Overview of gas scenario in India

By Sanjay Sah

Energy Scenario in India

India witnessed consistent growth in demand for energy resources even during the period of global downturn. For the period 2002 to 2012, the primary energy consumption in India grew at 6 percent.

Mix of Primary Energy Consumption in India

The primary energy demand is expected to increase in future with increasing industrialisation and urbanisation in the country. Though coal is expected to continue to be the major source of primary energy in the country, the share of other fuels in the energy mix is expected to increase. Domestic coal sector has witnessed a lot of challenges in the recent years and has not been able to meet the demand. This has been mainly on account of insufficient mechanization in mining, delays in developing new blocks, environmental clearances, transportation issues and lack of adequate planning to meet the demand.
 
India’s domestic oil production has not been able to meet the increasing demand, and today India imports about 80 percent of the total oil demand. Though hydroelectric power has huge potential in India, the sector has witnessed issues in the recent past related to environmental concerns, longer gestation periods, etc. which have slowed down the pace of growth of this sector.
 
While renewable energy sources like wind and solar have immense potential, they are infirm in nature and the sector is still in an evolution phase. The flagship discovery of natural gas in KG D-6 fields was expected to be a game changer, however geological challenges in the field have led to decline in production from about 55 mmscmd in 2010 to 13 mmscmd currently.

Natural Gas Demand Supply Scenario in India

Natural gas sector has witnessed a number of challenges in the recent past with decline in domestic production, delay in clearances from different authorities in development of new blocks, clarity regarding pricing of natural gas, delays in development of natural gas pipelines, etc. Recently BHP Billiton surrendered 10 blocks to the government as it was not able to proceed with exploration activities due to delay in clearances.

Natural gas consumption in India has increased from 27.6 BCM in 2002 to 54.6 BCM (CAGR of 7 percent) in 2012, due to increased consumption from major consumer categories and increased supply of gas (both domestic and RLNG) in the Indian market.
 
Demand Supply Scenario for Natural Gas

The graph indicates the widening gap between the demand and supply for natural gas in the country.  Due to unavailability of natural gas in the country, 7,818 MW capacity of gas-based power plants were left stranded, while another 16,800 MW capacity power plants were operating at a Plant Load Factor (PLF) of just 23.7 percent.

To meet the increasing deficit of natural gas, reliance on imports has increased in the recent years. Various players have also announced plans to set up new RLNG capacities over the next 3-4 years to meet the increasing demand for natural gas in the country.

Recent Developments

In order to provide a fresh impetus to the natural gas sector, the government has initiated a number of reforms. The government recently gave an in principle approval to a formulation by Rangarajan Committee to increase the domestic gas prices. The new domestic gas prices would be at average cost of imported LNG into India and global gas hub prices from 1st April, 2014 onwards. It is envisaged that formula based gas prices will bring in transparency and thus additional investments in domestic exploration and production.  The government also intends to introduce revenue sharing model from the current profit sharing model as per the recommendations of the Rangarajan committee on formulating new production-sharing contracts. This mechanism shall remove the issues of the government monitoring the contracts in terms of contractor’s expenditure.

The shale gas policy was recently approved with the government initially permitting national oil companies to explore shale resources from pre-NELP onland blocks. It is envisaged that shortly the shale oil and gas blocks will be offered to other companies. However, production from shale may not be significant in the medium term as the country does not have the necessary ecosystem to support extensive exploration activities.

Given the domestic gas deficit, there has been a significant momentum on the LNG front with many new terminals being announced (both onshore and Floating Storage Regasification Units). Some of the recent contracts have been linked with Henry Hub which could probably mean gas prices that could be cheaper than currently available crude linked LNG contracts. Given the rising affordability, LNG could increasingly meet some of the energy requirements.

On the pipeline infrastructure side, PNGRB recently amended the bidding guidelines for new Geographical Areas and announced fourth round of bidding for development of city gas infrastructure. The new bidding norms are framed to discourage aggressive bids and bring rationality in the bids. Further, the recent penalties on entities who have failed to meet the work requirement as per the tender submission will deter entities to quote unrealistic numbers in their bids. However, the regulation may still need some evolution in terms of the size of the geographical areas and the inch per square kilometer of the network to be laid to attract serious players.

The author of this article, Sanjay Sah, is Director-Infrastructure, Govt & Energy, KPMG in India