Fueling India’s Growth Story
April 26, 2012
By Sudha Mahalingam*
As India races towards its manifest destiny of becoming a developed nation, its growth paradigm continues to remain energy-intensive. Sustained efforts by Indian policy makers to de-link its economy from energy consumption have had only a modest impact. Service sector-led growth has turned out to be almost as energy-intensive as manufacturing-led growth for a variety of reasons, the foremost being the energy-intensive life-styles of its prosperous workforce. Rapid urbanisation has also contributed to increasing energy demand. Meanwhile, mounting concerns over climate change and the consequent compulsions – overt and covert – to move to a cleaner growth trajectory are forcing a rethink in favour of less polluting fuels that are also viable and accessible.
Natural gas, the relatively cleaner fossil fuel offers an alluring option. Environmental impact apart, infrastructural and other bottlenecks to coal-fired power plants and the mounting opposition to big dams have made natural gas the preferred fuel for power generation. Food security concerns also find gas a viable feedstock for fertiliser industries. Other industries, hamstrung by power cuts that can last an entire factory shift have set up diesel-fuelled captive power generation whose costs have been soaring sky-high in tandem with skyrocketing crude prices. They would love to shift to cheaper gas turbines while process industries are looking for natural gas which can provide combined heat and power.
Public transportation in India’s national capital now runs on compressed natural gas (CNG), and the results are palpable enough for its residents, persuading emulation by other metropolises. City and local gas distribution networks – existing and newly-licensed, are looking for additional and competitive sources of supply to service their expanding network of consumers which include commercial complexes like offices, malls and multiplexes, domestic households using gas for cooking as well as private automobiles running on relatively less-expensive compressed natural gas. Indeed, in India, natural gas is poised to claim its space as the fuel of this century.
However, domestic production has lagged far behind demand and according to present indications, is set to drop even further. Of the total daily consumption of 166 MMSCM, (million metric standard cubic meter) a fourth comes from imported LNG, (liquefied natural gas) regasified by the two LNG terminals, both located on the west coast. With a total capacity of 13.6 mmtpa (million metric tonnes per annum), these are inadequate to satisfy India’s burgeoning demand.
The national gas grid, slender and patchy as it is, remains grossly under-utilised, and new pipelines, long licensed, are not even getting built, citing insufficiency of domestic supplies. Gas-based industries like power, fertiliser, ceramics and sponge iron, which came up on the promised bonanza from KG basin are now looking for alternate sources of supply. City and local gas distribution networks that hitherto flourished on low prices of domestic gas fixed by the government suddenly find themselves jostling in the market place for LNG supplies. After all, turning off piped cooking gas supply could turn out to be politically explosive, especially when alternative fuels are costly and not readily available.
India is ringed by gas-rich neighbours – Iran, Turkmenistan, Afghanistan, Myanmar, and Bangladesh, but its efforts to access neighbourhood gas have been frustrated by regional politics. Despite the protracted negotiations that have stretched over decades, these pipelines will remain pipedreams, at least for the foreseeable future. India’s only option, therefore, appears to be LNG from the global market-place. India is now looking to expand regasification capacity and is scouting around for tying up long-term gas supplies from as far away as the Asia-Pacific region.
What are the contours of India’s policy and regulatory environment that would encourage inflow of more LNG into the country? Gas market development in India, now well-past the nascent stage, is grappling with twin masters – an unimaginative and at times, unstable policy environment and a hitherto undistinguished regulatory regime. Yet, the urge to maintain the growth momentum, has unleashed animal spirits in entrepreneurship, devising innovative ways to deal with ground realities, thereby throwing up immense possibilities for potential investors.
First and foremost, the Indian economy is no longer looking inwards for increasing its gas supplies. Nor is it banking on transnational gas pipelines which might not materialise for quite a while. There is a growing realisation that LNG is perhaps India’s only option. While the existing PLL (Petronet LNG Limited) terminal at Dahej is being expanded from 10 mmtpa (million metric tonnes per annum) to 12.5 mmtpa by 2013, Shell is expanding its terminal in Hazirato regassify 10 mmtpa by 2016-17. Even so, that would add up to just 14.1 mmtpa whereas the market can readily absorb more than twice that quantity. Three more terminals are being built, two of them, already on the verge of commissioning in the next few months.
The Dabhol LNG terminal with a capacity of 5 million tonnes built primarily to supply the Dabhol power plant already has a surplus capacity of 2.5 mmtpa which might be made available to other shippers on a tolling model basis. PLL, a consortium led by India’s National Oil Companies is building a second one in Kochi in Kerala the southern-most state in the Indian peninsula. This terminal should add another 5 mmtpa. There are other regasification facilities under construction/planning, in Mundra and Ennore apart from considerable groundwork being done on an FSRU (floating storage and regasification unit) at Diggi port in Maharashtra. But even when all these terminals materialise, they can satisfy only a portion of the demand, both latent and patent.
There are opportunities galore for potential investors in the entire gas value chain. For the upstream investor, India’s long coast line offers several locations where more LNG terminals could be set up. That of course, would depend upon the ability of industries using gas to absorb international gas prices. Liquefaction costs have declined drastically in the last few decades and LNG has all but decimated fragmentation of gas markets. Arbitrage opportunities are on the wane and indeed the world is veering towards a unified LNG price. That is good news for countries like India. Regulatory initiatives to open up regasification infrastructure as a common-user facility might incentivise independent gas marketers who can source gas competitively from the international market.
India still has only a skeletal pipeline network. Trunk and regional pipelines span a length of about 10,000 kilometres, including those under construction, and these can service only a fraction of the market and that too, in a limited geographical region. An autonomous and independent statutory regulatory body on the lines of FERC (Federal Energy Regulatory Commission) has put in place transparent bidding parameters for investors competing to build gas pipeline networks across the country. Paripassu, the regulator is also engaged in bidding for local gas distribution networks all across the country where trunk pipelines have already reached. As more trunk pipelines get built, more such cities and geographical areas will come under the board’s auctioning gavel. Access codes are already in place for new players to access the existing pipeline networks. In fact, city gas business is going to be a sunrise industry in India.
However, gas market development in India will crucially depend upon the ability and willingness of the market to pay global prices for gas. A beleaguered government trapped in unsustainable subsidies primarily for cooking fuel, is thrashing about for a way out. Reaching piped gas to kitchens is a painless a way of phasing out subsidieson LPG (liquefied petroleum gas) since these households can well afford to pay market price for cooking fuel. A smart government will align itself with the regulator to make this a reality, sooner rather than later.
*Sudha Mahalingam is Member, Petroleum and Natural Gas Regulatory Board and Former Member (Energy), National Security Advisory Board, India. All views expressed are personal.