LNG has become a global commodity on a scale previously unprecedented. One result is a significant increase in the number of LNG-related infrastructure projects. Although importing gas via pipelines from energy rich countries would result in an uninterrupted supply of gas, it is not a viable option in the short term due to implementation challenges stemming from prevailing geopolitical scenarios. This makes importing liquid natural gas the most attractive short-to-medium term option for India, writes G. Sathiamoorthy, Country Manager and Managing Director, Black & Veatch Consulting Pvt. Ltd, India.
India, the 9th largest economy in the world and clocking an average GDP growth of 7.3 per cent since 2009, is the fourth largest energy consumer after USA, China and Russia. As per the projection of the Government of India, domestic energy production of 669.6 MTOE is expected to be reached by 2016-17 and 844 MTOE by 2021-22, which would meet only 71 per cent and 69 per cent of expected energy demand respectively; the deficit being met through imports to keep the engine of economic growth up and running!
The country’s feedstock portfolio is dominated by coal and oil, which in 2012 jointly accounted for 84 per cent of generators’ needs. The 2014 Energy Outlook Report released by British oil giant BP has portended fossil fuels along with gas to constitute 87 per cent of India’s energy mix by 2035, compared to a global average of 81 per cent. What is of particular interest for players in India’s energy segment is that this demand would be led by a 183 per cent increase in gas imports.
Although constituting a relatively low proportion of 10 per cent of the feedstock portfolio, current gas requirements of 197 million m3 per day are forecast to reach 467 million m3 per day by 2030; a figure that encompasses the requirements of the fertiliser industry as well as energy generation.
It is estimated that India holds less than 1 per cent of the world’s natural gas reserves, and tapping them has not progressed as desired. Lower than anticipated output from the KG-D6 block in the Bay of Bengal is not anticipated to change in the short term. This has led to ‘stranded’ gas-fuelled power projects with an aggregate capacity of 8,000 MW that are close to commissioning; and another 1,500 MW that have been commissioned and operating at a plant load factor of under 20 per cent.
Although importing gas via pipelines from energy rich countries would result in an uninterrupted supply of gas, it is not a viable option in the short term due to implementation challenges stemming from prevailing geopolitical scenarios.
This makes importing liquid natural gas (LNG) the most attractive short-to-medium term option. India is the world’s fifth largest LNG importer behind Japan, South Korea, Spain and China. The vast majority of India’s LNG, 80 per cent in 2012, comes from Qatar; with the remainder sourced from Yemen, Nigeria, Egypt, Algeria and Indonesia.
Levels of imports are likely to grow significantly, with some forecasts placing India as the world’s second largest LNG importer by 2017.Another development in the pattern of India’s LNG imports will be diversification of suppliers. Australia is likely to have a greater role, as is the USA. As a result of the development of shale gas reserves, for example, India has signed an off-take agreement for the supply of 3.5 million metric tonnes of US LNG per annum.
Factors influencing the increase in LNG imports include India’s continued economic growth combined with a more competitive gas pricing regime. Just prior to the election the outgoing government agreed to reduce subsidies for domestic natural gas and move towards gas prices which reflected more closely the cost of production.
The Petroleum Ministry under the newly elected government has proposed a higher gas price as per the Rangarajan formula of weighted average of gas prices in North America, Europe and Japan to be allowed for only incremental production over and above the current levels from July 1, 2014, which would not just incentivise production by providing a level playing field for E&P players, but would also protect the interests of consuming industries such as power and fertilisers in terms of importing at a fair price.
LNG has become a global commodity on a scale previously unprecedented. One result is a significant increase in the number of LNG-related infrastructure projects. In India, the focus is on schemes which bring imports to users: receiving terminals and pipelines. In the mid-term receiving terminal capacity needs to more than double from 13.7 million tpa to 26 million tpa. B.C. Tripathi, Chairman of GAIL (India) Ltd, the country’s national gas distributor, has put the cost of upgrading and expanding the gas network to meet projected demand at Rs. 350 billion.
Existing receiving terminals are located at Dahej, Hazira, Dabhol and Kochi; all on the west coast. Plans are in place to double the number with new facilities at Mundraon on the west coast and Ennore, Kakinada and Gangavaramon on the east. This reflects the anticipated diversification in supplier countries. The Ennore project, for example, will have an initial capacity of 5 million tpa, with likely expansion to 15 million tpa. Based upon successful delivery of similar EPC projects such as Mexico’s Costa Azul LNG terminal, it is schemes like Ennore that Black & Veatch is well qualified to support.
In addition, capacity at existing terminals is being increased significantly, such as the recently awarded contract to expand Dahej’s LNG receiving capacity from 10 million tpa to 15 million tpa. Projects to develop India’s receiving terminal infrastructure are attracting investment from major players such as Indian Oil Corporation and ONGC.
Time and cost overruns, however, have become synonymous with project execution, and the LNG sector has not been immune. LNG and other energy infrastructure projects have been affected by delays in defence and environment clearances. A case in point would be foreign hydrocarbon majors like BHP Billiton, Santos, BP and Eni being unable to go ahead with exploration activities despite being awarded blocks through auctioning under the New Exploration and Licensing Policy (NELP).
With the government deciding not to go ahead with the planned 10th edition of the auction under NELP till a review of the policy in the light of past experiences is completed, players in the hydrocarbon space would be keeping their eyes on how the government removes bottlenecks in the way of existing production-sharing contracts and also arrives at a cost recovery and revenue sharing mechanism to make it a viable proposition.
The initial signals from the new government are promising as we commence the premiership of India’s “first energy literate Prime Minister.”