Pipeline Growth Hinges On Gas Sector Reforms
Latest data on eight core infrastructure sectors show that fall in natural gas output pulled down overall growth in these sectors. Here’s a peep in to the dynamics of natural gas industry in India and its impact on gas pipeline industry.Production
A large part of gas demand in India was unmet until April 2009 when Reliance Industries Ltd started production from its Krishna-Godavari basin. This resulted in a 47% surge in overall gas output in the country. Previously, it was mainly state-owned Oil and Natural Gas Corporation Ltd and Gail (India) Ltd that supplied to the Indian market.
Initially, output by Reliance Industries at the KG–D6 basin was expected to go up to 80 million metric standard cubic meter per day (mmscmd). But it peaked at 60 mmscmd and fell below 50 mmscmd because of technical issues, the company claims. Reliance said the reservoir turned out to be different from what initial surveys had shown.
Reliance Industries has roped in BP as a joint venture partner to acquire 30% stake in Reliance’s 21 oil and gas blocks, including D-6, for $7.2 billion. Reliance expects BP’s expertise in the sector will help boost output. However, it claims that ramp-up in production will take two to three years.
Due to lower availability of gas in the country, imports of liquefied natural gas surged in the current financial year. Imports of gas in June soared 62.5% while it rose 39.5% during the quarter on a year-on-year basis.
Global demand for natural gas has risen sharply. Demand for LNG from Japan surged as 80% of its nuclear power capacity is not functional after the Fukushima nuclear disaster. Thus, nuclear plants in that country are using natural gas as an alternate fuel. This has resulted in a surge in Asian spot LNG prices up to $17 per mmbtu. Bank of America-Merrill Lynch in its report estimates that price may rise to $25 per mmbtu, in a worst case, if all reactors shut down.
It must be noted that cost of imported natural gas is as high as $14 per mmbtu compared with $4.2 a unit supplied by Reliance Industries. Prices of gas supplied by the company will be renewed in 2014. At that time, a ramp-up in capacity is sure to help Reliance boost its revenues and profitability.
Demand for gas in India mainly comes from power, fertiliser and refineries. Assuming a surge in production from the KG basin, a number of gas-based power plants were planned.
Given the fall in domestic production, what does it mean for gas transmission industry?
The two gas transmission companies in India include Gail and Gujarat State Petroleum Ltd (GSPL). India began LNG imports in 2004 with Petronet LNG starting imports at its Dahej terminal in Gujarat under long- term contract with RasGas of Qatar. Another LNG import terminal was commissioned by Shell and Total at Hazira in Gujarat during the same year.
In anticipation of a strong demand for natural gas from user industries and slow growth expected in domestic gas production, LNG imports are expected to rise in coming years. As a result, companies are investing heavily in LNG terminals that are used to store and re-gasify imported LNG.
Oil marketing companies Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd plan to set up LNG terminals. BPCL is planning to set up a LNG terminal for an investment of Rs.4,500 crore. The terminal is expected to have a capacity of 6 million tonne per annum (mtpa). HPCL also announced plans to set up an LNG terminal on India’s east coast. Both companies are yet to finalise locations for the terminals.
Gas production in India soared in 2010 followed by a fall in output at the KG basin. Despite increase in domestic production, a number of issues hamper growth of the Indian gas market. The various issues relate to policy and regulation, gas pricing, domestic supply and related infrastructure.
India needs a clear policy and regulatory framework to attract investments needed in the energy sector. Regulated pricing of natural gas has resulted in slow pace of growth in output even after nine rounds of exploration under New Exploration and Licensing Policy.