Future of LNG in India's energy mix is bright

The rapid growth of LNG business in the country is being hailed as the next big thing in the oil and gas industry. While experts are optimistic on the future of LNG, they have also cautioned on the need to weed out the challenges to ensure sustainable growth. R K Batra, Distinguished Fellow, The Energy and Resources Institute (TERI), however, feel that there are more opportunities than challenges in the LNG industry today.

When Petronet LNG commissioned its 5.0 Mtpa LNG storage and regasification facility at Dahej on the west coast in 2004, it was the dawn of a new phase in the natural gas scenario in India. In the following year, Shell commissioned a smaller unit of 2.5 Mtpa at Hazira near Surat, again on the west coast. These two terminals, after expansion, currently account for the import of nearly 14 Mtpa of LNG every year.

The future of LNG in India's energy mix is projected to grow even brighter with further expansion of the Dahej and Hazira terminals, the commissioning of a dormant facility at Dhabol and new terminals at Kochi, Ennore and Gangavaram, the latter two on the east coast. These projects will raise total capacity to 42 Mtpa.

This optimistic outlook is due to various factors which draw from past experience, national and international responses to India's energy demand and global developments in LNG supply around the world. These are:
  • Demand is outstripping supply and India needs not just more gas but also diversity of sources and supply modes, which will enhance energy security.
  • The two terminals at Dahej and Hazira were developed without a hitch. For Petronet LNG, it was an introduction to a totally new technology, product and markets. It was able to sign an extremely competitive contract with RasGas of Qatar, erect and commission the facilities on schedule and create a market for regasified gas. Shell, on the other hand, adopted the merchant model with spot purchases of cargoes delivered to those who were willing to pay a price higher than the contracted price by Petronet. At $13-14 per MBtu regasified LNG can compete and replace a product like naphtha at current crude oil prices of around $100 per barrel. There are also many industrial customers who, for technical and other reasons, have made the switch from petroleum products to regasified LNG.
  • Foreign gas companies have demonstrated the willingness to take a stake in the LNG market. Gas de France has an equity stake in the Dahej terminal and TOTAL in the Hazira terminal. BP has tied up with RIL in a new company "India gas solutions" to import and market LNG. This reflects the confidence of foreign investors in the developing gas market where they are able to contribute, not only with their investments, but by bringing in proprietary technology and setting operational standards in line with global practices.
  • Till a few years earlier it was hoped to lay a cross-border pipeline bringing gas from Iran to Pakistan and India. This proposal is now off the table due to geopolitical and security concerns. Progress on the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline is tardy and gas may not be available till 2017-18. India can expect to receive 38 mscmd (equivalent to 10 Mtpa of LNG) at a delivery price of around $13 per MBtu which is the current spot price for LNG. However, security will continue to be a major concern.
Future of LNG in India's energy mix is bright
  • RIL's production from its D-6 offshore fields in the KG Basin was projected to be as high as 80 mscmd; whereas it peaked at 60 mscmd and thereafter has dropped to as low as 25 mscmd, attributed to certain technical problems. This has created a space for LNG imports especially as heavy additional investments will have to made by RIL to try and reach somewhere near the originally targeted figure after various contentious issues between RIL and the Government are resolved. Ramping up of production should take till at least 2016-17 at which point in time domestic demand would have gone up further.
  • The RIL gas price is currently pegged at $4.20/MBtu till April 2014 and the government has clearly said that they will not consider any revision till then. However, this price was fixed when crude oil was selling at $60/bbl and it was not possible at that time to clearly determine an arm's length market price. A substantial rise in the RIL price can be expected to take place in 2014. Discussions need to start as soon as possible, so that RIL is able to plan the necessary additional investments. By 2017-18, there should be a convergence of domestic gas, cross-border piped gas and LNG prices.
  • The global gas market has undergone a sea change with shale gas production in the USA rising substantially. From being an LNG importer, producers in the USA are looking to export LNG, especially as domestic prices, are as low as $3/MBtu. However, there is a view that allowing LNG exports could result in an increase in domestic gas prices. So far, only one proposed terminal of Cheniere Energy at Sabine Pass on the Gulf coast has been permitted for export of LNG to countries that have not signed a free trade agreement with countries such as India. GAIL however has been quick off the mark seeking a 20-year contract for LNG supplies. New and substantial sources of LNG are coming up in Australia, Indonesia etc. Petronet has signed up for 1.5 Mtpa LNG from the Gorgon gasfield in Australia and more contracts can be expected. The general view is that LNG terminals should sign up long term contracts for about 80% of their requirements, allowing for spot purchases of around 20%.
  • The future mix of coal and gas based thermal power plants need to be urgently addressed. At present, India's power sector is heavily dependent on coal. Coal India Limited is not able to meet demand and imports are projected to rise rapidly. The future of ultra mega power projects has already been impacted by unforeseen tax increases in coal supplies from Indonesia and Australia. Also the sourcing of coal is going to be increasingly difficult, despite large investments by Indian companies in equity coal, as projected imports could almost touch the total quantum of international coal that is traded today. Gas based power plants must therefore be given an increasing share. Further gas based plants have a lower capital costs and are more environmentally friendly. Coastal plants based on LNG would be the best option. Further, LPG tankers are being developed that will regasify the LNG onboard and pump the gas directly into supply pipelines, thereby obviating the need for a land based facility.

In conclusion, the prospects for LNG in meeting a rising share in India's energy portfolio are bright and face fewer challenges than domestic gas and crossborder gas pipelines.

Tags: domestic LPG, LNG, crossborder gas pipeline, India's energy portfolio, LNG in India