Introduction
In today’s article, we talk firstly of India’s natural gas sector, and then of some news therefrom which is of importance to India’s corporate and energy sectors. In India, the natural gas sector has gained importance only later, over the last decade – some are calling natural gas the Fuel of the 21st Century. As per the Oil and Gas Journal, India had 1076 billion cubic meters of confirmed natural gas reserves as of January 2007. A huge mass of India’s natural gas production comes from the western offshore regions, particularly the Mumbai High complex. The onshore fields in Assam, Andhra Pradesh, and Gujarat states are also major producers of natural gas. India produced 32.8 bcm of natural gas in 2009.
The natural gas value chain looks as follows: Gas exploration/production -> Refining -> Gas transmission and marketing
- Gas exploration/production – Gujarat State Petroleum Corporation (GSPC); Cairn; Oil India; Oil and Natural Gas Corporation Ltd. (ONGC); Reliance Industries Ltd. (RIL); Aban Offshore Ltd. (Only offshore drilling)
- Refining – Essar Oil; Hindustan Petroleum (HP); IndianOil; Kochi Refineries; Mangalore Refinery and Petrochemicals Limited (MRPL); Reliance India Ltd. (RIL); GGSR; Indian Oil; Chennai Petro
- Gas transmission and marketing – Gas Authority of India (GAIL); Reliance India Ltd. (RIL); Bharat Petroleum Corporation Limited (BPCL); IBP
Utilization of Natural Gas in India
The total Natural Gas consumption is roughly split as
- Production of Electric Power 45%
- Fertilizer 30%
- Industry 20%
- Others 5%
Among the industries, the distribution is roughly as follows: Iron and Steel 19% – Heavy Engineering 12% – Ceramic and Glass 10% – Textiles 2% – Chemical 9% – Cement 1% – Metals & Minerals 3% – Others 10% – Paper 1% – Refining and Petrochemicals 33%.
The main producers of natural gas have traditionally been Oil & Natural Gas Corporation Ltd. (ONGC), Oil India Limited (OIL), and other JVs. Under the government’s Production Sharing Contracts – private parties have also started exploiting gas. Of the total production of around 87 MMSCMD (million metric standard cubic meter per day), around 74 MMSCMD is available for sale to various consumers.
Our specialty focus areas include
A gas shortage by the end of the 1990s led to a situation where, by some estimates, nearly half of India’s gas demand was left unmet. In response, the government passed a series of broad reforms designed to increase the production and availability of gas, most prominently the New Exploration Licensing Policy (NELP) – which allowed private companies to bid for oil and gas exploration blocks. Such policies have yielded fruit. In 2002, Reliance Industries Limited announced a 396 million cubic meters gas field off the east coast of India, increasing India’s available gas reserves by nearly 50%. Other large fields have since been announced by the Gujarat State Petroleum Corporation (GSPC) and ONGC respectively.
Geostrategic appraisal of India’s natural gas position
Local:
India is very strategically located, and is flanked by large gas reserves on both the east and west. Most of India’s natural gas comes from the western offshore area. Onshore fields in Assam, Andhra Pradesh and Gujarat States are also major producers of gas. Smaller quantities are produced in the states of Tripura, Tamil Nadu and Rajasthan. OIL is operating in Assam and Rajasthan, whereas ONGC is operating in the western offshore fields and in other states.
International Shipping:
India is relatively close to four of the world’s top five countries in terms of proven gas reserves, viz. Iran, Qatar, Saudi Arabia and Abu Dhabi. The large natural gas market of India is a major attraction to the LNG exporting countries. In order to encourage gas imports, the Government of India has kept import of LNG under Open General License (OGL) category and has permitted 100% FDI.
International Pipeline:
India needs the Iran-Pakistan-India and Turkmenistan-Afghanistan-Pakistan-India pipelines as the indigenous production target is likely to be missed. India could face an acute shortage if the proposed pipelines are scrapped due to geostrategic instability. The loss on the supply side of natural gas would be around 1274 MMSCMD, and the demand/supply gap widens by 5.7 %.
Natural Gas Pricing Policies
Until 1987, gas prices were fixed by ONGC/OIL. Since then, the government has been determining prices. The price of ONGC’s, and OIL’s gas – was last revised on 1.7.2005. The setting up of a Petroleum & Natural Gas Regulatory Board is under consideration, and a bill is being drafted as of now.
Very recently, the government has announced yet another revision in the gas prices.
However, some of the new privately held gas supplies are being sold at prices well above the prices traditionally seen in India. While ONGC gas was delivered at state decided prices around $2.50/mmbtu (this was very recently revised to above $4), new private supplies cost upwards of $4.5/mmbtu. Despite these high prices, private suppliers have found eager buyers, because for some users, even expensive gas is more desirable than no gas at all.
In this new private market, the main consumers of expensive private gas have been those unable to secure subsidized supplies from ONGC – mostly industrial consumers who have a particularly acute interest in reliable gas supplies because they must keep their factories running reliably. Fertilizer producers and electricity generators, by contrast, have reliably secured access to low-cost gas due to their political clout. In effect, the market has bifurcated. Politically connected users in the fertilizer and electric power sectors still obtain their gas at low government-regulated prices. Other users get their gas from private suppliers at market prices. As the low-price supplies become scarcer and less reliable, a larger number of users are forced to shift from the public to the private market.
Future Trends in Natural Gas Market
In the near future, the size and growth of the Indian gas market will be driven mostly by bold policies in a few critical parts of the government
- In the electricity sector, gas competes largely with coal, and the liberalization of the Indian coal sector, which is, sporadically, underway, could stifle the rise of natural gas. Such reforms may make coal a bit more expensive in India, but they will also liberalize large new coal supplies. Head-to-head, a competitive coal sector is likely to out-compete gas for most electric power applications – because as a fuel, coal is much cheaper. Failure to reform, on the other hand, could reduce available coal supply, and expand the window of opportunity for natural gas. Regional air pollution controls – for instance, restrictions on oxidizing sulfur emissions – could also provide a strong advantage to natural gas over coal. For example, a plausible tightening of sulfur emission rules could nearly double demand for gas in the power sector by 2025. The expected rationalization of the Indian grid may provide an opportunity for natural gas to play a larger role in power generators which provide electricity during the few hours of the day of maximum demand – so called ‘peaking’ power generators.
- India’s fertilizer industry uses natural gas as a key, highly subsidized feedstock. Here, India’s fertilizer import policy is the most important factor affecting future gas demand. While India currently maintains a domestic self-sufficiency goal for nitrogenous fertilizer production, this policy is costly, as it precludes much cheaper fertilizer imports from countries where natural gas can be sourced cheaply, and fertilizer sold to India on long term contracts. Despite being a relatively high cost producer of fertilizer, India produces essentially all of the nitrogenous fertilizer it uses – imports are limited only to meeting unforeseen supply shortfalls. Producers in the nearby Persian Gulf make fertilizer at less than half the cost of production in India – because of cheaper natural gas in the Gulf. A future shift to a greater role for imports would dramatically reduce Indian gas consumption, apart from reducing the government’s subsidy burden. Without reform, subsidy to the fertilizer sector could rise to as much as US$8 billion by 2025. Despite this economically sensibility – all fertilizer reform efforts have historically been stymied by powerful interests within the fertilizer and farming lobbies under the banner of “food security.” The Indian government’s political ability to increase imports in the face of these interests will have large implications for domestic gas consumption.
- For industrial users, natural gas competes with liquid (oil-based) and solid (coal-based) fuels. In general, where gas competes with oil, firms find it cost-effective to switch if they can obtain gas supplies. These consumers have historically had difficulty securing gas supplies, which were allocated through a political process which gave priority to electricity generators and fertilizer producers. Newer natural gas supplies (domestic production and imports) afford much greater access to gas for industrial consumers. For gas suppliers, this is a most lucrative market – a major growth opportunity. (At current gas prices, however, gas is not competitive with coal in industrial applications, and most analysts think that gas prices, which are linked to oil in most of the world’s markets, are unlikely to reduce much in the future.)
The Recent Verdict in Ambani Vs Ambani
We now proceed to the next part: the Supreme Court’s latest verdict on the RIL-RNRL gas supply dispute – which is understood to have dealt a severe blow to Anil Ambani’s Reliance Natural Resources Ltd (RNRL). By April, 2009, Mukesh Ambani’s Reliance Industries Limited (RIL) started production on the KG-D6 field in the Bay of Bengal. The fieldwork had gotten over in record time, a feat which helped India save $9 billion in imports a year – now, with the Court’s denial of RNRL’s rickety profits – the national exchequer’s coffers are all set to swell further. The KG-D6 gas field, owned by RIL, used to supply, until lately, gas to the RNRL, this gas was used in power plants run by the Ambani group (ADAG) – the Supreme Court judged against the sovereignty of the industrial dynasty’s family will (which had previously mandated that it was RIL’s duty to supply gas to RNRL at a subsidy) – thus, Anil had claimed that the price of natural gas (as charged by RIL for this field) should be US$2.34 per mmBtu (million metric British thermal unit). However, such a will is, according to the Supreme Court, a private memorandum of understanding, and state policy, i.e. Production sharing Contracts for gas fields, is sacrosanct.
RIL, which is well-known for its dispute with RNRL – claims that the price of gas should be US$4.21, the price according to the Production Sharing Contract (PSC) signed by the government and RIL. The Court, in agreement, observed that RIL’s marketing freedom to sell product to other consumers was “not absolute”, as the price and quantity of the gas and tenure of the contracts are determined by the Government, and that the price of the field’s gas has already been set by an Empowered Group of Ministers at $4.2/mBtu. The court observed that the parties must abide by this. The government will get its royalty and profit share according to the PSC. If Anil agrees to buy gas at the government decided price of $4.21 per mmBtu, he will have to pay 80 per cent more than what the family agreement required him to. RNRL shares lost 23 per cent on the day the verdict was announced, while RIL share prices went up 3 per cent.
What are the implications of this landmark judgment, the denial of an industrial giant as it tried (using agreements the kind of which are not usually the first to be made public) to get a resource which can logically be perceived only as belonging to the public as a whole – at a discount (relative to the small entrepreneur)?
Will this judgment hamper foreign investment in the natural gas exploration sector in India, especially given that most natural gas reserves in India are offshore, and very advanced technologies are needed to extract them – and how such projects require huge investment by the multinational oil companies which have the technology and experience for the same?
Some say that the government’s inflexibility on its pricing scheme may not go well with global oil giants, who may therefore look at opportunities in Africa or South America. But as seen in how RIL’s balance sheet was left unruffled by the decision, this judgment may not really impact the profitability of any oil majors interested in India – but of course, RNRL will lose a lot, since they now have to buy natural gas at “free market” prices.
Hope you found this article useful. Your feedback is welcome.
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