Rr07.23 India Natural Gas

8/2/2019 Rr07.23 India Natural Gas

1/93

chris rumley, marina kim, allison ball,and robert curtotti

december 2007

abare research report 07. 23

abare

innovationineconomics

natural gas in india

prospects for LNG imports

abareconomics.com


2/93

ii

Commonwealth of Australia 2007

This work is copyright. The Copyright Act 1968 permits fair dealing for study,research, news reporting, criticism or review. Selected passages, tables ordiagrams may be reproduced for such purposes provided acknowledgment of the

source is included. Major extracts or the entire document may not be reproducedby any process without the written permission of the Executive Director, ABARE.

ISSN 1037-8286ISBN 978-1-921448-07-2

Rumley, C., Kim, M., Ball, A. and Curtotti, R. 2007, Natural Gas in India Prospects for LNG Imports, ABARE Research Report 07.23 Prepared for theAustralian Government Department of Resources, Energy and Tourism, Canberra,December.

Australian Bureau of Agricultural and Resource EconomicsGPO Box 1563 Canberra 2601

Telephone +61 2 6272 2000 Facsimile +61 2 6272 2001Internet abareconomics.com

ABARE is a professionally independent government economic research agency.

ABARE project 3126


3/93

iii

natural gas in india abare research report 07.23

foreword

Consumption of natural gas in India has the potential to rise significantly, on thebasis of robust economic growth, an expanding population and recent largedomestic gas discoveries. However, realising this potential will depend onaddressing several issues, including further deregulation of the gas sector, reformsin gas pricing and in key consumer markets, and the development of further gas

infrastructure. These issues are creating significant uncertainties about the prospectsfor future LNG imports, which play a small but growing role in the domestic gasmarket.

The objective in this study is to assess the potential growth in natural gas demandin India over the period to 2025 and to consider how such demand might bemet. A number of gas supply options are considered, including the delivery ofgas from existing and recently discovered domestic gas sources, the commence-ment of pipeline gas imports from Iran, and increased imports of LNG. The studyconcludes that LNG imports are likely to rise, particularly from the middle of thenext decade, but that the share of LNG will be affected by the rate at which othergas supply options are developed.

The study also considers whether India will be able to secure the additional LNGit requires. Existing and planned LNG terminal capacity is expected to be sufficientto meet Indias gas requirements over the medium to longer term. However, compe-tition from major LNG consuming countries that are willing to pay high prices maybe a constraint to Indias ability to secure long term LNG supplies.

Phillip GlydeExecutive Director

December 2007


4/93

iv


acknowledgments

This study was funded by the Australian Government Department of Resources,Energy and Tourism, with assistance from BHP Billiton Petroleum Pty Ltd and SantosLtd.

The authors wish to thank several colleagues for their valuable contributions

throughout the course of the study: in ABARE, Karen Schneider, Terry Sheales,Jane Melanie, Paul Ross, Leanna Tedesco and Andrew Schultz; in the Departmentof Resources, Energy and Tourism, Geoff Stone and Willie Senanayake; in theAustralian High Commission, New Delhi, Victoria Walker.

In addition, the authors gratefully acknowledge the information, insights andcomments on a draft report that were provided by BHP Billiton Petroleum Pty Ltd,Chevron Australia Pty Ltd, ExxonMobil Australia Pty Ltd, ConocoPhillips AustraliaPty Ltd, North West Shelf Australia LNG Pty Ltd, Santos Ltd, Shell Development(Australia) Pty Ltd and Woodside Energy Ltd.

Many organisations in India also provided valuable information and insights. The

authors are grateful for contributions from: The Energy and Resources Institute (TERI),ExxonMobil Gas (India) Private Limited, GAIL (India) Limited, Indian Council ofWorld Affairs, India Energy Forum, Ministry of Petroleum and Natural Gas, NationalThermal Power Corporation (NTPC) Limited, Observer Research Foundation, Petro-leum and Natural Gas Regulatory Board, Petronet LNG Limited, Planning Commis-sion of India, PricewaterhouseCoopers Pvt Ltd and Reliance Industries Limited (RIL) .

conversions for natural gas and LNG

billion billion million million trillioncubic metres cubic feet tonnes oil tonnes British

NG NG equivalent LNG thermal units

1 billion cubic metres NG 1.00 35.30 0.90 0.73 36.00

1 billion cubic feet NG 0.028 1.00 0.026 0.021 1.03

1 million tonnes oil equivalent 1.111 39.20 1.00 0.805 40.40

1 million tonnes LNG 1.38 48.70 1.23 1.00 52.00

1 trillion British thermal units 0.028 0.98 0.025 0.02 1.00

Source: BP (2007).


5/93

v


contentssummary 1

1 introduction 8

2 energy and natural gas in India 11primary energy consumption 11

natural gas consumption 18natural gas supply 23

gas pricing 33

3 factors affecting Indias future naturalgas demand 38gas market reform 38

end use market reforms 40

security of energy supply 45

environmental issues 46

4 projecting natural gas demand in India 48analytical framework 48

key assumptions 49

outlook for energy consumption, by fuel 52

outlook for natural gas demand, by sector 58

5 natural gas supply considerations 61domestic natural gas production 61

cross border pipelines 63

existing LNG import contracts 67

natural gas supply and demand balance 67

LNG import infrastructure 70international LNG outlook 71

prospects for Australian LNG 75

6 conclusions 79

references 81


6/93

vi


boxes1 recent economic performance in India 12

2 household consumption of noncommercial fuels in India 21

3 structure of the natural gas sector in India 27

4 evolution of gas pricing in India 34

5 alternative projections for Indias energy outlook to 2025 53

6 coal seam methane potential in India 63

7 international pipelines and LNG 65

fi guresA natural gas consumption, by sector, 2005 India 2

B natural gas consumption, by sector, reference case India 4

C potential gas demand and supply India 6

1 total primary energy consumption India 11

2 international comparison of primary energyconsumption, 2005 11

3 GDP and per person income India 12

4 distribution of Indias population, 2005 12

5 foreign direct investment in India 13

6 structure of the Indian economy 137 international comparison of energy intensity, 2005 14

8 international comparison of energy consumption perperson, 2005 15

9 fuel mix in primary energy consumption India 16

10 electricit y output, by fuel India 17

11 annual growth in electricity generation, by fuel,19902005 India 18

12 natural gas consumption, by end use India 19

13 energy consumption in key sectors, by fuel India 20

14 energy consumption in the residential sector, by fuel India 21

15 natural gas supply India 2516 LNG imports, by source India 26

17 natural gas sector structure India 27

18 gas pricing reform direction India 35


7/93

vii


19 trends in population growth India 50

20 assumed fuel mix in electricit y generation, reference case India 51

21 fuel mix in electricity generation, 2025 India 53

22 comparison of energy consumption growth projections,200525 India 54

23 comparison of natural gas demand projections,2025 India 54

24 total primary energy consumption, by fuel India 56

25 projected average annual growth in energy consumption,200525 India 56

26 fuel mix in total primary energy consumption India 57

27 projected electricity generation, by fuel India 58

28 natural gas consumption, by sector India 59

29 distribution of population between urban and rural areas India 60

30 natural gas production scenarios India 62

31 potential gas demand and supply India 68

32 potential LNG imports India 69

33 world LNG trade 71

34 Australian gas production and LNG exports 7735 Australian LNG exports, by destination 77

36 outlook for LNG capacity in Australia 77

maps1 natural gas reserves India 24

2 natural gas infrastructure India 33

3 proposed international pipeline routes serving India 65

4 Australias natural gas reserves and infrastructure 76


8/93

viii


tablesA Indias total primary energy consumption, 2005 2

B Indias LNG imports, by source, 2006 4

C potential gas demand and supply balance India 7

1 major energy and economic indicators India 15

2 total primary energy consumption India 16

3 installed electricity generation capacity, 2004-05 India 17

4 natural gas consumption, by end use India 18

5 city gas consumer base India 226 distribution and consumption of compressed natural gas

in India, 2005-06 23

7 natural gas production India 25

8 existing LNG terminals India 29

9 changes in natural gas prices, by sector India 36

10 regions and sectors in GTEM in this study 49

11 GDP and population assumptions India 50

12 growth in Indias GDP and primary energy consumption 55

13 potential international gas pipeline projects India 67

14 potential gas demand and supply balance India 68

15 LNG terminals in India 70

16 existing LNG plants Asia Pacific market 72

17 LNG plants under construction and planned Asia Pacific market 74


9/93

1


summary

Since the discovery of large gas reserves off the west coast of India in the1970s, natural gas has played an increasingly important role in meetingIndias growing energy demand. This trend is expected to continue, withforecast strong growth in natural gas demand over the period to 2025. Untilrecently, India relied on state controlled domestic production to meet its natural

gas requirements. However, with mature domestic gas fields facing a declinein production, India is embracing the need for increased private sector partici-pation in the gas supply chain.

Following the commissioning of Indias first LNG (liquefied natural gas) importterminal in 2004, LNG imports rose to 6.2 million tonnes in 2006, just under aquarter of Indias natural gas consumption. LNG imports will continue to playan important role in supplying Indias demand for natural gas.

The outlook is for increasing natural gas demand in India, given an expectedcombination of high economic growth, an expanding population and recentlarge domestic gas finds. However, realising this potential depends onaddressing several major issues, including further deregulation of the gas

sector, reforms in gas pricing and key consumer markets, such as electricitygeneration and fertiliser production, and the development of a national gasgrid linking gas sources with geographically dispersed demand centres. Theseissues, particularly uncertainties about the prospects for domestic gas produc-tion and pricing, are creating some uncertainty over the outlook for LNGimports and future LNG procurement.

While there are ambitious LNG import plans in India, this is not likely totranslate into a significant increase in LNG imports in the short to medium term.Pipeline natural gas imports could also provide an additional source of gassupply over the longer term, although these projects face significant obstacles.

energy and natural gas consumption in India Energy consumption in India has increased by almost 5 per cent a year since

1990, driven by rapid growth in economic output and population, and risingpersonal incomes. Total primary energy consumption (excluding noncommer-cial fuels, referred to as combustible renewables and waste) reached 379


10/93

2


million tonnes of oil equivalent(Mtoe) in 2005, compared with186 million tonnes of oil equivalentin 1990. Coal is the main sourceof energy in India, accounting for55 per cent of primary energyconsumption in 2005, followed byoil, natural gas, renewable energyand nuclear power (table A).

Natural gas use in India has grownat an average rate of more than 7per cent a year since 1990, albeitfrom a small base. It accountedfor 8 per cent of primary energyconsumption in 2005. This rapid growth has been driven by government poli-cies to encourage natural gas use, including gas allocations to priority sectorssuch as electricity and fertilisers at subsidised prices, and expansions in gasinfrastructure. In 2005, natural gas consumption in India was 32 billion cubicmetres (equivalent to 23.4 million tonnes of LNG). Consumption, however, hasbeen constrained by natural gas availability and, as such, does not reflect thetrue potential for natural gas demand in the country.

The electricity and fertiliser sectors are the main consumers of natural gas inIndia, partly subsidised by the government. These sectors, including captiveelectricity generation, accounted for 70 per cent of Indias natural gasconsumption in 2005 (figureA; IEA 2007a).

The use of LNG has beengrowing rapidly since itsintroduction to the Indian gasmarket in 2004. India currentlyhas two operational LNGterminals on the west coast Dahej and Hazira with

a combined capacity of 8.9million tonnes. The Dahejterminal is supplied from RasGas in Qatar under a longterm contract, supplementedby spot cargoes from other

table A Indias total primary energyconsumption, 2005

consumption share

Mtoe %

coal 208.0 54.9oil 128.6 33.9natural gas 28.8 7.6nuclear 4.5 1.2renewables a 9.1 2.4

total 379.0 100.0a Includes hydro/solar/wind/other; excludes combus-tible renewables and waste.Source: IEA (2007a).

other 3%residential 2%

otherindustries 25%

fertiliser 26%

electricity 44%

2005

natural gas consumption, by sectorfig AIndia


11/93

3


sources, while the Hazira terminal imports spot LNG cargoes as required(table B). Indias third LNG terminal, Dabhol in the south west, with an annualcapacity of 5 million tonnes, is expected to be commissioned toward 2009.

factors affecting Indias future natural gas demand

A range of factors will affect the extent and profile of Indias future natural gasdemand, including the development of a national gas pipeline network andthe implementation of energy market and broader economic reforms. One of

the most important factors will be the continuing deregulation of the domesticgas market. The government has made significant progress in developing aregulatory framework to facilitate open access to the pipeline network andto promote public and private investment in gas pipeline infrastructure. Theestablishment of an independent regulator to monitor pipeline access and gastransport tariffs is expected to facilitate the development of a market basedregime in Indias natural gas sector.

The continuing transition from state administered, subsidised gas pricingtoward market pricing is also a key factor in improving the overall availabilityof natural gas in India and will affect gas demand over the outlook period.The complex mix of administered and market gas prices that vary acrossconsumer segments reduces incentive to invest in the expansion of domestic

gas production and LNG imports. The reform processes in key end use markets, such as electricity and fertilisers,

are also likely to have a direct impact on future gas demand in India. Recentpolicy initiatives in the fertiliser industry seek to convert the majority of nitrog-enous fertiliser production in India to natural gas. Electricity market reform,including government plans for substantial generation capacity augmentation,is likely to provide incentives for new investment in gas fired power plants. Theextent of natural gas use in electricity generation, as well as in fertiliser produc-tion, will depend to a large extent on gas availability and pricing.

projecting natural gas demand in India

The analysis of the potential demand for natural gas in India over the periodto 2025 presented in this report is based on results from ABAREs globaltrade and environment model (GTEM). The projections of energy demandare based on an assumption that Indias GDP will grow at an average annualrate of 6.5 per cent over the period 200525 in the reference case. In an


12/93

4


alternative high growth scenario, GDP growthis assumed to average 9.0 per cent a year overthe same period, supported by higher levels ofeconomic reform and productivity growth thanin the reference case. This higher rate of GDPgrowth is consistent with the upper range ofIndian Government projections.

The projections are also based on assumptionsrelating to the fuel mix in electricity generation.

In India there is considerable uncertainty aboutthe expected fuel mix over the period to 2025.This is reflected in the wide range of alterna-tive projections from Indian and internationalsources. In this study, the share of natural gasin electricity generation is assumed to be 7 percent in 2025, around 2 percentage points lower than in 2005. This reflects anassumed continued expansion in nuclear and coal fired electricity generationover the projection period (IEA 2006a).

On the basis of these assumptions, total primary energy consumption in Indiais projected to expand by 4 per cent a year to reach 837 million tonnes of oilequivalent in 2025. Natural gas consumption is projected to grow by 5 per

cent a year between 2005 and 2025 to reach 74 million tonnes of oil equiva-lent in the reference case in 2025 (equivalent to 82 billion cubic metres and 60million tonnes of LNG) (figureB). In the high growth scenario,gas consumption is projectedto reach 89 million tonnesof oil equivalent in 2025(equivalent to 99 billion cubicmetres and 72 million tonnesof LNG). Driving this growthwill be increases in demandin the fertilisers and otherindustrial sectors. This growth,however, will be dependenton the development of naturalgas infrastructure, includingtransmission networks, and newsources of supply.

table B Indias LNGimports, by source, 2006

imports share

Mt %

Qatar 5.19 84.3Egypt 0.42 6.8Oman 0.19 3.1Australia 0.12 1.9Abu Dhabi 0.06 1.0Malaysia 0.06 1.0Algeria 0.06 1.0Trinidad 0.06 1.0

total 6.16 100.0

Source: FGE (2007a).

20

10

30

bm3

India

200520152025

residentialotherindustry

fertiliserelectricity

natural gas consumption, by sector,reference case

fig B


13/93

5


natural gas supply considerations

India has three options to meet the anticipated growth in natural gas demandover the period to 2025 increase domestic gas production; increase LNGimports; and import natural gas via pipeline.

It is assumed that there is a continued decline in production from existingmature domestic gas fields. However, the rate of this decline is expected to beslowed by the production of gas from recently discovered fields in the offshoreKrishna Godavari (KG) basin from late 2008. While this and other newnatural gas discoveries have the potential to expand domestic output signifi -cantly, the production timetables of these fields remain highly uncertain.

Over the longer term, there is potential to develop pipeline natural gasimports. Several international pipelines have been under discussion in Indiafor many years, including from Iran, Turkmenistan and Myanmar. Only theIranPakistanIndia pipeline project is considered to have potential as asource of supply to India over the period to 2025. Given the uncertaintiesthat surround the supply of pipeline gas from Iran, a possible startup date isassumed to be af ter 2020.

Indias decision to import pipeline gas will depend significantly on geopoliticaland energy security issues but the competitiveness of pipeline gas with othersources of gas will also play an important role. Distance and volume are

key variables that affect the unit cost of transporting LNG and pipeline gas.While transporting natural gas via pipeline can be more cost effective thantransporting LNG in some cases, the political risks associated with transitingthrough other countries can increase the costs of pipeline projects. In contrast,the flexibility of LNG supply can largely avoid geopolitical sensitivities andmay address some of the energy security concerns of gas importing countries.

indicative gas supply and demand balance

A potential natural gas supply and demand balance for India is provided infigure C and table C, based on demand projections and current and expectedgas supply. This balance assumes that production from gas fields in the KG basin

would add supply of around 14.6 billion cubic metres a year to existing domesticproduction, starting from late 2008. Production from fields operational as at June2007 is assumed to gradually decline over the outlook period. It is also assumedthat the supply of LNG under long term contract with Qatar reaches 7.5 milliontonnes a year (10.4 billion cubic metres) from 2009 and that an internationalpipeline from Iran could add 37 billion cubic metres a year after 2020.


14/93

6


Based on these assumptions, it is expected that around 4.0 billion cubicmetres (2.9 million tonnes) of additional gas will need to be procured by2015. Additional gas requirements are projected to expand to 18.6 billioncubic metres (13.6 million tonnes) in 2020, and 31.6 billion cubic metres (23.1million tonnes) in 2025. Assuming that this additional gas will be sourced fromLNG, Indias total LNG imports are projected to reach 10.5 million tonnes in2015 and 21.1 million tonnes in 2020. The introduct ion of imported pipelinegas from Iran by 2025 could meet the requirement in that year. However, if thepipeline does not proceed, Indias total LNG imports would be 30.6 milliontonnes in 2025.

In the high growth scenario, additional gas requirements are projected to be6.9 billion cubic metres (5.1 million tonnes) in 2015 and 27.1 billion cubicmetres (19.8 million tonnes) in 2020. Significant additional gas is still requiredin 2025 even if the pipeline from Iran eventuates. This implies that Indiastotal LNG imports in the high growth scenario would be 12.6 million tonnes

in 2015 and 27.3 million tonnes in 2020. If the pipeline from Iran does notproceed by 2025, total LNG imports would be 42.7 million tonnes in 2025.

While existing and planned LNG terminal capacity should be adequate tomeet Indias LNG requirements over the medium to longer term, sourcing theadditional gas and uncertainty about domestic and imported gas timetables

60

40

20

80

60

40

20

80

bm3 bm3

India

reference case high growth case

2025Iran

pipeline

2025no Iranpipeline

202020152005 2025Iran

pipeline

2025no Iranpipeline

202020152005

pipeline gas from Iran

gas supply shortfall/additional LNGactual gas consumption

domestic gas supplycontracted LNG supply

potential gas demand and supplyfig C


15/93

7


are likely to provide a challenge for India in the coming years. It also suggeststhat new long term LNG supply contracts will be required to meet demand.

There are currently a number of LNG supply projects in the Asia Pacific region,both existing and planned, that have the capacity to meet Indias long termgas requirements. However, the current world LNG market is characterisedby a tight supplydemand situation. Hence, competition from major LNGimporting countries that are willing to pay high prices may be a constraint toIndia securing long term LNG supplies.

Over the period to 2025 there is the potential for Australia to become a more

significant supplier of LNG, including to India. A number of LNG projectscurrently under construction or in the planning stage could add substantialcapacity to Australias LNG export infrastructure. Other areas of potentialfuture cooperation between Australia and India include research and develop-ment and the transfer of technology (for example, in the development of coalseam methane resources) and investment in upstream and downstream gassectors in each country.

table C potential gas demand and supply balance India

2015 2020 2025 2015 2020 2025

billion m3 billion m3 billion m3 Mt Mt Mt

assumed natural gas supply

contracted LNG supply 10.4 10.4 10.4 7.5 7.5 7.5domestic gas supply 43.1 40.6 40.5 31.5 29.6 29.6pipeline gas from Iran 0 0 37.0 0 0 27.0total 53.4 51.0 87.8 39.0 37.2 64.1

projected natural gas consumption

reference case 57.4 69.5 82.4 41.9 50.8 60.2 high growth scenario 60.4 78.1 99.0 44.1 57.0 72.3

gas supply shortfall/possible additional LNG including pipeline gas from Iran

reference case 4.0 18.6 2.9 13.6 high growth scenario 6.9 27.1 11.2 5.1 19.8 8.2

gas supply shortfall/possible additional LNG excluding pipeline gas from Iran


total LNG imports excluding pipeline gas from Iran



16/93

8

introduction

Indias economy has undergone significant transformation since a range of struc-tural reforms were undertaken in the 1990s. These reforms included opening theeconomy to more international trade and investment, abolishing industrial licensing,floating the exchange rate, and increasing domestic and foreign private partici-pation in financial markets. The reform process has stimulated strong economic

growth in India, with gross domestic product (GDP) expanding at an average rateof 6.1 per cent a year between 1990 and 2006. As a result, India now has theworlds third largest economy (on a purchasing power parity basis).

The expansion in economic output, supported by a large and growing population,has led to a strong rise in energy consumption in India. Primary energy consump-tion (excluding combustible renewables and waste) has increased at an averageannual rate of nearly 5.0 per cent since 1990, and India now ranks fifth in theworld in terms of energy consumption. However, unlike many other countries inAsia that have had sustained periods of high economic growth, including China,much of Indias growth has been led by the services sector. This sector is lessenergy intensive than the industry sector and has moderated the rate of growth

in Indias energy requirements. Even so, because of Indias sheer size, the actualexpansion in energy consumption has been significant.

Indias energy mix is currently dominated by coal and oil, although the role ofnatural gas has been increasing. Natural gas consumption grew by 7.4 per centa year between 1990 and 2005 and accounted for nearly 8 per cent of primaryenergy consumption in 2005. The main natural gas consumers in India are theelectricity generation and fertiliser industries, which account for more than two-thirds of natural gas use. The consumption of natural gas in other industries and inhouseholds is relatively small, although growing rapidly.

While demand for natural gas in India is strong, actual consumption has beenconstrained by the availability of natural gas supplies. India has relatively largenatural gas reserves and prospects for further discoveries are good. However,the natural gas market has been dominated by government owned companiesselling gas at heavily subsidised prices, reducing incentives for private investmentin production facilities. Production of gas from mature domestic fields is dwindling,and has resulted in the Indian Government restricting gas supplies to mainly the

1


17/93

9


priority sectors. However, private sector participation in Indias gas market isincreasing, which should lead to an increase in domestic gas production. Gassold privately is based on market prices, creating a complex domestic gas pricingsystem.

Imports of liquefied natural gas (LNG) to India commenced in 2004, after morethan a decade of planning. In 2005, LNG imports accounted for around a fifth ofnatural gas consumption in India. Two LNG import terminals are operational onthe west coast of India, and a third is near completion, although imports are stillwell under capacity. To date, LNG imports have mainly been sourced from Qatar

under a long term contract. But with high natural gas demand, India has alsoimported a number of spot cargoes of LNG, including from Australia. In 2006,India accounted for 6 per cent of Asias total LNG imports.

Natural gas demand is expected to continue to grow strongly in India, fuelledmainly by continued economic and population growth and hence growingdemand for electricity. Continued switching to natural gas by fertiliser plants willalso be a key driver of demand, particularly given the high price of alternative oilbased feedstock. Realising this potential growth will depend on the availabilityand competitiveness of natural gas supplies, both domestic and imports, and therate of development of gas infrastructure. Other factors likely to affect the outlookfor natural gas demand include the pace of market oriented reforms in gas, elec-

tricity and fertiliser markets, including in gas pricing, and an increasing emphasison energy security and environmental concerns.

There are plans to expand LNG import infrastructure significantly in India, althoughthere is considerable uncertainty about the likely size of Indias future LNG market.The availability and competitiveness of other gas supplies and other fuels andthe development of infrastructure will govern the penetration of LNG in India, aswill developments in international LNG markets. In the next few years, the outlookfor the supplydemand balance in the international LNG market is expected tobecome increasingly tight, in which case India would need to be willing to payhigher prices to secure additional LNG cargoes. Over the longer term, there issufficient potential in the Middle East and the Asia Pacific, including in Australia, tosupply LNG to India, although many potential projects will require a commitmentto long term contracts from buyers to underpin their development.

Natural gas imports via pipeline could also provide an additional source of supplyto the Indian market over the longer term. Several options have been under consid-eration for some time, including from Iran. In addition to cost effectiveness, these


18/93

10


projects will have to overcome significant geopolitical issues and the associateddevelopment risks that have stalled their development to date.

The key objective in this study is to assess the potential growth in natural gasdemand in India and, in particular, the role that LNG could play in that market. Arange of projections of energy and natural gas demand in India are presented,reflecting the uncertainty surrounding prospects for Indias gas market. As well aseconomic and population growth, other factors that could influence the outlook fornatural gas in India are examined, including further reforms in gas and end usermarkets and environmental and energy security policies.

Potential sources of natural gas supply are also assessed, including the capacityto expand domestic gas production, options for natural gas imports by pipeline,and the scope for increasing LNG imports. An update of recent developments ininternational LNG markets, including the potential for Australia to supply LNG toIndia, is also provided.


19/93

11

energy and natural gas in India

primary energy consumption

Primary energy consumption inIndia has grown rapidly since

1990, at an average rate of 4.8per cent a year. (The focus in thisstudy is commercial fuels. Unlessotherwise noted, references toenergy consumption excludenoncommercial fuels, principallycombustible renewables andwaste.) In 2005, primary energyconsumption was 379 milliontonnes of oil equivalent, comparedwith 186 million tonnes of oilequivalent in 1990 (figure 1; IEA

2007a). India was the worldsfifth largest energy user in 2005,behind the United States, China,the Russian Federation and Japan(figure 2; IEA 2007a,b).

Driving the growth in energyconsumption has been Indiasincreasing population and strongeconomic performance. Togetherthese factors have underpinned risingpersonal incomes and increasingurbanisation. GDP in India grew atan average annual rate of 6.1 percent between 1990 and 2006,following the implementation ofreforms in the early 1990s (box 1).

2

300

100

200

Mtoe

1990 1995 20052000

renewablesnucleargas

oil

coal

total primary energy consumptionIndiafig 1

2000

1000

500

1500

Mtoe

AustraliaIndiaJapanRussianFederation

ChinaUnitedStates

international comparison ofprimary energy consumption, 2005

fig 2


20/93

12


box 1 recent economic performance in India

The Indian economy has grown strongly since the early 1990s. The strengthening ofeconomic activity has been underpinned by broad based structural reforms imple-mented in 1991. These included liberalisation of tax and tariff policies, the openingof fifteen industries that had previously been restricted to the public sector, liber-alisation of parts of the financial sector, and an easing of foreign direct investment

restrictions.

Average annual growth in the Indianeconomy between 1990 and 2004was around 5.7 per cent. In the threeyears since then, GDP growth hasincreased even further, to average8.9 per cent a year (figure 3; IMF2007a). Higher growth rates haveled to strong increases in per personincomes and significant falls in theproportion of the population livingin poverty. In addition, there hasbeen steady growth in the share

of the population living in urbanareas (figure 4; World Bank 2007).Indias inflation performance has alsoimproved, despite sustained capitalinflows and continued increases infuel prices.

Although India has had severalgovernments since the program ofreforms began, each government hasmade growth and reform a focus ofits economic agenda. This continuedcommitment to reform has encour-aged both Indian and foreign busi-nesses to substantially increase theirinvestment in the economy. From

4000

2000

1000

3000

US$PPP

1992 200720021997

%

2

4

6

8

annual GDP growth

GDPper

person

GDP and per person incomeIndia

fig 3

1000

600

400

200

800

million

rural populationurban population

1990 1995 20052000

distribution of Indias population,2005

fig 4

continued...


21/93

13


box 1 recent economic performance in India continued

1992-93 to 2006-07 investment spending grew from 1.8 trillion Indian rupees(US$42.8 billion) to 12.2 trillion Indian rupees (US$182.8 billion) (IMF 2007b).Although the share of foreign direct investment is still low relative to the size of Indiaseconomy, in real terms it has increased by around 27 per cent a year to reach morethan US$15.7 billion in 2006-07 (figure 5; Ministry of Commerce and Industry 2007).

The services sector has been the

main driver of economic growth inIndia, accounting for more than half ofeconomic output in 2005 and contrib-uting almost three-quarters to overallgrowth over the period 19902005(figure 6; ADB 2006). The growth inthe services sector is mainly due to itslower reliance on Indias weak infra-structure (for example, electricity andtransport) and its ability to benefit fromtechnological changes, particularly IT.

After an initial decline in the post-reform period, the industry sector hasbegun a gradual recovery, supportedby growth in both domestic andexport demand. The manufacturingsector, in particular, has benefitedfrom licensing and trade reforms.Although the share of agriculture inthe economy fell from 31 per centin 1990 to 19 per cent in 2005, thesector provides employment for morethan 60 per cent of the workforce.Lifting the growth rate in the agriculture

sector is one of the major challengesfaced by the Indian Government inensuring an ongoing reduction inpoverty.

2006-07

US$b

1994-95

1998-99

2006-07

2002-03

8

4

12

foreign direct investment in Indiafig 5

services41%

industry 28%

agriculture 31%

services54%

industry27%

agriculture19%

1990

2005

structure of the Indian economyfig 6


22/93

14


Indias energy intensity, or energy consumption per unit of economic output,declined by 15 per cent between 1990 and 2005, as the services sector, whichis less energy intensive than the industry sector, continued to expand its share of theeconomy (table 1). The current level of energy intensity in India, at 0.1 tonnes of oil

equivalent per US$1000, is low relative to other major energy consuming econo-mies (figure 7; IEA 2007a,b).

Energy consumption per personhas risen by more than 58 per centsince 1990 to 0.35 tonnes of oilequivalent in 2005. Indias popula-tion expanded by almost a thirdover the same period, to reach1.1 billion in 2005 as a result ofa historically high fertility rate anda declining mortality rate. Energyconsumption per person in India is

one of the lowest in the world andis significantly lower than in othermajor energy consuming countries(figure 8; IEA 2007a,b).

0.4

0.2

0.1

0.3

Australia IndiaJapanRussianFederation

ChinaUnitedStates

toe/2000

US$'000

international comparison of energyintensity, 2005

fig 7

box 1 recent economic performance in India continued

To sustain high rates of economic growth, India needs to undertake further structuralreforms, particularly those leading to improvement in the state of its physical infra-structure, notably roads, ports and electricity. Recognising that infrastructure deficitis a major barrier to Indias long term growth potential, the government is working toaddress regulatory and investment issues in order to attract foreign investment intothe sector. Another key challenge is to improve education and labour policies totake advantage of Indias imminent demographic dividend the expansion in the

working age population that has the potential to create growth in both the supply oflabour and domestic saving. Ongoing effort to continue fiscal consolidation, agricul-tural and trade liberalisation, and reforms in the areas of energy, environment, healthand welfare is also required.

Sources: Reserve Bank of India (2007); McKinsey and Co (2007).


23/93

15


fuel mix in primary energy consumption

Coal accounts for the largest shareof primary energy consumptionin India, at 55 per cent in 2005(figure 9; IEA 2007a). Strongeconomic growth has led to anincrease in coal use in the past fewyears. Demand for coal grew atan average rate of 4.6 per cent a

year from 1990 to 2005 reaching208 million tonnes of oil equivalentin that year (table 2). India haslarge reserves of coal, which is itsmost abundant domestic energysource. The country is the worldsthird largest coal producer andconsumer after China and theUnited States (MoC 2006).

Oil is also an important energy source in India, accounting for 34 per cent ofprimary energy consumption in 2005. Oil consumption grew at an average rateof 4.9 per cent a year between 1990 and 2005 and its share of primary energyconsumption remained largely unchanged. The combination of rising oil consump-tion and fairly stable production has left India increasingly dependent on imports.

table 1 major energy and economic indicators India

annual growth

1990 20001990 2000 2005 2000 2005

% %

energy consumption a Mtoe 186.3 310.7 379.0 5.2 4.1GDP b US$b 1 406.3 2 402.1 3 362.1 5.5 7.0

GDP per person b US$ 1 655.4 2 364.4 3071.5 3.6 5.4population million 849.5 1 015.9 1 094.6 1.8 1.5energy intensity a b toe/US$000 0.13 0.13 0.11 0.2 2.7energy consumption per person a toe 0.22 0.31 0.35 3.4 2.5

a Excludes combustible renewables and waste. b In 2000 US dollars on a purchasing power parity basis.Source: IEA (2007a).

6

4

2

Australia IndiaJapanRussianFederation

ChinaUnitedStates

toe

international comparison of energyconsumption per person, 2005

fig 8


24/93

16


Indias oil import dependency(imports as a share of consump-tion) increased from 48 per cent in1990 to 88 per cent in 2005 (IEA2007a), giving rise to concernsover energy security.

Indias consumption of natural gasrose at an average rate of 7.4 percent a year from 1990 to 2005,

reaching 29 million tonnes of oilequivalent (equivalent to 32 billioncubic metres of gas or 23 milliontonnes of LNG) in 2005. Thisrapid growth, albeit from a small

base, is a result of the increasing importance of natural gas as a fuel in electricitygeneration, and the production of fertiliser and steel. Until 2004 when LNG importscommenced, natural gas consumption was met entirely from domestic production.

Renewable energy, including hydropower, contributes only a small part of Indiasprimary energy consumption, at 2 per cent in 2005. Supportive governmentprograms providing subsidies and tax and financial incentives seek to increase the use

of renewable energy as a means of achieving a cleaner fuel mix and meeting energysecurity objectives. Although use of nuclear power has grown steadily, it accountedfor only 1 per cent of total primary energy consumption in 2005. The pace of nuclearpower development has been constrained by modest domestic uranium resources.

renewablesnucleargasoilcoal

%

1990 1995 20052000

40

20

80

60

fuel mix in primary energyconsumption India

fig 9

table 2 total primary energy consumption India

1990 2000 2005

Mtoe % Mtoe % Mtoe %coal 106.1 56.9 164.3 52.9 208.0 54.9oil 62.6 33.6 114.4 36.9 128.6 33.9

natural gas 9.8 5.3 21.0 6.8 28.8 7.6nuclear 1.6 0.9 4.4 1.4 4.5 1.2renewables a 6.2 3.3 6.5 2.1 9.1 2.4

total 186.3 100.0 310.7 100.0 379.0 100.0

a Includes hydro/solar/wind/other. Excludes combustible renewables and waste.Source: IEA (2007a).


25/93

17


electricity generation

Electricity consumption in India grew more rapidly than overall energy use in theperiod 19902005, at 6.1 per cent a year, to reach 699 terawatt hours in 2005.The largest electricity consumers in India are the industry sector, accounting fornearly half of electricity use in 2005, and the residential and services sectors at 22per cent and 20 per cent respectively(IEA 2007a). Electricity generationis dominated by state owned utilities,which account for almost 90 per cent

of Indias total installed capacity.However, the share of private sectorgenerators is growing, particularly incaptive or own use electricity genera-tion.

Electricity generated from coal is thelargest source of electricity genera-tion in India, at 69 per cent in 2005(figure 10; IEA 2007a). Current coalfired power plant capacity repre-sents more than half of total electricity generation capacity in the country. Theshare of hydroelectricity, the next largest source of electricity generation in India,has declined from 25 per cent in 1990 to 14 per cent in 2005, as the growth inthermal generating capacity has outstripped that of hydro (table 3).

Natural gas represented nearly 9 percent of electricity generation in 2005,compared with 3 per cent in 1990 andwas the fastest growing thermal fuel(figure 11; IEA 2007a). It is being usedin gas turbine and combined cycle gaspower plants, which currently accountfor more than 10 per cent of Indias elec-tricity generation capacity. Oil fired elec-

tricity generation accounted for 4.5 percent, while nuclear power accounted for2.5 per cent in 2005. Electricity genera-tion from renewables other than hydroaccounted for around 1 per cent of totalgeneration in 2005.

table 3 installed electricitygeneration capacity, 2004-05 India

capacity shareGW %

coal 67.8 57.2oil 1.2 1.0

natural gas 11.9 10.1nuclear 2.8 2.3hydro 30.9 26.1other renewables 3.8 3.2

total 118.4 100.0

Source: CEA (2006a).

%

1990 20052000

40

20

80

60

hydro + otherrenewablesnucleargasoilcoal

electricity output, by fuelIndia

fig 10


26/93

18


natural gas consumption

As discussed above, natural gas consumption in India has grown steadily overrecent years, at an average rate of more than 7 per cent a year since 1990. In2005, consumption of natural gas by end use sectors was 32.0 billion cubic metres(equivalent to 23.4 million tonnes of LNG) , compared with 10.9 billion cubicmetres (7.9 million tonnes) in 1990 (table 4). These consumption levels do not,however, reflect the underlying demand for natural gas in India over this period asconsumption has been limited by natural gas supplies.

Until recently, all natural gas produced in India was subject to allocation by theMinistry of Petroleum and Natural Gas, on the recommendation of the intermin-

isterial Gas Linkage Committee.Natural gas allocations werebased on sectoral priorities, gasavailability and potential gasmarkets in particular regions. Atpresent, a large proportion ofnatural gas continues to be allo-cated to priority consumers such asthe electricity generation and ferti-

liser sectors, while the remainingquantity is traded directly betweenbuyers and sellers.

30 40% 10 20

other renewables

natural gas

oil

nuclear

coal

hydro

annual growth in electricity generation,by fuel, 19902005 India

fig 11

table 4 natural gas consumption by enduse India

1990 2000 2005

billion m3 billion m3 billion m3

electricity 3.8 10.3 14.2fertiliser 5.9 9.8 8.3other industries 1.1 2.7 8.0residential 0.0 0.3 0.7

other 0.1 0.2 0.9

total 10.9 23.3 32.0 LNG equivalent

(million tonnes) 8.0 17.0 23.4

Source: IEA (2007a).


27/93

19


gas consumption, by sector

Electricity generation currently accounts for almost half of Indias natural gasconsumption. Natural gas use by electricity utilities grew at an average rate ofover 9 per cent a year, from 3.8 billion cubic metres in 1990 to 14.2 billion cubicmetres in 2005 (table 4 and figure 12; IEA 2007a).

Existing gas fired power plants in India require more than 19 billion cubic metres ofnatural gas a year to operate at full capacity. However, as a result of difficulties insecuring natural gas supply, gas fired power plants have been running at less than

full capacity, switching to higher cost liquid fuels such as naphtha where feasible.

The fertiliser sector is the second largest consumer of natural gas in India, accountingfor around a quarter of natural gas consumption in 2005. Demand for natural gas fromthe fertiliser industry grew at an average annual rate of 2 per cent from 1990, to reach8.3 billion cubic metres in 2005 (IEA 2007a). The expansion in the use of natural gasby the fertiliser industry reflects the high priority placed by the government on boostingagricultural production through greater fertiliser use.

India currently produces nitrogenous (mainly urea) and phosphatic fertilisers, withnatural gas used as a feedstock in urea production. During 2004-05, natural gasbased fertiliser production accounted for 66 per cent of total fertiliser production.Production based on naphtha, fuel oil and low sulfur heavy stock (a residual fuelprocessed from crude oil that can be used in the place of fuel oil) constituted theremaining 34 per cent (MoPNG2006a). Gas prices for bothelectricity generation and fertiliserproduction are partly subsidised bythe government.

Other industrial users, including ironand steel, glass, ceramic and elec-tronics manufacturers are rapidlyincreasing their share of natural gasconsumption. Gas consumption in

the industry sector has grown at anaverage rate of 14 per cent a year,from 1.1 billion cubic metres in 1990to 8.0 billion cubic metres in 2005.There has been substitution away

30

10

20

25

5

15

billionm3

1990 1995 20052000

other

other industry

fertiliser

electricity

residential

natural gas consumption, by enduse India

fig 12


28/93

20


from coal in this sector toward electricity and, to a lesser extent, natural gas (figure13; IEA 2007a).

While small in absolute terms, natural gas use in the residential sector has grownstrongly, at an average rate of 20 per cent a year since 1990. Household naturalgas consumption was virtually nonexistent in 1990, but rose to more than 0.7billion cubic metres in 2005. Rapid economic growth and rising incomes haveled to a shift in consumer preferences from coal and noncommercial fuels to moreconvenient and clean fuels such as petroleum products and electricity (see box 2).Natural gas constitutes a marginal share in the residential fuel mix, although use

of natural gas has been growing rapidly in recent years following an expansion ingas supply infrastructure.

city gas

Natural gas is supplied to residential, commercial and industrial consumers viaunderground pipeline distribution networks within metropolitan areas. Residentialconsumers use city gas for cooking, water and space heating, and air condi-tioning, while commercial and industrial consumers also use gas for steam raisingand power generation, dryers, furnaces and boilers.

City gas distribution systems in India are not well developed, primarily as a result

of limited supplies of natural gas and the allocation of gas to priority sectors suchas electricity generation and fertilisers. However, city gas distribution has been

%

1990 1990 20052005 20002000industrial residential

40

20

80

60

electricity

natural gaspetroleumproductscoal

energy consumption in key sectors, by fuelIndia

fig13


29/93

21


box 2 household consumption of noncommercial fuels in India

Indian households have traditionally relied on noncommercial or biomass fuels,including firewood, crop residue and animal waste, as a source of energy, primarilyfor cooking. In 2004, 69 per cent of the Indian population, or 740 million people,are estimated to have relied on biomass resources as their primary fuel for cooking,predominantly in rural households (IEA 2006a, 2007a).

If noncommercial fuels are included in the residential fuel mix, they constitute the largest

share of residential energy consumption in India, at 124 million tonnes of oil equiva-lent in 2005, or 79 per cent of energy consumption in the sector. While demand fornoncommercial fuels has traditionallybeen strong, their share has declinedfrom 84 per cent in 1990 (figure 14,which includes combustible renewablesand waste; IEA 2007a). However, thereare some uncertainties over the reliabilityof these data, given the informal natureof the sector.

In the past, the Indian Government has

initiated various measures to promotethe use of cleaner fuels in the residen-tial sector, primarily by subsidisingpetroleum products such as keroseneand liquefied petroleum gas. Thisapproach had limited success, particu-larly in lower income households, which still rely predominantly on noncommercialfuels. Abundant supplies of biomass fuels at zero cost, together with low afford-ability and poor delivery infrastructure for commercial fuels have inhibited and willcontinue to inhibit wider penetration of modern fuels in the residential sector.

Some reluctance to discontinue cooking with firewood may also reflect taste prefer-ences and the familiarity of cooking with traditional technologies. For instance,many wealthy households in India retain a wood stove for baking traditionalbreads. As incomes increase and fuel options widen, the fuel mix may change, butwood is unlikely to be entirely excluded (IEA 2006a).

%

1990 20052000

40

20

80

60

electricity

natural gaspetroleumproductscoal

combustiblerenewables

and waste

energy consumption in theresidential sector, by fuel India

fig14


30/93

22


growing rapidly over the past few years, from two cities Delhi and Mumbai in 2002-03 to ten cities in 2005-06 across the western, northern and southernregions of the country (MoPNG 2006a).

The largest city gas distribution networks currently operate in the cities of Mumbaiand Delhi, and the state of Gujarat (cities of Surat, Bharuch and Ankleshwar), withmore than 500 000 consumers in various sectors. City gas sales grew to almost2 billion cubic metres in 2005-06, compared with 1.6 billion cubic metres theprevious year, an increase of 22 per cent (table 5).

compressed natural gas

Compressed natural gas (CNG) is used as an automotive fuel in a limited numberof cities in India. The initially sluggish growth in CNG demand from the automotivesector has picked up as a result of recent directives by the Supreme Court of Indiato control air pollution caused by vehicular traffic through the promotion of CNGuse. The directives included expansion of CNG infrastructure, conversion of buses,taxis and auto-rickshaws from liquid fuel to CNG, and allocation of natural gas tothe transport sector in Delhi and Mumbai.

In 2003, the Supreme Court ordered the government to draw up plans for theintroduction of clean fuels such as CNG in eleven cities apart from Delhi andMumbai Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad, Sholapur,Surat, Lucknow, Kanpur, Agra and Pune (De 2004).

table 5 city gas consumer base in India

sales volume

industrial commercial residential total 2005-06 a 2004-05 a

no. no. no. no. million m3 million m3

MGL (Mumbai) 40 819 258 433 259 292 455 413IGL (Delhi) 47 215 46 727 46 989 445 405GGCL (Gujarat) 750 2 500 200 000 203 250 1 088 813

total 837 3 534 505 160 509 531 1 988 1 631

a Includes CNG. MGL = Mahanagar Gas Ltd; IGL = Indraprastha Gas Ltd; GGCL = Gujarat Gas Company Ltd.Sources: MGL (2007); IGL (2007); GGCL (2007).


31/93

23


CNG sales have grown recently at an average rate of 61 per cent a year, fromaround 69 million cubic metres in 2000-01 to around 690 million cubic metresin 2005-06 (MoPNG 2006a). In 2005-06, the CNG distribution networkincluded 281 stations in Delhi, Mumbai and Gujarat, with CNG powering morethan 300 000 vehicles in these cities (table 6; MoPNG 2006a).

natural gas supply

domestic gas reserves

Indias proved natural gas reserves have increased from 0.7 trillion cubic metres

in 1990 to more than 1 trillion cubic metres in 2006. This represents less than 1per cent of total proved gas reserves in the world. These reserves can sustain thecurrent level of production for around 34 years (BP 2007). Around 70 per cent ofIndias proved gas reserves are located in offshore basins (map 1; IEA 2007c).

The recent discovery of natural gas in the KrishnaGodavari basin and neigh-bouring areas, off the east coast of India, was the biggest gas find since theBombay High (now Mumbai High) discovery on Indias western offshore territoryin the 1970s. Reliance Industries Ltd (RIL) was the first to announce a gas discoveryin the KrishnaGodavari basin in 2002, followed by a number of discoveriesby Gujarat State Petroleum Corporation Ltd (GSPC) and Oil and Natural GasCorporation Ltd (ONGC). Estimated gas reserves of these combined discoveries,

yet to be certified, exceed 1.5 trillion cubic metres (IEA 2006a).

Substantial parts of Indias territory remain unexplored, suggesting potential forfurther growth in domestic gas reserves from future gas discoveries and more accu-rate estimation of existing reserves.

table 6 distribution and consumption of compressed natural gas in India, 2005-06

Delhi Mumbai Gujarat total

CNG stations units 146 120 15 281CNG vehicles units 106 483 170 003 33 403 309 889price Indian rupees/kg 18.00 20.1921.30 22.5523.41consumption billion m3 a year 0.47 0.29 na

na Not available.Source: MoPNG (2006a).


32/93

24


natural gas reserves Indiamap 1

gas and oil field

gas and oil basin

gas field

BANGLADESH

BHUTANNEPAL

Mumbaioffshore

KrishnaGodavari Basin


33/93

25


domestic gas production

Natural gas production in Indiaincreased at an average rateof 4 per cent a year, from 11.9billion cubic metres in 1990 to28.8 billion cubic metres in 2005(figure 15; IEA 2007d), althoughestimates of Indias gas productionvary between sources. Around

70 per cent of domestic produc-tion comes from offshore fields,operated by ONGC and privatesector companies/joint ventures.The Mumbai High fields accountfor almost three-quarters of Indiasoffshore gas production (table 7).

20

10

30

1990 200520001995

billion m3

imports

domestic gas production

natural gas supplyIndia

fig 15

table 7 natural gas production India

1990-91 2000-01 2004-05 2005-06 s

billion m3 billion m3 billion m3 billion m3

onshoreGujarat 1.70 3.15 3.71 3.83Assam/Nagaland 2.01 2.20 2.25 2.41Arunachal Pradesh 0.03 0.03 0.04 0.05Tripura 0.07 0.38 0.50 0.48Tamil Nadu 0.06 0.20 0.68 0.91Andhra Pradesh 0.05 1.60 1.71 1.66Rajasthan nil 0.16 0.21 0.24

total onshore 3.92 7.73 9.09 9.58

of whichOIL 1.52 1.86 2.01 2.27ONGC 2.40 5.56 5.66 5.75joint ventures/private nil 0.31 1.43 1.56

offshoreONGC (Mumbai High) 14.08 18.47 17.31 16.82joint ventures/private nil 3.29 5.36 5.80

total offshore 14.08 21.75 22.67 22.62

grand total 18.00 29.48 31.76 32.20

s Estimated. Note: These data for total gas production differ from IEA (2007a,d). For consistency, IEA data have been usedthroughout this report, however, these data have been included to provide state based data that are not available from the IE A.Source: MoPNG (2006a).


34/93

26


Until the opening up of the oil and gas sector to private participation in the late1990s, natural gas production in India was dominated by two national oil compa-nies, ONGC and OIL (box 3). These companies still account for the largest shareof domestic gas production, at 77 per cent in 2005-06. Private companies/jointventures, which make up the rest of Indias gas production, have increased theirshare rapidly from nil in 1990-91 to nearly 23 per cent in 2005-06.

Existing onshore and offshore gas fields operated by national oil companies arefacing declining production over the medium term, which places an increasedemphasis on identifying new sources of gas supply, either domestic or imported.

LNG imports

India has placed increasing focus on LNG imports as a potential means of meetingdomestic natural gas demand. LNG imports have risen steadily since the commis-sioning of Indias first LNG terminal at Dahej in the State of Gujarat in early 2004.From just under 2 million tonnes that year, LNG imports reached more than 6 milliontonnes in 2006. In the first half of 2007, LNG imports by India were 4.1 milliontonnes, a rise of more than 66 per cent compared with the first half of 2006.

While Qatar was the sole supplier of LNG to India in 2004 and remains thelargest LNG supplier at present, the range of suppliers is becoming increasingly

diverse. In 2005, India imported LNG from Australia and Oman. Additionalsupplies were sourced from Egypt,Trinidad and Tobago, Abu Dhabi,Malaysia and Algeria in 2006(figure 16; FGE 2007a).

At present, India has two opera-tional LNG import terminals Dahejand Hazira in Gujarat state,while a third terminal at Dabhol inthe state of Maharashtra is underconstruction (table 8). There areseveral other proposed LNGterminals in various stages of plan-ning. These are discussed further inchapter 5.

Mt

200620052004

6

4

2

Australia

otherEgypt

OmanQatar

LNGimport capacity

LNG imports, by source countryIndia

fig 16


35/93

27


box 3 structure of the natural gas sector in India

Until recently, the exploration and production of natural gas in India was undertakenexclusively by the state owned Oil and Natural Gas Corporation Ltd (ONGC) andOil India Ltd (OIL). As a result of government initiatives to encourage private sectorinvestment in exploration and production activities and to deregulate the oil and gassector, several private sector participants are also now engaged in exploration andproduction (figure 17; PETROTECH Society and PwC 2007; GAIL 2007).

Under the New Exploration Licensing Policy (NELP), operating since 1999, foreignand domestic private sector companies acquire exploration blocks and undertakeexploration activities either as joint venture consortiums with state owned companiesor independently.

Reliance Industries Ltd (RIL) is the largest oil and gas acreage holder among theprivate sector companies in the country. It is also Indias first private sector companyin the exploration and production sector to have discovered large natural gasreserves in the eastern offshore KrishnaGodavari basin in late 2002. Other

continued...

natural gas sector structureIndia

fig 17

production LNG suppliers transport city gas/CNG distribution

gas marketing

GAIL GAILONGC PLL (Dahej & Kochi) GGCL (Gujurat)

OIL GSP/NikoOIL Shell (Hazira) MGL (Mumbai)

GSPC ONGCBG India a RGPLL (Dabhol) b IGL (Delhi)

RIL AGCLGSPC ONGC(Mangalore) c BGL (Andhra Pradesh)

AGCL RILRIL RIL

ONGC IndianOilCairn Energy BG India

BPCLNiko Resources

BG India

OIL

Cairn Energya BG India is a partner in the Panna/Mukta and Tapti (PMT) joint venture with ONGC and RIL.b LNG terminal under construction. c LNG terminal planned.


36/93

28


box 3 structure of the natural gas sector in India continued

private sector participants in exploration and production activities include BG India,Niko Resources and Cairn Energy.

Pipeline gas transport is primarily undertaken by state owned GAIL (India) Ltd,formerly the Gas Authority of India Ltd. GAIL is Indias largest gas transmission andmarketing company, with a high pressure pipeline network of around 5600 kilome-tres. The largest pipeline network, HaziraVijaipurJagdishpur, with a total length

of more than 2800 kilometres, covers the states of Gujarat, Rajasthan, MadhyaPradesh, Uttar Pradesh, Haryana and Delhi in the north west of the country. The610 kilometre long DahejVijaipur pipeline owned by GAIL transports regasifiedLNG received at the Dahej terminal operated by Petronet LNG Ltd (PLL).

GAIL also has regional gas distribution grids, totalling around 1 800 kilometresof varying length and diameter in Ahmedabad, Assam, Baroda, Cauvery basin,Hazira, Krishna-Godavari basin, Mumbai, Rajasthan and Tripura. Other regionalnatural gas pipeline operators include Gujarat Gas Company Ltd (GGCL) andGujarat State Petronet Ltd (GSPL) in Gujarat, Assam Gas Company Ltd (AGCL)and Tripura Natural Gas Company Ltd (TNGCL) in Assam and Tripura respectively.Indraprastha Gas Ltd (IGL) in Delhi, Mahanagar Gas Ltd (MGL) in Mumbai andGGCL in Gujarat are also developing city gas distribution networks for the supplyof compressed natural gas (CNG) and city gas in their respective areas.

The gas produced by ONGC and part of the gas from joint venture consortiums,such as the Panna/Mukta and Tapti joint venture formed by BG India, ONGCand RIL, is marketed by GAIL. The gas produced by OIL is marketed by OIL itself,except in Rajasthan where GAIL markets its gas. Gas produced by Cairn Energyand Gujarat State Petroleum Corporation Ltd (GSPC) is being sold directly by therespective companies.

Companies operating Indias LNG import facilities include Petronet LNG Ltd (PLL)and Shell Hazira. PLL, the operator of Indias first LNG receiving and regasificationterminal at Dahej, Gujarat, is comprised of four state owned oil and gas companies

GAIL, ONGC, Indian Oil Corporation Ltd (IndianOil) and Bharat PetroleumCorporation Ltd (BPCL). The Hazira LNG Terminal and Port is partnered by ShellGas BV and Total Gaz Electricit Holdings France, representing two of the largestprivate LNG suppliers in the world.

continued...


37/93

29


Dahej terminal, Gujarat

Petronet LNG Ltd (PLL) was formed by the Indian Government as a joint ventureto set up LNG terminals and import LNG. GAIL, ONGC, Indian Oil CorporationLtd (IndianOil) and Bharat Petroleum Corporation Ltd (BPCL) are the key partnersand promoters of PLL. The terminal at Dahej has an annual design capacity of 6.5million tonnes of LNG. The company plans to expand the capacity to 10 milliontonnes of LNG a year by the end of the decade.

table 8 existing LNG terminals India

project commis- potential

location developer capacity supplier sioned expansionMt pa

Dahej, Petronet LNG Ltd (PLL) 6.5 a RasGas, Qatar; 2004 10 million tonnes aGujarat spot cargoes year by 2010

Hazira, Shell Hazira LNG 2.4 spot cargoes 2005 planned expansionGujarat Terminal and Port to 510 million

tonnes a yearDabhol, Ratnagiri Gas and 5.0 yet to be delayed by

Maharashtra Power Private Ltd finalised various issues,(RGPPL) expected 2009

a Debottlenecking increased capacity from 5 million tonnes a year to 6.5 million tonnes a year in early 2007.Sources: PLL (2007a); Shell (2007).

box 3 structure of the natural gas sector in India continued

Ratnagiri Gas and Power Private Ltd (RGPPL) is a special purpose organisation thathas been incorporated to take over assets and revive the former Dabhol PowerCompany project in the state of Maharashtra. The Dabhol project is an integratedfacility consisting of a gas fired power plant and an associated LNG receivingand regasification terminal. The RGPPL shareholders include GAIL, state ownedNational Thermal Power Corporation Ltd (NTPC), Maharashtra State ElectricityBoard Holding Co Ltd (MSEB) and Indian financial institutions.


38/93

30


PLL has a long term sale and purchase agreement with Ras Laffan LNG CompanyLtd (RasGas) for the phased supply of 7.5 million tonnes of LNG a year from Qatarto India, starting in 2004 and expiring in 2029. The first phase of 5 million tonnesof LNG a year is already in progress, while the second phase of an additional 2.5million tonnes of LNG a year is due to begin in 2009. GAIL, the sole transporter ofthe regasified LNG, has upgraded the HaziraVijaipurJagdishpur (HVJ) pipelinefrom Dahej to Vijaipur to synchronise with the LNG terminal.

GAIL, IndianOil and BPCL market the regasified LNG to their respective customers.The gas is sold to existing industrial customers requiring increased volumes of gas

or to those who currently use liquid fuels such as naphtha or fuel oil in their manu-facturing process. These customers are located in the states of Gujarat, Mahar-ashtra and along the HVJ pipeline.

Hazira terminal, Gujarat

The Hazira terminal in the state of Gujarat is partnered by Shell Gas BV and TotalGaz Electricit Holdings France. The first LNG shipment, sourced from Australia,arrived at the terminal in April 2005. The Hazira terminal has an annual capacityof 2.4 million tonnes, which can be increased to 510 million tonnes a year,if required. To date the Hazira LNG terminal has been operating well belowcapacity. Terminal partners source LNG from various projects around the world as

required, rather than on a long term contract basis.

The Hazira LNG terminal has access to existing pipeline infrastructure to transportand deliver gas to customers. A pipeline from Hazira to Mora has been laid toconnect to the Gujarat grid operated by Gujarat State Petronet Ltd (GSPL). Theterminal is also connected to GAILs pipeline network, and Shell and GAIL haveinitialled a broad framework of agreement to deliver gas from the Hazira terminalto GAILs customers.

Dabhol terminal, Maharashtra

Ratnagiri Gas and Power Private Ltd (RGPPL) was set up in 2005 under the IndianGovernments restructuring plan to take over the assets and revive the formerDabhol Power Company project. The project includes a 2184 megawatt gasfired power plant and a linked LNG import and regasification facility. The Dabholpower project was shut down in May 2001 following a power tariff disputebetween its initial promoter, Enron Power Corporation, and the only customer,Maharashtra State Electricity Board Holding Co Ltd (MSEB).


39/93

31


RGPPL is now a wholly owned Indian project with GAIL, National Thermal PowerCorporation Ltd (NTPC), MSEB and Indian financial institutions as the main share-holders. GAIL was given the mandate to revive the LNG facility, while NTPC wasto revive the associated power plant. The power plant resumed operation in April2006 using naphtha as fuel in the absence of gas supply. In July 2006 the powerplant was shut down again as a result of the high cost of naphtha supplies. Theplant restarted in late August 2007, using imported LNG (Platts 2007a).

The Dabhol LNG import terminal is planned to have an annual capacity of 5million tonnes of LNG, of which 2.1 million tonnes is required for the power plant,

with the remaining quantity available for supply to various consumers. Commis-sioning of the terminal has been delayed, primarily as a result of significant costoverruns, and is now expected to occur toward 2009 after the completion ofassociated facilities.

In the absence of long term supply contracts, RGPPL has entered into a mediumterm arrangement with PLL for the supply of spot LNG to be delivered at PLLsDahej terminal and transported to Dabhol via the recently completed DahejDabhol pipeline. PLL signed a short term LNG import agreement in mid-2007 withQatari supplier Rasgas to meet RGPPL requirements and is also sourcing cargoesfrom the spot market (Platts 2007b).

gas supply infrastructure

Indias natural gas pipeline network is made up of high pressure interstate transmis-sion pipelines, located mostly in the north western part of India, and regional gasdistribution grids in western, southern and eastern regions of the country. Indiacurrently does not have any major storage facilities for natural gas.

The total length of the gas transmission system is 6300 kilometres, of which morethan 5600 kilometres are operated by GAIL. Other gas pipeline operators includeGujarat Gas Company Ltd and Gujarat State Petronet Ltd in Gujarat, Assam GasCompany Ltd and Tripura Natural Gas Company Ltd in Assam and Tripura respec-tively. At the core of Indias transmission system is the HaziraVijaipurJagdishpur(HVJ) pipeline, which carries natural gas from the western offshore fields to endusers in Gujarat, Madhya Pradesh, Rajasthan, Uttar Pradesh, Haryana and Delhi.The HVJ pipeline is more than 2800 kilometres long, and has a design capacityof 12.2 billion cubic metres a year (equivalent to 8.9 million tonnes of LNG)(MoPNG 2006a; GAIL 2007).


40/93

32


GAIL also operates more than 1800 kilometres of regional gas pipelines inAhmedabad, Assam, Baroda, Cauvery basin, Hazira, KrishnaGodavari basin,Mumbai, Rajasthan and Tripura. These pipelines are smaller and vary in lengthfrom less than 1 kilometre up to 55 kilometres. In addition, there are a number ofcity gas distribution grids, which supply gas to households, commercial and indus-trial users, and the transport sector.

While GAIL is the largest gas transmission and distribution company in India, italso provides access to third parties for the transmission of natural gas. Currently,transmission tariffs on the interstate gas pipelines HVJ and DahejVijaipur are

regulated, while transmission tariffs on the regional gas pipelines and LPG pipe-lines are not regulated.

The total capacity of the transmission network is 51.1 billion cubic metres a year(equivalent to 37.3 million tonnes of LNG). The amount of gas transmitted via GAILspipeline network has increased by almost 30 per cent in recent years, from 22.5billion cubic metres in 2001-02 to 28.8 billion cubic metres in 2005-06 (GAIL2006).

GAIL has drawn up major plans for the expansion of the interstate gas transmissiongrid, which would allow expansion of Indias gas supply infrastructure and provideconnections between various gas sources and geographically dispersed markets

(map 2; GAIL 2006). The proposed grid would add a further 8400 kilometresof natural gas transmission pipelines in line with the emergence of gas sources onthe west and east coasts of the country, and require investment of approximatelyUS$5 billion. Several private companies also have plans to construct interstatepipelines, including in Andhra Pradesh, Maharashtra, Gujarat, Goa, MadhyaPradesh, Orissa, West Bengal and Tamil Nadu (MoPNG 2006a).

The integrated gas pipeline network would also enable the development of citygas distribution projects in the country by catering to a large number of cities andtowns falling in the catchment area of the existing and future pipeline networks.Recent developments in downstream petroleum and natural gas regulation, such asthe enactment of the Petroleum and Natural Gas Regulatory Board Act in 2006and the formulation of the Gas Pipeline Policy, are expected to provide furtherimpetus for the expansion of gas supply infrastructure in the country. The regulatoryframework in the natural gas sector is discussed further in the following chapter.


41/93

33


gas pricing

Until recently, all natural gas produced in India was subject to an administeredpricing mechanism, based on subsidised consumer prices. After an attempt tobring gas prices to parity with import prices of alternative fuels in the late 1990sproved unsuccessful, the Indian Government has set gas prices on an ad hoc basis(see box 4 on the evolution of gas pricing in India). At present, India has a mixof administered and market gas prices that vary across consumer segments anddepend on their eligibility for administered gas pricing.

Jaipur

Amritsar

NewDelhi

Chandigarh

natural gas infrastructure Indiamap 2

Dahej

Hazira

Kochi

Kolkata

Chennai

existing pipelines

proposed pipelines

existing LNG import terminals

under construction/planned LNG import terminals

BangaloreMangalore

Dabhol

Pune

Hyderabad Kakinada

BANGLADESH

BHUTANNEPAL

Kota

Ahmadabad

Jamnagar

Vijaipur

Mumbai

Jagdishpur

Bhatinda

Srinagar

Bhopal

Patna


42/93

34


box 4 evolution of gas pricing in India

Historically, natural gas prices in India have been regulated using a variety of mecha-nisms. Until the 1970s, gas prices were based on recommendations made by expertcommittees. During the 1970s and most of the 1980s, prices were determined by themonopoly gas producers ONGC and OIL on a negotiated basis. Since 1987,the government has set uniform gas prices across the country, with an exception ofthe north east region, which receives gas at concessional prices.

In 1997, natural gas prices were pegged to the import parity price of a basketof internationally traded fuel oils. Prices were set to increase progressively as aproportion of the fuel oil basket price, from 55 per cent in 1997-98 to 85 per centin 2000-01. To curb any major fluctuations in gas prices, the government set aprice band, with a floor price of 2150 Indian rupees per thousand cubic metresand a ceiling price of 2850 Indian rupees per thousand cubic metres. However,in 1999-2000 gas prices reached the ceiling price, as international fuel oil pricescontinued to increase. The process of raising gas prices to achieve full import paritywas stalled and gas prices remained at this ceiling until 2005-06.

In July 2005, the gas price for priority sectors electricity generation and fertilisersectors and other users specified on occasion by the government or court was

revised upwards to 3200 Indian rupees per thousand cubic metres. The priceof gas in the north east region was pegged at 60 per cent of the revised price.However, the price of gas for consumers in all other sectors more than doubled to6893 Indian rupees per thousand cubic metres (table 9).

Administered gas prices were revised further in 2006, with prices for nonprioritysectors such as steel raised by around 23 per cent, and by 20 per cent for citygas distribution companies and customers consuming less than 18.25 millioncubic metres a year. The priority sectors continue to pay 3200 Indian rupees perthousand cubic metres. Further rises in gas prices are anticipated once the TariffCommission under the Ministry of Commerce and Industry makes recommendationson prices for gas sold under the administered pricing mechanism.

There have been recent disputes over privately produced gas not subject to admin-istered pricing, including the pricing formula for gas sourced from RIL fields in theKG basin. RIL proposed a landed price of US$4.33 per million British thermal unitsto the government for approval in mid-May 2007 and stated that there would be


43/93

35


However, the Government has recognised the need to move to market basedprices to enable potential customers to secure imports and to encourage domesticgas exploration and production. In 2005, the government started a gradualphasing out of the administered pricing mechanism, with an increasing number ofnatural gas producers and consumers moving toward market prices. The ultimategoal of domestic gas pricing reform is market pricing that is aligned with globaltrends and makes natural gas competitive against alternative fuels (figure 18; PLL2007b).

Currently, administered prices apply only to natural gas produced by ONGC andOIL from nominated domestic gas fields and supplied to priority sectors, namelyelectricity generation and fertiliser production. The current output of natural gas

from the nominated fields accounts for approximately 60 per cent of total gasproduction in the country (MoPNG 2007).

box 4 evolution of gas pricing in India continued

delays in the commencement of production should prices remain unresolved.The price for gas proposed by RIL is substantially higher than the prices paid bycustomers who currently have access to subsidised gas. The government subse-quently made changes to the pricing formula proposed by RIL where the landedprice of KG basin gas would be US$4.20 per million British thermal units. However,as of late September 2007, the issue remained unresolved (Platts 2007c).

gas pricing reform directionIndia

fig 18

past present future

100 per centgovernment controlled

single price for allusers and sources

cost plus basis

government controlledin priority sectors

electricity

fertiliser

CNG/small consumers

market prices

private/joint ventures

regasified LNG

free market pricing

competitive withalternative fuels

alignment withglobal trends


44/93

36


Gas prices in the transport sector and for small customers (consuming less than18.3 million cubic metres a year) are expected to be progressively increasedover three to five years to reflect market prices. City gas distribution companiesare already required to pay market rates to GAIL for gas sold to industrial andcommercial customers, which was previously charged at subsidised rates.

The total price of gas to the consumer is a combination of the government regu-lated wholesale price, royalty charges, pipeline transmission tariffs and applicabletaxes and duties. As at August 2006 the total price of gas sold to priority sectorswas estimated at around US$3.07 per million British thermal units, compared with

a market driven price of US$6.22 per million British thermal units (table 9; ICRA2006; MoPNG 2007; ABARE research).

To provide incentives for private players to invest in gas exploration and produc-tion, the government has permitted natural gas produced under the New Explora-tion Licensing Policy (NELP) conditions to be sold in the open market at competi-tive prices. These prices are based on the production sharing contracts betweenthe government and successful NELP bidders, and gas sales agreements. Gaspricing for pre-NELP blocks, including Panna/Mukta and Tapti and Ravva fieldsin the countrys western and eastern offshores, is partly covered by the adminis-tered pricing mechanism and partly market determined. Natural gas produced by

table 9 changes in natural gas prices, by sector India

cost to theprice pre price post price post consumers as at

July 2005 July 2005 June 2006 August 2006 bIndian rupees Indian rupees Indian rupees US$ per millionper 000 m3 per 000 m3 per 000 m3 British thermal units

priority consumers 2 850 3 200 3 200 3.07CNG, small consumers 2 850 3 200 3 840 3.52nonpriority consumers 2 850 6 893 8 482 a 6.22priority consumers (north east) 1 700 1 920 1 920 1.50nonpriority consumers (north east) 1 700 3 515 5 089 a 3.38

regasified LNG (Dahej) 6 893 6 893 4.88Panna/Mukta and Tapti joint venture 6 893 8 482 a

a From April 2006. b For consumers located outside Gujarat and along the HVJ pipeline.Note: Priority consumers include electricity, fertilisers and specific end users as per court orders. Nonpriority consumersinclude other industries such as steel, sponge iron and ceramics. There is considerable variation in prices reported bydifferent sources therefore prices should be interpreted as indicative only.Sources: ICRA (2006 ); MoPNG (2007); ABARE research.


45/93

37


ONGC and OIL from the new fields that are not subject to administered pricing isalso expected to be sold at market determined prices.

Regasified LNG prices are based on the gas sale and purchase agreements. Theprice of LNG for the Dahej project is fixed for the first five years, up to December2008. Thereafter, the pricing structure will be gradually aligned with JCC (Japa-nese crude cocktail) prices. As at September 2007, the selling price of LNG wasUS$4.87 per million British thermal units in Gujarat and US$4.88 per million Britishthermal units outside Gujarat. At this price, LNG is cheaper than alternative fuels,such as naphtha, fuel oil, low sulfur heavy stock, light diesel oil and LPG (MoPNG

2007).

In the first half of 2007, Indian buyers were paying around US$8 per millionBritish thermal units for spot LNG to be used primarily in electricity generation, toreplace naphtha in combined cycle plants and to meet peak load requirements(Platts 2007d). While spot cargo purchases have shown the gas markets abilityto absorb marginal LNG volumes at current high global prices, it is unlikely thatthis pricing can be sustained in the form of long term contracts for more significantvolumes, as fertiliser and power producers continue to rely on low administeredprices for supplies from domestic fields and resist attempts to move toward marketpricing, particularly while the selling prices of their end products are also capped.


46/93

38

factors affecting Indias futurenatural gas demand

While natural gas demand has the potential to grow strongly in India, a range offactors will affect the extent and profile of future demand. These include the paceof gas market reform and pipeline network development; reforms in energy end

use markets, including electricity and fertilisers; and policy responses to energysecurity concerns and environmental factors.

gas market reform

A central issue for gas market reform in many economies has been how to createmore competitive and flexible markets in the presence of natural monopolies intransmission and distribution. Pipelines, the only economic option for transp

Rr07.23 India Natural Gas

Documents

Transcript of Rr07.23 India Natural Gas