Competitive gas

The Iran-Pakistan-India and Turkmenistan-Afghanistan-Pakistan-India pipeline projects will help in optimising gas supply in the country and bring down prices to an affordable level

Noor Mohammed Delhi

The recent developments in the proposed Iran-Pakistan-India (IPI) and Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline projects offer new hopes to the Indian industry hamstrung by domestic gas shortages. These projects will help in optimising gas supply in the country and bringing down prices to an affordable level for key consumers like city gas distributors, industrial users, fertiliser manufacturers and peaking power generators, which are currently using costly naphtha and other liquid fuels.
India has now moved on to a high-growth trajectory. But maintaining the momentum remains a challenge as India's energy security is fragile. The country is heavily dependent on coal to fire its power plants to meet the energy requirements of its industry. With consensus building on fighting global warming, India is facing growing international pressure to cut greenhouse emissions. By an estimate, the power sector accounts for about 35 per cent of India's carbon emissions. So replacing coal with cleaner and environment-friendly natural gas from Iran and Turkmenistan as a fuel for power generation is the best option for India's industry. Gas-fired power plants are also best-suited to meet peak-hour requirements. According to energy experts, if gas-based power plants are set up along the trunk gas pipelines near load centres, they can supply electricity at a competitive tariff vis-à-vis generating stations located away from coal pitheads or those based on imported coal. In addition, gas can be used to efficiently fire combined heat power (CHP) plants in the size of 50 MW to meet electricity and heating requirements of urban centres.
Availability of piped gas will also help to bring in competition into the Indian gas market, leading to rationalisation of spot market re-gasified LNG prices, which are currently ruling in the range of $13 per million British thermal unit (mmbtu).
Although additional demand for natural gas is coming from various sectors, each has its own affordable price range. For example, according to international consultancy firm Mckinsey & Company, at a $ 50 a barrel crude price, captive power generators using diesel will find the $9 per mmbtu price for natural gas affordable. Similarly, city gas distribution can expand fast if natural gas is made available to it in the price range of $7 per mmbtu. Fertiliser plants running on naphtha will find any price around $10 per mmbtu attractive for switching over to natural gas.
The domestic gas production of 87 million metric standard cubic metre per day (mmscmd) is not sufficient to meet the demand. This gap is projected to widen further in the years ahead as domestic production is unable to keep up with the energy demand of a surging economy. By government's own projections, gas shortfall could go up to 80-100 mmscmd by 2014. That is the reason why Iran and Turkmenistan see India as a lucrative market for their surplus gas supplies.
India has been able to meet the demand-supply mismatch to some extent through LNG imports. But with the continuing uptrend in the crude oil markets, tying up long-term LNG supplies is getting increasingly difficult as producers are insisting on linking pricing formula more closely to crude oil benchmark prices. That means rising cost of procuring long-term LNG supplies through contracts. For example, according to industry experts, re-gasified LNG at Petronet LNG's Dahej terminal in Gujarat currently costs around $4.5 per mmbtu. But when Petronet's contractual price for LNG supply from RasGas of Qatar gets linked to the crude oil price post 2009, the cost could go up significantly. In that period, even a crude oil price of $60 per barrel would mean a $9 per mmbtu R-LNG price.
Meanwhile, global supplies are also projected to tighten in the medium term due to delays facing LNG liquefaction projects in countries like Australia, Nigeria, Iran and Qatar, in the wake of an abnormal rise in input costs. In contrast, delivered cost of piped gas from Turkmenistan and Iran is expected to be $ 6-7 per mmbtu, a price range within affordable reach of most of the bulk natural gas consumers. Prices of piped gas will also be less susceptible to volatility in the global oil crude markets and help in the maturing of the Indian gas market by stimulating the development of required physical infrastructure like long-distance pipelines and CNG stations.
Natural gas demand in India is growing at a brisk pace of 9-10 per cent a year, driven by environmental concern and high oil prices. The bulk of additional demand is coming from industry sectors like transportation, glass, ceramics and steel.
However, the government needs to further liberalise its gas pricing regime. As of now, there are two parallel gas regimes, one for pre-NEL blocks and another for NELP blocks. While pricing for NELP blocks have been liberalised and contractors can sell gas at market prices, this facility is not available to pre-NELP blocks.
However, the target of 391 billon cubic meters (BCM) natural consumption as envisaged in the 'Hydrocarbon Vision' cannot be achieved without deregulating key gas consuming sectors like fertiliser and power. These two sectors consume as much as 70 per cent of the existing gas supply, the bulk of which is made available to them at discounted Administered Price Mechanism (APM) rates under a special dispensation created by the government.
India has 21 million metric tones (mmt) of urea manufacturing capacity. Of this, 78 per cent uses natural gas, 11 per cent naphtha and the rest fuel oil as feedstock. The current production cost for units using natural gas as feedstock works out to $226 per tone while for naphtha and fuel oil-based units, the same is $538 per tone and $358 per tone, respectively.
Considering that international urea prices are projected to stay in the range of $260-340 per tone, units using costly naphtha and fuel oil will be able to afford $ 6.77-9.04 per tone of natural gas.
However, the government needs to liberalise prices of urea, which is currently sold below the cost of production due to heavy subsidisation, to help urea manufacturers to switch over from liquid fuels to natural gas.
The current natural gas consumption in the power sector is 38 mmscmd. But the government's scheme to supply power to all by 2012 and the plan to raise the share of gas-fired generation capacity to 20 per cent from the existing 10 per cent level can lead to a dramatic increase in gas requirement in the sector.
The government will be required to add another 78,000MW of generation capacity by 2012 if it is to meet the target of providing power for all. And if the share of gas-fired generation capacity is to be raised to 20 per cent in the energy mix, that will require increasing gas supply from 38 mmscmd to 153-208 mmscmd.
However, the power sector is still heavily regulated and electricity tariffs are decided by regulatory commissions rather than by demand and supply. Under the existing regime, gas-based power plants have to compete with coal-based generating stations on tariff parameter to remain viable, without getting any credit for their green value. Or for that matter, coal-based power plants are not taxed for their emissions.
This tariff regime is holding back power project developers from switching over to natural gas and coal continues to remain the favourite fuel for power generation. The gas industry has requested policy interventions from the government to level the playing field which is skewed in favour of coal.
Industry body Petroleum Federation of India (PetroFed) has said that it is for the government to decide whether it wants to promote clean and environment-friendly natural gas or dirty coal.
To encourage usage of natural gas in power generation, the government needs to provide fiscal incentives to generators. Otherwise, coal will continue to be the choice fuel of the power sector even if there is no shortage of natural gas.
Though not as attractive as piped gas, LNG import will still remain a credible option for India to partially meet its growing domestic natural gas demand and supply gap provided tax burden on the sector is lightened.
Presently, R-LNG transactions attract cumbersome fiscal burdens including sales tax and service tax on transportation. Besides, LNG imports face customs duty. All these add to the final R-LNG price. The government can exempt R-LNG from these taxes to make it competitive vis-à-vis piped gas.