Policy for Import & Transportation of Liquified Natural Gas (LNG) into India

(by B.L.Mehta, Executive President, Varun shipping Co. Ltd.)

A. PREAMBLE India is undoubtedly emerging as a major LNG market of the future. For the generation of electric power LNG is by far the most favoured fuel. LNG fueled Gas Turbine yields a high thermal efficiency of 55% as against 40% with Indian and 46% with imported coal. It has the highest calorific value in comparison with all other competing fuels and is the most Eco-friendly. It gives off the cleanest exhaust which is completely free from Acid Rain and other pollutants (refer to Table I). Since LNG is free from contaminants like Sulphur, Sodium and Vanadium, which generate corrosive after combustion products, operating costs, are comparatively one the lowest. India's installed power generating capacity is of the order of 94,055 megawatts (nearly 10% of which is contributed by Gas/Naphtha) and proposals for an additional capacity of 105,356 megawatts are still alive on paper, being under various stages of approvals/implementation. (Refer Table II). If these plans get implemented, approximately, 24% of this capacity would be provided by Gas/Naphtha. However LNG is comparatively cheaper and enjoys better price stability. Furthermore, LNG being available in abundant quantities in the Mid East Countries, Malaysia, Indonesia and Western Australia, which involves fairly short shipping distances, LNG would gain precedence over Naphtha in this niche. Some of the prominent Power Generating Companies like TATA Electric Power Company is planning to even convert their IPPs from coal to LNG. It is likely therefore that in the next decade LNG will play a dominant role in the generation of electric power in India. Additionally, LNG also provides several base stocks for the production of Nitrogenous and Phosphate fertilizers and petrochemical products in which India lacks self sufficiency and has to depend exclusively on imports which are likely to continue in the foreseeable future. Examples of these LNG derivatives are Ammonia, Methanol, MTBE, Formaldehyde and Methyl Methacrylate and Acetic Acid (refer to Table III). It is prognosticated on the basis of above, that in a span of 5 to 10 years, Indian imports of LNG could touch 35 - 40 million Tons a year (refer Table IV). In terms of sea borne LNG trade India would then be next only to Japan, which imports the largest and nearly two thirds of total LNG traded by sea (65 million Tons/year). In order to cater to the sea transportation requirements of LNG trade of this magnitude approximately 20 LNG vessels (about 130,000-cbm capacity) would be needed. This will entail a time charter cost of over 700 million dollars per year - which would undoubtedly impose a sizable burden on India's balance of payments. In view of the above perspective which has in the recent days acquired a high degree of visibility in the international market, all kinds of multinational players interested in the cake that LNG and related business opportunities in India present, are virtually swarming decision makers involved in potential LNG related projects. Major players seen in this are: - 1) Intending Sellers of LNG - Government supported Corporations i.e. Rasgas and QGPC of Qatar, Oman LNG of Oman, Adgas of Abu Dhabi, Yemen LNG of Yemen, Petronas of Malaysia, Pertamina of Indonesia and Woodside Petroleum of Australia. 2) Integrated gas companies like Enron, Shell, British Gas, Unocal Mobil and Gaz de France. 3) Equipment Vendors for Power Generation like Siemens, Asea Brown Boveri and CMS Energy. 4) Infrastructure builders Multinational Companies, Construction companies from the Far East ( from Korea and Japan) are the most visible contenders. 5) Ship yards having Shipbuilding capacity and (Mainly from Japan) and Technology for building LNG vessels (Korea).  A development of some concern that has surfaced recently in the Indian market, is the thrust by the Suppliers, i.e. the LNG Marketing Corporations in the Source Countries (1) and the Integrated Gas Companies (2), having substantial stake in the sale of LNG into India, to sell Shipping Services in tie-up deals to Indian Companies intending to import LNG. The sellers, even if they do not have any Shipping tonnage whatsoever (let alone LNG Operational Credentials) e.g. Oman and some LNG Traders who too do not possess any worthwhile LNG experience are vigorously pushing and enticing the buyers to relinquish the Ownership and Management Control of LNG Shipping to them, which is contrary to the practice followed by an overwhelming majority of LNG Importers. It is the same motivation that pervades the marketing efforts of Japanese and Korean Corporations having multi-billion dollars stake in selling ships and building LNG receiving/re-gassification infra-structure in India. They are vigorously promoting tie ups for Shipping Services by their group Companies i.e. NYK (A Mitsubishi Group Co), MOSK (A Mitsui Group Co.) and HMM (A Hyundai Group Co.). Unsolicited suggestions for Joint Ventures are in the air in which control of shipping should vest with the foreign partners. In view of the fact, that India has not enunciated a clear cut policy that should govern the transportation of LNG, it is feared that we are unwittingly or by default, consenting to the domination of a vital sector of our Industry by foreign Shipping interests, which will continue to cause a huge drain in our foreign exchange resources for a long time to come due to the long term nature of these contracts. Shipping contracts for LNG transportation entered into today employing foreign ships, will oust the Indian Shipping from this Sector for all time to come and this would sound the death knell of this industry which has been so painstakingly nurtured over half a century. It is well known, that the growth of Indian Shipping Tonnage is not only stagnating but has been declining in recent years due to a depressed freight market. The LNG opportunity could provide it with the requisite shot in the arm that could impart stability to our Shipping Industry through steady cash inflows available through long-term charters. This is indeed an opportunity of a lifetime that cannot be frittered away. It is in this context that a need for laying down a national policy for LNG Shipping with clear objectives that it should serve, is inexorably warranted. B. NATIONAL LNG POLICY Before delving into the mechanics of formulating the LNG Transportation Policy it is worth considering whether the LNG Transportation Policy should be a stand alone set of Objectives/Policy proclamations, or be evolved as a sub set of an Integrated Public Policy dealing with all aspects of LNG trade. Secondly, how and to what extent the Policy relating to the Ocean Transportation of LNG should be integrated into the overall Public Policy. This should become clear after giving a thought to some of the salient facets of the Public Policy that are likely to impinge on the LNG trade in a country such as ours, having practical regard to the fact that LNG trade always transcends across borders of several countries, serves several Industrial goals in an Industrial Society and involves a vast number of players such as:- the Gas sellers in the host country, gas buyers, investors/sponsors of associated Industrial and infra-structural complexes, consumers/guarantors, transporters, suppliers/vendors of capital equipment’s, insurers and risk managers each having their own corporate goals and almost all belonging to different countries having different financial, legal and tax regimes. It must, therefore be ensured that, at least, broad objectives of the National Policy on LNG, that are consistent with overall national interest, are identified and built into each of the subsets of the overall National Policy. Some of the facets of Public Policy bearing relevance to the LNG trade are briefly surveyed hereunder along with some directional suggestions/comments. A discussion among the key decision making echelons in the inter related ministries, government departments and trade organizations would provide the right forum and opportunity to evolve a balanced National Policy. 1) Energy Security Policy The objective of this policy should be that the country is assured of an uninterrupted availability of energy over a defined span of time, say 20 years or 50 years. An assessment has to be made of the overall energy demand projections in the defined time perspective and the means/resources necessary to satisfy this demand are to be prognosticated after taking into account the existing and potential national reserves and costs of exploring and developing new resources. The possible modes of transporting the energy resources to the site of its intended conversion into electric or other means of power has to be considered and planned for implementation at shorter time intervals of say 5 years. Shipping and Pipelines are the only two modes of LNG transportation. An integrated system of distribution such as a national LNG Grid supported by nationally controlled shipping fleet could provide the most cost-effective network for serving national goals to distribute LNG over a long time perspective. 2) Industrial Policy The objective consideration in regard to this policy input to the formulation of LNG Policy would be to ascertain and provide the total power demands needed to sustain a pre-planned level of Industrial and Economic growth. Another possible input could be to make available a viability analysis of the relative costs of competing feed stock materials which can produce the same intermediate or end product, so as to enable the production of the end product at the minimum cost to the consumer. It is in view of the fact that various fertilizer intermediates, like Ammonia and several petrochemicals, (derivatives of LNG) can be produced either using LNG as feed stock or alternatively, i.e. directly importing these products instead. This would enable a better assessment of the total national LNG demand. 3) Environmental Policy Should lay down the national preferences with regard to the choice of fuel for Power generation so as to bring about the desired level of environmental pollution control. It is customary in all Industrial economics to lay down the acceptable levels of contaminants in the fuel such as sulphur and ash content or prescribe a cap for the pollutants in the exhaust such as Sox, Nox and carbon monoxide, etc. It is obvious that environmental norms so prescribed would greatly influence the share of power generated by LNG possibly at the expense of Coal generated Power. 4) Foreign Policy Having regard to geo-political environments in our region it should be desirable to prescribe by way of a national objective that the sources of LNG supply are diversified to a reasonable extent, so that in the event of unforeseen hostilities or political instabilities in any geographical region or source country, the security of the energy supply is not jeopardized. National perceptions of our futuristic relationship with host countries supplying LNG would need to be kept in view. A well considered policy prescription in this behalf will not only insulate us from possible supply interruptions, it would also assist in maintaining a long term price stability for imports and build a wider spectrum of trade relationships. 5) Electric Power Policy Having regard to the objective of ensuring a well balanced industrial development and making the energy resources available at the least overall cost, it would be desirable to earmark the share of each energy resource in the generation of electric power. It should be a conscious national decision to allocate the percentage of power produced by LNG having regard to its CIF Cost, environmental benefits and low operating costs. It would also be useful to provide a Policy direction towards consciously increasing the share of one resource over the others having an eye on the future availability and projected import costs of the competing resources as well as the capital costs of the futuristic alternatives involved. Phasing out some of the obsolete power plants fueled by Coal in favour LNG based units is already setting in as a trend for future in India and abroad. 6) Energy Tariff Policy Electricity supply in India, for political and historical reasons is perceived to be a public service rather than a public utility, a concept which militates against the climate for attracting investments into this sector. In the context of LNG generated electricity it is unavoidable that this commodity is treated as a public utility which must be paid for, failing which the viability and integrity of the LNG chain is bound to break down. There could hardly be any room for populous and politically expedient rhetoric such as that electric power will be supplied free to a particular section of the Industry, society or a region. In this context, it would be desirable that the authority to set the electricity tariffs is vested in a central body rather than state bodies so that a balance between the inputs and outputs of the LNG chain is ensured on a uniform national basis and no link of the LNG chain gets stressed unduly. System of subsidies, wherever imperative, must be well defined and laid down for long perspectives of time. 7) Infrastructure Policy The objectives of this policy should be to demarcate the locations of power generation stations as also other LNG related industries such as Petrochemical and Fertilizer units, with a view to, evenly distribute the benefits of industrialization in various regions of the country. Infra-structural facilities for LNG reception are highly capital intensive and in a resource scarce country like ours we can ill afford to build LNG infrastructure in competing locations at short distances. Location of GP LNG at Pipavav, Petronet at Dahej, Essar/Shell at Hazira, Unocal/Natelco at Maroli, Tata/Total at Mumbai, DPC/Enron at Dabhol, do not appear to be guided by a sensible approach to locating the LNG receiving facilities in a cost effective manner. Most of these LNG terminals presently under implementation/consideration would cost several hundred Crores each. Safety hazards of such installations, in large numbers should also be a cause for national security concern. Here again, there is apparently a case that it should perhaps be the Central Govt. that should prescribe some guidelines for the location of LNG receiving Terminals rather than leaving it to State Governments. Furthermore guidelines also would need to be prescribed in regard to the ownership of such infrastructure installations and the manner in which the investments will be recouped i.e. by way of a levies and or Port charges spread over the volume of products handled by the serving infrastructure or any other form of service charge that would ensure a reasonable rate of return for the investor. 8) Maritime Policy LNG is undoubtedly a strategic commodity as determined by major users of this product such as Japan and Korea (who jointly account for 75% of Worlds LNG Imports) . The impact of the freight revenue if retained within the ambit of Indian trade basket being of the order of about 700 million dollars per year as stated in the Preamble, it is bound to have a significant bearing on India's balance of payments. Having regard to observations made in the Preamble and in the foregoing paragraphs, it would be inevitably desirable that, we must, like Japan and Korea, prescribe a policy declaring LNG as a strategic trade thus ensuring dominant participation for the Indian ship owners. A discussion on this subject will follow in the foregoing part of this paper. 9) Balance of Trade Policy Indian Economy has had to contend with an ever-increasing volume of trade deficit. Historically, for several years in the past, Imports have always outstripped the exports and, in dollar terms, the gap continues to widen. Consequently the intrinsic value of Rupee has steadily depreciated in comparison with currencies of trade surplus or economically strong countries. Consequently the expansion of foreign trade for which imports in larger volumes are inescapable does not seem to confer the benefit of increasing our national wealth and strength of our currency. Thus controlling the trade deficit continues to remain our much-desired national objective. Imports of LNG in such large quantities, as anticipated, i.e. nearly 40 million tons/year in the next decade, is estimated to levy a foreign Exchange outgo burden of nearly US $ (4.5 - 5.0) billion per year @ US $.2.6 per million BTUs and the Transportation Cost (inclusive of fuel and other charges) will be an additional outgo of about 1.4 billion @ 0.75 cents per million BTUs. A prudent approach will undoubtedly suggest that every effort should be made to ameliorate this ever-growing burden on India's Balance of Payments. Control of Shipping offers an opportunity not only to conserve the freight outgo but also to effectively control the FOB cost of LNG imports as well, through diversification of Supply Sources and taking advantage of options discussed in Section D of this paper. C. JAPANESE EXAMPLE The Japanese Government has dealt with the LNG trade (Import and Transportation) in the following manner:- A national committee on LNG comprising of Ministry of Trade and Industry (MITI), Ministry of Finance (MOF), Ministry of Transportation (MOT) has been set up for the purpose of setting goals and to provide the baseline for the national LNG policy. Liquefied Natural Gas (LNG) has been declared a strategic commodity. Control of LNG shipping has been declared as strategic necessity. Share of total power generated by LNG was initially set at 10% to 12%; it has been gradually increased to 25% as of now. A well-enunciated legal and financing structure has been provided to regulate and promote LNG Trade and Transportation. Modification of the charter of Japanese Development Bank has been made for facilitating investments in LNG infrastructure and ships. (A summary of Japanese LNG strategy is given in Annex. III) It is pertinent to mention that just as the situation in which Indian shipping stands today, the Japanese ship owners had initially engaged foreign LNG operators who assisted them to phase in the know-how of LNG operations. However, at the present juncture they have completely absorbed and indigenised the operations of LNG vessels just as Indian Shipping Companies have mastered the LPG operations. Further with the supportive policies laid down by the Japanese Government the ownership control of LNG fleet has also been nationalized completely. ADVANTAGES OF THE JAPANESE MODEL (i.e. BUYERS CONTROL OF LNG TRANSPORTATION) Control of Shipping by the buyer enables diversification of supply sources and bestows a freedom from domination of a single supplier. Tokyo Electric Power Company (TEPCO) sources their LNG supplies from as many as six countries. It affords better control of price negotiations and reduces the overall cost of supplies. It would be seen from the study of Annex. 1a and 1b that approximately 120 Billion Cubic Meters of LNG (110 BCM for end 97 + 8% approx. annual growth) are being currently traded by sea. Potential New Supplies of LNG, which are on the shelf awaiting immediate commercialization of production for want of buyers are also nearly of the same volume. This implies a 100% surplus ready for being tapped. Thus the market is poised to move in favour of potential buyers for a foreseeable future. This available freedom of choice can assist the buyer only if the control of shipping is wielded by him. Control of Shipping enables the Buyer to affect cost reduction of his imports by availing of the swing volume margins inherently incorporated in the Supply and Purchase Agreements (SPAs). The contracting practices currently in vogue in LNG trade permit the buyer to fix the quantity of the annual lifting with considerable flexibility of volumes between the Take or Pay Quantity (MBQ) and the Maximum. (Explanatory Notes) Minimum Billed Quantity (MBQ) is the quantity of the gas, which the Buyer is obliged to lift on an annualized basis. The failure to do so will entail a "take or pay" penalty. This volume is normally fixed at about 80% of the average Annual Contract Quantity (ACQ). However since the power supply demand varies with seasonal changes, the maximum lifting will take place normally in the winter months, the MBQ could be 60 - 65% of the Maximum Demand Quantity (MDQ) . In fact the Minimum Billed Quantity (MBQ) can be also passed over to the following years in the event of the buyers inability to lift MBQ in a particular year. The Buyers thus have lot of flexibility in their contractual obligations and can avail of the margin between MDQ and MBQ to their advantage by sourcing LNG on best opportunity basis from alternative suppliers which are invariably available at lower cost since all the suppliers are keen to maximize their revenues for the year by selling the available gas even at some discount rather than conserving it in the well. In many situations there are options of a spot purchase and swapping the product with other users. As per Drewry approximately 3 million tons of LNG (3% of total volume) were traded in 1997 on spot basis. However, such options are only exploitable if the control of the transportation is firmly in the hands of the buyer. Freight revenues are a sizable proportion of the total landed cost. In the case of Japanese LNG imports the FOB cost is approximately US$ 2.65 per million BTUs and the ocean transportation cost from WAG is approximately US$ 1.25 - 1.3 per million BTUs which is approximately 50% of the FOB Cost. The control of freight revenues therefore must be of a substantial commercial interest to the buyer. India, as stated earlier is seen to be an importer of 35 to 40 million tons of LNG per year in the next decade spread over several importers around the Indian coast. It is quite conceivable therefore that an active market cooperation network can be built up in order to provide a strategic and cost benefit to the country as a whole. At the present juncture most potential gas suppliers are located around the Arabian Peninsula that is Oman, Qatar, Abu Dhabi, Yemen and Iran. Due to geo-political factors that surround us and the supplier countries, it cannot be totally ruled out that unforeseen interruptions in the supply of LNG may not take place in the future due to hostilities breaking out or political upheavals. It would therefore be desirable on geo-political considerations that an option is available to us to source our supplies from the countries situated towards East of India, such as Malaysia, Indonesia and Australia. This could only be possible, if we control the transportation link, which would also be quite in keeping with our status as the dominant LNG buyers of tomorrow. E. LNG TRADE PROSPECTS AND INDIAN SHIPPING Even though, the National Shipping Policy Committee constituted by the Government of India in 1997 headed by the then Director General of Shipping: Shri M P Pinto had recommended that the emerging potential of LNG shipping should be substantially reserved for Indian shipping companies, it has unfortunately met with resistance from some quarters and the potential users. It is not difficult to understand that the motivation for this resistance has been provided by the vested interests represented by the Gas Sellers, Gas Traders and Equipment Vendors. By and large the potential users of LNG shipping services in India seem to have been taken in by false motivated propaganda prompted by foreign vested interests which has been nurtured by inadequate awareness of the LNG shipping by the users, and public at large. An oft repeated canard which has been vigorously spread is that Indian shipping companies lack LNG expertise and their financial capabilities are insufficient to take on the burden of massive investments that are necessary for the acquisition of LNG ships characterized by huge capital costs. It must be said that the bulk of Indian Shipping Industry too has not braced itself to this challenging opportunity in a pro-active manner. Neither has the government provided a forum for an educated debate on the role that national shipping can and should play in the LNG trade of the country. Consequently a gap does exist between public perception and the ground realities in regard to the capabilities of Indian Shipping Companies to service the trade. Notwithstanding a general public perception as evidenced from media reports, some of the Indian Shipping Companies have, however, seriously investigated, ways and means of overcoming these purported drawbacks and it has been found by them that the LNG vessels, are financed not necessarily on the basis of direct asset mortgage or the strength of balance sheets of the intending Companies, but that the financing of LNG vessels, is essentially driven by the project cash flows. In view of the fact that the LNG vessels are from the inception, dedicated to specific projects and are hence chartered for long tenures of about 20 years duration, the assured revenues that flow from long term charter commitments provide an acceptable form of security and comfort to the lenders. In fact funds are available in the international market to finance acquisition of LNG vessels at a very low gearing. It is, also possible to spread the loan repayments over longer tenures than the conventional shipping loans. Some Indian shipping companies have already received assurances from the financial markets in terms of firm commitments for the availability of financial packages for LNG Ships at attractive terms. As regards the alleged lack of expertise in the Indian shipping companies to operate cryogenic vessels, at least three Indian companies have reasonable working experience with LPG (-50° C) and Ethylene (-104° C) vessels. Some of them have finalized working relationships and have signed MOU's (Memorandum of Understanding) for a transfer of technology of LNG operations, in a phased manner with operators of LNG Ships, having a good track record and internationally established reputation. It needs to be reiterated that Indian shipping industry is not facing the challenge of embracing a new technology for the first time. It is the contention of Indian Shipping Industry, that the technology of LNG transportation is only marginally different (and not necessarily more difficult). from LPG/Ethylene (refer to Annex. IV). It is pertinent to observe that major burden of this difference (or complexity?) is absorbed by the design features of the vessel viz. by Selection of appropriate materials for the Cargo Containment Systems to withstand the lower cryogenic temperatures of -160° C for LNG and higher levels of insulation standards, so as to obtain an acceptable rate of gas boil off. It is for this reason that the cost of a LNG vessel of comparative capacity is approximately twice as much as that of a LPG vessel. It is also noteworthy that construction and operation of LNG vessels is rigidly regulated by the International Gas Carrier Code and the International Safety Management Code (ISM) adopted by IMO which are universally binding. The Procedures and Arrangement (P & A) Manuals which set down the Operational Procedures for Cargo Handling Operations on board as required under the International Gas Carrier Code as well as the ISM Documentation and Certification Procedures are mandatorily required to be prepared by acknowledged experts and approved by Maritime Administration Authorities as laid down by IMO. These procedures are uniformly applicable to all LPG and LNG Ships all over the world. Thus the LNG operations on board ships of today enjoy a fair degree of international standardization which the Indian Shipping Companies must also follow. Similarly the qualifications and skills of shipboard staff serving on Gas Carriers of any flag nationality have also been upgraded uniformly all over the world under the provisions of Safety of Training, Certification and Watch Keeping (STCW 95) which has been adopted by IMO on 01.07.1998 and is statutorily applicable for Indian Ships and Operators as well. Therefore, it is envisaged that the up-gradation of Operational competence from LPG/Ethylene to LNG by a Shipping Company, would be achieved without much hassles provided however, the Indian companies enter into workable Technology Transfer Agreements with international LNG operators. The quality of such an arrangement and the basic ability pre-requisites of the Indian Company, in any case, must be proven to the satisfaction of the International Lenders without whose approval the raising of finances would never materialize. Thus the basic pre-requisites for an Indian Shipping Company desirous of venturing into LNG Operations could be briefly summarized as follows:- Operating Experience with LPG Ships. A Technology Transfer Agreement with an internationally reputable LNG Operator. Ability to raise financial resources on the strength of (a) + (b) and a charter commitment from the LNG importer of repute having firm contracts for supply and sale of Gas both ways. F. SUGGESTIONS FOR A NATIONAL POLICY FOR LNG TRANSPORTATION The formulation of a Comprehensive National Policy on LNG embracing all the inter related policy aspects mentioned in Section B would need a lot of inputs from several ministries and government departments and would consequently take some time. However, in the meantime salient features of a National Policy for LNG Transportation logically derived from the preceding discussion and based on the Japanese model which to a large extent, is also being followed by South Korea and France (the other two major importers of LNG) are suggested for consideration and implementation. LNG be declared as a Strategic Commodity. LNG Shipping be declared a strategic need of the country. All LNG Imports should be bought on FOB basis only so that Indian Controlled Shipping Companies can be encouraged and enabled to increase their participation in this trade progressively. Transport of LNG by foreign Companies should be discouraged, however without causing any obstruction to the operational needs of the trade. In order to encourage participation of Indian Shipping in LNG transportation, the first right of refusal to transport LNG into India should be given to an Indian or Indian Controlled Special Purpose Vehicle (SPV) registered abroad, which can mobilize funding support in the international financial market on their own strength and technical competence built upon LPG experience and duly supported by a Transfer of Technology Agreement, with an LNG operator of repute acceptable to the project lenders. Transfer of Technology arrangement should provide for joint supervision during construction of the vessel and restore complete operational control to the Indian Company, in a time span satisfactory to the project lender but not later than 5 years after commencement of operations. As a second alternative, an Indian or Indian Controlled SPV registered abroad should be taken in as an active partner in the joint venture formed with a foreign company and which will control the operation of the vessel for an initial period of 5 years (for which period chartering permission may be initially given). After this period further chartering permission should be granted subject to Indian Company or Indian Controlled SPV being given the full operational control and the foreign partner being entitled to receive only the Bare boat component of the charter hire for a further period of 5 years. The Indian Company or Indian Controlled SPV should, at this stage, i.e. after 10 years, have the option of buying over the equity and any other residual stake of the foreign partner. An aspirant company under (5) will have precedence over (6). An Indian Controlled SPV, registered abroad would qualify for same benefits in regard to Corporate and Personal Taxation, as available to a foreign company rendering shipping services to transport LNG into India, so that they are in a position to compete with foreign owners, on even terms and are enabled to offer internationally competitive charter rates to the importers. Any relaxation of 5 & 6 may be granted by the Ministry of Surface Transport only for a minimum transitional period with the proviso that whenever Indian or Indian Controlled SPVs are in a position to fulfil 5 or 6, the foreign Shipping Company should accept their partnership, on the terms and conditions to be specified by the Central Government consistent with the objectives of LNG Transportation Policy. Employment of Indian Officers and Seamen on LNG vessels trading to India should be maximised. TABLE I Comparative Analysis: LNG Versus other Fuels Fuel Calorific Value (Kcal/Kg) % Sulphur Imported coal 6,000 0.5 - 1.2 LNG 11,500 0.1 Naphtha 11,200 0.15 Diesel 10,800 < 1.0 Fuel Oil 10.200 2.0 Plant Performance : Gas versus Coal Coal Pulverised Coal - PFBC Coal - ICGC Gas - CCGT Efficiency (%) 42 43 46 55 Carbon dioxide (gm/kWh) 830 810 760 380 Nitrogen oxides 9mg/kWh) 600 585 300 350 Sulphur dioxide (mg/kWh) 600 585 150 0 Cooling water heat losses (MJ/kWh) 4.3 3.6 3.2 2.6 PFBC : Pressurised fluidised bed combustion; ICGC : Integrated coal gasification combined cycle; CCGT : Combined cycle gas turbines. Source : Power Line - May 1998 TABLE II - Indian Potential (Existing and proposed capacity) Existing Capacity (By ownership) Capacity (MW) Coal Diesel Gas/ Naphtha Hydel Others Total State Sector 34,298 417 2,442 18,899 25 56,081 Public Sector 19,020 0 3,884 5,213 2,225 30,342 Private Utilities 3,208 0 585 324 917* 5,034 IPPs 130 200 2,398 0 0 2,698 All India 56,526 617 9,309 24,436 3,167 94,055 *Wind Potential capacity (Still alive on paper) Capacity (MW) Fuel 0-50 51-100 101-250 251-500 500+ Total Public Sector (including SEBs) Coal 0 0 0 3,760 9,630 13,390 Gas/Naphtha 47 135 375 1,090 1,950 3,597 Other Liquid Fuel 36 0 128 0 0 164 Hydel 590 589 2,797 3,155 12,192 19,323 Total Public Sector 673 724 3,300 8,005 23,772 36,474 IPPs Coal 0 0 1,150 5,490 19,401 26,041 Gas/Naphtha 140 728 3,551 4,353 10,347 19,119 Refinery Residue 0 0 110 2,300 700 3,110 Other Liquid Fuel 606 402 1,244 0 0 2,252 Hydel 15 100 0 1,430 2,100 3,645 Total IPPs 761 1,230 6,055 13,573 32,548 54,167 Private Utilities (including licensees) Coal 0 0 375 500 0 875 Gas/Naphtha 0 0 130 495 0 625 Hydel 0 0 450 0 450 Total Private Utilities 0 0 505 1,445 0 1,950 Under Bidding (proposed to be given to private or public sector) Coal 0 0 0 2,375 2,000 4,375 Gas/Naphtha 0 0 0 0 615 615 Hydel 82 307 312 1,774 5,300 7,775 Total 82 307 312 4,149 7,915 12,765 All India Coal 0 0 1,525 12,125 31,031 44,681 Gas/Naphtha 187 863 4,056 5,938 12,912 23,956 Other Liquid Fuel 642 402 1,372 0 0 2,416 Refinery Residue 0 0 110 2,300 700 3,110 Hydel 687 996 3,109 6,809 19,592 31,193 Total India 1,516 2,261 10,172 27,172 64,235 105,356 Source : Power Line * June 1999 TABLE - III LNG : Commercial Uses Derivatives of LNG are: Ammonia (NH3) obtained through a process of Reformation and Synthesis. Methanol (CH3OH) through Steam Reformation - Synthesis Gas / Catalytic Conversion. MTBE (Methyl Tetra Butyl Ether) - Lead free anti-knock gasoline additive. Formaldehyde - Feedstock for Chemical + Paint Industry. Methyl Methacrylate - Feedstock for Production of Acrylics. Acetic Acid - Feedstock for Polyester Fibre Fuel Applications of LNG: CNG/LCNG - Automobile Fuel - Substitute for Gasoline & Diesel. Cleaner Emissions - Lower fuel and maintenance costs (50 - 60% of range) As Industrial Fuel for Power Generation. As City Consumer Gas. TABLE IV (Major LNG import terminal proposals) Company Site Capacity (mtpa) Petronet LNG Dahej 5 Petronet LNG Cochin 2.5 TIDCO Ennore 5 Shell Hazira 2.5 Enron Dabhol 5 British Gas Pipavav 2.5 Reliance, Elf Hazira 5 Reliance Jamnagar 5 Total, HPCL Kakinada 2 Tata - Total Mumbai 2.5 Al Manhal Gopalpur 2.5 Unocol/Natelco Maroli N A Source : Power Line May 1998 ANNEXURE - 1a (LNG IN ASIA - DEMAND/SUPPLY) LNG EXPORTS Suppliers 1996 bcm 1997 bcm Libya 1.1 1.1 USA 1.7 1.65 Qatar 0.00 2.86 Abu Dhabi 6.7 7.52 Brunei 7.7 8.25 Australia 9.1 9.77 Malaysia 15.3 19.66 Algeria 18.3 24.20 Indonesia 32.1 35.54 TOTAL 92.0 110.55 LNG IMPORTS Consumers 1996 bcm 1997 bcm USA 1.1 1.98 Italy 0.0 1.90 Turkey 2.2 2.90 Taiwan 3.3 3.53 Belgium 3.7 4.80 France 6.6 9.20 Spain 7.1 6.26 Korea 12.0 15.71 Japan 56.0 64.27 TOTAL 92.0 110.55 Source : Cedigaz, Paris ANNEXURE – 1b LNG IN ASIA - NEW SUPPLY SOURCES POTENTIAL NEW LNG EXPORTS PROJECT SIZE (bcmy) Gorgon (Australia) 10 Undan Bayu (Australia) 4 Bonaparte (Australia) 3 Irian Jaya (Indonesia) 6 Natuna (Indonesia) 7 Papua New Guinea 4 Qatar III 7 Sakhalin I 8 Sakhalin II 6 Trans-Alaska 19 Pac Rim 4 Yemen 7 Egypt 10 Venezuela 8 Iran Not known TOTAL 103 + Source : Cedigaz, Paris ANNEX. - III THE STRATEGY OF JAPAN Natural gas imports (all in the form of LNG) are handled by well - established, credit worthy, large regional utilities: Electric utilities. Gas utilities. The Japanese government encourages tariff stability and indirect support. No use of sovereign guarantees is necessary. The support consists of: Government lending to LNG exports projects delivering LNG to Japan. Support of Japanese consortia for risk sharing. Support for Japanese control of more LNG shipping. There is no foreign participation in strategic gas infrastructure such as LNG terminals or gas transmission pipelines. Risk reduction tactics by Japanese companies: Control transportation of LNG to Japan. Investment in upstream gas production for LNG exports projects. Creation of consortia to share and spread risk. Purchase of LNG from multiple sources: Indonesia, (b) Malaysia, (c) Alaska, (d) Qatar, (e) Abu Dhabi, (f) Brunei and (g) Australia. Negotiation for access to expansion potential of sources with large gas reserves, sources with low production costs and sources with low political risk: Indonesia, (b) Malaysia, (c) Brunei, (d) Australia, (e) Qatar and (f) Abu Dhabi. Pooling and sharing of LNG supply among buyers in event of supply interruption. (Source: Liquefied Natural Gas: Developing International Energy Projects by Gerald B Greenwald) ANNEXURE – IV Technological comparisons (LPG/LNG ships operation LNG SHIPS LPG SHIPS Double hull structure with cargo containment, Suitable for - 160° C Double hull structure with cargo containment, Suitable for - 50° C for LPG & - 104° C for Ethylene Cargo tank material - Stainless Steel (36% Ni) or Aluminum Alloy - Heavily insulated Cargo tank material - 6 -9% Nickel Steel - Moderately insulated High capital cost Capital cost less than 50% Life expectancy (35 - 40 years) Life expectancy (30 - 35 years) No re-liquefaction plant Re-liquefaction plant fitted Vapour Boil off - Fuel for Boilers No vapour release Steam propulsion Diesel propulsion Cargo - Single Product - No change in cargo Cargo - Multi Products - Frequent cargo changes Fixed two port operations Multi port operations Non corrosive Chances for corrosion due to cargo change overs/NH3 No bio - chemical hazards Bio-chemical hazards - Reactivity with previous cargoes, moisture, Air.

  Courtesy: http://shippingstarnet.com/lng.htm

Author:

Mr. Brij Lal Mehta is a Marine Engineer by profession and is well known figure in the Indian Shipping Industry. Starting his career in 1957 as a Junior Engineer, he rose to the position of Executive Director, Shipping Corporation of India. In 1981 he joined Century Shipping as Chief Executive and was responsible for making it a highly professional and profit making shipping company in a very short time. In 1991 he moved to Reliance Industries Ltd. as President, Shipping Division. He was responsible for setting up and operating Ethylene Supply System, comprising of shallow draft Liquefied Ethylene Carriers, a dedicated jetty terminal, safe navigation system, and Ship to Ship Ethylene Transportation System.Besides above he has represented various Technical and Professional bodies like, Chairman of Indian Technical Committee of Lloyd’s Register of Shipping and immediate past president of Indian National Shipowner's Association (INSA).At present he is Executive President with Varun Shipping Company Ltd., who owns a diversified fleet of 13 ships including LPG carriers, amounting to 50% of Indian LPG fleet.His present paper is a bench mark for Indian LNG policy and emanates from well-researched material, his administrative and technical knowledge, and long experience behind it.