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Arundhati Prasad, 36, who lives in the outskirts of Patna, has to queue up in front of a liquefied petroleum gas (LPG) agency’s office to get a cylinder of gas. Now compare Prasad to Mohammad Ali Bhatti of Dera Baba Bhuman Shah village in Pakistan’s Okara district: in addition to the gas used for cooking in his kitchen, everything from the refrigerator to lamps in the Bhatti home run on natural gas. Pakistan supplies piped gas to 1,050 towns and villages through 31,000 km of pipelines. In the future, piped gas will be available to any Pakistani habitation with a population of more than 20,000.
In contrast, only 20 Indian cities have been connected with gas pipeline — 11,000 km. “India is nowhere near Pakistan as far as availability of gas infrastructure is concerned,” says Labyendu Mansingh, chairman of the Petroleum and Natural Gas Regulatory Board (PNGRB). Worldwide, gas discoveries and production are taking centre-stage even while oil production is slowing down somewhat. For most of the world, gas is turning out to be a great source of energy because it is relatively clean, can be substituted for oil in many cases (not all), and is also cheaper than oil as an energy source.
Not only Pakistan, in the past 25 years, natural gas has grown to account for 24 per cent of total energy consumption globally. Even Brazil (20.1 per cent) and China (25.8 per cent) are far ahead of India, which only meets 9 per cent of its energy needs from gas.
Need For Network
The only issue with gas is that it is not as easy to transport as oil is. “The situation is just like the chicken and egg story,” says B.S. Negi, member of the PNGRB. “Which comes first? Gas or infrastructure? My answer in this case would be the chicken, which is the infrastructure — that is, pipelines.” Talking to BW, Negi says that in the past two decades, the country’s largest gas transmission company, GAIL, had failed to capitalise on opportunities and slowed down the process. “If we see what they have added in terms of gas exploration and pipelines, it is minuscule.”
Click To View Enlarged Map
In India too, there seems to be a huge amount of gas waiting to be discovered. India’s gas inventory will be doubled by the end of fiscal 2010-11 as Reliance Industries’ D6 block reaches production of 90 million metric standard cubic metres per day (MMSCMD) — more than twice its present 44 MMSCMD.
Yet, even while the world is embracing gas wholeheartedly, India is in danger of missing the bus because it doesn’t have a proper gas pipeline network and new pipeline projects are being built too slowly. India has also failed to work out a proper policy for gas carriage, which is why not too many players want to get into building pipelines. Other than GAIL , RGTIL (Reliance Gas Transportation India) and GSPL (Gujarat State Petronet) are the only major players in transporting gas through pipelines. Indian Oil Corporation (IOCL) and Oil India (OIL) have also entered the segment but in a small way.
This is a pity because, given India’s huge dependence on imported oil, a quick move to adopt gas as a fuel could help the country actually reduce its energy costs somewhat.
In fact, the actual demand for gas in the country is estimated to be higher at 196 MMSCMD. Consumption stands at 119 MMSCMD, reflecting a deficit of about 77 MMSCMD. In the future, latent demand will increase; there may be more court directives to switch to public transport in the most polluted cities to CNG; and city-based gas distribution will be extended to more cities. However, without the necessary pipelines, gas supply and its demand will never match.
Pricing, The Pandora’s Box
Of the 119 MMSCMD of gas currently consumed in India, 64 per cent goes to the power and fertiliser sectors, and only 9.5 per cent reaches the nation’s transport and city-based gas distribution systems. Further, there is another policy shortcoming that is making the switch-over to gas difficult.
9% Energy needs met by gas in India, while 24% is the world average
“The current regime of gas allocation across various sectors is decided by the EGoM (empowered group of ministers), and is vague,” says Ajay Arora, partner and national leader for oil and gas at advisory firm Ernst & Young. “Industry players need clarity so that they can plan their supply portfolios better. More complications will come up when future deficits lead to competing end users, with each user capable of absorbing different levels of gas prices,” he says.
The ongoing multiple gas pricing regime is messy: the administered pricing mechanism (APM) is applicable to government-nominated fields; companies in production sharing contracts (PSCs), a common contract signed between a government and a company that extracts resources, follow a different system.
There is another price for imported re-gasified liquefied natural gas or RLNG; and the spot LNG price is variable. Other than the government’s claim that it is examining the idea of a unified gas pricing regime, there has been no progress on this front.
Pricing of gas supply from different sources is even more uncertain in the long term. Of course, there is room for multiple interpretations, but PSC terms need to be spelt out clearly, which will assure their enforceability for future investors in the oil and gas sector.
At present, the domestic tax law provides a 10-year tax holiday for laying and operating cross-country natural gas distribution networks, including pipelines and storage facilities. Tax holidays were introduced with the aim to promote and set up gas infrastructure, and simultaneously reduce the existing subsidy on LPG.
Gas distributed through city-based gas distribution networks is a substitute for LPG. And the applicability of tax incentives for the city-based gas distribution network is in line with the legislative intent to reduce LPG subsidies. Tax incentives will also reduce the operating costs, which will help reduce the price charged to consumers and encourage households to migrate from LPG to CNG.
Stuck In The Pipelines
Typically, there is a blame game afoot. U.D. Choubey, former chairman and managing director of GAIL, blames PNGRB for its slow approach, and for creating troubles in the growth of pipeline infrastructure, especially in the city gas distribution systems. “World over, regulatory boards have shown a soft hand in order to promote the gas industry,” says Choubey. “But in India, the restrictions are too big too handle. The bidding process takes so much time. The PNGRB is responsible for the slow growth of the gas industry.”
In comparison, chairman of Pakistan’s gas public-sector undertaking, Sui Northern Gas Pipelines, Tariq Iqbal Khan, told BW that the regulator in his country has played a crucial role in taking natural gas to the people. “It is the regulator who asked us to reach to the masses,” says Iqbal Khan citing the new order that requires all habitations with more than 20,000 people to have gas supply.
In spite of knowing gas to be a viable fuel alternative for the past 25 years, India’s government, says Choubey, is still not keen on laying pipelines. “In the first six years of this decade, neither was any pipeline laid, nor did the government sanction any,” says the former chief of India’s premier gas PSU. “India has good gas reserves. (To tap them), transporting and other issues should be planned at least two-and-a-half years in advance.”
In reality, there is still not much competition from private players in the pipeline infrastructure space: state-owned GAIL is handling most of the major projects, and works through joint ventures with private players. The natural gas PSU leads with a network of over 7,100 km of a high-pressure trunk pipeline with the capacity to carry 155 MMSCMD.
“GAIL’s major focus is to maintain its dominant position in the gas business, especially in the transmission segment,” says the company’s official spokesperson. “Therefore, during the 11th Five-Year Plan, GAIL will build 5,000 km of pipeline with an estimated investment of Rs 28,000 crore.” When these pipelines are commissioned by 2012-13, GAIL’s gas-carrying capacity will double to about 300 MMSCMD. However, in the larger picture, this will be far from enough.
The Gas Authority
In his 2008 interim budget speech, finance minister Pranab Mukherjee told Parliament that India will soon have a national gas highway authority (NGHAI) along the lines of the National Highway Authority of India. In a written reply to a query in the winter session, Murli Deora, minister for petroleum and natural gas, said that it was envisaged that the NGHAI would “plan, develop, manage and regulate the gas highways”. The body will also concentrate on planning the development of gas pipeline infrastructure, especially in remote and under-developed regions, leading to a national gas grid.
Ministry sources told BW that the Union government is thinking of levying Rs 10 as cess on the transportation of domestically produced natural gas, which would garner Rs 3,000 crore annually and help build 500-600 km of gas pipeline. The ministry is also of the view that since companies such as GAIL, RGTIL and GSPL are enterprises formed to earn profits, it would not be appropriate for the government to ask the companies to lay pipelines in areas that are not economically feasible.
Nevertheless, official sources say the administration is keen on taking gas to precisely those areas so that it will generate “growth in the local industry, the government can earn tax revenues, and these areas can be developed”. Most such areas are in northern and eastern India.
But the NGHAI is courting controversy even before its constitution. The PNGRB feels the petroleum ministry is curtailing its powers. Moreover, “we already have nine pipelines, five more are in process, we need only one more from Siliguri to Patna and our quota for the next one decade is over”, says Negi of PNGRB.
Ernst & Young’s Arora feels the advantage of a national gas grid will be that states can tap into high-pressure trunk lines and distribute them to cities. This can be further distributed through city-based gas distribution networks. Overall infrastructure is the key to the development of the gas market in India. Commissioning of the proposed networks would ensure connectivity to new demand centres and supply sources, and the balanced development of the natural gas market. Calling for the reform of the board and setting of targets by the petroleum and natural gas ministry, Choubey says: “Pipeline is a lifeline for the country as far as gas is concerned.” And the momentum in gas discoveries across the globe seconds this thought.
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Future Gas Supplies
The world’s natural gas production is expected to grow to 106 trillion cubic feet by 2030 from 65 trillion cubic feet in 2006. According to a report by US statistical and analytical agency Energy Information Administration (EIA), non-OECD countries will account for 84 per cent of this hike. OECD’s gas production, on the other hand, grows by only 0.8 per cent per year — from 40 trillion cubic feet to 47 trillion cubic feet.
With more than 40 per cent of the world’s proven natural gas reserves, West Asia will account for the largest increase in regional natural gas production by 2030, thus accounting for more than one-fifth of the total increment in world production.
Currently, there are four major natural gas producers in West Asia: Iran, Saudi Arabia, Qatar, and the United Arab Emirates, which together accounted for 83 per cent of the natural gas produced in West Asia 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, says EIA in a report published at the end of last year.
Among the West Asian countries, Iran has the world’s second-largest reserves of natural gas, after Russia, and is currently the Middle East’s largest natural gas producer. The largest natural gas development project in Iran is the offshore South Pars field, discovered in 1990, which is estimated to contain between 350 and 490 trillion cubic feet of natural gas reserves.
Russia remains Asia’s most important natural gas producer, providing the single largest increment in production, from 23.2 trillion cubic feet in 2006 to 31.3 trillion cubic feet in 2030; supply from the Sakhalin-2 LNG facility is expected to reach its total capacity of 9.6 million metric tons in 2010. Moreover, the Shtokman natural gas and condensate field in the Barents Sea is officially scheduled to commence production of 840 billion cubic feet of natural gas in 2013, which will be shipped via pipelines.
Substantial growth in natural gas production also is projected for Africa, increasing from 6.6 trillion cubic feet in 2006 to 9.6 trillion cubic feet in 2015 and 13.9 trillion cubic feet in 2030. Currently, more than 85 per cent of Africa’s natural gas is produced in Algeria, Egypt and Nigeria, which together accounted for 81 per cent of Africa’s proven natural gas reserves as at the start of 2009, with a combined total of 402 trillion cubic feet.
Asia’s natural gas production is likely to increase by 8.8 trillion cubic feet by 2030, with 2.2 trillion cubic feet of the increment coming from China, 1.3 trillion cubic feet from India, and 5.3 trillion cubic feet from the rest of the continent.
With production declining in recent years in Indonesia, EIA has projected that China is poised to become the region’s largest natural gas producer, as increases in the Red Republic’s production have outpaced those from the region’s other major producers, which are Malaysia, Pakistan and India.
In sum, as more gas is being produced and discovered worldwide, it is high time that India built an extensive pipeline network to support its burgeoning energy needs.
bweditor at abp dot in
(This story was published in Businessworld Issue Dated 29-03-2010)