas Pipeline Policy 25. On December 20, 2006, Government notified the policy for development of natural gas and city or local natural gas distribution to promote investments, facilitate open access for all players, promote competition among entities and secure consumer interest by ensuring gas availability and reasonable tariffs. The policy applies to all natural gas pipelines and city or local gas distribution networks except dedicated pipelines laid exclusively for supplying gas to a specified consumer. The main features of the policy are:

• All natural gas pipelines will be built with authorization from the PNGRB, which will be granted only if the designed capacity of the pipeline is 33% more than the capacity required by the entity plus the firmed up contracted capacity. The extra capacity will be available for use as a common carrier for a third party without discrimination at the transportation rate laid down by the board. The open access capacity will be allocated in a transparent and objective manner’ based on the Board’s regulations.

• The entity authorized by the Board to lay, build, operate , or expand a city or local gas distribution network will be required to follow the Board’s prescribed marketing service obligations. The board may grant a period of exclusivity- the specified number of years for which the city or local gas distribution network shall be excluded from the purview of common/contract carrier- to such an entity in accordance with its regulations. In the long run the policy envisages complete separation between entities involved in transportation of natural gas and those involved in marketing or CGD of natural gas.

• Transportation tariff of the common/contract carrier or city/local gas distribution shall be determined by the Board.

• State governments are required to play an enabling role to ensure speedy and timely completion and operation of pipelines and city or local natural gas distribution networks. They can prioritize cities/local areas for setting up of distribution networks.

• Automatic approval of 100% FDI for laying of pipelines.

21

Gas Utilisation Policy

26. In September 2007 Empowered Group of Ministers (EGOM) approved the gas pricing formula and fixed gas price at $4.20 /MMBTU applicable for the next 5 years and will be applicable for all gas produced from all blocks under NELP . This price was to set a benchmark for natural gas pricing in country with the following distribution of 40 MMSCMD gas:

(i) 14 MMSCMD: Existing gas-based urea plants to enable full capacity utilization.

(ii) 3 MMSCMD: Existing LPG extraction units.

(iii) 18 MMSCMD: Existing gas-based power plants lying idle or under-utilized, gas based plants likely to be commissioned during 2008-09 and liquid based plants currently running on liquid but which could be changed to gas.

(iv) 5 MMSCMD: City Gas Distribution Projects.

Setting up of LNG Plants 27. Existing regulation in this regard have been framed to encourage overall growth and development

of the sector:

• Import of natural gas as well as LNG is allowed without any restrictions.

• Establishing LNG terminals, re-gasification of LNG, marketing of re-basified LNG, pricing of LNG and re-basified LNG are left to the LNG players.

• Investors are free to choose locations where they want to put up the LNG terminals, subject to environmental clearances and clearance from the regulator.

Pricing

28. The Government, through its pricing policy, has created two distinct gas markets in the country. One market is characterized by quantitative allocations of gas produced by PSUs from pre-NELP gas producing areas at controlled prices and the other one by market determined prices for gas sold by private and JV operators. There is also some amount of ‘contract’ pricing for bigger buyers. Currently high demand has been fuelled by years of government-controlled artificially low prices and supply has been constrained. In such a supply-constrained scenario, LNG importers drive the short-term prices. As more private and JV gas come online, prices will be driven by them. It is expected that price deregulation would gather further momentum over the long term as domestic supplies from Administered Price Mechanism (APM) fields decline and gas from new sources is sold at market rates and demand side starts dictating the prices.

22

29. The fuel-wise variable cost of power is shown in Table 9 below.

Table 9 Fuel-wise Economics for Power12

Fuel Type Variable Cost of Power (Rs/kWh)

Domestic Coal 2.94

Imported coal 3.50

Fuel oil 3.22

Naphtha 7.47

Diesel 6.98

Natural gas (central sector) 2.96

Natural gas (state sector) 1.88

Natural gas (private sector) 2.82

30. There are several mechanisms for determining the price of oil or gas. At one end, there can be a market that operates to determine the price and at the other end, prices may be locked in, often determined by cost-plus mechanism. The former usually involves higher volatility, but also possible windfalls for a particular stakeholder. In reality many contracts are a hybrid, in that the end prices are not determined a priori, but themselves rely on a benchmark or index. For example, gas prices can be indexed to crude oil prices, such as Japanese Crude cocktail, but the mechanisms for relating these two is mutually agreed before hand. In addition, participants in the deal may choose to utilize financial instruments for risk mitigation and management, e.g. the use of futures contract or hedging. Gas suppliers often prefer indexed prices, or even netback mechanism, but the consumers often prefer a cost – plus mechanism. Table 10 below shows the methodology adopted by different countries.

Table 10 Methodology followed in other countries13

Country Methodology Germany, Spain, Netherlands, Denmark, Sweden, Switzerland

Market value pricing

N. America Cost based approach

Japan (LNG) Linked to price of crude oil

UK and Italy Mix of market value and cost-based approach

India Linked to price of HS/LS FO

Strategy for CNG and City Gas

31. Based on the success of pilot project and experience of full scale projects in Delhi and Mumbai, a plan was drawn to promote CNG and City Gas through multi-pronged strategy, which includes, inter alia,

12 Source: Gas Report 2008, India Infrastructure Research 13 Source: Hydrocarbon Vision India 2025

23

the formation of JVs, creation of awareness, development of safety standards and development of equipment manufacturers.

32. The end user price for the city gas distribution companies is derived by taking the company’s acquisition price and then adding royalty, local sales/excise taxes as applicable, transportation charges and local operation and connection charges.

Challenges

33. The challenges facing the natural gas sector include:

(i) ensuring gas supplies in a constrained world market amidst rising prices- demand from fertiliser, power and non-power end users will continue to mount pressure on the supply constrained market. Expanding gas market would in turn demand huge infrastructure requirements. Servicing gas demand of the order o 243 to 405 BCM in 2030 would require development of major new supply frontiers and commensurate infrastructure.

(ii) rational pricing of natural gas- is the most important and critical factor in emerging gas markets. The ability of gas to penetrate the market in India depends on its ability to compete with other fuels: coal in power generation, gas, oil and LPG as an industrial fuel when clean fuel is required, and kerosene and LPG in the residential sector. The challenge is also to find the right balance between what price the producer wishes to charge and what price the consumer is willing to pay;

(iii) removal of entry barriers for private players in distribution and retail business in order to create real market competition;

(iv) regulation of upstream and downstream sectors;

(v) environmental management through product upgradation; and

(vi) The global rising trend of gas prices, the linkage to the rising crude oil prices and non availability of gas on long term commitment has reduced willingness of Indian power generators to rely on gas as a fuel. In the prevailing circumstances, coal provides much more comfort to the developers as well as Indian planners, due to its abundant domestic availability and relatively lower cost.

INDIA 2030: Energy Needs

34. Already the world's fifth-largest energy consumer, India is projected to rise to third-largest by 2030, surpassing Japan and Russia. According to the U.S. Energy Information Agency's reference case scenario, primary energy demand in India is expected to grow by 3.6% per year, doubling from 16.3 QBtu in 2005 to 32.3. QBtu in 2030.

24

Figure 7 Primary Energy Consumption14

Quadrillion Btu (Reference case scenario)

1000 678.3637.3 595.7551.5508.3472.4462.1 347.7

100

32.329.6 26.822.9 India

19.117.716.3

7.9 10

1 1990 2005 2025 2006 2010 2015 2020 2030

Year

World

35. India will need to quintuple its electricity-generation capacity from 1,600 gigawatts to nearly 8,000 gigawatts. India needs $1.25 trillion in energy infrastructure from 2006-30 of which 3/4th will be in power. 96 % of the population in India will have access to electricity in 2030 from 62% in 2005. Figure 8 shows the fuel-wise current installed capacity in 2008 and Figure 9 shows the delivered energy consumption fuel-wise in the year 2006 and estimation for the year 2030.

Figure 8 India: Fuel-wise current installed capacity (MW)15

2008

25%

53%

10%1%3%

8%Hydel

coal

gas

diesel

nuclear

renewable

14 EIA/IEO 2009 15 Central Electricity Authority

25

Figure 9 Delivered Energy Consumption by fuel in India16

5.4

9.6

1.4

3.8

9.4

14.2

0.2

1.6 1.2

3.2

0

2

4

6

8

10

12

14

16

Qua

drillion Btu

Liquids Natural  Gas Coal Electricity Renewables

Fuel

2006 2030

36. Energy sector demand projections for India have been made by various agencies. They include the Government, international agencies and industry bodies. The projections of the Eleventh Plan (2007-12) are contained in Table 11.

Table 11: Overall Demand Supply Balance - XI Plan17 (MMSCMD)

2007-08 2008-09 2009-10 2010-11 2011-12 Total Supply I –Conservative 110.99 153.58 168.47 183.09 191.42 Total Supply II –Optimistic 110.99 153.58 242.47 267.09 285.42 Demand (MMSCMD) 179.17 196.64 225.52 262.07 279.43 Demand Supply Gap I - Conservative 68.18 43.06 57.05 78.98 88.01

As per the EIA/ IEO projections for the various regions Non-OECD regions natural gas production and consumption to be higher than those of the OECD countries, Figure 10 shows the same by region/country.

16 Source: EIA/IEO 2009 17 Source: Infraline

26

Figure 10 World natural gas production by region and country18

0 10 20 30 40 50

Trillion cubic feet

OECD

Non‐OECD Europe & EurasiaChina

India

Middle EastAfrica

2030

2006

37. India Hydrocarbon Vision 2025 (2000), India Vision 2020 (2002), report of the Expert Committee on Integrated Energy Policy (2006), and PetroFed’s Vision 2030 (2005) are some the studies undertaken to project long-term energy demand scenarios. Table 12 depicts natural gas demand estimations by various agencies.

18 EIA/IEO, 2009

27

Table 12: Demand Scenario for Natural Gas – India19

MMSCMD

Projections by the Various Agencies

EIA(2004) India-Vision-2020

(2002)

IRADe & PWC

Year

ReferenceCase

High Case

Low Case

IEA

(2004)

IHV-2025

(2000)

BAU BCS

Power & Energy Divison’s Projections

(2003-04) BAU HOG

Base Year

2001

(62)

2001

(62)

2001

(62)

2000

(67)

1999-2000

(110)

1997

(59)

2001-02

(81)

2003-04

(85)

2004-05 74 77 74 91 195 89 87 98 93 95

2009-10 93 101 93 140 277 115 111 134 145 164

2014-15 124 132 109 189 329 149 142 183 226 285

2019-20 155 171 132 228 358 194 177 249 356 493

2024-25 195 225 155 259 391 258 226 326 488 738

2029-30 295 430 667 1111

EIA - Energy Information Administration, USA IRADe - Integrated Research and Action for Development

IEA - International Energy Agency BAU - Business as Usual

IHV - India Hydrocarbon Vision 2025 BCS - Best Case Scenario

PWC - Price Waterhouse Coopers HOG - High Output Growth

*includes Natural Gas & N G equivalent of Naphtha

Note: As the available projections by the various agencies are for different years, the same have been interpolated or extrapolated to bring them to common years and have been converted into MMSCMD for the purpose of comparison.

2819 Integrated Energy policy August 2006

End- Users

Some of the major natural gas end users and some of the salient aspects are as under:

A. Fertilizers: (28% of the total gas consumed in 2007-08)

38. India is one of the major producers and consumers of fertiliser in the world and today it is more or less self sufficient because of the conducive policy environment provided by the government in the past. A definite policy on allocation of feedstock also played a crucial role for build up of urea production facility in past. A Core Group constituted by Department of fertilizers for procurement of LNG for fertilizer industry, concluded that in view of the tight supply of gas and price volatility , it may not be possible to get firm commitment for LNG supplies to fertilizer plants at various locations and that individual companies may make own arrangements .

39. In this regard, despite several proposals for setting up fertilizer plants through joint ventures in other countries, only OMIFCO project of KRIBHCO with commitments by Governments of India and Oman at highest levels could fructify the project. Government of India has committed itself to buy buyback 100% of the production for the next 15 years at pre-determined prices. Thus, while joint ventures abroad are an option for augmenting the increased demand of urea in the country, need for buy-back arrangements, security and price volatility ought to be considered altogether.

B. Petrochemicals

40. This sector consumed 4.2% of the gas produced in 2007-08. Ethane extracted from gas is used as a feed stock here. KG gas being dry in nature will not suit the purposes of LPG extraction/Petrochemicals etc. Wet regasified LNG has propelled ONGC to seek government nod for setting up C2,C3 extraction plant at Dahej. Setting of similar plants is being studied by various companies near LNG terminals like Kochi etc.

C. Power (35.1% of the gas consumed in 2007-08)

41. Unlike Fertilizers and Petrochemicals which can be produced in other countries at well head gas prices and transported back, power generation facilities will have to be located in India. Shorter installation time and lower investment costs will propel gas plus oil based fire power plants capacities (1207 gigawatt) to surpass coal based power plants capacities (1151 gigawatts) by 2010 world over. Price sensitivity and availability of gas are two constraints for this sector as gas in this sector has to compete with the cheaper option of coal.

India's LNG Portfolio

42. India produces approximately 80 million cubic meters (mcm) of natural gas per day, but domestic demand is 170 mcm per day. Thus, India must import approximately 90 mcm per day. According to energy consultants Wood Mackenzie, Indian demand for natural gas is rising at 8 per cent per annum and will reach 270 mcm per day by 2020.

43. India has two LNG terminals and will complete a third terminal by 2009. India has a long-term LNG contract with Qatar's Ras Gas 2 project for the delivery of 7.5 million tons of LNG per year through 2029 and an additional 1.25 million tons per year on one-year contracts. In addition, India has active LNG contracts with Australia, Malaysia, Oman, and Turkmenistan. In June 2005, India and Iran reached a $22 billion deal to export 5 million tons of Iranian LNG to India per year beginning in 2009. However, the talks

29

have been stalled over the past two years. Recently, for its LNG plant at Kochi, PLL signed a long term contract for supply of LNG from the Gorgon fields of Australia. India's LNG prospects are promising and the likely terminals with probable transnational pipelines are shown in Figure 11.

Figure 11 India: Gas Outlook20

25

CHENNAI

KOLKATA

KAKINADA

DABHOL

PUNE

DAHEJ

VIJAIPUR

BHUBANESHWAR

VIZAG

TIRUCHCHIRAPALLI

HAZIRA

KOCHI

A 1 BLOCK, MYANMAR

ENNORE

KRISHNAPATTANAM

TURKMENISTAN

IRAN

IRAN

MYANMAR

BANGLADESH

NEW GAS DISCOVERIESLNG TERMINALS - PROBABLELNG TERMINALS (MATURE)TRANS – NATIONAL PIPELINESCBM

MUMBAI

JAMNAGAR

MANAPPAD

44. Trans-national gas pipelines are estimated to cost several billion dollars not to mention the attendant downstream market development requiring more than US$ 1 billion per annum. The trans-national pipelines currently under consideration are the Iran-Pakistan-India (IPI) Gas Pipeline and Turkmenistan-Afghanistan-Pakistan-India (TAPI) Gas Pipeline.

45. India-Pakistan-Iran pipeline (IPI) has the following features:

• Cabinet decision dated 9.2.2005 to pursue the Project.

• Phase-l-60 mmscmd of gas to be shared equally between India & Pakistan.

• Total length of the pipeline up to India border is about 2135 km. Out of this, 1100 km in Iran and 1035 km in Pakistan.

• A tripartite JWG formed, six meetings held. Last meeting held on June 28-29, 2007.

• A Ministerial-level meeting between India and Pakistan held on 25.4.2008 in Islamabad.

• Issues regarding project structure, transportation tariff and transit fee discussed. Greater agreement on these issues.

• A non-paper handed over to Iranian President at New Delhi in April 2008.

20 Dr.U.D Choubey : Energy Security Challenges for India: Role of Natural Gas (2006)

30

• Iran sent its non-paper in response on October 2008.

• India’s comments on the Iranian non-paper communicated to Iran in October 2008. Response from Iran is awaited.

46. Turkmenistan-Afghanistan-Pakistan-India (TAPI) Gas Pipeline Project

• 'In-principle approval' by Cabinet on 18.5.2006 to India joining the project.

• Total capacity 90 mmscmd; total length upto India border is about 1680 km; out of this, 145 km in Turkmenistan,735 km in Afghanistan and 800 km in Pakistan.

• ADB to act as lead development partner.

• Meeting of 10th Steering Committee held on April 23-24, 2008, wherein India admitted as an official member of the project.

• 3rd meeting of TWG held in May 2008, wherein GSPA pricing, draft agreements discussed and Heads of Agreement initialled.

47. Gas imports from, say, Iran through Pakistan, or from Central Asia through Afghanistan and Pakistan or from Myanmar through Bangladesh do provide a higher degree of energy security compared to equity oil or gas. This is so because of the security of such supply. The supplying country typically invests in the pipeline and hence has a stake in maintaining the supply. Also, if supply to India is stopped, alternate buyers along the route may be difficult to find and the pipeline cannot be easily diverted. Thus, the risk of disruption from the supplier is relatively smaller. There is, however, the risk of sabotage of the pipeline as it transits through different countries this can be guarded against by the following:

(i) Create an interest in the pipeline for all countries through which it transits. For example, a common pipeline shared by India and Pakistan will have substantial gains for Pakistan too. There are economies of scale that reduce costs for Pakistan over the alternative of obtaining gas through a pipeline of its own. Also Pakistan would earn transit fees. With this, a disruption should it occur, would likely be of a short duration.

(ii) Get multilateral agencies to invest in the project by way of equity and debt.

iii) Enlarge the domestic buffer stock of LNG, have redundancy in regasification facilities and ensure that, in the case of a disruption, the supplier would be obligated to provide compensatory supply in the form of LNG. Such additional buffer stock can only be justified as cost of energy security.

48. India’s dependence on imported LNG is projected to be reduced in the short term, when new natural gas production from the K G Basin comes on line. Accordingly, import share of India’s natural gas consumption falls from 20 % in 2006 to 13 % in 2010 . Much of India’s current production, however, comes from more mature natural gas fields that are beginning to decline, and in 2030 India is projected to be dependent on imports for more than 30 % of its total natural gas consumption (ref. Figure. 12). Pipelines to bring natural gas from Iran, Central Asia, or Myanmar have been discussed in the past, but to date no firm agreements have been reached.

31

Figure 12 Imports as Share of Non-OECD Natural Gas Consumption by Country, 2006-203021

Development of Gas Marketing Hub/ Gas culture in India

49. Asia today accounts for 70% of the total LNG trade; Japan and Korea are meeting their entire gas requirement through imports. Natural gas accounts for 3% of China’s primary energy consumption and 9 % of that of India. These two countries today account for about 3.5% of the global gas consumption. However, with greater integration of the natural gas markets at a global level, the share of natural gas consumption in China and India together is expected to account for about 7% of the total global natural gas consumption in high oil price scenario by the year 2030 as has been reported in EIA/IEO 2009. Figure 13 shows the average annual percentage change in natural gas consumption by region/country 2006-2030.

21 Sources: 2006: Energy Information Administration (EIA),International Energy Annual 2006 (June-December 2008), web site www.eia.doe.gov/iea. Projections: EIA, World Energy Projections Plus (2009).

32

Figure 13 Average annual percentage change in natural gas consumption by region/country 2006-203022

5.24.2

50. Table 13 succinctly brings out the past trends and the future expectations.

22 EIA/IEO, 2009

OECD Asia China India Others‐non‐OECD Asia World

1

3.6 1.6 6 5 4 3 2 1 0

Percentage

33

Table 13 Gas Market Trends –A look back and forward23

Past years Natural Gas 2030 Supply Gas produced by NOCs

Allocation on the basis of economic merits at controlled prices

Companies free to supply Challenge of global competition

Supply Frontiers West Coast Resurgence of LNG

East & West Coast North East Deepwater Gas LNG CBM Trans-national pipeline imports

Demand Energy /

Non energy use

Controlled market Energy use of gas preferred over non-energy use.

Expansion of market share Ethylene Crackers Mega Power plants and Fertilisers Flexible sources and fuels

Market Integration Limited Availability Gas predominantly used in Western India and along the HVJ Pipeline

Integration of West and East markets Growth of regional hubs De-bottlenecking of north-East Southern India emerging as a new gas market.

Regulation Controlled pricing and supply of gas produced by NOCs NELP blocks free to sell gas at market determined prices. A slow move towards unbundling transmission & distribution and marketing.

Unbundled Transmission Transport tariff regulation Third-party access. Redefined role of the customer Unbundled local gas distribution

E&P Dominated by NOCs Emergence of private players

NOCs, Private Players , IOCs

Transmission Monopoly of NOC Few other Transporters Transportation by Gas owners

Unbundling Third Party Access. Shippers look for capacities Captive Pipelines

Distribution Distribution by Gas owners Monopoly Exclusive markets

Unbundled distributors Competitive Industry Marketing rights in remote markets.

Wholesale Trading Negotiated contracts Development of robust trading and forwards market.

Retail Energy Limited choice and that too at select regions

Large customers have access of to choice. Choice linked with information technology Redefines retail energy business.

Customer interface Limited Suppliers Rise in the number of marketing players to serve liberalised gas market. Information and choices expand for high off take customers. Information Techno logy and internet redefine the consumer-supplier relationship.

23 The green imperative-PWC

34

Key Drivers of Natural Gas in 2030

51. Gas sector development and, if required, reforms is an imperative for the utility sector reforms. Current provision of price of gas produced by PSU oil companies at administered prices well below the prevailing global and local market prices for the power and fertilizer sectors acts as a disincentive for increasing domestic exploration and gas imports. Well defined downstream gas regulatory framework and creation of adequate transmission infrastructure are other challenges that need to be addressed.

52. A number of reports have chalked out the path towards realising the demand by 2030 for natural gas. This is likely to pose a challenge to all policy makers. According to PWC, the key drivers which would finally be used for evaluating the success of the natural gas industry would be:

• Building markets- Gas industry has a natural advantage in building markets through replacing existing fuels in various sectors both for feedstock as well as for energy purposes. However, this substitution will depend upon relative price of gas with respect to competing fuels e.g Naptha for fertilizer and petrochemicals, and coal for power etc.

Figure 14 Delivered Energy Consumption in India by end-user sector 2006-203024

1.1

0

2.8

4.7

3.4

0

2.72.8

1.62

1.3

0

5.65.9

3.4 3.3

0 0

‐0.4

0

‐1

0

1

2

3

4

5

6

percen

tage

 cha

nge

Liquids Natural  Gas Coal Electricity RenewablesFuel type

(Average annual percentage change)

2006‐2030 Rersidential 2006‐2030 Commercial

2006‐2030 Industrial 2006‐2030 Transportation

• Meeting the supply challenge - responding to this market challenge will require discovering and connecting new supplies in traditional and frontier regions. This endeavour alone will absorb bulk of the incremental capital investment in the gas industry. Timing of these investments to perfectly match the market requirements will be a challenge for the Indian industry. Ability of the market to

24 EIA/IEO 2009

35

develop in such timely phases will determine the health of the gas industry in India. Currently, there are four major natural gas producers in the Middle East: Iran, Saudi Arabia, Qatar, and the United Arab Emirates, which together accounted for 83 percent of the natural gas produced in the Middle East in 2006. Each of the four countries has announced plans to expand natural gas production in order to meet the expected increase in regional demand and/or to supply markets outside the region. Iran has set a goal to raise marketed natural gas production to between 9 and 10 trillion cubic feet per year by 2010, more than double its 2006 marketed production of4.4 trillion cubic feet. That goal may be difficult to achieve, however, without attracting substantial foreign investment in the near term. Gazprom intends to increase production from the Yamal peninsula to 12.7 trillion cubic feet by 2030, both to meet domestic demand for natural gas and to double the size of its exports from current levels. The rest of the production increase is spread over a number of countries, including Algeria, Egypt, Libya and Angola. The largest increases in reported natural gas reserves in 2009 were for Iran and the United States. Iran added an estimated 43 trillion cubic feet (a 5-percent increase over 2008 proved reserves) and the United States added 27 trillion cubic feet (a 13-percent increase). There were smaller, but still substantial, reported increases in reserves in Indonesia, Kuwait, Venezuela, and Libya. Reserves in Indonesia and Kuwait both rose by 13 percent—with Indonesia’s reserves increasing by 12 trillion cubic feet and Kuwait’s by 7 trillion cubic feet. Venezuela added nearly 5 trillion cubic feet of reserves (a 3-percent increase), and Libya added 4 trillion cubic feet (a 9-percent increase).

• Market Integration - Effective integration of the market will equip the market with the ability to balance risks and conflicting forces across regions and fuels. This will lead to flexibility in fuels and consumption patterns which, in turn will lead to market stability and will promote sustainable growth. The integration of gas markets has become a necessity due to the fact that gas has emerged as an important alternative source of energy and the top 15 gas producing nations, except the US, having 78% of global gas reserves, account for only 27% of the global consumption. Further, the gas markets in China and India are shaping out to be major drivers of growth. With China’s energy demand growing by 15% and India’s by 7.8%, these two Asian giants are projected to be leading gas consumers by the year 2020. Moreover, the spiraling oil prices and the uncertainty on the pricing front are also helping to shape the gas market. The growth of natural gas market can be aided by increasing emphasis on environment protection. This can be achieved by applying the “polluter-pays-principle” to coal and by taking measures to induce replacement of coal by other fuels. Moreover, the government policy with regard to development of natural gas industry needs to be clearly enunciated including, inter alia, allowing surplus power generation by captive or Combined Heat & Power (CHP) technologies to flow in a grid to meet deficits in generation capacities. Further, regulatory framework to improve investments needs to be developed. There should be emphasis on the development of domestic capability to build small and medium sized gas turbines and Combined Cycles Gas Turbines (CCGTs) in India. Liberalising pricing or decontrol will enable buyers and sellers to negotiate better prices of gas in relation to competing fuels. Deregulation has generally led to lower prices and more choices for the end users and increased reliability of the system.

• Taxes and Duties-Central and State taxes on commercial energy supplies need to be rationalised to yield optimal fuel choices and investment decisions. Relative prices of fuels can be distorted if taxes and subsidies are not equivalent across fuels. This equivalence should be in effective calorie

36

terms. In other words they should be such that producer and consumer choices as to which fuel and which technology to use are not affected by the taxes and subsidies. Socio-economic benefits such as employment generation and positive impact on energy security may support differential taxes on alternate fuels.

Court directives towards environmental concerns

53. The Supreme Court of India, in its order dated July 28, 1998, directed that all pre-1990 registered autos and taxis plying in Delhi to be taken off Delhi’s roads by March 31, 2000. Again on April 5, 2002, the Supreme Court of India directed the Government to accord highest priority to the transport sector in the allocation of gas for CNG. It again directed Government and concerned State Governments to draw up an action plan for introduction of alternative transport fuels in the cities of Ahmedabad, Kanpur, Sholapur, Lucknow, Bangalore, Chennai, Hyderabad, Mumbai and Kolkata.

Energy Intensity and Energy Efficiency

54. With progressive growth of economy towards developed/OECD level, the energy intensity is required to be reduced over the years. The reduction in energy intensity will depress the demand curve, thereby pushing forward the mid-point of depletion of our non-renewable resources thus extending the period of availability, reducing import and BOP pressures. The energy intensity, therefore, should be reduced through concerted efforts so that, the appropriate index is reached by 2025.

Energy Efficiency and Demand Side Management

55. Lowering the energy intensity of GDP growth through higher energy efficiency is important for meeting India’s energy challenge and ensuring its energy security. The energy intensity of India’s growth has been falling and is about half of what it used to be in the early seventies. Currently, we consume 0.16 kg of oil equivalent (kgoe) per dollar of GDP expressed in purchasing power parity terms. India’s energy intensity is lower than the 0.23 kgoe of China, 0.22 kgoe of the US and a World average of 0.21 kgoe. India’s energy intensity is even marginally lower than that of Germany & OECD at 0.17 kgoe. However, Denmark at 0.13 kgoe, UK at 0.14 kgoe and Brazil & Japan at 0.15 kgoe are ahead of India. These figures and many sectoral studies confirm that there is room to improve and energy intensity can be brought down significantly in India with current commercially available technologies. Lowering energy intensity through higher efficiency is equivalent to creating a virtual source of untapped domestic energy. It may be noted that a unit of energy saved by a user is greater than a unit produced, as it saves on production losses as well as transport, transmission and distribution losses. Thus a “Negawatt”, produced by a reduction of energy need has more value than a Megawatt generated.

56. Integrated Energy Policy (IEP) states that with an aggressive pursuit of energy efficiency and conservation, it is possible to reduce India’s energy intensity by up to 25% from current levels. Efficiency can be increased in energy `extraction, conversion, transportation, as well as in consumption. Further, the same level of output or service can be obtained by alternate means requiring less energy.

57. As the Indian economy opens up to international competition, it will have to become more energy efficient. This is well demonstrated by India’s steel and cement industry. However, IEP recommends the following policies for raising energy efficiency. Some of these policies can be implemented through voluntary targets undertaken by industry associations as opposed to external dictates and enforcement.

37

• Merge Petroleum Conservation Research Association (PCRA) with Bureau of Energy Efficiency (BEE). The merged entity should be an autonomous statutory body under the Energy Conservation Act, be independent of all the energy ministries and be funded by the Central Government. It must:

o Force the pace of improvement in energy efficiency of energy using appliances, equipment and vehicles, and create “golden carrot” incentives in the form of substantial rewards to the firm which first commercialises equipment that exceeds a prescribed energy efficiency target.

o Establish benchmarks of energy consumption for all energy intensive sectors. o Disseminate information, support training and reward best practices with national level

honours in energy efficiency and energy conservation. • Increase the gross efficiency in power generation from the current average of 30.5% to 34%. All

new plants should adopt technologies that improve their gross efficiency from the prevailing 36% to at least 38-40%.

• Require a least-cost planning approach to provide a level playing field, to Negawatts and Megawatts so that regulators permit the same return on the investment needed to save a watt as to supply an additional watt.

• Promote minimum life cycle cost purchase instead of minimum initial cost procurement by the Government and the public sector.

• Promote urban mass transport, energy efficient vehicles and freight movement by railways through scheduled freight trains with guaranteed, safe and timely deliveries. Enforce minimum fuel efficiency standards for all vehicles.

• Institute specialisations in energy efficiency/conservation in technical colleges and commence certification of such experts.

58. To promote energy efficiency and conservation we need to create an appropriate set of incentives through pricing and other policy measures. Barriers to the adoption of efficient technologies have to be removed and encouragement to develop and deploy more efficient technologies has to be provided. Public policy can set the pace for such development by offering attractive rewards and imposing biting penalties. Several new technologies in the natural gas industry have emerged in recent years as a result of this market trend. One such technology is combined-cycle power plants. Conventional power plants use coal and oil to produce the stream that turns the turbines, which produce power. Gas turbines can be directly powered by natural gas. Exhaust heat is captured and used to produce steam for additional power production. Combined-cycle technology can increase the efficiency of a fossil fuel from an average of 40%

to over 80%, thereby reducing emissions of atmospheric pollutants. TERI’s Technology Vision states that industry and transport sectors have the highest potential of energy savings as per Table 14 as under:

Table 14 Potential for Savings by Industry & Transport sector

Year/Sectors Industry Transport

2011 44% 41%

2021 42% 44%

2031 41% 47%

59. TERI, in its Report “ National Energy Map of India: Technology vision 2030 “, based on Figure 15 below shows:

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• Enhancing end-use efficiencies (intervention1, I-1)

• Adopting advanced coal- and gas-based power generating technologies (intervention 2, I-2).

• Enhancing the exploitation of renewable energy and nuclear energy resources (intervention 3, I-3).

• Enhancing efficiency in the transport sector by modal shifts (intervention 4, I-4).

Figure 15 Scope for energy conservation

60. The figure above shows the possibilities of reducing commercial energy requirements over the 30-year modelling time frame against the above-mentioned set of interventions. It is observed that from a level of 2123 Mtoe in 2031 in the BAU scenario, commercial energy requirements can be reduced significantly to 1503 Mtoe in the I-4 scenario. Thus, a reduction of about 620 Mtoe (more than twice the total commercial energy requirements in 2001) can be achieved by undertaking an integrated approach of adopting demand-side as well as supply-side alternatives in the energy sector. As indicated in Figure 15, the scope for energy reduction is the maximum from end ues efficiencies in the demand sectors as represented by the area between BAU and I-1. In 2031, each of the end-use sectors has a potential to reduce energy consumption between 15% and 25% of the energy use in the BAU scenario. The potential savings due to end-use efficiency alone increase from about 28 Mtoe in 2011 to 106 Mtoe in 2021, and 294 Mtoe in 2031 across all the sectors. The possibility of commercial energy saving due to advanced coal- and gas-based power generating technologies is represented by the area between I-1 and I-2 in Figure 15. The model results indicate that there is not much saving in energy between the advanced coal and gas based power generating technologies. Renewable energy based power generation is not a preferred option due to high upfront costs and low capacity utilisations of these technologies. However, these sources play a crucial role in providing decentralised power to remote areas to bring them clean and reliable energy. These schemes should be supported and large scale deployment would help bring down their costs.

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Development of Infrastructure

Long-Distance Natural Gas Pipelines

61. Building a long-distance natural gas pipeline in a financially sound way is a continuing challenge, especially so in India, where gas market is just being developed and other essential framework conditions for investment and regulation are not yet firmly elaborated. As India goes ahead with construction of the required infrastructure to expand its gas market, it needs to pay particular attention to its weak areas in downstream gas market development and investment framework.

62. Investments in gas sector as well as rate of such investments would critically depend upon the policies being adopted/to be adopted in the end use sectors. In this context, the power and fertilizer sectors would influence the pace and growth of gas demand in the country. In addition to the above de-regulation of these sectors, setting up of the regulatory framework and the scope of regulation would also influence the pattern and intensity of investments in development of gas infrastructure sector.

63. Immediate Steps Required for developing infrastructure & markets

• Proactively expand pipeline infrastructure from 6100 km to 11000 km by 2011-12 to meet the transmission target of 246 MMSCMD.

• Leverage existing capacities in trunk lines & regional networks; focus on optimization of pipeline capacity.

• Reduce project cost and execution time.

• Create spurlines for prospective City Gas Distribution projects; Immediate priority of rolling out city gas in more cities:

20 cities by 2008-09

54 cities by 2010-11

130 cities by 2012-13

• As future pipeline projects get allotted based on competitive bidding procedure by regulator, competitiveness in all players in market gets maintained in terms of cost efficiency, execution, timelines etc.

• Prioritize network to be developed for the industry clusters

• Development of one CNG corridor for transport sector on pilot basis

64. Immediate Priority for players in gas market

• Aggressively tie-up with producers/suppliers and linkage with upcoming sources to enhance transmission and marketing volumes

• Proactively expand pipeline infrastructure and strengthen project management competencies

• Aggressively pursue City gas opportunities in domestic cities

• Develop E&P as a self-sustainable business

• On globalization front, focus on areas having synergy with existing businesses

• Rationalization of transmission tariff for spur-lines

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Financing

65. Government endeavor, along with liberal fiscal regimes, will assume importance particularly for risk venture and information gathering campaign not only through NOCs but Private/Multinational companies as well. Such governmental support will assume importance particularly in short and medium terms. In the long term, market mechanism will take care of the funding as the industry will be largely market dominated hopefully within the next decade.

66. Hydrocarbon Vision India 2025 states that as long as there is shortage of gas in the country and the two major users of gas, namely fertiliser and power, work in a regulated cost plus environment, a competitive market determined price would be highly distorted. Such distortions would get further amplified by the prevailing regime of fertiliser subsidies & power sector subsidies and cross subsidies. In such a situation price of domestic gas and its allocation should be independently regulated on a cost plus basis including reasonable returns.

Technology Induction

67. Similar effort and policy support is required for technology induction, which will ultimately pay off in tapping the national endowment. Keeping in view the complexity and enormous requirement of capital, government is required to formulate a suitable mechanism for funding and identification/ creation of a financing agency and also supplement the efforts through appropriate incentives, subsidy and fiscal regime.

Create a Central Administration for Energy

68. India does not have a single central government entity in charge of energy policy and regulatory matters. Energy sector responsibilities are spread across several ministries, among them are the MOPNG, Ministry of Coal, Ministry of Power, Ministry of Non-Conventional Energy Sources, and Department of Atomic Energy etc. The allocation of policy and regulatory responsibilities among these ministries is not well-defined.

Development of National Gas Grid

69. Development of natural gas sector in India will require establishment of a robust nationwide gas grid connecting producing fields, LNG import terminals and trans-national gas pipelines to end users in major consumption centers spread across different states of India. The cost of such a project is estimated at around US$ 4 billion. Pipelines forming the gas-grid are shown in Figure 16.

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Figure 16: Existing/ Authorised/ Proposed Gas Pipelines25

TUTICORIN

KOCHI

COIMBATORE

MANGALORE

GOA

BANGALORECHENNAI

HALDIA

KAKINADA

DABHOL

MUMBAIPUNE

DAHEJ

VIJAIPUR

HYDERABAD VIZAG

JAGDISHPUR

KANJIRKKOD

KOTA PHULPUR

BHATINDA

KOLHAPUR

GADAG

GAYA

JAMNAGAR

HAZIRA

AURAIYA

BANGLADESH

NEPALDADRI

AIZAWL

IMPHAL

NANGAL

HVJ / DVPL / GREP NETWORK

DUPL / DPPL NETWORK

REGIONAL PIPELINES

DVPL/GREP UPGRADATION

CHAINSA – JHAJJAR –HISSAR PIPELINE

DADRI-BAWANA-NANGAL PIPELINE

JAGDISHPUR – HALDIA PIPELINE

DABHOL- BANGALORE PIPELINE

KOCHI-KANJIRRKOD-BANGALORE-MANGALORE PIPELINE

CENTRAL INDIA PIPELINE

OTHER PLAYERS PIPELINES AND PROPOSED PIPLINES

DHOLPURBHUTANJAISALMER

CHAINSA

HISSARDELHI

PARADIP

BARODA

AHM’D

KG Basin Network

Cauvery Basin Network

GANDHAR

NAGPUR

RANCHIBHOPALJHABUA

KHERA BOKARO

DEWASPITAMPUR

AGRA

MALANPUR

JHAJJAR

JAIPUR

ANTA

AONLA

Assam & Tripura

VIJAYAWADA

KANDLAMEHSANA

NORTH / SOUTH GUJARAT NETWORK

JABALPUR

RAIPUR

RAMAGUNDAM

BETIAH

BARAUNIPATNA

KAYAMKULAM

Ludhiana

BONGAIGOAN

GUWAHATI

WARDHA

JAMSHEDPURBHILAI

KALINGANAGAR

ROURKELA

ANGULCUTTACK

AMRAVATI

WASHIM

MALEGAONNASHIK

AURANGABAD

AKOLA

Amristar

JAMMU

NEEMRANA

KASHIPUR

PARWANOO

TALCHER

PROPOSED PIPELINES TO COVER MISSING AREAS

JODHPURAJMER

SRI GANGANAGAR

AHMEDNAGAR

DURGAPUR

IPI PIPELINE CONNETIVITY

VARANASI

• Existing cross country pipelines - 10270 km, • Additional pipelines required- 6000 km needing capex of Rs. 30000 Crores (USD 6 Billion)

Recently Built Infrastructure

70. Reliance Gas Transportation Infrastructure Limited, after testing its 1,440 km East-West pipeline from Kakinada in Andhra Pradesh, operationalised it in May 2009 and is expected to transmit 80MMSCMD by end of 2009. The East-West pipeline will be connected to the Hazira-Vijaipur-Jagdishpur, Dahej-Vijaipur, Dahej-Uran, Dabhol-Panvel, and with GSPL’s existing pipeline network.

71. GAIL has completed the 30 km, 18 inch pipeline which would connect the Kakinanda landfall point at Oduru, and transport natural gas from RIL’s D6 block to GAIL’s pipeline system in Andhra Pradesh. GAIL would also provide connectivity to RIL’s East-West pipeline at Maskal in Maharastra, from where gas would flow to Dabhol through the Dahej-Uran pipeline, and at Ankot in Gujarat flow through the Hazira-Vijaipur-Jagdishpur pipeline. It has also finalized 4-5 sites for creating compressed natural gas corridors along the national highways of Delhi, Agra, Lucknow, Nagapattinam, Chennai and Puducherry. Further, RIL has proposed/expressed to lay 2800 Km of pipelines and GSPCL which already has 1130 Km of pipelines proposes/expresses to lay 1000 Km. In addition to the existing infrastructure (ref table 3), upcoming additional infrastructure in the next few years is shown in the table 15 below:

25 Source: GAIL ,Infraline and Gas in India –India Infrastructure Research

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Table 15 Additional P/L Infrastructure26

Pipeline Project Capacity (MMSCMD)

Length (KM)

Cost Rs. Crores

Status/ Completion By Year

Upgradation of DVPL pipelines 24 to 60 610 2009( Phase I)

2011( Phase II)

Upgradation of GREP pipelines 20 to 62 505

5000

2009( Phase I)

2011( Phase II)

Upgradation of Vijaipur-Jagdishpur Pipeline 12 to 24 571 2000 2009-10

Dadri-Bawana-Nangal Pipeline ( Passing through UP, Delhi, Haryana & Punjab)

25 610 2500 2009( Upto Bawana) 2011 (Bawana to

Nangal)

Chainsa-Gurgaon- Jhajjar- Hissar Pipeline ( Passing through Haryana & Rjasthan)

25 310 1000 2009(Up to Chainsa) 2011( Up to Hissar)

Jagdishpur-Haldia Pipeline ( Passing through West Bengal,Jharkhand,Bihar & UP)

12 876 3300 2011

Dhabol-Bangalore Pipeline ( Passing through Maharashtra & Karnataka)

12 730 2500 2011

Kochi-Kanjirkkod-Mangalore / Bangalore 12 840 2500 2012

Total 176 5195 18800 By 2012

LNG Terminals

72. Proposed LNG terminals and associated facilities are expected to cost around US$ 3-4 billion. LNG procurement, downstream gas reticulation and construction of end-use facilities e.g. integrated combined-cycle power plants for base and intermediate loan would further require sizeable investments. Investment planned for upcoming LNG terminals is USD 1.5 billion.

Table 16 LNG Supply Outlook in XI Plan27

LNG Supply Source 2007-08 2008-09 2009-10 2010-11 2011-12

Dahej 5 5 7.5 10 10

Hazira 2.5 2.5 2.5 2.5 2.5

Dabhol 1.2 2.1 5 5 5

Kochi - - - 2.5 5

Mangalore - - - - 1.25

Total LNG Supply (MMTPA) 8.7 9.6 15 20 23.75

Total LNG Supply (MMSCMD) 30.45 33.6 52.5 70 83.13

26 GAIL: Gas Availability and Pricing GAIL’s Perspective (presentation 7.3.09) 27 Source: Infraline

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Issues and concerns

Price of LNG

73. The price at which LNG is available to Indian importers has been a contentious issue. Initially, when the price for LNG with RasGas was agreed at $2.53 per MMBtu, it was considered to be high at the time. The long term contract with Iran for LNG hit a roadblock essentially due to pricing issues. Some entities refused to tie up LNG as they considered the price to be too high given the crude oil scenario then. Now, despite the large demand-supply gap, there is no LNG supply available in the near term.

Demand Management

74. Commercial energy requirements can be reduced significantly by enhancing efficiency in transport sector. This can be achieved by undertaking an integrated approach of adopting demand-side as well as supply-side alternatives in the energy sector. The long term demand-supply projections show that substantial gas imports would be required to satisfy growth requirements in such a manner as to reduce dependence on crude oil as well as reduce the cost of our energy imports.

Figure 17 Delivered Electric Power in India by Fuel: 2006 & 203028

0.2

0.5

5.9

0.2

1.2

0.2

2

9.3

1.6

3.2

Liquids

Natural Gas

Coal

Nuclear

Renewables

Quadrillion Btu

2006 2030

Leverage India’s buying power to obtain global E&P projects

75. The country’s position as the 7th largest market for energy and India’s position as one of the world’s largest oil/LNG importer can be leveraged as the buyer’s power to obtain quality acreage/property for oil and gas abroad. The buying power of India and its good political relations in some of the countries and also the availability of large bank of human resources can be leveraged for creating strategic alliances.

28 EIA/IEO 2009

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Creation of strategic alliances in the hydrocarbon sector

76. The objective behind alliances at the company level as well as at the level of governments should be the acquisition of latest technology, which may not be available commercially for years to come and also to mobilize the necessary finances for developing the hydrocarbon industry.

Pricing

77. Over the past few years, Government of India has implemented a series of gas pricing reforms to encourage gas production. It now needs to adopt a new pricing approach aimed at encouraging consumption. This should involve gradual phasing out of price and volume restrictions applicable to APM gas supplies. Gas price decontrol would pave the way for buyers and sellers to negotiate prices on the basis of net-back market value of gas in relation to competing fuels.

78. End-use pricing is also of crucial importance for infrastructure development, because the revenues from sales to all categories of end-users will decide the viability of any natural gas project. The challenge is to find the right balance between what price the producer wishes to charge and what price the consumer is willing to pay. In addition, the pricing of the intermediate stages of the gas chain also needs careful consideration, and each link should be priced according to the risks involved. Outside of the gas value chain, gas pricing also needs to take into account the government’s environmental and social objectives. The government needs to reposition itself with regard to gas pricing.

79. An alternative for gas producers is to export gas, in which case the domestic gas price could be the net realisation of the domestic natural gas producer after investing and getting a return on the investment needed to make the natural gas tradable across borders in either a trans-border pipeline or through liquefaction and shipping facilities. For the foreseeable future, domestic gas supplies to both the fertiliser and the power sector, that together account for about 80% of the current gas usage, would need to be allocated based on availability and charged at regulated price that reflects cost of production and a reasonable profit.

80. India and China are expected to account for the strongest growth levels in the region, but to a large extent this will depend on the pricing of LNG in these markets. India’s tiered deregulation policy – which allows discounted rates for gas customers in the core sectors, electricity and fertilisers, has contributed significantly to pricing challenges since these sectors currently account for more than 70 percent of total gas use in the country. Shell’s Hazira re-gasification terminal in India has operated at below capacity since start-up and is finding its difficult to secure off-take commitments in the local market. Although there is adequate demand within the market, it is proving unresponsive at the price the company is offering. Shell’s prices for its LNG which are estimated to be least US$2.0/MMBtu higher than the discounted APM price of natural gas and about US$1.0/MMBtu higher than prices set at the terminal in Dahej.

81. Each market around the world has its own unique set of supply, demand, transportation and alternative fuel characteristics, which together set the competitive price for gas. Even within a single market, there may be different prices depending on the type of service customer requires. Market competition is always a more effective control on prices than any form of administered pricing. Governments need to intervene only where inter-fuel competition is unfair because pure market-based pricing does not take into account environmental impacts, or where there is a risk of monopoly power that could damage consumer interests. This could be done by a taxation policy in favour of gas, as in the case

45

of Japan and Korea, or in the form of the regulation of gas distribution activities. However, these objectives should be aimed to be covered over a period of time.

82. The cost-plus29 approach prices gas independently from alternative fuels. It encourages gas production, but does not take into account its end-use competitiveness and the final consumers’ interests. It could work in countries where gas resources are abundant and cheap to produce. But it does not encourage efficiency improvements and is ineffective in sending accurate market signals to investors to stimulate competition. This explains why the United States and Canada have both abandoned this approach.

83. The net-back30 approach links gas prices more closely to competing fuels. It guarantees the competitiveness of gas against competitive fuels, protects upstream and midstream investment and encourages fuel switching to gas. International experience demonstrates that net-back pricing is the best approach to gas market development, especially in a country without cheap and abundant gas reserves. The setting of prices for all parts of the gas chain should be left to market participants, GoI should restrict itself to protecting captive customers against unfair use of market power and to using taxation to reflect externalities and provide incentives for the development of a gas industry.

CNG as an alternative to LNG

84. Gas transportation in the form of CNG from countries within proximity of 500 km was found to be an effective solution for the strategically placed India by Mckinsey and per unit cost of CNG is less than that of LNG. This is because LNG infrastructure entails large investments in liquefaction and re-gasification, which in case of CNG is less for setting up compressors, though the cost of shipping CNG is higher than that of LNG, but overall CNG is cheaper . This option also provides greater flexibility in terms of sourcing the gas and it can be received at any point without the need for terminals.

Financing

85. As a rule of thumb, the State Development Planning Commission of Commission of China assumes that each additional one BCM of gas will cost about US$ 1 billion to develop. Applied to India this would

imply investment needs of more than US$ 350 billion till 2030 in India (Rs. 17.5 lakh crores).31 Keeping in view the complexity and enormous requirement of capital, government is required to formulate a suitable mechanism for funding and identification/ creation of a financing agency and also supplement the efforts through appropriate incentives and fiscal regime. In this regard, ODA/PPP/FDI are some of the other options.

Technology

86. Similar effort and policy support is required for technology induction, which will ultimately pay off in tapping the national endowment. In exploration, for deploying cutting edge technologies and meeting engineering needs, methods could include identifying commercial gas resources, improved gas-reservoir characterization, better stimulation techniques in gas bearing formations.

29 Well head price Plus Pipeline Mark-up cost Plus Local distribution mark up cost=sale price to consumer 30 Market value of gas based on price of consumer’s competing fuel Less Distributor charges Less Pipeline transportation charges=net back price at well-head 31 Pricewaterhouse Coopers

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The LNG option

87. LNG option should be examined closely especially in light of the large irreversible investments involved, high outflows of hard currency, and the likely impact of devaluation of the rupee on the landed price of LNG. LNG should at best constitute 20-30% of total gas imports into the country. Delivered price of gas would strongly influence the cost per unit of power generation and cost per tonne of urea production. The Government may, therefore, like to consider that major projects in the gas sector (LNG terminals, cross-country pipeline etc.) be granted status of "Infrastructure Sector Projects". Issues like unbundling of marketing and transport and third party access to pipelines need to be resolved at the earliest.

88. Based on the analysis of the model results, the key interventions can be delineated for growth of LNG market are as follows:

• Assist in Growth and Maturation of LNG Markets: o Increase spot and short term trading o Have a portfolio approach o Shorter- terms contracts o Encourage swaps

• Facilitate Market Oriented Transparency in the LNG Business: • Encourage regular forums and workshops amongst members, which encourage cooperation, an

exchange of views, and a better understanding of the direction of the market. • Consider and study the concept of strategic gas reserves as they become more dependent on fuel. • Expansion of Energy Trade related Infrastructure

• Huge increases in energy infrastructure, notably port facilities and pipelines, will be needed over the coming decades.

• Collection of country-specific gas supply –demand data, negotiations with prospective sellers and end-users, and understanding of market fundamentals are crucial in this process.

Way Forward 89. India is poised for take-off in an environment where the developed economies are on the path to stagnation and decay. The projected growth rate of the economy can only be achieved with adequate provisioning of infrastructure in which power will play a pre-dominant role. There needs to be a policy statement clearly enunciating its priorities relating to the development of fuels which are environmentally sustainable in the long run. This should address issues which have been discussed in the preceding paras thereby providing clean and green, competitively priced options to the end-users.

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[1] Asian Parliamentary Assembly Secretary – General: Preliminary Report on Asian Integrated Energy Market, 29 April 2008

[2] Asia Gas Partnership Summit; vision 2020

[3] BIMSTEC (Bay of Bengal Initiative for Multisectoral Technical & Economic Co- operation)- http//: en.wikipedia.org/wiki/BIMSTEC, www.binstecenrgycentre.org

[4] BP Statistics 2009

[5] Brookings: " Caspian Basin and Asian Energy Markets "(12th June 2009)

[6] Dr. U.D Choubey: Energy Security Challenges for India: Role of Natural Gas (Presentation-June 2006)

[7] CIA World Fact Book

[8] Dan Millison: Turkmenistan-Afghanistan-Pakistan-(India) Natural Gas Pipeline Project (Presentation - November 2006)

[9] Dasgupta P.: Business Standard – 11 May 2009.

[10] DGH - Report : Petroleum Exploration & Production Activities India 2007-08

[11] EIA - Annual Energy Outlook

[12] Fereidun Fesharaki, Kang Wu & Sara Banaszar Natural Gas: The Fuel of the future in Asia

[13] Fereidun Fesharaki, Kang Wu, Shahriar Fesharaki: Natural Gas Markets in APP Countries with a special focus on India and China: Regulatory Issues, Cross border Trade, and evolving LNG contract structures (Presentation-14 September 2007)

[14] GAIL: Background paper on Regulation on City Gas Distribution Network

[15] GAIL: Gas Availability and Pricing – GAIL’s perspective “ (Presentation - 7.3.09)

[16] GAIL: Gas Availability and Pricing (Presentation 7.3.09)

[17] Global Infra System (P) Ltd & Asia Consulting Group (P) Ltd. :South Asia Power & Energy Study.

[18] IFP- Innovation Energy Environment:Panoroma 2009 - Outlook for Natural Gas Industry

[19] India Infratructure Research: Gas in India 2008

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[21] Kohji Iwakami: Towards an integrated energy system in Asia: Trans Asian Energy System (TAES)

[22] KPMG India: The Oil & Gas Sector Overview in India- 2008

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[23] LNG Daily vol 6/ Number 92 Thursday, May 14,2009.

[24] LNG Daily, 30 April 2009 & 14 May 2009

[25] Martin Traschel: South Asian Energy Challenge: Implications for Pakistan

[26] Michael R Smith: The future for Asia- Pacific Oil & Gas (Energy Files)

[27] MOPNG:Energizing India for Sustainable Growth

[28] MOPNG:Petstats

[29] Munawar Baseer Ahmed: Pakistan -Energising Asian Energy Corridor February 2007

[30] Philippe Le Billion and Fouad El Khatib: “From Free Oil to “Freedom Oil”? Terrorism, War and US Geopolitics in Persian Gulf

[31] Planning Commission: Integrated Energy Policy- Report of the Expert Committee

[32] Prasad PMS, Business Standard, April 28, 2009

[33] Pricewaterhouse Coopers : India Union Budget 2009-Implications on Oil & Gas Industry

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[39] Sharma R.P. :Indian Gas Scenario (Presentation - 25 September 2008)

[40] Sibal V.K. : Indian Gas Scenario (Presentation 25 September 2008)

[41] Talmiz Ahmad: Iran-Pakistan-India Gas Pipeline

[42] TERI:National Energy Map of India: Technology Vision 2030

[43] Tetsuo Morikawa: Summary of “ Natural Gas Market in Asia: Measures for Stabilization” (IEEJ: August 2008)

[44] Vivek Chandra: Fundamentals of Natural Gas- An International Perspective

[45] World Bank: Global Economic Prospects- Commodities at Cross Roads 2009

[46] www.defmin.fi/files/1154: Abstract from the paper “ Predictions regarding International actors upto the year 2030” (kansaninvalisen jarjestelman toimijoiden ennakointia vuoteen 2030)

[47] Yasuo Tanabe,V.P. Research Institute of Economy, Trade & Industry, Japan: Asian Economic Integration and Energy Cooperation

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