The world energy market has been changing fast. With it the natural gas
market is also witnessing a change hitherto unseen. On the demand side
the fast developing economies of India and China has created a massive
increase in demand for energy. Along with the traditional form of
hydrocarbon - crude - this has created a rising appetite for natural
gas. Both India and China are adding LNG capacity, a minor fuel till a
couple of years ago. Natural gas represented a mere 3 percent and 8
percent of total primary energy consumption in China and India
respectively in 2004. Since then both countries are rapidly expanding
infrastructure to serve demand.
While the growth stories of India and China remain a favourite one for any global economic analysis there had been many other factors which changed the natural gas market dynamics. On the demand side for instance the closure of Tepco's nuclear plant in Japan saw a seven per cent increase in demand from the major gas buyer. On the other side of the globe, Spain, another major consumer of natural gas, saw a sharp rise in wind power generation, thanks largely to the Mother Nature; this led to fall in demand for natural gas.
The change in government policy or the refusal for change in certain cases, too, has affected the market. In South Korea, another major buyer, the government decision to create three separate companies to handle natural gas business and the delay in settling the gas buying procedure led to the country shifting to spot buying. A spot buying of a commodity, supply of which is finite in the short term, puts extra pressure on the market. Natural gas exploration and production is capital intensive. Also storing the gas produced is not simple - it is both capital intensive and creation of such underground storage is time consuming. Therefore suppliers require long term contracts to protect against sudden shifts in demand. Sometimes such contracts spell trouble also. For instance a producer in South East Asia had to buy LNG to meet its long term commitment.
The unavoidable fact is that every market follows its own pattern - that of supply, cost of production, cost involved in creating an infrastructure for supply and of course the willingness or the ability of the buyer to meet the expenditure involved in production and supply. The buyer's willingness will depend on the availability of alternate product and the cost of the same. If any country intends to participate in any market it must follow the rules governing the market. The same applies for India as well.
Price discovery of natural gas in India is a contentious issue. There was a point when natural gas from the western field had little use. To promote the use of the gas, therefore, the government offered benefits beyond the rules of the market. The problem is that once a distortion is created it takes long to remove the same. Thus natural gas pricing remained a debatable issue. India is the only country where pricing of gas is based on the source of supply. There are at least six different prices and benchmarks for gas pricing, each catering to a specified group of consumers. The aberration is both a demand side and supply side bottleneck. On the demand side it has created a lobby of buyers which keep demanding price benefit rightfully or wrongly. On the supply side presence of such a mind set prevents market driven price, therefore hesitation in investing in exploration and distribution. India may eventually miss the opportunity of exploring hydrocarbon deposits hidden in its coast.
While there will always be lobbies and special interest group finally the market rules take over. Take for example the predicament that Royal Dutch faced when it could hardly find takers at a price of US $ 8 per MBTU. India now reportedly has been paying more than $9 per million Btu for one cargo. Natural gas shortages in India have reportedly left natural-gas-fired electric power plants and fertilizer plants underutilized in the past few years.
India had 38 trillion cubic feet (Tcf) of proven natural gas reserves as of January 2007. The bulk of India's natural gas production comes from the western offshore regions, especially the Mumbai High complex. The onshore fields in Assam, Andhra Pradesh, and Gujarat states are also major producers of natural gas. According to EIA data, India produced 996 billion cubic feet (Bcf) of natural gas in 2004. India imports small amounts of natural gas. In 2004, India consumed 1,089 Bcf of natural gas, the first year in which the country showed net natural gas imports. During 2004, India imported 93 Bcf of liquefied natural gas (LNG) from Qatar. Total import in 2006, as mentioned earlier, crossed 253 Bcf with Qatar accounting for the bulk of it.
There have been several large natural gas finds in India over the last five years, predominantly in the offshore Bay of Bengal. In December 2006, ONGC announced that it had found an estimated 21 to 22 Tcf of natural gas in place at the KG-DOWN-98/2 block off the coast of Andhra Pradesh in the Krishna Godavari basin. On the same day, ONGC announced another find in the Mahanadi basin off the coast of Orissa state, with an estimated 3 to 4 Tcf in place. Neither of these finds has been certified, but could potentially raise India's natural gas reserve levels significantly. The discoveries also fit into the recent trend of large upstream developments in the Bay of Bengal, especially in the Krishna Godavari basin. State-owned Gujarat State Petroleum Corporation (GSPC) holds an estimated 20 Tcf of natural gas reserves in place at the KG-OSN-2001/3 block in the Krishna Godavari area. Reliance Industries has already secured government approval for the commercial development of the D-6 block in the Krishna Godavari basin, which holds 9 Tcf of recoverable natural gas reserves (14.5 Tcf total reserves in place). Under the development plan for the D-6 block, Reliance and its equity partner Niko Resources will spend $5.2 billion to bring the first natural gas to the market in 2009. At its peak, the D-6 block is expected to supply 2.8 Bcf/d of natural gas, which would more than double the country's current production level.
Despite these large natural gas finds, most analysts expect natural gas demand in India to outstrip new supply in the years ahead. Indian natural gas consumption has risen faster than any other fuel over the last five years. According to the estimate of the 11 th Five Year Plan demand for gas in India at the end of the Plan period (year 2012) will be 283 mmscmd. At the same time domestic supply, including from the new fields of the KG Basin, will be at 108 mmscmd; and RLNG at 82 mmscmd. There will be a shortfall of 90 mmscmd
To help meet this growing demand, a number of import schemes including both LNG and pipeline projects have been floated. One such scheme is the Iran-Pakistan-India (IPI) Pipeline, under discussion since 1994. The plan calls for a roughly 1,700-mile, 2.8-Bcf/d pipeline to run from the South Pars fields in Iran to the Indian state of Gujarat. A variety of economic and political issues have delayed the project agreement. Indian officials have security concerns. In addition tripartite talks in December 2006 fell over natural gas pricing disputes. Both Indian and Pakistani officials refused Iran's proposed price of $8.00 per million Btu (MMBtu), stating that they would not pay more than $4.25/MMBtu.
India has worked to join onto the Turkmenistan-Afghanistan-Pakistan Pipeline (TAP, and sometimes referred to as the Trans-Afghan Pipeline). The TAP project consists of a planned 1,050-mile pipeline originating in Turkmenistan's Dauletabad-Donmex natural gas fields and transporting the fuel to markets in Afghanistan, Pakistan, and possibly India. India was invited to join the TAP project in February 2006.While India had publicly promoted this scheme when negotiations with Iran slowed; the TAPI project faces a variety of hurdles. There are concerns about the security as the proposed line would traverse unstable regions in Afghanistan and Pakistan. Furthermore, there is doubt that Turkmen natural gas supplies might be inadequate to meet its proposed export commitments.
A third international pipeline proposal envisions India importing natural gas from Myanmar. In March 2006, the governments of India and Myanmar signed a natural gas supply deal, although a specific pipeline route has yet to be determined. Initially, the two countries planned to build a pipeline that would cross Bangladesh. However, after indecision from Bangladeshi authorities over the plans, India and Myanmar have studied the possibility of building a pipeline that would terminate in the eastern Indian state of Tripura and not cross Bangladeshi soil.
The political and security issues delaying the apparently feasible pipelines projects India has to depend on use of LNG in a big way. At present Petronet LNG terminal at Dahej can handle 5 MMTP of LNG. It plans to expand the capacity by another 7.5 MMTP. Shell's Hazira has a capacity of 2.5 MMTP. Petronet LNG is adding a capacity of 5 MMTP at Kochi in two phases of 2.5 MMTP each. Dabhol is expected to add another 5 MMTP of capacity. By year 2012 India needs LNG handling capacity of 23 MMTP which is likely to be ready well in time.
If one looks at the major global natural gas reserves Iran, the one with the second largest known reserve, is still a small player in the market. ( Russia with 1680 tcf is the largest) If India-Pakistan-Iran pipeline finally takes shape India can gain immensely from about 975 trillion cubic feet of gas reserve in Iran. Qatar with 910 trillion cubic feet, has the second largest known reserve. It has already emerged as the largest exporter of natural gas pushing Indonesia to the second spot. India buys largely from Qatar but must broadbase its source to ensure uninterrupted supply. Clearly India has only two options: importing LNG and intensify exploration and evacuation of known gas finds. Both necessitate economic pricing of the product. The unavoidable conclusion is that if India has to maintain its 9 per cent growth rate unimpaired it cannot afford to debate the gas pricing issue any longer. Finally market must guide the pricing principle - the sooner Indian consumers accept the inevitable and let there be uniform market-determined pricing policy the better for the economy.
India cannot avoid following eventually a domestic gas pricing policy based on the global average of spot and long term contract prices. Since, as explained earlier, natural and manmade factors influence the natural gas price, India, too, must use judiciously spot and contract market prices. Even for domestic reserves unless the same principle is adopted known reserves will never come to the market. With myopic policy of keeping market forces at bay and fixing prices arbitrarily the long term economic prospect of the nation will be sacrificed.
Courtesy: http://www.petronetlng.com/NewsContent.aspx?newsid=323
While the growth stories of India and China remain a favourite one for any global economic analysis there had been many other factors which changed the natural gas market dynamics. On the demand side for instance the closure of Tepco's nuclear plant in Japan saw a seven per cent increase in demand from the major gas buyer. On the other side of the globe, Spain, another major consumer of natural gas, saw a sharp rise in wind power generation, thanks largely to the Mother Nature; this led to fall in demand for natural gas.
The change in government policy or the refusal for change in certain cases, too, has affected the market. In South Korea, another major buyer, the government decision to create three separate companies to handle natural gas business and the delay in settling the gas buying procedure led to the country shifting to spot buying. A spot buying of a commodity, supply of which is finite in the short term, puts extra pressure on the market. Natural gas exploration and production is capital intensive. Also storing the gas produced is not simple - it is both capital intensive and creation of such underground storage is time consuming. Therefore suppliers require long term contracts to protect against sudden shifts in demand. Sometimes such contracts spell trouble also. For instance a producer in South East Asia had to buy LNG to meet its long term commitment.
The unavoidable fact is that every market follows its own pattern - that of supply, cost of production, cost involved in creating an infrastructure for supply and of course the willingness or the ability of the buyer to meet the expenditure involved in production and supply. The buyer's willingness will depend on the availability of alternate product and the cost of the same. If any country intends to participate in any market it must follow the rules governing the market. The same applies for India as well.
Price discovery of natural gas in India is a contentious issue. There was a point when natural gas from the western field had little use. To promote the use of the gas, therefore, the government offered benefits beyond the rules of the market. The problem is that once a distortion is created it takes long to remove the same. Thus natural gas pricing remained a debatable issue. India is the only country where pricing of gas is based on the source of supply. There are at least six different prices and benchmarks for gas pricing, each catering to a specified group of consumers. The aberration is both a demand side and supply side bottleneck. On the demand side it has created a lobby of buyers which keep demanding price benefit rightfully or wrongly. On the supply side presence of such a mind set prevents market driven price, therefore hesitation in investing in exploration and distribution. India may eventually miss the opportunity of exploring hydrocarbon deposits hidden in its coast.
While there will always be lobbies and special interest group finally the market rules take over. Take for example the predicament that Royal Dutch faced when it could hardly find takers at a price of US $ 8 per MBTU. India now reportedly has been paying more than $9 per million Btu for one cargo. Natural gas shortages in India have reportedly left natural-gas-fired electric power plants and fertilizer plants underutilized in the past few years.
India had 38 trillion cubic feet (Tcf) of proven natural gas reserves as of January 2007. The bulk of India's natural gas production comes from the western offshore regions, especially the Mumbai High complex. The onshore fields in Assam, Andhra Pradesh, and Gujarat states are also major producers of natural gas. According to EIA data, India produced 996 billion cubic feet (Bcf) of natural gas in 2004. India imports small amounts of natural gas. In 2004, India consumed 1,089 Bcf of natural gas, the first year in which the country showed net natural gas imports. During 2004, India imported 93 Bcf of liquefied natural gas (LNG) from Qatar. Total import in 2006, as mentioned earlier, crossed 253 Bcf with Qatar accounting for the bulk of it.
There have been several large natural gas finds in India over the last five years, predominantly in the offshore Bay of Bengal. In December 2006, ONGC announced that it had found an estimated 21 to 22 Tcf of natural gas in place at the KG-DOWN-98/2 block off the coast of Andhra Pradesh in the Krishna Godavari basin. On the same day, ONGC announced another find in the Mahanadi basin off the coast of Orissa state, with an estimated 3 to 4 Tcf in place. Neither of these finds has been certified, but could potentially raise India's natural gas reserve levels significantly. The discoveries also fit into the recent trend of large upstream developments in the Bay of Bengal, especially in the Krishna Godavari basin. State-owned Gujarat State Petroleum Corporation (GSPC) holds an estimated 20 Tcf of natural gas reserves in place at the KG-OSN-2001/3 block in the Krishna Godavari area. Reliance Industries has already secured government approval for the commercial development of the D-6 block in the Krishna Godavari basin, which holds 9 Tcf of recoverable natural gas reserves (14.5 Tcf total reserves in place). Under the development plan for the D-6 block, Reliance and its equity partner Niko Resources will spend $5.2 billion to bring the first natural gas to the market in 2009. At its peak, the D-6 block is expected to supply 2.8 Bcf/d of natural gas, which would more than double the country's current production level.
Despite these large natural gas finds, most analysts expect natural gas demand in India to outstrip new supply in the years ahead. Indian natural gas consumption has risen faster than any other fuel over the last five years. According to the estimate of the 11 th Five Year Plan demand for gas in India at the end of the Plan period (year 2012) will be 283 mmscmd. At the same time domestic supply, including from the new fields of the KG Basin, will be at 108 mmscmd; and RLNG at 82 mmscmd. There will be a shortfall of 90 mmscmd
To help meet this growing demand, a number of import schemes including both LNG and pipeline projects have been floated. One such scheme is the Iran-Pakistan-India (IPI) Pipeline, under discussion since 1994. The plan calls for a roughly 1,700-mile, 2.8-Bcf/d pipeline to run from the South Pars fields in Iran to the Indian state of Gujarat. A variety of economic and political issues have delayed the project agreement. Indian officials have security concerns. In addition tripartite talks in December 2006 fell over natural gas pricing disputes. Both Indian and Pakistani officials refused Iran's proposed price of $8.00 per million Btu (MMBtu), stating that they would not pay more than $4.25/MMBtu.
India has worked to join onto the Turkmenistan-Afghanistan-Pakistan Pipeline (TAP, and sometimes referred to as the Trans-Afghan Pipeline). The TAP project consists of a planned 1,050-mile pipeline originating in Turkmenistan's Dauletabad-Donmex natural gas fields and transporting the fuel to markets in Afghanistan, Pakistan, and possibly India. India was invited to join the TAP project in February 2006.While India had publicly promoted this scheme when negotiations with Iran slowed; the TAPI project faces a variety of hurdles. There are concerns about the security as the proposed line would traverse unstable regions in Afghanistan and Pakistan. Furthermore, there is doubt that Turkmen natural gas supplies might be inadequate to meet its proposed export commitments.
A third international pipeline proposal envisions India importing natural gas from Myanmar. In March 2006, the governments of India and Myanmar signed a natural gas supply deal, although a specific pipeline route has yet to be determined. Initially, the two countries planned to build a pipeline that would cross Bangladesh. However, after indecision from Bangladeshi authorities over the plans, India and Myanmar have studied the possibility of building a pipeline that would terminate in the eastern Indian state of Tripura and not cross Bangladeshi soil.
The political and security issues delaying the apparently feasible pipelines projects India has to depend on use of LNG in a big way. At present Petronet LNG terminal at Dahej can handle 5 MMTP of LNG. It plans to expand the capacity by another 7.5 MMTP. Shell's Hazira has a capacity of 2.5 MMTP. Petronet LNG is adding a capacity of 5 MMTP at Kochi in two phases of 2.5 MMTP each. Dabhol is expected to add another 5 MMTP of capacity. By year 2012 India needs LNG handling capacity of 23 MMTP which is likely to be ready well in time.
If one looks at the major global natural gas reserves Iran, the one with the second largest known reserve, is still a small player in the market. ( Russia with 1680 tcf is the largest) If India-Pakistan-Iran pipeline finally takes shape India can gain immensely from about 975 trillion cubic feet of gas reserve in Iran. Qatar with 910 trillion cubic feet, has the second largest known reserve. It has already emerged as the largest exporter of natural gas pushing Indonesia to the second spot. India buys largely from Qatar but must broadbase its source to ensure uninterrupted supply. Clearly India has only two options: importing LNG and intensify exploration and evacuation of known gas finds. Both necessitate economic pricing of the product. The unavoidable conclusion is that if India has to maintain its 9 per cent growth rate unimpaired it cannot afford to debate the gas pricing issue any longer. Finally market must guide the pricing principle - the sooner Indian consumers accept the inevitable and let there be uniform market-determined pricing policy the better for the economy.
India cannot avoid following eventually a domestic gas pricing policy based on the global average of spot and long term contract prices. Since, as explained earlier, natural and manmade factors influence the natural gas price, India, too, must use judiciously spot and contract market prices. Even for domestic reserves unless the same principle is adopted known reserves will never come to the market. With myopic policy of keeping market forces at bay and fixing prices arbitrarily the long term economic prospect of the nation will be sacrificed.
Courtesy: http://www.petronetlng.com/NewsContent.aspx?newsid=323
The author is managing director & CEO of Petronet LNG Ltd.
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