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India is the 6th largest producer of electricity after US, China. The electricity produced in India is produced by using various alternative methods like coal-fired plant, Gas-fired plants, nuclear plants, hydro etc. According to the predictions India will need to add over 150,000 MW of additional installed power generation capacity by 2025. Gas is predicted to account for about 20% of generation capacity in 2025, up from its current share of 10%. According to India’s Hydrocarbon Vision 2025 this would translate into a gas demand for power generation between 56 bcm/y and 76 bcm/y, depending primarily on gas prices, varying between $ 3 to $ 4 mmbtu. The power sector would account for about 50 percent of total gas consumption. In 2005 all of India’s gas-fired power plants required 17bcm/y to operate at a plant load factor of 90%. Other gas demand projections, including those made in the IEA’s World Energy Outlook, are considerably more conservative. The differences reflect the extent to which price sensitivity of demand and gas availability were taken into consideration.
The per capita Power consumption in India is increasing manifolds since Independence, due to various factors like rapid industrialization and factors like Rural electrification under “Rajiv Gandhi Grameen Vidyutikaran Yojna”. Since independence over 500,000 Villages are electrified but we still have lot to achieve. According to CEA 81% of the villages have been electrified till 31.05.07.
Coal accounts for over 70% usage as a fuel for power generation. But due to climatic constraints and Kyoto Protocol considerations other fuel should be considered such as natural gas that not only have high calorific value but also environment friendly and will also help in gaining carbon credits, which will be the another source of income for power generating companies. Huge gas finds have been announced in KG basin and Cauvery basin. Currently, India meets 70% of its energy requirements through imports. But as there are new natural gas reserves are found by RIL whose production is expected to start in mid-2008 which is estimated to produce 80mmscmd and one of the biggest and most significant discoveries of natural gas by GSPC whose production is expected to start in 2009, which is estimated to produce 65million to 70 million standard cubic meters. It seems that natural gas will be price at market rates. This has left a cause of concern for the power ministry. The risen prices are creating conflicts between power producers, Gas producers and the government. Power producer demanding less prices or high subsidy, and the natural gas producers are demanding high prices. As stated by the India’s Ministry of Petroleum that the country will have surplus natural gas in two years and its rapidly growing economy is likely to be fueled by it after major discoveries by state-run and private energy companies. The cost of power from any plant has three major components: (a) capacity cost of plant, (b) the cost of transmission, including the losses in transmission, and (c) the fuel cost.
The cost of fuel should not be considered in isolation instead overall view should be taken cost of electricity also include other factors than fuel which should also be considered like transmission and distribution losses, asset losses, operational losses. In India, average T & D (Transmission & Distribution) losses; have been officially indicated as 23 percent of the electricity generated. However, as per sample studies carried out by independent agencies including TERI, these losses have been estimated to be as high as 50 percent in some states.
TABLE OF CONTENTS
Chapter 1 – Introduction 1.1 Background
History of Natural Gas
1.1.2 Development of Natural Gas Pricing Methodology in India 1.1.3 Taxes and duties
1.1.4 Regulated pricing implies a regressive approach
1.2 1.3 1.4
Overview Purpose of study Objective
Chapter 2 – Organization 2.1 2.2 2.3 2.4 2.5 2.6 History of Indian School of Petroleum Technological Development Production / Operations Process Product Value Chain Mission Organization Structure
Chapter 3 – Identification of Problem Chapter 4 – Literature Review Chapter 5 – Research Methodology 5.1 5.2 Data Source Sources of error
Chapter 6 – Findings Chapter 7 – Analysis of the data Chapter 8 – Conclusion Bibliography References
LIST OF TABLES
Table No. 1. 2. 3. 4.
Title Capacity addition during Pre-NELP and Post-NELP Fuel Parity Calculation of delivered price of gas Rural Electrification.
Page No. 23 30 57 62
LIST OF FIGURES
Figure No. 1. 2. 3. 8. 9. Title Proved reverves at the end of 2006 World natural gas reserves by region,1980-2007 World Natural gas consumption by end use sector Growth of generation Per capita consumption of electricity in India(Kwh/yr) Page No.
19 21 22 26 32
Chapter 1 INTRODUCTION
1.1.1 History of Gas in India
Oil and Gas, in India, were first discovered in 1886 by Mr. Goodenough of McKillop Stewart Company, near Jaypore in Upper Assam. However the find remained noncommercial as he failed to establish adequate production. In 1889, the Assam Railway and Trading Company discovered an oil and gas well at Digboi, Upper Assam. The area was then acquired by Burmah Oil Co. But, during this period, gas was not considered as viable for commercial production. The associated gas during oil production was vented through a pipe at the top and set ablaze in order to avoid any potential hazard. Despite this practice the petroleum companies kept their interest in gas since it was considered as a ‘faithful companion’ to oil. Till 1955, the business of exploration of hydrocarbon resources, in India, was largely carried out by private companies. In 1955, the Government of India, decided to develop oil and Natural gas as strategic resources through public sector initiative. By late 1955, an Oil and Natural Gas Directorate was established under the Ministry of Natural Resources and Scientific Research, constituting of a core of geoscientists from the Geological Survey of India. In August 1956, the Directorate was raised to a status of ‘commission’. This gave birth to Oil and Natural Gas Commission (ONGC), now one of the ‘navratna’ companies. ONGC initially restricted itself only to the inland areas. In October 1959, ONGC was converted into a statutory body by an act of the Indian Parliament, which enhanced its powers. In 1961, the Government of India and Burma Oil Company became equal partners in OIL, which was earlier a joint venture with 1/3rd and 2/3rd shares respectively. In 1974, ONGC struck huge oil and gas field, now known as Mumbai High. The commercial production began 1976, however, the associated gas was once again set ablaze. In 1978, giant South Bassein free gas field was discovered. In 1978, the gas supply from Bombay offshore was used for power generation and fertilizer manufacture. During the period 1975-90, though the state owned enterprises kept increasing the reserve base, yet, the country continued to be one of the underexplored regions. Till 1990, only 40% of India’s estimated gas reserves were explored, hence creating a widening gap between domestic production and demand. Private sector investment was sought in E&P sector by offering exploration acreage through production sharing agreements with Government of India. In 1994, the Government awarded first of the fields to be operated through joint venture between state enterprises and private companies. Still, by 1998, the exploration efforts were low at 12 per 10000 sq km of exploratory wells compared to a world average of 100 (source: GAIL – Infraline Natural Gas in India: A Reference Book, p73). Of the 26 sedimentary basins only six were explored resulting in huge gap between potential and existing reserves. In 1999, the Government of India announced New Exploration Licensing Policy (NELP), with objective of invigorating E&P activities by providing attractive incentives and level playing fields to the new entrants, including foreign companies. Since then six rounds of NELP have already been completed and the VIIth round is about to be announced. In the six years of the first five rounds of NELP a significant capacity addition has been made as shown in the table below: Table 1 Capacity addition during Pre-NELP and Post-NELP
S.No. Indicator 1. 2. 3. 4. 5. 6.
Pre-NELP (19932006) 2D Seismic Survey (LKM) 24,091 3D Seismic Survey (SKM) 5,304 Exploratory Wells (Nos.) 167 PSC Blocks 28 No. of Discoveries (upto 25 15.04.07) Investment made on US$781.65 mn Exploration
NELP-I,II,III,IV,V (2000-06) 1,09,305 67,773 93 138 40 US$1451.18 mn
1.1.2 Development of Natural Gas Pricing Methodology in India The pricing approach for Natural Gas in India has seen several variants. The approach has been guided by the belief to secure the interest of all stakeholders equitably. Understanding pretty well that market mechanism is the best allocator of resources, the government had to deviate from it in order to provide the humane touch. The tender Indian economy of those times, when the first gas supplies commenced in 1959, may not have withstood the pressures of market forces. Till 1970, the prices were determined by Government Committees, which ranged between Rs 9 - 50/tcm. In 1970, ONGC negotiated prices with different consumer segments reaching around Rs 115/tcm. During 1974 to 1977, the producers determined the prices depending upon the opportunity cost to the consumer that included thermal equivalence of the substitute fuels. The price ranged between Rs 210 – 350/tcm. During the period 1978 – 82, the price for power sector ranged between Rs 1000 – 2600/tcm and for fertilizer sector it ranged between Rs 600 – 3500/tcm. In 1986, the government decided to charge uniform price on a year – to – year basis determined through cost-plus methodology. The price of natural gas was fixed at Rs 1400/tcm w.e.f. 30.01.1987, however price for North-East region was subsidized to Rs 1000/tcm. Subsequently, under the recommendation of Kelkar Committee, the price was revised to Rs 1550/tcm w.e.f. 01.01.1992, with provision to raise it by Rs 100/tcm p.a. upto Rs 1850/tcm by 1995. In Jan 1995, Sankar Committee was constituted to review the gas pricing. Its recommendations, though not intended, resulted in shifting the pricing approach from cost-plus to import parity. This was for the first time that consumers of natural gas in India got exposed to global dynamics. The committee had intended to determine the price based on long run average cost, calculated on basis of long term business plans of ONGC. Through this formula the committee arrived at a price of Rs 1854/tcm. The Committee eventually recommended a price of Rs 1800/tcm, giving due consideration to findings of Expert Committee, which based the pricing on costs of production on that day. However, new dimensions emerged in form of 1) higher price having been offered to
joint venture licenses at Ravva and Panna-Mukta-Tapti fields, and 2) likely import of large quantities LNG by end of next five years. Keeping all these developments in view, Sankar Committee recommended that the consumer price should keep increasing at rate of Rs 200 to Rs 250 per year. Government accepted these numbers but related it to the price parity with the cheapest alternative fuel oil. The pricing policy was announced as gas prices being a percentage of the fuel oil parity price in different years. Though the prices were same as proposed by Sankar Committee, but, the principle had changed to that of import pricing.The fuel oil basket was computed as average of four fuel oils, viz., Cargoes FOB, Med basis, Italy (1% sulphur); Cargoes CIF, NEW basis ARA (1% Sulphur); Singapore, FOB, HSFO 180 cst (3.5% surplus); and Arab gulf, FOB, HSFO, 180 cst (3.5%. sulphur)) with progressively .increased fuel oil parity as given below. Table 2
Year 1997-98 1998-99 1999-2000
% of Fuel Oil Parity (Other than N.E.) 55% 65% 75%
This price was, however, subject to the range Rs 2150 – 2850/tcm. The price was intended to be reviewed after three years with objective of achieving full Fuel Oil Parity over the years 2000-01 and 2001-02. But, it could not be achieved and the gas prices remained stuck at the ceiling of Rs 2850/tcm that was near 34% of then Fuel Oil Price. The gas prices did get stuck at Rs 2850/tcm, but, the gas market was becoming quite complex for Government’s comfort. As the market increased the diversity among the players increased too. Amongst the producers there were some from public sector with nominated gas fields, some from public private joint ventures and some who imported the gas in liquefied form. Among the consumers were the fertilizer industry, power industry, sponge iron and others. Due to diverse backgrounds and objectives the interests too became diverse. A deft balancing in the pricing of natural gas was required to be done by the Government. On July 23, 2003, a Group of Ministers, comprising of representatives from user and producer Ministries, met and recommended that the price of gas that had remained static since Oct 1999 should be raised from Rs 2850/tcm to Rs 3200/tcm. Some of the other recommendations made by the Group included the following: 1. Appointment of a Tariff Committee to study the cost structure of ONGC and OIL and suggest a reasonable price, within six months, for the period till complete deregulation of the gas prices could be achieved.
2. Gas produced by the JV of Panna-Mukta and Tapti, around 8tcm, to be sold at market-determined price. 1 tcm gas from Ravva JV to be taken by GAIL and the higher cost to be adjusted as per the existing arrangements. 3. In order to provide a level playing field to the public sector companies the gas produced by them (ONGC and OIL) from the new oil fields to be sold as per the NELP. 4. Price for the North-East region, which was then at 60% of the price for others, should be brought to 60% of the new price i.e. Rs 3200/tcm. A new gas pricing order, dated 26.06.05, was issued by the government revising the price to Rs 3200/tcm for the following categories of consumers: 5. Power sector consumers. 6. Fertilizers sector consumers. 7. Consumers covered under court orders. 8. Consumers having allocations of less than 0.05 tcm. 9. It was further decided that all the APM gas, estimated to be around 55 tcm, will be made available to these categories only. The price for small consumers and the transport sector would be increased over the next 3 to 5 years to the level of market price. With effect from 06.06.2006, the price of as for small consumers and the transport sector was increased to Rs 3840/ tcm. 10. It was decided that price for all other than the ones mentioned in above categories would be determined as per the market mechanism. 1.1.3 Taxes and Duties In order to reach the Burner Tip/ Delivered Price, we add the royalty, taxes and duties etc., which are payable by the consumer to the price calculated as per the above arrangement. The royalty, for the privately operated fields, is fixed on the wellhead prices as negotiated amongst the players, and presently it is 10% of the wellhead price. For ONGC gas, it is 0.18$/MMBtu, 10% of the ceiling price of 1.80$/MMBtu. Natural gas, being mineral, does not attract any excise duty. Sales tax is applicable depending upon whether the sale of the gas is within the state or interstate. In case of within the state sale the tax is as per the state rate, which may vary between 0 to 22%, and in case the sale is interstate a central rate of 4% would be applicable. Table 3 Calculation of delivered price of gas Consumer Price (say) $4.33 MMBtu
Royalty $0.433 Transportation tariff* $0.5 Sales Tax ( say 10%) 0.54 Burner Tip/ Delivered Price $5.8 MMBtu *It may be noted that GAIL is not permitted to make any margin on merchant sales, it is entitled just to the investment on the pipeline, which is computed as follows: Transmission charges to GAIL along HBJ pipeline Rs/tcm (Oct 1997) = 1,150 X calorific value of gas supplied by GAIL to consumer/8,500kcal per cubic metre. The consumer price these days is being determined by market mechanism. Earlier, let us say for the period Oct 97 – March 98, when the price of gas had to have import price parity (55% of the fuel basket), the consumer price was computed as follows: Consumer price at landfall = Basket of fuel price X 0.55 X Rs/US$ Exchange Rate X calorific value of gas/10,000Kcal In this analysis we will bypass the micro issues and deal with macro concern of what actually should be the approach while pricing the gas from NELP fields. 1.1.4 Regulated pricing implies a regressive approach The Government set up a committee, referred to as ‘R’ (reform) Group, to deliberate on the liberalization of the Petroleum Sector. It is chaired by the secretary Petroleum, and comprises Indian Industry’s elite, including Mukesh Ambani, Aditya Birla, and Chairmen of the major PSUs –IOC, ONGC and GAIL. The terms of reference of the committee are quite clear – a) unshackle the sector from government control b) Competition should be encouraged and the bureaucracy should be replaced by market as core determinant of prices and resource allocation c) The committee should recommend a set actions in order to achieve the objectives, but, in consideration with the political constraints. The report was submitted to the Government in 1996 and proposed three phased deregulation – First, allowing private participation in exploration and production. Second, limits on investment in refining and distribution should be removed. Finally, private companies should be permitted to market transportation fuels. In the final phase, the administered pricing mechanism should be replaced by market driven pricing. It was proposed that the three phases should be implemented by April 1, 2002. The bulk of recommendations were implemented on April 1, 2002. The private sector has access to E&P, refining and marketing. The APM has been abolished and the PSUs can operate independent of the bureaucratic control. But, the present natural gas pricing imbroglio seems to be indicating something else. There are allegations of monopolistic behavior on the part of RIL, implying that the competition is minimal. There are suggestions that the Committee of Secretaries should determine the price, rendering all the efforts to move towards market driven prices as futile. The PMO suggests that power generation should largely be coal based and natural gas be left for the interest of the fertilizer industry. Is this the way we wanted the ‘R’ Group to create an environment of market based resource allocation? Looking at the present situation it seems that the recommendations of the group would largely be bypassed. But, such a move would certainly erode the sanctity of the nation’s
decision making institutions. After all there has been involvement of the executive and the legislative arms of the government. It has been scrutinized by the parliament and endorsed by the Union Cabinet. Extensive debates preceded the pronouncements. (FE June 16, 2007, “Re-regulation of the Oil Sector” by Vikram Singh Mehta) Significant investments from international and domestic players were planned on basis of these pronouncements. Success of NELP can largely be attributed to the several fiscal and commercial incentives offered to the contractors. One of the incentives has been to sell the gas at market determined prices. Now that investments have come a debate has been initiated on whether market determined prices or not! Is there any vision to our development? In upstream business the inputs are deterministic while the output is probabilistic. In such a situation it may become quite tedious to compute a reasonable return. Hence, the traditional models of cost-plus pricing would not be able to do justice. In a month’s time NELP VII is to be announced. Any deviation from market determined pricing may lead to dis-interest on the part of the potential contractors and probably things would become simpler since no gas implies no pricing dilemma. There are arguments that by asking for regulated prices we are not retracting from what we promised. Article 21.1 of the Production Sharing Contract is often referred to in defense of moving away from market determined pricing. The Article states that all proposals by the contractor related to discovery and production of natural gas should be in context of the government’s policy for utilization of natural gas. One look at the historical development in the pricing of natural gas shows that there is a gradual move towards achieving market based price. Let us not try to take refuge behind selfinterpretations of government’s policy. The reluctance to go ahead with market-determined prices could be due to the fear of high prices eroding the vote bank (remember the terms of reference – consideration about political constraints). We have a history in price of onions felling the government. But, this tendency seems more of a political myopia than a visionary move. A recent article in Financial Express, dated July 5, 2007 “Cost of Political Myopia” by Arvind Sehgal tries to estimate the price India has been paying with our ‘one slow step forward only to retrace and go back two’ approach. He makes somewhat informed estimates of losses incurred in various industries: Retail At about 4% net higher prices being paid by the consumers on their overall spending through unorganized retail channels, the additional amount spent comes out to about Rs 60,000 cr in 2007. Add to it the supply-side in-efficiency losses to the tune of Rs 20,000 cr. Potential for taxation yet not estimated.
Housing: Near 16 million rentable houses can come to the market provided the present rent control laws are replaced by modern ones that are equitable to both the landlord as well as the tenant. Commercial rents have gone through the roof, yet, Indian government has done nothing to bring additional land in the market, update regulations pertaining to land use and the allowed floor area ratio (FAR). Indian businesses may have saved near Rs 4,000
cr, in the last one year, in rental values in the top eight urban cities provided FAR norms were made even partly comparable to other land deficient cities such as Hong Kong and Singapore. Our economy is getting increasingly services-oriented resulting in demand for office space outpacing the GDP growth rate. The financial impact on Indian businesses would be come further acute even as the government continues to turn blind eye this issue. Aviation: “The recent spat between a West Asian airline and the state-owned carrier once again highlights the misguided notion that there must be a state carrier and its monopoly has to be protected, no matter how shoddy its performance and services are, and how much it costs the average Indian citizen in terms of higher fares being paid out each time she has tot ravel out of India. The estimate of losses to this account could be near Rs 5000 cr pa. Education: Over 120,000 students Indian students study abroad, since they are unable to get admission in decent colleges despite achieving 80 -90% marks. The expenditure on studying abroad would be over Rs 16,000 cr, which is expected to increase year on year by 15% and hence we might result in spending more on educating our children abroad than the entire budget of the Government of India on Higher Education. Adding the loss of the four sectors together it amounts to near Rs 1,05,000 crore per annum. It is not that the approach has not affected the Hydrocarbons sector. The government’s infatuation with imposing pricing controls has left the oil companies bleeding. As per a report in Business Standard, dated July 5, 2007, the oil marketing companies could see a sharp rise in the subsidy, to the extent of 240% this year. Three marketing companies – IOC, BPCL and HPCL will have to foot a subsidy of Rs 17000 cr this year as against Rs 5000 cr last year. The under-recovery would be to the extent of Rs 55,000 cr. In the previous financial year, the oil marketing companies bore a loss of Rs 5000 cr and total under-recoveries of around Rs 49,000 cr. Further, the deviation from market principles has diluted the efficiency gains from competition, and also undermined the capability of the companies to fund R&D for clean technology and renewables. We find that the international oil companies spend the biggest amounts towards development of clean technology and renewable, but, Indian companies do not, may be, due to the strained balance sheets. Another development that needs mentioning is the tendency of the private players to look for foreign markets in case domestic market becomes un-attractive. Reliance, for example, has gained export oriented unit (EOU) status for its refineries, enabling them to generate more revenues from exports than from domestic sales. It makes good economic sense for Reliance since it can capture relatively high international margins, and by minimizing domestic sales it is able to mitigate the losses incurred in the domestic market. Adding to it the duty concessions it gets entitled to, indeed, benefits it a lot. But, it may not benefit the country, since this tendency can compel us to import relatively more expensive petroleum products. Have subsidies helped?
No doubt the higher prices would lead to higher cost of production for fertilizer and power companies. Talking about the fertilizer sector, as reported by Economic Times (07.07.07) the fertilizer subsidy bill is set to reach Rs 50,000 cr during 2007-08. Are gas prices responsible for this? No, it is the other inefficiencies of this sector which needs to be curbed. Seeking solution in lower prices of natural gas leads to permeating of the inefficiencies of one sector into other. Moreover if subsidies like this were to offer solution we would have overcome poverty long back. An article by Arvind Virmani in Business Standard dated 29.06.07, mentions the case of year 1999 – 2000. “The total subsidies provided by the central government were Rs 25,690 cr, of which 22,680 cr were for food and fertilizer. During the same period the central and the state governments together spent another 28,080 cr on ‘Rural development’, ‘Welfare of SC, ST and OBCs’ and ‘Social Security and Welfare’. Either of these was sufficient to bring all the poor to the consumption level of the person/household at 30% level. Given that poverty was between 26.1% and 28.6% either of these if transferred directly to the poor and disadvantaged would have eliminated poverty. Together these subsidies and poverty alleviation expenditures (Rs 53,770 crores) would have been sufficient to eliminate poverty in 1999-2000, even if administrative costs and leakages used up half the allocation. It can be argued that most efficient social welfare policy is a direct transfer of income to the poor through a negative income tax.” Ironically, the subsidized price of urea has prompted its overuse and hence making an adverse impact on long term productivity of the soil. Productivity loss has become one of the major banes for the farm sector today. In case of Power Sector, too, it needs to first mend its own house before claiming a share from the riches of others. Economic Times has reported in its issue of 29.06.07, “About Rs 2,70,000 cr, one-third of the total investment of Rs 8,10,000 crores earmarked for the power sector in the 11th Plan, will go down the drain, if immediate and effective steps are not taken to check transmission and distribution losses, a survey has said. India would not be able to come out of the power crisis if the T&D losses of about 30-40% are not controlled as these losses would result in deteriorating financial health of the power utilities, according to Assocham Eco Pulse (AEP) study on mounting T&D losses.” Instead spending time and energy on building case for getting natural gas at lower prices, it would benefit the power ministry more if it focuses on plugging the T&D losses. One can draw significant learning from the coal sector which provides the main fuel for the power sector. The coal prices have not been revised for few years now, which have quite adversely affected the production and modernization of the processes. There has been no attempt to economize on use of coal despite the fact that we might run out of it in next 50 years.
India being the sixth largest producer of electricity and the demand for electricity is increasing continuously. The growth in generation during 2002-03, 03-04, 04-05 and 0506 has been 3.2%, 5.1%, 5.2% and 5.2% respectively. In the year 2006-07(up to Dec2006) a growth rate of 7.5 % has been recorded. During the 10th plan the Compounded Annual Growth Rate (CAGR) of generation is expected to be about 5.1%. However, if adequate gas would have been available for the existing and new gas based plants commissioned during 10th plan than higher growth could have been achieved. The targeted addition capacity of 41, 110 MW comprising 14, 393 MW hydro, 25, 417 MW thermal and 1, 300 MW nuclear was fixed for the 10th Plan. Planning Commission issued the Integrated Energy Policy (IEP), during the 11th Plan GDP growth rates of 8%-9% have been projected. Only 2,114 MW gas based capacity has been planned for 11th Plan where gas supply has already been tied up. This does not include NTPC’s gas based projects at Kawas and Gandhar, totalling to 2,600 MW, for which NTPC says that it has the gas supply contract but the matter is sub-judice. However more gas based projects could be taken up for construction as and when there is more clarity about availability and price of gas. India is a fast growing economy and it expected to add 100,000 MW power generating capacity between 2002-2012. The use of coal has a limitations in terms of environmental considerations, quality and supply constraints, gas is expected to play an increasingly important role in India’s power sector. The Indian economy grew by 9.4 % in 2006 and is expected to grow by more than 8 % in 2007. The power ministry says that to keep the economy growing at around 9.5%, the country’s power generation will have to grow at a similar pace. India’s predicted strong economic growth the country will need to add over 150,000 MW of additional installed power generation capacity by 2025. Gas has current share of 10% and it is predicted to account for about 20% of generation capacity in that year. According to India’s Hydrocarbon Vision 2025 this would translate into a gas demand for power generation between 56 bcm/y and 76 bcm/y depending primarily on gas prices ranging between $ 3 to $ 4 mmbtu. The power sector would account for about 50 percent of total gas consumption. India’s gas-fired power plants required 17bcm/y to operate at a plant load factor of 90% in 2005. The first major policy paper on the future role of gas in India’s economy is issued in Hydrocarbon Vision 2025 in the year 2000. The Vision identified natural gas as the fuel of choice for the Indian economy and projects future gas demand in the economy broken down by different demand drivers.
Purpose of study
As we know that India is the 6th largest producer of electricity the demand of power are rapidly increasing. The main source of power generation are : Thermal power plants The problem with coal fired power plants is low calorific value of coal, high ash content and its hazard to the environment. Moreover, problems related to transportation of coal, rate of production and its supply and quality. There are continuous reports on coal supply shortages especially in monsoon season. Hydroelectric power plants Although hydroelectric power is admittedly one of the cleanest and most environmentally-friendly sources of energy, it too has the capability to alter or damage its surroundings. Among the main problems that have been demonstrated by hydroelectric power is significant change in water quality. Because of the nature of hydroelectric systems, the water often takes on a higher temperature, loses oxygen content, experiences siltation, and gains in phosphorus and nitrogen content. Another major problem is the obstruction of the river for aquatic life. Salmon, which migrate upstream to spawn every year, are especially impacted by hydroelectric dams. Nuclear power plants The nuclear power plants are clean when it comes to electricity generation. But the problems with them are mining and purifying uranium has not been a very clean process, spent fuel from nuclear power plants is toxic for centuries, as yet there is no safe, permanent storage facility for it. Transportation nuclear fuel to and from plants is very risky and the gestation period of these plants is very high. Solar power plants One of the big problems with solar power has been that it costs more than electricity generated by conventional means. But some experts think that, under certain circumstances, the premium for solar power can be erased, without subsidies or dramatic technical breakthroughs.
The main disadvantage regarding wind power is down to the winds unreliability factor. In many areas, the winds strength is too low to support a wind turbine or wind farm, and this is where the use of solar power or geothermal power are great alternatives. A wind turbine can only support a specific population. Wind turbines aren't like power stations, where you can just burn a bit more fuel to generate more energy when you need it. Wind turbine construction can last over a year, be very expensive and costly to the surrounding nature environment during the build process. Natural gas is one of the cleanest, safest, and most useful of all energy sources, it burns cleaner than other fossil fuels. Though there is volatility in the price of natural gas and uncertainty in the supply but even then we cannot ignore the benefits of using natural gas. The calorific value of natural gas is higher than coal and it do not leave ash, and most importantly it do not generate green house gases. The power generation companies who shift to gas fired power plants can also earn carbon credits. So with the help of this study I will be looking for the potential of natural gas for power generation.
1. To understand the world natural gas scenario. 2. To understand the Indian natural gas scenario. 3. To understand the fuel requirement by power sector. 4. To study and analyze the challenges and opportunities of Gas fired power stations.
Chapter 2 ORGANIZATION
2.1 History The Indian School of Petroleum was set up in 2001. It is a Unit of M-Power Energy India (P) LTD, has over the years established itself as a premier domain specific
institution providing state of the art services in the areas of Consulting, Funded Research, Projects, and Competency Enhancement Programs and Outsourced Project Services to the Oil & Gas Industry. Another important achievement made by ISP when it was selected as the Indian Partner of Energy Institute UK, and is credited with setting up India's First Energy Specific University the University of Petroleum & Energy Studies, recognized by the University Grants Commission of India. Other credit to Indian School of Petroleum is that it has trained over 9,000 Industry Professionals, and has executed with excellence, Consultancy Assignments, & Outsourced Projects through hands on application.Having recourse to over 150 highly skilled Energy Domain Experts , Indian School of Petroleum is well placed to offer state of the art services across the hydrocarbon value chain Comprehensively covering all major sectors of the Hydrocarbon Sector, The Indian School of Petroleum provides a platform to prepare professionals with broad based industry knowledge and provides training with extensive hands on experience. The Indian School of Petroleum has on its Advisory Board eminent professionals from the energy domain. The Board headed by Mr. T.N.R Rao, former Secretary, Ministry of Petroleum & Natural Gas provides strategic advice and guidance. The affairs of the Indian School of Petroleum are overseen by a professional Board of Governors chaired by Mr. B.D.Gupta former President JM Morgan Stanley, Director Finance Indian Oil Corporation and currently Advisor Finance ONGC Ltd. Other members of the Board are drawn from the cross section of the Indian Oil & Gas sector and has representation of eminent professionals drawn from , Reliance, ONGC, GAIL, BPCL, HPCL, ESSAR OIL, PETRONET LNG, INDIAN OIL and others. 2.2 Technological Development ISP’S Core Competencies • • • The Exhaustive Domain Expertise in Oil & Gas Value Chain. Competency Enhancement. Consultancy Services in various facets of the hydrocarbon value chain.
• • •
Implementation of Best Practices through Audits leading to ISP Certification. Process Management (Mapping, Re-engineering, Training, Improvement). Project Planning & Implementation.
2.3 Production/Operations process 2.3.1 Consulting Services ISP has well-developed competencies in technical consulting, advisory & training services in various facets of the hydrocarbon value chain viz Upstream, Refining, & Petrochemical Operations, Retailing, Supply Chain Management, & Support and Auxiliary Services. ISP can value add with its extensive domain knowledge to: • • • • • Benchmark current performance Identify strengths & opportunities for improvement and prioritize initiatives Process Mapping Planning & Implementation Audit & Certification.
2.3.2 Competency Enhancement and Training ISP’s tailored made programs cover the following areas • • • • • • • • • • The Hydrocarbon Value Chain Exploration & Production Refining Technology & Operations Gas (LNG,PNG,CNG) Technology, Engineering, Economics Retailing and Channel Management Supply Chain Management Petrochemicals Project Management Health Safety Security & Environment Automation & IT Applications
2.3.3 Retail Practice of ISP ISP has a well developed practice in retail and has been very active in this sector. ISP’s Retail Practice covers: • • • • • • • • Execution of Technical Advisory & Retail Plan implementation Services on turnkey basis. Market Research Surveillance Audit of Retail outlets Development of Benchmarks and Best Practices for Operations, Maintenance, HSE and Quality Control at product terminals Retail Visual Identity development and brand perception Studies on Highway Automotive Fuel Consumption & Future scenario Study on Regulatory Compliance for setting up retail chain in Oil & Gas BPO Services through deployment of ISP Manpower.
2.3.4 COMPETENCY ENHANCEMENT & TRAINING
ISP Competency enhancement program’s provide clients the opportunity to achieve Strategic alignment, post better results and build the bottom line, through preparing their core manpower resources for added responsibilities ISP offers confidential, customized program solutions to meet the training challenges of your workforce What ISP offer is : • • • • Unmatched Course Development Expertise Innovative Training Formats Industry Expertise Global Reach
Focus on Learning Partnerships: ISP focuses on long-term needs, and consistently delivers – forging lasting learning alliances 2.4 Product Value Chain
• • • • • • • • • • •
The Hydrocarbon Value Chain. Exploration & Production. Refining Technology & Operations. Gas (LNG, PNG, CNG)-Technology, Engineering Economics. Retail Engineering & Channel Management. Supply Chain Management. Pipeline Engineering & Systems. Petrochemicals. Project Management. Health, Safety, Security & Environment. Automation & Information Technology applications.
To established itself as a premier domain specific institution providing state of the art services in the areas of Consulting, Funded Research, Projects, and Competency Enhancement Programs and Outsourced Project Services to the Oil & Gas Industry.
2.6 Organization Structure
The institute has on its advisory board eminent professional and accomplished experts from diverse areas of the petroleum operations. The board headed by Mr. T.N.R. Rao, former secretary, Ministry of Petroleum and Natural Gas, Government of India, provides strategic advice and guidance to the management team of ISP. The affairs of the school are overseen by the Board of Governors which is chaired by Mr. B.D. Gupta, former President, JM Morgan Stanley, Director(Finance), Indian Oil Corporation, currently Advisor(Finance), ONGC ltd. And has practicing CEOs and Managing Directors of the Oil Companies. The academic affairs are supervised by the Board of Studies, which is chaired by Dr. S.J. Chopra, former Executive Director, Centre for High Technology, Ministry of Petroleum, Government of India.
Dr. Parag Diwan, Director-Academic Affairs, Indian School of Petroleum provides intellectual guidance to the management team of the school. Mr. Sanjay Kaul, Director, is leading the school. The school has already trained various professionals for certification, in-company and open-house programmers. Mr. Pummy Chicker has also played a very active and important role as a former Vice President in the institute.
Chapter 3 Identification of Problem
Earlier almost all the electricity was generated by using coal but slowly and gradually with the development of technology and entrance of private players new fuel options were invented like nuclear, gas fired plants, hydro power plants, but still the share of coal is highest. With the continuous increase in electricity demand and the hazards of using coal as a fuel give rise to the debate of using other fuels than coal for generating electricity. The environment friendliness and high calorific value makes the natural gas a strong contender for power generation. As it seems that the prices of natural gas will be market driven. This left a cause of concern for the power ministry about the subsidy and the price at which the gas will be available to them.
So the problem which is going to be studied is “The potential and challenges of gas fired power plants”
CHAPTER 4 LITERATURE REVIEW
I studied various research papers and newspaper articles to know about the topic given to me: The research paper titled “Gas to Power- India” by Dagmar Graczyk, Manager for South Asia, International Energy Agency (IEA), Paris, France published by IGU (International gas union). In that paper they focus on the India’s potential for gas fired power generation. The paper shows the analysis made by the ADB which projected that at a price of $3.5 bcm/y the capacity addition made by power generation will be 41100 MW by the year 2012. The paper shows another study made in the hydrocarbon vision 2025 that at a price of $ 3 the demand for gas by the power sector will be 61 bcm/y by 2012 and 76 bcm/y by 2025. At a price of $ 4 the demand will be 33 bcm/y by 2012 and 56 bcm/y by 2025. It concluded by saying that the potential for use of gas in India’s power production is large. India has one of the strongest economic growth rates in the world and has sufficient potential to maintain this high growth rate over a sustained period of time. The power sector will be growing in tandem with the economy. As the large discoveries have been made in India the scope for gas fired plants are large. Another reports titled “International energy outlook 2007” by EIA, U.S. department of energy and “BP Statistical review of world energy 2007” by British petroleum. These reports provide high-quality, objective and globally consistent data on world energy markets. The Review is one of the most widely respected and authoritative publications in the field of energy economics. The review focuses on world energy data, from that report I came to know about the world natural gas reserves, production, and consumption. They also talks about the consumption of natural gas by various sectors. The monthly reports published by CEA (central electricity authority) which shows all India installed generating capacity, growth in installed capacity, actual power position, targeted generation capacity etc. The 10th and 11th plan published by Planning commission of India. The plans shows the demand projection, targets, fuel requirements, supply position, growth in generation, initiatives made for power sector.
Various newspaper articles that give me insight about the price of natural gas at which it will be available for the power generation. The research paper titled “Gas to Power- India” by Dagmar Graczyk, Manager for South Asia, International Energy Agency (IEA), Paris, France published by IGU (International gas union). In that paper they focus on the India’s potential for gas fired power generation. The paper shows the analysis made by the ADB which projected that at a price of $3.5 bcm/y the capacity addition made by power generation will be 41100 MW by the year 2012. The paper shows another study made in the hydrocarbon vision 2025 that at a price of $ 3 the demand for gas by the power sector will be 61 bcm/y by 2012 and 76 bcm/y by 2025. At a price of $ 4 the demand will be 33 bcm/y by 2012 and 56 bcm/y by 2025. It concluded by saying that the potential for use of gas in India’s power production is large. India has one of the strongest economic growth rates in the world and has sufficient potential to maintain this high growth rate over a sustained period of time. The power sector will be growing in tandem with the economy. As the large discoveries have been made in India the scope for gas fired plants are large. Another reports titled “International energy outlook 2007” by EIA, U.S. department of energy and “BP Statistical review of world energy 2007” by British petroleum. These reports provide high-quality, objective and globally consistent data on world energy markets. The Review is one of the most widely respected and authoritative publications in the field of energy economics. The review focuses on world energy data, from that report I came to know about the world natural gas reserves, production, and consumption. They also talks about the consumption of natural gas by various sectors. The monthly reports published by CEA (central electricity authority) which shows all India installed generating capacity, growth in installed capacity, actual power position, targeted generation capacity etc. The 10th and 11th plan published by Planning commission of India. The plans shows the demand projection, targets, fuel requirements, supply position, growth in generation, initiatives made for power sector. Various newspaper articles that give me insight about the price of natural gas at which it will be available for the power generation. RIL Gas find Present consumption volume RIL pricing Controversy Still companies line-up for RIL gas The article titled “ RIL`s gas pricing formula draws flak from users” by Anupama Airy in the Financial express dated 11 June, 2007 focuses on the criticism from major user ministries i.e power and fertilizer. The criticism was on the bidding process adopted
by RIL to arrive at market determine price of $ 4.79 per mmbtu. RIL invited five power and five fertilizer companies for bidding. Based on these bids the price quotes range between $ 4.64 and $ 4.86 per mmbtu. RIL`s formula is clearly meant to maximize its selling price for gas, which will be to the disadvantage of both power and fertilizer sectors. The article titled “Going up in gas” by “Economic times” dated 12 June, 2007 stated the problems that are facing by RIL in the price discovery for the gas struck by it in KG basin. RIL initiated a price discovery by invited bids from potential users for the gas. The discovered price, range from $ 4.30-$ 4.37 per mmbtu. Two problems were encountered by RIL, one is the ongoing dispute between RIL and RRNL. The second relates to whether the price discovery process has been significantly transparent and broad based. The article titled “Govt. wants market driven prices for RIL gas” by Rakteem Katakey in Business standard dated 23 June, 2007. The article tells about the Government intention that RIL gas will be sold at market driven price rather than lowered administered price. If the gas will be sold at market driven price i.e $ 4.79 mmbtu the share of profit that the government gets will be much higher. Article titled “Gas threat to real economy” by Piyush Pandey in Economic Times on 4 July, 2007. The article states that Natural Gas is one commodity that might help India’s public and private corporations produce allegedly super normal profits in the coming years. If the gas will not be available at the affordable price than the government’s ambitious target to provide affordable power for all by 2012 will be thwarted. RIL’s KG D6 gas field has one of the highest internal rate of return among ongoing projects globally and would be the company’s major revenue earner in future. The two major consumers of gas i.e power and fertilizers are regulated sectors with their end products being sold at regulated prices. In fact the power sector earns only 14% returns. The government, through its Common Minimum Programme (CMP) and National Electricity policy (NEP), has envisaged capacity addition to the tune of 100, 000 MW during the Xth and XIth five year plans. Capacity addition to tune of 80, 000 MW during the XIth plan looks critical as government has added only 21, 180 MW during the Xth plan against target of 41, 110 MW. RIL has sought a price of $ 4.67 per mmbtu for power plants. Gas at $ 4.67 per mmbtu would push the electricity tariff to over Rs 5 per unit. In the past also government has re-negotiated power purchase agreement (PPA) to save consumers from higher cost of power. So, there is a case here for changing PSC to limit the gas price and returns to the contractors. If affordable gas will be available more than, 16000 MW of gas based plants can be added. Power sector indicate that for every dollar increase in price of gas from $2.34 per mmbtu, the governments petroleum profit will go up by Rs 17, 100 crore. Article titled “Petromin clears RIL`s D-6 gas price, with alteration” by Anupama Airy in Financial Express on 9 July, 2007. The petroleum ministry, bring down the base price
of gas to $ 4-$4.10 from $ 4.33 per mmbtu. The main change relates to dropping the built-in exchange rate parity in the RIL pricing formula. Article titled “Gas biggies present formulae to CoS” by the bureau of Economic Times on 11 July, 2007. RIL and other big gas producer like ONGC, headed by Mr. Mukesh Ambani made presentations to the committee of secretaries (CoS). RIL has held the company had arrived at the price of $ 4.33 per mmbtu for KG-D6 gas in transport manner. The company claimed at apart from high revenues upsides (as profit petroleum) for the government, gas sold at a price would also bring down fertilizer subsidy by Rs 6400 crores. According to ONGC, gas from the fields is selling at $ 4.75 mmbtu. The article titled “ONGC mulls 2700 MW power generation” by Rakteem Katakey in Business standard dated 13 July, 2007 which tells that ONGC is going to add 2700 MW of gas based generation capacity, for both captive and commercial use, through three plants. Article titled “KG basin price row may end up with Mansingh” by Rajeev Jayaswal in Economic times on 27 July, 2007. The article tells that the controversy over the pricing of natural gas from KG basin will end up with the newly appointed downstream regulator, L Mansingh. Article titled “Imports cheaper at $ 5 per mmbtu gas: Fertilizer department” by Rakteem Katakey in Business standard on 31 July, 2007. The department of fertilizer has said that gas priced at over $ 5 per mBtu, will force the country to remain dependent on imports. RIL has “discovered” a well head price of $ 4.33 per mBtu, which will work out to a delivered price of between $ 5.2-$ 6.2 per mBtu after taxes and transport cost. RIL price is opposed by power and fertilizer industry. If the price of gas in India is around $ 5 per mBtu, at which fertilizer department says it can afford to buy the gas, the cost at which a new plant in Nigeria, for example, can buy the gas will be around $ 2.5 per mBtu. Fertilizer department says that if they get gas for less $ 3 per mBtu. That will make plant viable, despite the $ 3.5 per tonne freight and port handling charges. Article titled “Reliance KG gas pricing in with Doc” by Rajeev Jayaswal in The Economic Times on 31 July, 2007. RIL’s gas pricing formula is independently examined by the PM’s Economic Advisory Council (EAC) chairman C Rangarajan. The senior officials that were involved in examining say that the end price of $ 4.33 per mmbtu is reasonable in terms of prevailing rates of natural gas in the domestic and global markets. But they have some reservation over the formula devised by RIL to derive the value of gas. They say almost 97% of the component in RIL`s formula is the fixed component. The pricing formula adopted by RIL is subject to an approval either by the government (parent administrative ministry) or by the regulator, under the terms of the production sharing contract.
Article titled “Wanted: a national benchmark price for gas” by Varun jaitly and Anupama Airy on 1 August, 2007. The reports give insight about the intentions of National Spot Exchange of India (NSEI) to set up a national level electronic spot market for petroleum product and natural gas. NSEL said that it will help refiners sell products at best possible rates and provide end users a place to buy at the most competitive rates. It also said that it would stand counter party guarantor with respect to all trades besides provide services like quality certification, storage of goods and customized value added services. With India moving from being a gas deficit to a gas rich country, the spot market will definitely become a necessity in coming years. Article titled “Government cannot set price, supply of gas: Ministry” by Siddharth Zarabi in Business Standard on 27 August, 2007. The petroleum ministry has rejected key conclusions of two separate reports on the vexed issue of gas pricing and allocation ahead of the first meeting on the issue by the empowered group of ministers ( EGoM) headed by External Affairs Minister Pranab Mukherjee. The two reports were submitted by Committee of secretaries and PM`s Economic Advisory Council. The ministry said that the government could only formulate a gas supply prioritization policy that encouraged the use of gas in certain sectors. However PSC under NELP, which involves private sector participation do not empowered the government to allocate gas for priority sectors. These views contradict both reports that recommend priority based allocation of gas. The ministry also said that the government’s right in pricing gas is limited to examining whether a proposal conforms to an arm’s length pricing basis or not between the buyer and seller. The government cannot impose differential pricing if the market can bear higher price.
Research Methodology The research problem is going to be studied by using Descriptive research. Descriptive research is used to obtain information concerning the current status of the phenomena to describe "what exists" with respect to variables or conditions in a situation. The methods involved range from the survey which describes the status quo, the correlation study which investigates the relationship between variables, to developmental studies which seek to determine changes over time.
For research no primary data was collected, only secondary data has been collected. No hypothesis has created and I will be discussing about the present scenario and likely future developments. 5.1 Data Sources Secondary Data: The secondary data was collected by visiting various Internet sites such as ministry of power, ministry of petroleum, google search etc. The data collected from various research papers and from various newspaper articles.
How you will process data?
5.2 Sources of Error The data has been collected from the secondary sources so the possibility of error is there. The results generated may have limitations as I am discussing the present scenario and future developments which are based on present conditions. So, as the present scenario will change the future developments will also get effected.
Findings of data
6.1 WORLD NATURAL GAS SCENARIO
The primary energy consumption of the world has increased by 2.4% in 2006, down from 3.2% in 2005 and just above the 10-year average. Except nuclear power the growth slowed for every sector. The most rapid growth is again shown by 4.9% increase in Asia Pacific region, while North America’s consumption fell by 0.5%. China continued to account for the majority of global energy consumption growth and its energy
consumption rose by 8.4%. The slow consumption among energy importers and continued strong consumption growth among energy exporters was the impact of continued high energy prices. The consumption of natural gas in the world grew by 2.5% in 2006, which is below than the 3.4% growth seen in 2005 but close to the 10-year average. Increased Russia and China consumption results in the declining of US and EU consumption. Despite an increase in gas used for power generation, gas consumption declined for the second year in a row in the US. High prices and warmer-than-normal weather made the European consumption fell. UK as well as in eastern European countries that experienced large increases in contracted prices shown a large decline in the consumption. A strong increase in Russian gas consumption was seen and it accounts for nearly 40% of the global increase. Chinese consumption grew by more than 20%. Gas production rose by 3% in 2006, slightly above the 10-year average. In Russia rapid growth among independent producers led to the largest incremental growth in production. Production in the US rose by 2.3% as it is recovering from hurricane-related outages, the strongest growth since 2001. The world’s largest decline in 2006 is recorded by UK, with output falling by 8.6%: in volume terms, its sixth consecutive annual decline. In 2006, International trade in natural gas increased by 3.1%, nearly half of the 10 year average. Due to weak demand among key importers and reduced export availability among key suppliers pipeline shipments stagnated as a result of strong domestic demand growth. Net exports declined from Russia, Canada and Argentina. Liquefied natural gas (LNG) receipts in Asia, the world’s largest regional market, rose by 10%. In 2006, the shipments of LNG rose by a strong 11.8%, well above the 10-year average. European LNG imports rose by 20% and US imports declined slightly. Egypt, Nigeria, Qatar and Australia saw the largest increases in LNG exports. GTL (the conversion of gas to liquid form), LNG (liquid natural gas) transportation and gas by wire, in which gas energy is converted to electricity close to source and transmitted by grid, offer ways of commercializing reserves that are currently too remote. The commercial viability of GTL remains distant but, given the prize of converting gas into a readily transportable end fuel, the prospect of GTL breakthroughs cannot be discounted. Significant increases in LNG, in particular, are set to provide much of the
flexibility and hence market liquidity to move the gas market on to a more global and dynamic footing . Current orders will result in significant increases in the global fleet of LNG ships by 2006, with the prospect of significantly greater increases after that. LNG is predicted to take a 10 per cent share of the global gas market in five years’ time, a huge step forward for this industry. Within the US alone, there are plans in place to build eight LNG terminals to accommodate the growing need for imported gas. Pipelines, though, will remain the dominant transportation method. Already, investment in more orthodox pipeline transportation is set to increase the supplies that can be taken from Russian, Libyan and Gulf fields to markets in Europe, the Caspian Sea and China. 6.1.1 RESERVES AND RESOURCES OF NATURAL GAS For the year 2006, proved world natural gas reserves, (proved reserves are generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs/deposits under existing economic and operating conditions.)As reported by BP Statistical Review of World Energy June 2007, were estimated at 181.46 trillion cubic metres—1.26 trillion cubic metres higher than the estimate for 2005 showing 0.7% increase, yielding reserves to production ratio of 63.3. Total Middle East constitutes the largest share of the proven reserves at 73.47 trillion cubic metres (2593.53 trillion cubic feet). Among the Middle East countries Iran and Qatar taken together constitutes 53.49 trillion cubic metres (1778.23 trillion cubic feet) of proven reserves. Reserve to production ratio indicates that reserves would last for more than 100 yrs. Brazil shows highest (13.5%) increase over the previous year reserve. . FIGURE 1
Source: BP Statistical Review, 2007
The regional grouping of total Europe and Eurasia accounts for the next largest proved reserves of 64.13 trillion cubic metres (2263.69 trillion cubic feet) constituting 35.3% of total proved reserves. Within the group the Russian Federation accounts for the largest proved reserves of 47.65 trillion cubic metres (1682.07 cubic feet) comprising of 26.3% of total proved reserves. If we talk of Former Soviet Union, it accounts for 58.11 trillion cubic metres (2051.28 trillion cubic feet) of total proved reserves, which is 32% of total world’s share. Total Asia Pacific has 14.82 trillion cubic metres (523.15 trillion cubic feet) of proved reserves which amount to 8.2% of total proved reserves. With the reserve to production ratio 39.3. The major countries in this region which have remarkable reserves are Australia, China, Indonesia and Malaysia. Total African region has 14.18 trillion cubic metres (500.67 cubic feet) of total proved reserves. The countries which have some remarkable reserves in African region are Algeria and Nigeria. They together account for 9.71 trillion cubic metres (342.91 trillion cubic feet) of the total proved reserves and contributes 5.4% in the total reserves. Total North America has 7.98 trillion cubic metres (281.62 trillion cubic feet) of total proved reserves, making 4.4% of the world’s total. USA is the largest contributor to this region with 5.93 trillion cubic metres (209.15 trillion cubic feet) of the total proved
reserves, which is 3.3% share of total proved reserves. North America has greater potential in the Alaskan region; hence this figure can change dramatically in the coming years. Total South and Central America has the lowest proved reserves of all the groups with 3.8% share of the world total. It has 6.88 trillion cubic metres (242.83 trillion cubic feet) of total proved reserves with reserves to production ratio of 47.6 which is higher than the North American region as well as the Asia Pacific region FIGURE 2 World Natural Gas Reserves by Region, 1980-2007
Source: www.eia.doe.gov Middle East and Eurasia account for almost three-quarters of the world’s natural gas reserves. In January 1, 2007, about 58 percent of the world’s natural gas reserves were reported to be located in Russia, Iran, and Qatar. Reserves in the rest of the world are fairly evenly distributed on a regional basis. Over the past decade, high rates of increase in natural gas consumption are reported, most regional reserves-to-production ratios are substantial. Worldwide, the reserves-toproduction ratio is estimated at 65 years. Reserves-to-production ratio of Central and South America is 52.0 years, Russia 80.0 years, and Africa 88.0 years. The Middle East’s reserves-to-production ratio exceeds 100 years
Worldwide undiscovered natural gas is estimated at 4,136 trillion cubic feet, slightly larger than the IEO2007 projection for cumulative worldwide natural gas consumption from 2003 to 2030. FIGURE 3 World Natural Gas Resources by Geographic Region, 2006-2025
6.1.2 PRODUCTION OF NATURAL GAS Total gas production in the year 2006 has been 2865.3 bcf (billion cubic feet), which shows an increase of 3.0% over the previous year’s production of 2779.8 bcf. The highest individual producer is USA, It accounts for 524.1 bcf of gas production contributing 18.5% of the total output. Total Europe & Eurasia produces the largest volume constituting 37.3% of the total output. It produces 1072.9 bcf in 2006 recording an increase of 1.2% over its previous year contribution which was 1060 bcf. The output of Denmark, Germany, Italy, Netherlands, Poland, Ukraine, U.K, declined while it increased in Azerbaijan, Kazakhstan, Norway, Uzbekistan, Turkmenistan, Russian Federation, Romania. North America stood as a second largest producer with 26.5% contribution in the total output. It produced 754.4 bcf of production and recording an increase 2.3% over the
previous year production of 736.9 bcf. Mexico shows a significant increase of 10.4% over its previous year production of 39.2 bcf. Total Asia Pacific continue to keep its increasing production trend, its production recorded as the third largest contribution about 13.1% to the total output, it shows an increase of 4% over its previous year production of 362.6 bcf, except India and other Asia Pacific region shows a decline in its production otherwise all have positive change in their production some shows slight changes and some are showing significant changes. Total Africa is showing an upward trend in production since 1996, it recorded the highest increase in production over the previous year, it shows a percentage change of 9.5% over the previous year. Except Algeria all regions have shown increase in production, Libya shows a significant increase of 31% change over the previous year. Middle East production is also significant in 2006 to the total output, it contributed 11.7% to the total output. It is showing an upward trend and contributed 335.9 bcf of gas, its contribution is more than doubled since 1996 when it contributed 158 bcf. All countries of the Middle East increased their production over the previous year. South & Central America is the least contributor to the total output. However except Venezuela whose production decline in 2006, the production of every other country has increased over the previous year. Total South & Central America contributed 5.7% to the total output. 6.1.3 DEMAND OF NATURAL GAS The natural gas consumption in the non-OECD countries grows more than twice as fast as in the OECD countries. Production increases in the non-OECD region account for more than 90 percent of the growth in world production from 2004 to 2030. Consumption of natural gas worldwide increases from 100 trillion cubic feet in 2004 to 163 trillion cubic feet in 2030 as reported in the International Energy Outlook (2007). By energy source, the projected increase in natural gas consumption is second only to coal. Natural gas remains a key fuel in the electric power and industrial sectors. In the power sector, natural gas is an attractive choice for new generating plants because of its relative fuel efficiency. Natural gas also burns more cleanly than coal or petroleum products, and as more governments begin implementing national or regional plans to reduce carbon dioxide emissions, they may encourage the use of natural gas to displace liquids and coal.
Much of the world’s natural gas use is for industrial sector processes. The industrial sector accounted for 44 percent of world natural gas consumption in 2004 and is projected to account for 43 percent in 2030. With world oil prices expected to remain high relative to historical levels throughout the projection period, natural gas is projected to displace liquids in the industrial sector to some extent. FIGURE 4 World natural gas consumption by end use sector, 2004-2030
An average annual rate of 1.9 percent increase was projected by EIA from 2004 to 2030 in the industrial use of natural gas, as compared with an average increase of 1.1 percent per year for liquids consumption in the industrial sector. Over one-half of the world’s total natural gas use was accounted by the OECD member countries, non-OECD Europe and Eurasia accounted for one-quarter, and the other nonOECD countries accounted for the remainder. In the non-OECD countries natural gas consumption grows more than twice as fast as consumption in the OECD countries, from 2004 to 2030 with 2.6-percent average annual growth for non-OECD countries, compared with an average of 1.2 percent for the OECD countries. Demand in the non-OECD countries for natural gas accounts for 71 percent of the total world increment in natural gas consumption over the projection period. Natural gas use increases from less than one-quarter of the world total in 2004 to 35 percent in 2030 in the non-OECD countries (excluding non-OECD Europe and Eurasia).
In world’s total natural gas production the OECD countries accounted for 40 percent of the world’s total natural gas production and 52 percent of total natural gas consumption in 2004; in 2030, they are projected to account for only 27 percent of production and 43 percent of consumption. In the OECD nations the production of natural gas increases by an average of only 0.4 percent per year, whereas their demand increases by 1.2 percent per year. As a result, the projections were made that OECD countries will rely increasingly on imports to meet natural gas demand, with a growing percentage of traded natural gas coming in the form of LNG. In 2030, more than one-third of the natural gas consumed in OECD countries is projected to come from other parts of the world, up from 22 percent in 2004. In North America the consumption of natural gas is projected to increase at an average annual rate of 1.0 percent from 2004 to 2030. In the United States the average annual growth rate for the demand of natural gas is projected to be 0.6 percent, significantly less than in Canada and Mexico, largely because of the impact of higher natural gas prices and supply concerns in U.S. natural gas markets. The United States accounted more than 80 percent of the 27.6 trillion cubic feet of natural gas consumed in North America in 2004 and emerged as the largest consumer in North America. In OECD Europe, Natural gas is expected to be the fastest growing fuel source with demand increasing at an annual average rate of 1.4 percent, from 18.8 trillion cubic feet in 2004 to 23.0 trillion cubic feet in 2015 and 26.9 trillion cubic feet in 2030. The majority of total incremental growth in natural gas use for power generation is projected to 2030. Being less carbon intensive than oil or coal-fired generation, and its cost competitiveness over renewable energy, make natural gas the fuel of choice for new generating capacity in OECD Europe. Natural gas consumption in Japan is projected to grow on average by 1.4 percent per year over the projection period, from 3.0 trillion cubic in 2004 to 4.3 trillion cubic feet in 2030. The electric power sector is projected the strongest growth in consumption, averaging 1.7 percent annually from 2004 to 2030. The growth at an average annual rate of 1.6 percent from 2004 to 2030 is projected for the total natural gas consumption in South Korea. The country’s predominant source of demand for natural gas in 2004 was
the residential sector, accounting for 39 percent of the total. The electric power sector was a close second at 33 percent of total natural gas use, followed by the industrial sector at 20 percent of the total. The non-OECD Europe and Eurasia region is more reliant on natural gas than any other region in the world. United States is the largest consumer and Russia is second in total natural gas consumption, with demand totaling 16.0 trillion cubic feet in 2004 and representing 55 percent of Russia’s total energy consumption. 44 percent of their combined total energy needs of the other countries of non-OECD Europe and Eurasia were met with natural gas in 2004, consuming 8.4 trillion cubic feet. In 2004, non-OECD Asia The fastest growth in natural gas consumption among all regions is projected, which accounted for only 8.5 percent of the world total natural gas consumption. But total natural gas consumption from 2004 to 2030 is projected to account for almost 30 percent increase. In non-OECD Asia the natural gas consumption is projected more than triples, from 8.5 trillion cubic feet in 2004 to 27.4 trillion cubic feet in 2030. In 2006, India increased its spot and short-term LNG purchases, reportedly paying more than $9 per million Btu for one cargo (a year earlier, Royal Dutch/Shell could not find customers for LNG from its Hazira re-gasification terminal at a price of about $8 per million Btu). In India natural gas shortages have reportedly left natural-gas-fired electric power plants and fertilizer plants underutilized in the past few years. According to the projections India’s natural gas consumption will rise rapidly in the mid-term, growing by 6.2 percent per year on average from 2004 to 2015. The acceptance of international natural gas prices in India, and the Krishna-Godavari basin will start supplies from around 2009-2010, domestic natural gas supply is expected to catch up with currently underserved demand and also expand to serve new demand. 6.2 THE POWER SECTOR PERFORMANCE Indian economy growth is targeted to be over 8%. The major role in the sustainable development of the economy has to be played by energy. For achieving growth of such a
magnitude, the sector wise analysis of electricity, gas and water supply sector put together should also grow by 8%. The average growth in the economy has been estimated to be 7% in first four years ending 2005-06, according to the Economic Survey 2005-06. The actual growth of GDP in real terms during 2002-03 was 4.2%, 8.5% during 2003-04, and 7.5 % during 2004-05. The growth of economy has been estimated to be 8.1% during 2005-06. The growth in the electricity generation growth has increased to over 5.1% during the last three Years of Tenth Plan., which was around 3.1% towards the end of IX Plan (2001-02). FIGURE 5
The shortages in demand met during peak time and overall energy supply is characterized as power supply position. All India basis the peaking shortage is about 12% however, peaking shortage is much more in every region. On regional basis the energy shortages are varying in magnitude and overall shortage on all India basis is about 7%. In the next 10 years in between 2006-2016 the generation capacity is required to be doubled to meet the growing demand and shortages encountered in various regions, so that the total demand both in terms of peak and energy can be met. FIGURE 6
India ranks sixth in terms Electricity Generation after United States, China, Japan, Russia, and Canada. The year wise growth in electricity generation has been 3.2%, 5.1%, 5.2% and 5.2% during 2002-03, 03-04, 04-05 and 05-06 respectively. A growth rate of 7.5 % has been recorded in the year 2006-07(up to Dec-2006). The Compounded Annual Growth Rate (CAGR) of generation is expected to be about 5.1% during the 10th plan. However, higher growth could have been achieved if for the existing and new gas based plants commissioned during 10th plan, adequate gas would have been available. The total all India generation capacity is 134717 MW as on 30.06.2007. The break up of all India generating installed capacity in shown below in the graph as provided by the CEA (central electricity authority). FIGURE 7
Sou rce: CEA
DEMAND PROJECTION AND GENERATION ADDITION In the 10th plan the targeted addition capacity of 41,110 MW comprising 14, 393 MW hydro, 25, 417 MW thermal and 1, 300 MW nuclear was fixed. For state power utilities and IPPs, keeping in view the preparedness of various state power utilities and IPPs a moderate target was set. The sector wise, type wise summary of this capacity addition target is given in Table below. TABLE 4 10th PLAN CAPACITY ADDITION TARGET-SECTOR WISE
Source: Planning commission The capacity addition of 16,423 MW and 19,119 MW was achieved in 8th & 9th plan. During the 10th Plan the likely achievement of capacity addition is expected to be 30641
MW. The actual capacity addition is expected to be much higher than the earlier five year plans, the capacity addition target of 10th plan could not be achieved. After analyzing the 10th plan lessons have been learned and reasons for the slippages have been found out. During the first year of 10th plan, public and private sectors projects totaling to 3,009 MW could not be taken up due to various reasons which included non availability of escrow cover by State Government to IPP projects and fund constraints. There was also delay in super critical technology tie-up by BHEL for six units of 660 MW to be taken up by NTPC which resulted in delay in tendering. During 10th plan projects totaling to 5,008 MW capacities could not take off, which were identified for execution. The target as were set in the plan by the planning commission and the achievements made by the power sector in April 2006- March 2007 is shown in the graph below. The achievement is less than 50% of the target set by the commission.
RURAL ELECTRIFICATION Rural electrification is a vital programme for socio-economic development of rural areas. Economic development and generate employment are the objectives are to trigger by
providing electricity as an input for productive uses in agriculture and rural industries, the quality of life of the rural people is to be improved by supplying electricity for lighting of homes, shops, community centres and public places in all villages. Rural Electricity involves supply of energy for two types of programmes 1. Production oriented activities like minor irrigation, rural industries etc.; 2. Electrification of villages. TABLE 5
Source: CEA The Government of India has an ambitious mission of ‘POWER FOR ALL BY 2012’. This is a great challenge. At the same time, this provides great opportunities for developers and investors. The Electricity Act, 2003 has made special provisions for not only de-licensing generation of power, but even de-licensing distribution of power and systems which promote de-centralized distributed generation and supply. This challenge is converted into opportunities for development and growth, the Government of India has put in place a very ambitious programme, namely Rajiv Gandhi Grameen Vidyutikaran Yojana to create a sound Rural Electricity Infrastructure.
Analysis of the data
Indian LNG Price and Sources The LNG is being sourced through long term contracts as well as in the spot market. The prices of LNG vary from one source to the other. The price of LNG imported from Iran being linked to Brent crude, but with a ceiling. A unit of LNG will cost India pay $ 1.2 plus 0.065 into the Brent crude price average, subject to the upper ceiling of $ 31 a barrel. This implies that despite Brent crude price crossing $31 a barrel, the applicable price would remain 0.065 of $31 a barrel, i.e. $3.215 dollars per million British thermal unit. The LNG price, for the first three years of supplies, was fixed at $2.97 per unit in order to make imports competitive with the Qatar price. Since the price of Brent has jumped from $31 per barrel to $70 per barrel, Iran is showing unwillingness to supply the LNG at the contracted price of $3.215 per mmbtu. Iran now wants $4.78 per mmbtu. The price at which Shell wants for LNG from its Hazira terminal is in between $7 to $9 per mmbtu. The last consignment was delivered to Gujarat State petroleum Corporation (GSPC) in December 2005. Since GSPC, the first and the only customer of Shell from Hazira project, decided not to extend the agreement at the exorbitantly high price of $9 per mmbtu. Shell has preferred to wait for the favorable environment but not willing to cut down its prices. It is not merely a wait game, instead the company is negotiating hard with prospective clients and feels that with rising demand and completion of gas rid in Gujarat, the users of liquid fuels would see merit in shifting to gas even at high prices of $7 to $9 per mmbtu. The absence of supplies from Shell created a shortage of 0.7milliom cubic metres of gas per day in the region. The operations started in after a lull of 5 months. These days the price charged by Shell ranges around $8 per mmbtu. In 1999, Rasgas and Petronet LNG entered into a Sales and Purchase Agreement (SPA), for 25 years, for 7.5Mta of LNG Supplies of 5 MMTPA LNG (equivalent to about 18 MMSCMD), under the first phase, commenced from 2004. The agreement was further amended in August 2006 to implement the sale of the remaining 2.5 Mta. The delivery is to commence from 2009. The price for LNG was linked to JCC crude oil under an agreed formula. However, the FOB price for the period up to December 2008 has been agreed at a constant price of $2.53/MMBTU. This price translates to RLNG price of $3.86/MMBTU ex-Dahej terminal. After 2008, the price will be linked to Japanese Customs cleared (JCC) basket of crude oil within a price band of $16-$24 a barrel price band. Encouraged by the experience a new contract has been signed for import of 1.25 million tones of LNG to run the Dabhol plant. RasGas of Qatar will start supplying LNG at Dahej terminal from July7, 2007. However, the price for the new contract has not been revealed. Petronet has said that they have committed to supply gas to Dabhol at rate of $4.93 per MMBtu. Petronet plans to achieve this price by pooling the new gas with the supplies from the previous contract under which the price comes out to be $3.86 per MMBtu.
In 2007 Petronet has finalized a deal with the Australian gas supplier Gorgan. The price of the LNG will be around $5.75 per mmbtu. The present controversy that starts after RIL invited bids from group of companies from Power and Fertilizer industry. The objective was to discover market price for sale of gas produced from KG D6 gas field. Five companies each from Power and Fertilizer Industry submitted their bids. The bids received through this mechanism range between $4.64 per mmbtu to $4.86 per mmbtu, resulting in price discovery of $4.79 per mmbtu which would be much higher than $2.4 what is presently being paid by these two industries. The first one to cry foul was R-ADAG, on the pretext that RIL had already committed its supplies, of 28mmscmd at price of $2.34 per mmbtu, from that field to RNRL. Though the decision on price was pending in Bombay High Court, but, the Court had ruled out any third party being approached for sale of this gas until further orders. Going by this verdict, R-ADAG rendered the price discovery mechanism of RIL, through these ten companies, as null and void since it is a breach of the interim order of the Bombay High Court. Next to follow suit was Department of Fertilizer (DoF), which termed the bids submitted by the fertilizer companies as void since the companies had not sought approval from DoF. According to DoF, these companies could not bid for price of gas unless the subsidy component for fertilizer industry was known. Further, the department alleged that at such high price the subsidy bill might rise to Rs 88000 crores over the next 15 years. The Ministry of Power too raised concern over the resultant high price of electricity at such high price of gas. Since then, there have been news articles coming from variety of sources – politicians, news correspondents, environmentalists, experts from respective fields, members of planning commission and the representatives of affected companies. At a presentations made by the RIL and other big gas producer like ONGC, headed by Mr. Mukesh Ambani to the committee of secretaries (CoS). RIL has held the company had arrived at the price of $ 4.33 per mmbtu for KG-D6 gas in transport manner. The company claimed at apart from high revenues upsides (as profit petroleum) for the government, gas sold at a price would also bring down fertilizer subsidy by Rs 6400 crores. RIL’s gas pricing formula is independently examined by the PM’s Economic Advisory Council (EAC) chairman C Rangarajan. The senior officials that were involved in examining say that the end price of $ 4.33 per mmbtu is reasonable in terms of prevailing rates of natural gas in the domestic and global markets. But they have some reservation over the formula devised by RIL to derive the value of gas. They say almost 97% of the component in RIL`s formula is the fixed component. The pricing formula adopted by RIL is subject to an approval either by the government (parent administrative ministry) or by the regulator, under the terms of the production sharing contract. India’s public and private corporations produce allegedly super normal profits in the coming years. If the gas will not be available at the affordable price than the government’s ambitious target to provide affordable power for all by 2012 will be thwarted. RIL’s KG D6 gas field has one of the highest internal rate of return among ongoing projects globally and would be the company’s major revenue earner in future.
The two major consumers of gas i.e power and fertilizers are regulated sectors with their end products being sold at regulated prices. In fact the power sector earns only 14% returns. The government, through its Common Minimum Programme (CMP) and National Electricity policy (NEP), has envisaged capacity addition to the tune of 100, 000 MW during the Xth and XIth five year plans. Capacity addition to tune of 80, 000 MW during the XIth plan looks critical as government has added only 21, 180 MW during the Xth plan against target of 41, 110 MW. RIL has sought a price of $ 4.67 per mmbtu for power plants. Gas at $ 4.67 per mmbtu would push the electricity tariff to over Rs 5 per unit. In the past also government has re-negotiated power purchase agreement (PPA) to save consumers from higher cost of power. So, there is a case here for changing PSC to limit the gas price and returns to the contractors. If affordable gas will be available more than, 16000 MW of gas based plants can be added. Power sector indicate that for every dollar increase in price of gas from $2.34 per mmbtu, the governments petroleum profit will go up by Rs 17, 100 crore. In all the contracts, the price of LNG is close to $5 per mmbtu or above it. Except the contract made by petronet with Rasgas the delivered price is under $5 per mmbtu. The price that RIL wants for its gas is reasonable in terms of prevailing rates of natural gas in the domestic and global markets.
Conclusion and recommendations The potential for use of gas in India’s power production is large. India has one of the strongest economic growth rates in the world and has sufficient potential to maintain this high growth rate over a sustained period of time. There are limitations to the use of coal for power generation in terms of environmental considerations, quality and supply constraints, gas will play an increasingly important role in India’s power sector. Earlier the problems with the gas fired plants are uncertain supply of gas, distorted retail pricing structure in the power sector and provision of subsidized gas to public gas-fired plants which limits required investments in further gas exploration. But as now there are new gas finds in the country and the claim by petroleum ministry that we will be gas surplus nation in another two years. The supply problem will not be there. The CEA and CoS are also in favour of market determine price for the new gas finds according to the economic times report. According to a report in economic times it was stated that the electricity tariff will go over Rs 5, if gas will be taken at market driven price. But the power sector is already under losses and power tariffs need to be revised upwards. As a growing economy and like every other developed country India will have to move towards high cost society, the upward movement of tariffs is desirable. The power sector needs to look towards the other things also except fuel, according to the 11 th plan Rs 2, 70, 000 crore as transmission and distribution losses is expected. If the power sector makes efforts to reduce that than it can easily takes gas at market driven prices without any problem. India is a growing economy, in 2006 the economy grew by 9.4%. It is expected to grow more than 8% in 2007. GDP has been growing near 10% for the last few years. But power tariffs have not revised for a long time. Salaries in India have been recorded highest growth in the world. So, the paying capacity, purchasing power of Indian consumer has increased. This development shows that there will be demand for power even at higher tariffs. As it is natural gas, is to be used to cater to the peak hour’s demand. The natural gas is used for a small segment of total electricity produce. The share of thermal power plants in total electricity produce is 65% as on 31.12.2006, out of which 55% are coal fired power plants and 10% is gas fired power plants. Large power plants are coming up like UMPP, Sasan, Mundra etc. These plants will reap huge economies of scale and will lead to much lower tariffs for ex- Sasan project would supply the power at a low cost of Rs 1.196 per unit. According to the latest report by The Mint, India is all set to miss its 2012 power generation target by 60%. The main reasons are inadequate supply of equipments and shortage of firms that can make coal and ash handling, water treatment, and auxiliary services for coal fired power plants. India currently has a power generation capacity of 1, 35, 006 MW, which is insufficient for the second fastest growing major economy in the world. The gas fired plants are generally used in peak hours. This 60% loss can be somewhat recovered if we give more attention towards gas fired plants, as there is now abundant supply of gas within the country and it does not take time to produce electricity
like coal power plants. Moreover, problem with coal fired power plants is low calorific value of coal, high ash content and its hazard to the environment and problems related to transportation of coal, rate of production and its supply and quality. Due to Kyoto protocol norms one day we have to reduce the use of coal and gas fired plants is surely a better option.
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