It is big trouble that India finds itself in over its tardiness in putting together a prudent strategy to meet the demand for natural gas. With domestic production unable to meet the growing demand and overseas supplies a distant prospect, India’s age of energy insecurity appears to have begun. This might seem unnecessarily alarmist since natural gas meets just 9 per cent of the country’s primary energy requirement. But demand will increase, and the Ministry of Petroleum & Natural Gas reckons that gas will account for a fifth of the energy needs in less than 20 years. That, according to some industry sources, is a conservative estimate.
Right now, the shortage of this fuel is casting a darkening shadow of uncertainty over some critical areas, mainly the power and fertiliser sectors. Forced to fall back on spot purchases to tide over their immediate requirements, a raft of small industries along with two priority sectors are finding that the price spikes are throwing their business plans out of gear. But this is something they will have to learn to live with. A senior official in the petroleum ministry says categorically, “The shortage will continue for another two years, at least till June 2008.”
This is not good news for the power sector, which is the biggest consumer of natural gas (39 per cent of the total), or for fertiliser producers, who account for 27 per cent of the offtake. Power generation, in particular, has taken a hard knock with as much as 5,000 MW of capacity being shut down for want of fuel. That’s an investment of Rs 20,000 crore lying idle, ironically at a time when the power shortage is again plunging huge swathes of the country into darkness.
But the long-term prospects are equally bleak although domestic production would show a big upturn when Reliance Industries’ KG Basin wells begin production in June 2008. If the Gujarat State Petroleum Corporation (GSPC), which claims a bigger find in the same area — 20 trillion cubic feet (tcf) compared to RIL’s 14 tcf — but is battling difficult terrain, comes on stream in early 2009, then the domestic output should climb to almost 180 mmscmd (million metric standard cubic metres daily).
So why is there gloom? A large part of the problem is Iran. On both the liquefied natural gas (LNG) shipments and the more ambitious pipeline project, Delhi has run into a wall with Teheran. The $22-billion LNG deal, signed by a consortium of Indian public sector companies with the National Iranian Gas Export Company (NIGEC), would have brought India a comfortable cushion of 5 million tonnes (mt) of gas annually for 25 years to Dahej and Kochi, with deliveries starting in 2009. (Incidentally, LNG, which is shipped in tankers, is emerging as a tradable commodity unlike natural gas, which is not fungible).
The deal became embroiled in problems soon after India backed the US against the Iranians at the International Atomic Energy Agency (IAEA) in September 2005. The Iranians now say that the agreement inked in Teheran in June 2005 has not been ratified by the Supreme Economic Council of Iran and that “the contract is not binding as India believes it to be”.
This has taken the stuffing out of Delhi’s efforts to build an energy security cushion for the economy, which is poised to grow at 7-8 per cent. Sources close to the discussion say that price is the stumbling block but with little movement on either side, it appears the deal is on the back burner. India’s stated position is that it has a firm contract and will not renegotiate. One of the fallouts of this impasse is that Indian oil majors will lose the lucrative development rights in Iran’s abundant Yadavaran and Jufeyr oilfields. Unlike the India deal, Iran’s October 2004 contract with China — a staggering $100-billion, 25-year LNG export contract with Sinopec — has not come under any strain.
Nothing, it seems, is working out with the country that has the world’s second-largest gas reserves after Russia. Mired in deeper problems is the three-nation oil pipeline project, which is hostage to regional and international geopolitics. The odds, according to analysts, are stacked against this project, one of three cross-border pipelines that India is pursuing. Most are placing their bets on the Myanmar pipeline — an equally controversial and problem-prone. As one strategic analyst put it: “It’s a convoluted proposition but more negotiable than either the Iranian or Turkmenistan projects.” (See ‘Vanishing Into The Distance’.)
Where does that leave the dream of the gas economy that India was talking about three years ago? Practically in shreds, it would appear. The shortfall in domestic output and the failure to secure long-term supplies has left India far too vulnerable to the vagaries of the global supply situation. Take the case of the National Thermal Power Corporation (NTPC). The country’s largest power-generating company has been forced to slash generation and put expansion of capacities on hold for want for assured supplies of natural gas or LNG. Worse off are the smaller private plants in Andhra Pradesh. These have been operating at 45 per cent PLF and less as Gas Authority of India (Gail) has defaulted on the promised supplies.
Nor is there a cheaper option. Naphtha, the alternative fuel, is also on a price spiral and is hovering at $14 per million British thermal units (mBtu) compared with $9-11 for spot prices of LNG. Most power purchasers, that is, the state electricity boards have flatly refused to buy the expensive naphtha-based power, although Delhi appears to be considering the idea in view of the power blackouts plaguing the capital.
Maharashtra, for its part, is adamant that it will not buy expensive naphtha power from the controversial Ratnagiri Gas and Power plant. Ratnagiri Gas, the new avatar of the notorious Dabhol Power Company, is the most spectacular casualty of the current gas crisis. The project, which was salvaged by a bailout of Rs 10,000 crore in 2005 after rusting for five years, is back in hibernation for want of gas. Supplies from Qatar’s RasGas II are not expected till end-March 2007.
Other sectors, too, are paying heavily. Fertiliser units are piling several thousand crores to the subsidy bill because they are being forced to use naphtha or heavy oils. B.K. Saha, director-general, Fertiliser Association of India, complains that the industry has been victimised time and again by the policy shifts. Initially, fertiliser plants were set up to absorb naphtha from the downstream projects because it had no takers. “There was no feedstock option, it was all by allocation. Then we were asked to switch to gas.” Using gas as feedstock would save the government a cool Rs 8,000 crore annually in subsidies.
Saha’s gripe is that although the fertiliser industry is willing to convert fully to gas — at present 35 per cent of the capacity runs on expensive naphtha or fuel oil — it is deterred by the lack of infrastructure. “Where is the gas? Where are the pipelines?” he demands. The problem is that although fertiliser units have been told to find their own gas, approval for each deal becomes cumbersome.
The churn in the domestic energy market has just begun and it is going to be a tough challenge to find the right price levels for the various users. One sticking point is the government’s administered price mechanism (APM), which has long sheltered industrial users from the volatility of the global market. In any case, there really are no international benchmarks for gas although the Henry Hub acts as a reference point for the North American market.
In India, the gas market is governed by a complex regime that has as many as nine price bands (see ‘The Price Clutter’). Under the APM, gas is supplied at absurdly low prices of around $2 per mBtu from the public sector ONGC and OIL fields, whereas private and joint venture operators of gas fields are allowed to market their production directly to consumers instead of selling to the public sector GAIL. Therefore, prices vary widely leaving the buyer vulnerable to sudden changes in the price.
Take the Ravva JV. After formalising a retrospective gas price of $3.50 per mBtu for around 6 mmscmd of gas in July, the JV partners (ONGC with the biggest stake of 40 per cent; Cairn Energy India; Petrocon, which belongs to the Videocon group; and Singapore’s Ravva Oil, a subsidiary of Japan’s Marubeni Corp) are now seeking $4.5 per mBtu for the nearly 1 mmscmd produced from its satellite field. Although buyers are raising a ruckus about the proposed hike there is precious little they can do. With supplies falling to almost half the demand, there is a mad scramble for gas and the consumers are likely to count themselves lucky if they can be assured of supplies — once they find that lobbying the political leadership is not going to pay any dividend.
This is the big change, finds Anish De, associate director, Ernst & Young. Far too many deals have been lost in the past on account of the obsession with cheap gas, “in counting the pennies”, he says. “Now, we are talking of a reasonable price and suppliers are beginning to take India seriously.”
The fixation with cheap gas has cost us dearly, point out industry sources. NTPC, for instance, could have avoided shut down of its gas-based capacity had it taken up GAIL’s offer in 2004 of providing regasified LNG (LNG shipped in tankers and reconverted into natural gas) at $3.86 per mBtu (from the Dahej terminal). The price was exclusive of transport fees and taxes for a shipment of 18 mmscmd. Industry sources say that NTPC haggled for an all-inclusive price of $3. That deal fell through. NTPC now uses a daily price discovery model to source short-term gas requirements and prices are well past $4 per mBtu.
The power ministry, which has been putting up a spirited battle for keeping the subsidy regime, says the question of what is reasonable is, however, open to debate. Power secretary R. V. Shahi has been emphasising that power tariffs have to be kept within a certain band as otherwise generating plants would find no takers for costly power. In fact, the ministry has kept gas-based power projects on hold, while pushing for ultra mega power projects of 4,000 MW that would run on imported coal.
Exploration and production companies such as GSPCL are naturally keen that the market should be allowed a free rein. Managing director D.J. Pandian says we have twice missed the gas revolution and it should not be allowed for a third time. “The fixed price mentality must go and the market should be allowed to decide the price of gas.”
That, apparently, is happening in no small way. Suddenly, it appears, Indian companies, backed by the petroleum ministry, are taking up aggressive positions. Scouring the world for scarce supplies, India has managed to get Qatar to supply an additional 2.5 mt of LPG annually. This is in addition to the 5 mt that it has been receiving since 2004.
And the strategy is changing — rather dramatically. NTPC is offering its expertise in setting up power projects in exchange for guaranteed fuel supplies. And Petronet LNG, which operates the Dahej terminal and is setting up another in Kochi, is offering an equity stake to Qatar. The deal is that Qatar can buy a 7.5 to 12.5 per cent stake in the company in return for an extra 10 million tonnes of LNG annually on a long-term contract. That’s playing for big stakes indeed. If Qatar accepts, then it would, perhaps, be time to re-examine the gas economy dream.
Latha Jishnu in Businessworld
