Professional Documents
Culture Documents
Gaspoolingreport PDF
Gaspoolingreport PDF
August 2011
Planning Commission
Government of India
New Delhi
TABLE OF CONTENTS
Chapter IV: Non-conventional Natural Gas Sources .............................................................. 43
27.0 Coal Bed Methane (CBM) ..................................................................................... 43
28.0 Shale Gas ............................................................................................................... 44
LIST OF TABLES
Table 1.1 – Natural Gas Production and Imports ...................................................................... 8
Table 1.2 – Sectoral Consumption of Natural Gas including R-LNG..................................... 11
Table 1.3 – Price Comparison of liquid Automotive Fuels, CNG and Gas from R-LNG....... 11
Table 1.4 – Utilization of Domestic Natural Gas .................................................................... 13
Table 1.5 – Utilization of Domestic Natural Gas .................................................................... 14
Table 1.6 – With Incremental Domestic Natural Gas Going Entirely to Power Sector .......... 16
Table 1.7 – Status of Supply and Price.................................................................................... 23
Table 3.1 – Consumption of Natural Gas by Sector................................................................ 34
Table 3.2 – Optimistic Projections of Output of Natural Gas ................................................. 40
Table 3.3 – Projected Availability of Domestic Gas ............................................................... 41
Table 5.1 – LNG Terminals..................................................................................................... 46
Table 5.2 – Current Gas prices prevailing in select gas importing countries .......................... 48
Table 5.3 - Price & volume of Gas from domestic sources of supplies .................................. 48
Table 5.4 – Customer wise and Producer wise Gas Prices as prevailing in India ................... 49
Table 5.5 – Natural Gas infrastructure in India ....................................................................... 51
Table 5.6 – Regional Imbalance in Natural Gas Infrastructure ............................................... 51
Table 5.7 – Pipelines to GAIL about 5,500 kms ..................................................................... 52
Table 5.8 – Pipeline to RGTIL around 2800 Kms .................................................................. 52
Table 5.9 – Pipeline through bidding process ......................................................................... 53
Table 5.10 – Summary of Pipeline Status ............................................................................... 53
Table 5.11 – Additional Pipelines ........................................................................................... 53
Table 5.12 – Zonal Tariff Order .............................................................................................. 55
LIST OF CHARTS
Chart 1 – Pricing Mechanism Worldwide ............................................................................... 32
Chart 2 – Composition of India’s Energy Basket.................................................................... 33
Chart 3 – Projected net gas production from domestic sources, 2015..................................... 41
Chart 4 – Gap between Demand and Supply - Projection for next decade ............................. 47
Chart 5 – Affordability of LNG by different sectors............................................................... 50
EXECUTIVE SUMMARY
0.i. Presently domestic gas demand exceeds domestic supply. In future years,
the incremental domestic demand will significantly exceed potential
incremental domestic supply. This will mean that the import content of
total natural gas consumption will have to increase.
0.ii. There is a large price differential today between domestic and imported
gas. Domestic gas is priced at $4.2 to $5.5 per mmbtu + pipeline charges +
taxes. In contrast R-LNG spot prices are $10 to $14 per mmbtu + pipeline
charges + taxes.
0.iv. The priorities and regulatory burden are concentrated in the fertilizer and
power sectors.
0.v. The recommendations of this report assign priority, following the existing
policy of Government.
0.vi. The Committee does not recommend pooling mechanism for natural gas at
the overall level, nor does it recommend a price pooling on sectoral basis,
except where that may be found to be the best workable option.
1
0.viii. The Committee visualizes the internal consumption in oil/gas fields
(injection, turbines, flaring), pipeline internal consumption and LPG/C2–
C3 extraction as a clear necessity.
0.ix. The balance that is left after this is what is available for allocation.
0.x. Fertilizer and power sectors have been given first priority for domestic gas.
But it is recognized that even they will have to consume some amount of
R-LNG. The priority on domestic gas being given to the power sector
flows from the policy of the Ministry of Power to require gas based power
plants to have a PPA for 85 per cent of their generation.
0.xi. The projections in this report visualize that of the fertilizer sector’s total
consumption, R–LNG will amount for 21–22 percent, while that for the
power sector the share of R-LNG will be around 25–27 per cent based on
the existing capacity and new plants already under construction. The latter
projections may change depending on the level of domestic gas
production.
0.xii. For CGD/CNG and other Court mandated customers, the Committee
recommends that a certain amount of domestic gas be set aside for their
usage. These quantities are 6 mmscmd for CGD/CNG and 1 mmscmd for
other Court mandated customers. Presently the former is drawing 5.3
mmscmd and the latter 0.9 mmscmd. Thus the allocation procedure of the
Committee does not reduce their current access to domestic gas, but
requires that their additional needs will have to be met from imports.
2
0.xiv. These (non-priority) users operate in a market environment where their
output prices are market driven with no regulatory burden and hence they
should be able to pass on the higher costs of gas feedstock.
0.xv. In regard of the R–LNG needs, the users should have a choice of either
sourcing their own supply of LNG or depending on their present suppliers
to give them gas at blended domestic and R–LNG price.
0.xvi. Large users may opt to choose to source their own R–LNG and this will
help develop a competitive market for R–LNG.
0.xvii. By making such a large segment of users opt for R–LNG, a competitive
market will be created to serve the interests of this sector. This will ensure
that inefficient LNG pricing cannot prevail. It is also believed that by
exposing this class of users to R–LNG and giving them the option of
sourcing their own R–LNG, the scope for use of R–LNG will be greatly
enhanced.
0.xviii. Smaller users (and some larger users also) who may not be in a position to
source their own R-LNG will have to obtain a blended price from their
suppliers. The suppliers can arrive at a blended price depending on their
own costs of supply and should do so in a fair and equitable fashion.
0.xix. In future years, there will be an increase in domestic gas production but
there is no certainty as to what extent this increase will be. The Committee
has looked at four different scenarios and feels that the most likely one
from a fairly conservative point of view is Scenario# 2 which envisages
that total (gross) domestic gas output will increase from the present level
of 132.5 mmscmd to around 199 mmscmd by 2016/17 – that is, a
compounded annual rate of output growth of about 8.5 per cent..
0.xx. At the level of production of 199 mmscmd in 2016/17, the fertilizer sector
would need to source 22 per cent of their requirement from R–LNG while
the power sector, on the basis of existing schedule of gas based power
3
plants coming up, will need to source 27 per cent of their requirement from
R–LNG by 2016/17.
0.xxi. All other users, including CGD/CNG and non-priority industries, would
have to source the bulk of their requirement from R–LNG. In 2011/12,
about 73 per cent of their total requirement would have to come from R–
LNG and this proportion is likely to rise to little over 80 per cent by
2016/17 depending on the growth of demand from the sectors.
0.xxii. Total R–LNG imports are likely to rise from about 46 mmscmd presently
to about 103 mmscmd by 2016/17.
0.xxiii. The Ministry of Power would like to emphasize that taking R-LNG
beyond 25 per cent will be difficult keeping in mind the economics of the
electricity distribution business. They also would like to get firm
commitments on domestic gas supply and a clear idea of future price. The
Committee however felt that it is not in a position to take a view on firm
domestic gas supply and future prices.
0.xxiv. As stated previously, no explicit pooling for gas price is being prescribed.
However, the preferential allocation will have to be done by the concerned
administrative ministries. In the Department of Fertilizers, FICC is
institutionally capable of discharging the task. In the case of the Ministry
of Power, the requirements will have to be overseen by the Ministry of
Petroleum & Natural Gas. It is understood that in the allocation of
domestic natural gas, cost and other efficiency criteria will inform the
administrative decision.
4
0.xxvi. It is recommended that the pipeline tariff which is presently being set on a
cost/bid-based Zonal tariff basis should be modified to the extent that the
outlier tariffs (for small off-takes) should not be more than 50 per cent of
the average tariffs. This is a hybrid between a pure cost-based Zonal tariff
and Postal Tariff. It serves the objectives of respecting location economics
and ensuring efficiency, while at the same time ensuring that small off-
takes at underserved locations are not charged excessively high tariffs. The
regulator is the appropriate agency to take a call on this based on actual
data on both costs and the geographical distribution of demand loads.
0.xxvii. For “Price Discovery”, the Committee felt that the process should reflect
opportunity costs, adequacy of incentives for exploration and production
(E&P) and fairness to the consumer. It has recommended a procedure for
arriving at an inferred price by taking the average of the 12-month trailing
Henry Hub price on the one hand and the 12-month trailing producer net
back price (excluding shipping & liquefaction computed on a normative
basis that is discussed in the body of the report) derived from the Japan
Korea Marker (JKM) price or equivalent Asian LNG price for
Persian/Arab Gulf sources of supply. On the basis of this inferred price,
the Government should then set a premium or a discount, depending on
extant conditions on what the perception is with regard to it being: (a)
adequate for attracting investment in the E&P and (b) not excessive for the
consumer.
5
CHAPTER I
ANALYSIS & RECOMMENDATIONS
This chapter deals with the approach and the framework of analysis adopted as well as
the recommendations being made in this report. In subsequent chapters, some of the
more in-depth background and context has been placed. In an annex to the report
highlights from the report of the consultant M/s Mercados appointed by GAIL on the
subject has been appended at Annex-1 for information.
1.2 Government policy has clearly recognized the problem as being one of
allocation of scarce resources. The scarcity is embodied in the widely different
prices at which natural gas is available in the country. Domestic gas is priced
at $4.20/mmbtu in most cases + pipeline charges + taxes. There are a few
sources of domestic gas that is priced at a slightly higher rate, but that too is
only about $1.0–1.3/mmbtu more costly. On the other hand, imported R-LNG,
except for contracted supplies from Qatar (which are due for price resetting in
the near future) costs $10–14/mmbtu + pipeline charges + taxes. Obviously,
every rational consumer in this situation would like to have preferential access
to domestic natural gas.
6
1.3 Government has made a clear distinction between what it considers priority or
core and the non-priority or non-core sectors. It has clearly enunciated the
need to place fertilizer and power sector in the priority segment, while keeping
other industrial users such as petrochemicals, refineries, sponge iron etc. in the
non-priority sector.
1.4 There are two underlying logical threads for arriving at this conclusion.
1.5 First, fertilizer and power are in a sense vital to the national interest, require
substantial amounts of gas and involves large capital investments – that is, the
sunk costs are large.
1.6 Second, both the fertilizer and power sector operate in an environment where
the price of their output is subject to government regulation, either directly or
indirectly. Thus, the selling price of urea is much below the operating cost,
large government subsidies are involved and, there is limitation on the ability
of companies to change the selling price. It is unlikely that in the foreseeable
future, fertilizer companies will be able to set their selling prices near their
operating costs and will therefore continue, to be dependent on the subsidy
regime.
1.7 In the case of power, natural gas based producers have to compete with others
who are based on domestic coal. Domestic coal prices have been regulated and
are much lower than that of imported coal, even after adjusting for relative
heat values. Further, on heat value basis, domestic coal is much cheaper than
natural gas. The state electricity regulators are obliged to adopt a merit order
dispatch. Power producers, who use natural gas, especially R-LNG, are thus at
a great disadvantage in being able to sell their power. At the same time, there
is a huge power scarcity in the country. Many manufacturing plants, as well as
commercial establishments, have been forced because of the power shortage,
to use diesel based generating sets that are highly uneconomical and the cost
of such captive power is much more than R-LNG based power.
7
1.8 It is, therefore, in the larger national interest to ensure that power produced
from natural gas, including R-LNG, is able to be dispatched and is affordable
to the distribution companies who are financially quite constrained. It is an
acknowledged fact that revising certain kinds of electricity tariffs, such as that
for households and for agriculture has faced and will continue to be a
challenge. Thus, there are regulatory and institutional bottlenecks in the path
of gas based power producers to be able to realize the full cost of their
generation and this difficulty escalates if that cost is higher, as indeed is the
case with R-LNG.
1.9 Therefore, in the light of the above discussion, our own extant policy may be
seen as one that expressly provides preferential access for power and fertilizer
units to domestic natural gas. It is proposed that this should form the
cornerstone to the framework of the solution to the allocation problem which
sits at the heart of the present Committee’s terms of reference.
8
2.0 Proposed Scheme of Preferential Allocation
2.1 It is proposed that in the first instance, domestic gas be preferentially provided
to the priority sector, as defined to include the fertilizer and power industries.
It may be noted that, as on date, both the fertilizer and power sector do source
a part of their requirements from imports. The proportion of R-LNG to total
consumption was 19 and 12 per cent respectively in 2009/10 and 17 and 9 per
cent respectively in 2010/11 for the fertilizer and power sectors respectively
(see Table 1.2). The substitution of existing R-LNG supplies with domestic
supplies for power and fertilizer is not being considered in this report, given
the order of the present shortage and even more that of the prospective
shortage.
2.2 In the first instance, as an approximation to start with the total availability of
domestic natural gas is fixed at the present level. Subsequently, we will
examine what the situation will look like as we incorporate different levels of
incremental domestic natural gas output. The scheme then is visualized to
operate as below:
ii. After LPG and C2–C3 extraction (9.07 mmscmd) and internal consumption in
distribution pipelines (2.06 mmscmd) a balance of 110.59 mmscmd will be
available for general consumption (see Table 1.1)
9
adjusted for the fertilizer sector to bring it in line with its allocations and
closer to the level that obtained in 2010/11. The total adjusted domestic gas
drawal by the fertilizer and power sector is then 88.37 mmscmd. The net
position between the availability of 110.59 mmscmd and 88.37 mmscmd
leaves a balance of 22.20 mmscmd (see Table 1.4).
iv. Thus far, the city gas and CNG (CGD & CNG) and Court mandated customers
have been treated as part of the core sector, as has LPG/C2–C3 extraction. It
may be noted that LPG/C2–C3 extraction is in any case essential. The Court
mandate has been to make the gas available, but not at any particular price. At
the moment these customers at the aggregate level receive a mix of domestic
natural gas and R-LNG. It is believed that these Court mandated consumers
(which include some of the CGD/CNG operations) work in a market
environment and should be able to absorb an increase in supply prices of gas.
However, it may be appropriate to cap their access to domestic gas at about
the present levels.
v. In regard of CGD and CNG, the economics appear to suggest that even with
R-LNG the business should be competitive (see Table 1.3). The cost of R-
LNG based CNG in heat value terms is only 20 per cent higher than the
present sale price in Delhi and actually less than that it is in Ahmedabad.
Since, there will continue to be allocation at the rate of 6.0 mmscmd of
domestic gas, the impact of picking up incremental needs from R-LNG should
be eminently manageable and the necessary adjustments in selling price will
not be large and should be acceptable. This is especially considering the
enormous cost differential that is there even with respect to HS Diesel which
is being subsidized today. The actual consumption of CGD/CNG in 2010/11
was 5.34 mmscmd from domestic gas and 2.56 mmscmd from R-LNG. It is
proposed to cap the off-take of this sector from domestic gas to 6.0 mmscmd.
10
Table 1.2 – Sectoral Consumption of Natural Gas including R-LNG
Unit: mmscmd
2009/10 2010/11 June 2011 Adjusted
Qty Ratio Qty Ratio Qty Ratio Qty. Ratio
Power Sector
Domestic 49.67 (88%) 56.22 (91%) 56.37 (92%) 56.37 (92%)
R-LNG 6.74 (12%) 5.38 (9%) 5.05 (8%) 5.05 (8%)
Sub Total 56.42 61.60 61.41 61.41
Fertilizer Sector
Domestic 30.33 (81%) 33.10 (83%) 29.56 (78%) 32.00 (80%)
R-LNG 7.04 (19%) 6.76 (17%) 8.18 (22%) 8.00 (20%)
Sub Total 37.37 39.86 37.74 40.00
CGD/CNG
Domestic 6.40 (93%) 7.05 (62%) 5.34 (68%) 6.00 (76%)
R-LNG 0.14 (7%) 4.32 (38%) 2.56 (32%) 1.90 (24%)
Sub Total 6.54 11.37 7.90 7.90
Power and
Fertilizer sectors
Domestic 80.00 (85%) 89.32 (88%) 85.93 (87%) 88.37 (87%)
R-LNG 13.78 (15%) 12.14 (12%) 13.23 (13%) 13.05 (13%)
Sub Total 93.78 101.46 99.16 101.42
Table 1.3 – Comparison between Price of liquid Automotive Fuels, CNG and Gas
from R-LNG
Retail
Calorific RSP converted to
Unit Selling
value in Kcal heat value in paise
Price
per unit per K Cal
(RSP)
1 Motor Spirit Delhi Rs / Litre 63.38 8,798 0.7204
2. HS Diesel Delhi Rs / Litre 41.12 7,700 0.5340
3 CNG Delhi Rs / Kg 29.80 10,956 0.2720
CNG Mumbai Rs / Kg 31.47 10,956 0.2872
CNG Ahmedabad Rs / Kg 40.25 10,956 0.3674
4. R-LNG CIF $ / mmbtu 12.00
Ex-Delhi Rs / kg 42.07 12,870 0.3269
11
vi. In regard of the court mandated customers other than CNG, the present off-
take is 0.89 mmscmd from domestic gas and 0.20 mmscmd from R-LNG.
Though they may have some paying capacity, in the interest of ease of
transition (since their needs may increase in the future) allocation towards
these customers may be capped at 1.0 mmscmd. The rest of their needs may be
met by blending with R-LNG.
vii. That would leave 22.20–6.00–1.00 = 10.22, say 10.0 mmscmd for purposes of
either a substitution of R-LNG requirements by power and fertilizers or for
other users. Since it is being proposed that the present R-LNG used by power
and fertilizer should not be substituted, this 10.0 mmscmd is available for
either incremental use by the fertilizer and power sector or for non-priority use
or a combination of the two,
viii. Presently as is evident from Table 1.4, non-priority users, as in June 2011, are
using domestic natural gas to the extent of about 18.43 mmscmd. The
suppliers, mostly GAIL and also others, have contracts with these customers.
Though there are saving clauses which can permit the supplier to meet their
quantitative obligations from R-LNG, there may be disputes and litigation.
Further, the magnitude of the shock if all of this 18.43 mmscmd is substituted
wholly by R-LNG may be excessive. It is accordingly being recommended
that an amount of 5.0 mmscmd1 be set aside for meeting the needs of the non-
priority sectors, the balance requirement to be substituted by R-LNG.
ix. That will leave a balance of 10.22 mmscmd say 10.0 mmscmd, for additional
preferential allocation to the fertilizer and power sectors. Till additional
requirement from new power or fertilizer capacity is forthcoming, this
quantum of 10.0 mmscmd may be made available to other users.
1
This quantum of 5.0 mmscmd must include the non-power, non-fertilizer use in isolated gas
fields, such as tea factories and similar users. The total gas coming from isolated gas fields is 2.01
mmscmd presently. Most of this is being used in the power and fertilizer sector and some in the
CGD/CNG sector (which would be anyway covered under the 6.0 mmscmd set aside for this use). A
small amount is being used by other category of users which would be grouped under this head of 5.0
mmscmd.
12
Table 1.4 – Utilization of Domestic Natural Gas
On Unchanged Domestic Gas Output Basis
Unit: mmscmd
2010/11 Base line for 2011/12 & future
years
xi. The point has been raised that merchant power plants which do not have any
obligations to sell under a Power Purchase Agreement to Dist Coms./ SEBs,
but are free to sell to the highest bidder, ought not to avail of preferential gas
allotment. The present policy of Power Ministry requires all power plants who
apply for linkage to have a PPA for at least 85 per cent of their generation.
2.3 In working out what the allocation procedure will result in (Table 1.5), we first
try and meet the incremental needs of the fertilizer sector arising on account of
switching from LSHS/FO and naphtha to natural gas and that on account of
de-bottlenecking and new plants. We have maintained the composition of
incremental demand from the fertilizer sector at 75 per cent domestic gas and
25 per cent imported R-LNG. That results in an average position of around
13
21–22 per cent of R-LNG use in the consumption basket for the fertilizer
industry in the future years up to the end of the Twelfth Plan period.
4. Net gas available after Fertiliser 7.6 6.4 1.9 –3.5 –8.8 –11.0
for New Needs of Power Sector
2.4 It should be made clear that the 21–22 per cent R-LNG results out of the way
the incremental requirements are being satisfied through allocation. It does not
have implications for existing supplies.
2.5 Then we look to the additional needs of the power sector. A phasing has been
done, keeping in mind the completion of about 12,200 MW through 2011/12,
2012/13 and 2013/14. What then results is a sharp increase in the R-LNG
14
component of the power sector’s consumption to 40 per cent in 2013/14 and
60 per cent by 2016/17 (Table 1.5).
3.2 To put it alternatively, the first scenario envisages gross domestic gas output
to rise from 132.5 mmscmd in June 2011 to about 189 mmscmd by 2016/17,
which is a very modest expectation. The second scenario envisages a larger
increase by 2016/17 to about 199 mmscmd which is also reasonably in the
feasible range. The third and fourth scenarios envisage a much larger increase
of 12.0 and 16.0 mmscmd in each year and a gross output level in 2016/17 of
219 mmscmd and 239 mmscmd which are on the optimistic side.
3.3 As may be seen from Table 1.6, that only in the most optimistic scenario
(namely, Scenario #4) will there be adequate domestic gas to meet the entirety
2
As on June 2011, the proportion of domestic gas available after oil/gas field internal
consumption, injection & flaring, LPG/C2–C3 extraction and pipeline internal consumption is 83.5 per
cent. This proportion has been used to arrive at the corresponding gross natural gas output level. Thus
an additional 6 mmscmd net gas available at this level would translate to 6.0 ÷ 0.853 = 7.04 mmscmd
of additional gross gas output.
15
of the needs of the power sector, which does not include the requirements of
new gas based power plants, beyond the 12,200 MW that is due for
completion in 2011/12 to 2013/14.
Table 1.6 – With Incremental Domestic Natural Gas Going Entirely to Power
Sector
Note: * Each year there is an increment in net domestic availability of stated amount. That is, in
Scenario #1, by 2016/17, the total incremental output would be 30 mmscmd and in Scenario
#4, it would be 80 mmscmd.
Negative proportions under Scenario#4 means that the complete needs of the power sector are
met from domestic gas and there is a surplus over and beyond that for use by other sectors.
That is, on the assumption that there are no new gas based plants that would come up in the
closing years of the Twelfth Plan.
3.4 Thus, even with domestic gas output potential greatly relaxed, the
prioritization of fertilizer and power sector is clearly unavoidable.
3.5 If, however, domestic gas turns out to be along the lines envisaged in
Scenario#4 or even better and as a result there is a surplus of domestic gas
after meeting the needs of the fertilizer and the power sector to the extent of
75 per cent, then the excess should be allocated to the non-priority users.
16
3.6 In the light of the shortage of domestic gas, it is clear that users other than
power and fertilizer will have to meet the large part of their needs from R-
LNG. It is further obvious that even the power and the fertilizer sector will
have to meet a part of the incremental needs from imported R-LNG. This is
especially true for the power sector whose incremental requirements in their
coming years are going to be quite large.
3.7 Thus, the basic arithmetic even as it preferentially allocates domestic natural
gas to the power and fertilizer sector, only succeeds in mitigating, not
eliminating, the extent to which the import dependence of the fertilizer and
power sectors would rise, given their increasing requirements.
4.2 However, as has been seen, even at the moment imports account for about 19–
22 per cent of the gas that is being consumed by fertilizer units. Further, there
will be a subsidy regime in place for such units and if the incremental
allocation is made on the basis of 75 per cent domestic and 25 per cent R-LNG
that subsidy regime will recognize it. Further, if for other existing and new
units the R-LNG proportion is also placed at 25 per cent it is a more
symmetric treatment if the eight units that are switching from liquid fuels to
gas feedstock are treated in a uniform fashion that is identical to the rest of the
industry. As may be seen from Table 1.5, the overall R-LNG component of the
consumption basket for the fertilizer industry is maintained at around 21–22
17
per cent. In any case, the subsidy regime will have to take into account the
allocation and its implications.
6.0 Pipe Line Tariff
6.1 In the latter section of this report, the issue of pipeline tariff and postal tariff
has been discussed at some length. The latter (postal tariff) is a means of
equalizing the freight cost at different destinations. In the view of the
Committee, complete freight equalization may not be desirable from the
consideration of locational efficiency. At the same time, very widely varying
tariff cost on account of a lack of economies of scale may also not be in the
larger public interest.
3
See footnote 1
18
average tariff, say by 50 per cent. This is on the assumption that the bulk of
the off-take will take place at locations that are near the average or below the
average pipeline tariff and the more distant locations will account for a
relatively smaller part of consumption If this is taken as a policy advice, the
pipeline regulator may be allowed to work out the details within this
framework. The regulator is the appropriate agency to take a call on this based
on actual data on both costs and the geographical distribution of demand
loads.
7.0 Pooling/Preferential Allotment
7.1 The recommendations put forth here do not envisage any form of pooling at
the all-India level cutting across industries. What it does is to preferentially
allot available domestic natural gas to fertilizer and power sectors with a
certain reserved allotment for the CGD/CNG sector. Further this preferential
allotment is with respect to the incremental needs of the preferred industry,
rather than to their existing usage.
7.2 Following from this, the concerned administrative ministries dealing with
fertilizer and power will have to ensure that the incremental requirement is
fulfilled in the fashion that has been described in this report.
7.3 In the case of the fertilizer industry, the recommendations that is currently
before the CCEA is that up to the “cut-off” point, the department through
FICC, will operate a notional gas pooling so that different plants participating
in the pool will be able to get gas at a common price.
7.4 In addition, the Department of Fertilizers will have to ensure that in the
incremental requirements of the industry, the allocation procedure suggested
here is implemented by using the 75 (domestic): 25 (imported) formula.
19
7.5 In the case of the power sector, the Ministry of Power in conjunction with
MoPNG will have to ensure that the incremental requirements of the sector are
met in the preferential manner delineated here. They should seek to try and
ensure a fair allocation, whereby individual power units for the incremental
requirements are allocated the domestic gas in such a way that broadly the
overall resultant ratio applies at least within a power company if not
specifically across every single utility. It however would be preferable to do
this with respect to individual utilities, since it is conceivable that ownership
of a specific utility could change over time.
7.6 The Ministry of Petroleum & Natural Gas will have to coordinate the overall
procedure.
7.7 It may be noted that the scheme being proposed here is somewhat similar to
Option B as proposed by the Mercados report extracts of which are placed as
an Annex-1 to this report.
20
8.2 Thus once the allocation formula is used and a said party “A” is to be provided
domestic gas to the extent of 75 per cent and imported R-LNG of 25 per cent,
then two eventualities can arise. The customer may choose to search out his
own supply of R-LNG. Alternatively, if its supply contracts is such that
domestic is 60 per cent or for that matter 80 per cent, then the difference will
have to be swapped with someone else. Likewise, for a unit in the non-priority
sector having contract for supply of domestic gas in excess of the amount that
is available under the caps spelt out previously, that unit will have to be swap
with a priority user who is permitted incremental supplies of domestic gas in
keeping this need with the preferential allotment principle. Government of
India must ensure that these swaps do not attract taxes of any kind if the swaps
are made through the MoPNG as a part of the policy measure. In the case of
incremental domestic gas output the preferential allotment should directly
result in a contract and there may not be a need for a swap.
9.2 Import of LNG presently attracts Basic Customs Duty of 5 per cent ad
valorem. Till 25 June 2011, this was the same rate that the import of crude
petroleum attracted. There is no justification to have differential tax treatments
for LNG and crude petroleum. The Committee recommends that the import
duty of LNG may be made identical to that of the import duty of crude
petroleum, which presently is zero. If in future a non-zero import duty is
levied on crude petroleum, the same rate may be made applicable to LNG.
9.3 It may be noted that though there is a 2.5 per cent import duty on several
refined petroleum products, this is largely notional since the actual imports of
liquid hydrocarbons is overwhelmingly in the form of crude petroleum. If a
21
uniform tax treatment is not extended on import duty as between crude
petroleum and LNG, there will be needless discrimination against the latter,
given that the cost per calorific unit to the user is less in the case of LNG than
in the case of crude petroleum. It may be pointed out that unlike crude
petroleum, where it is the light and middle distillates that perform a valuable
energy function, the entirety of LNG is directly usable in a highly efficient
fashion. Further, the use of LNG is environmentally friendlier than is the case
with crude petroleum or rather refined petroleum products.
10.2 On the discovery of the KG Basin, a similar formula was developed. The
Empowered Group of Minister’s (EGOM) decided the following price
indexation formula for natural gas to be sold from KG basin:
Where, CP is annual average Brent crude price for the previous FY with a cap
of $60/bbl & floor of $25/bbl. The price comes to US$ 4.20 per mmbtu for
crude at a cap of $60/bbl
22
Table 1.7 – Status of Supply and Price
S.No. Producer Sales (mmscmd) Price ($/MMBTU)
6. RIL-KG-D6 48 4.20
11.1 The Committee has been asked to examine what should be the procedure for
discovery of gas price. It is fairly obvious that India will be a substantial
importer of natural gas/LNG and also of crude oil. It is also self-evident that
the world price of crude oil will remain elevated.
11.2 There is today a great disparity between the prevalent prices in the North
American market (which is the largest gas market in the world) and the Asia
Pacific market. The discovery of shale gas and other non-conventional gas has
led to the North American prices settling at quite low levels of around $ 4.0–
4.5 per mmbtu. This is in sharp contrast to the Asia Pacific prices where LNG
(the tradable form of natural gas in such markets) has gone to as high as $14
per mmbtu following on the March 2011 Tsunami in Japan and dislocation of
its nuclear power facilities.
23
11.3 It is in our national interest that exploration and production (E&P) activities
for natural gas and non-conventional gases proceed rapidly. For that to
happen, the indicative pricing of future domestic natural gas production should
realistically reflective the opportunity cost of such investment.
11.4 One view that may be taken is that as we live in the Asia Pacific market, hence
it is that price which should be relevant.
11.6 The simplest approach to evolve a reference price for future price discovery is
to take a simple average between the Henry Hub (US) prices and that of the
Asia Pacific LNG (JKM or Japan Korea Marker), the latter being reduced to
the extent of shipping, liquefaction and associated charges or as has been
described by some as the netback value or the producer netback. It should be
noted that there is a concept of net back price in the LNG trade which is a bit
of a notional calculation.
11.7 The Energy Intelligence Agency (EIA) of the Department of Energy of the US
federal government reports that:
“Netbacks are calculated using a long-term charter rate of $65,000 per day
for 138,000 cubic meter tankers. Re-gasification fees in the United States
and the United Kingdom are taken as 10 percent of the base price. U.S.
netbacks are calculated using the first and second month out closing price
taken from the New York Mercantile Exchange (NYMEX) on the 3
24
trading days before and including the date reported. A local adjustment for
delivery to the Lake Charles terminal is made using prior month spot
prices reported by Natural Gas Week. The calculation of United Kingdom
netbacks comes from an average of the closing price on the
Intercontinental Exchange (ICE) futures contract for delivery at National
Balancing Point (NBP) on the first and second months out. Japanese
netbacks are derived from the official average ex-ship prices for the most
recent month. A World Gas Intelligence European Border Price table is
used to estimate the most recent ex-ship prices for Spanish netbacks.”4
11.8 Trade journals such as the New York based World Gas Intelligence (weekly)
regularly reports volumes and prices for Asian LNG markets and Spot LNG
Exporter netbacks at key worldwide markets. These reported “netbacks” are
appears to be the CIF prices reduced by normative shipping costs perhaps as
described in the previous paragraph,
11.9 In so far as the JKM marker LNG price is concerned, for our purposes, we
should compute the producer netback starting from the reported Asian LNG
price, less the normative shipping cost to Qatar, which is regularly reported in
the trade literature. From this, we need to subtract the liquefaction cost again
on a normative basis, by say $2.50 per mmbtu. This will give us the gas
producer’s net back value.
11.10 To illustrate at the present time, the Henry Hub spot price is $3.94 per mmbtu.
The reported LNG netback at Qatar from North East Asian markets (JKM
marker) was $12.64 per mmbtu. Reduced by the normative $2.50 towards
liquefaction this comes to $12.64–2.50 = $10.14 per mmbtu. The simple
average of Henry Hub sport and this computed producer netback price is $7.04
per mmbtu.
4
Short-term Energy Outlook Supplement, US LNG Imports – the Next Wave, Damien Gaul and
Kobi Platt, EIA, January 2007, p.7
25
11.11 These calculations are based on spot prices. It is obviously better to eliminate
momentary price spikes by adopting a 12-month trailing average.
26
CHAPTER II
Energy Consumption Trends
27
cent per annum in its base case between 2008 and 2035. That would take total
natural gas demand to over 4,300 BCM by 2035.
28
importing countries in the Asia Pacific are Japan, South Korea, Taiwan, China
and India. The balance 25 per cent volume of LNG is consumed in 22 other
countries, mostly in Western Europe, including Spain, France, UK and
Belgium. Re-gasification capacity in the world is around 560 mtpa with the
US alone having re-gasification infrastructure of about 140 mtpa.
29
19.0 Likely Trajectory of Global Gas Demand
19.1 Global gas demand is expected to continue to show robust growth, although
the pace of the growth beyond 2020 may slow due to both economic and
environmental factors.
19.3 Phase II – 2020 to 2030 - Continued growth but with greater uncertainty:
o Growth will continue to be driven by Asian markets while the
consumption in the US and Europe is likely to plateau. Renewable and
nuclear sources of energy will begin to replace natural gas in power
generation.
o CO2/emissions legislations may begin to reduce the use of fossil fuel in
general, including natural gas.
30
the LNG trade will more than hold its ground, not only on account of basic
economics but also from security considerations. As a consequence, it is
expected that the share of LNG in global natural gas (conventional, shale,
CBM etc) will continue to show a significant rise in the coming years.
20.2 Emerging markets in South and South East Asia, Central and Latin America
are expected to experience rapid growth in gas consumption of up to 10 per
cent per annum over the next couple of decades. It is possible that both India
and China will experience a similar pace of growth in domestic demand.
22.2 A summary of the current situation, the likely future situation and the
associated risk factors are presented in Chart-1.
31
Chart 1 – Pricing Mechanism Worldwide
Source: GAIL
32
CHAPTER III
Indian Gas Markets – Demand & Supply Side
24.0 Introduction
24.1 In the last decade, the Indian economy has shown strong growth. Slowly, India
is gaining strategic importance globally owing to its economic growth pattern
and attractive market. After coming out successfully from the financial crisis,
the Indian economy is back on a robust growth track.
24.2 With economic growth, there will be more energy demand. This will result in
an increase share of natural gas in India’s energy basket. With a targeted GDP
growth rate of 9 per cent, India’s energy demand is expected to grow by 6.5 –
7.0 per cent.
24.3 The last decade also showed strong growth in the Indian gas sector. Gas is
slowly emerging as a primary source of energy for India, along with coal and
oil. The British Petroleum Statistical Review 2010, places natural gas as
accounting for about 10 per cent of India’s energy basket and this figure is
forecast to reach 20 per cent by 2025. It is also expected that by 2015, the
Indian gas market may be likely to be as large as that of Japan.
33
24.4 Current consumption of gas in India is around 170 mmscmd. The power sector
is the anchor customer for the gas sector, consuming 38 per cent of the total
supply while the fertilizer sector consumes around 25 per cent. The sector
wise consumption of gas in India is given in Table 3.1.
24.5 Although gas price have changed a lot in last two decades and are slowly
moving towards market driven price, the Indian gas market is sensitive to
price. In the last 20 years, the growth of the gas market was steady and with
improved infrastructure, local discoveries and low price level, the usage has
begun to rise rapidly. Currently, India has a substantial demand for gas that
has been estimated to rise, with estimates in excess of 370 mmscmd by
2016/17. As domestic gas discoveries are expected to be limited, the demand–
supply gap is expected to continue due to non-availability of domestic gas.
34
naphtha, diesel and LSHS/FO. This was the case too in India and it assisted in
covering the capital cost for the older liquid fuel based plants to natural gas
use. The advent of new technology and larger plants, ensured that gas based
use came to enjoy very large efficiency and scale economies. In consequence,
it has become the preferred route for fertilizers, petrochemicals and has made
large inroads into power generation.
25.2 However, as the natural gas market has matured, the spread between the price
of natural gas and that of liquid fuels has reduced. Further, the price of liquid
fuels itself has shot up. Thus, the price of Brent crude has risen from $25/bbl
in 2002 to $50/bbl in 2005, to $117/bbl in recent months. This is an increase
of 368 per cent over the nine-year period. In the same period LNG prices in
the Asia Pacific market has gone up from $2.50 to $14.00 per mmbtu or by
460 per cent.
25.3 In the face of such sharp and steep price increase, adjustment on the user side
is not easy. This is especially so since natural gas is an intermediate good and
the decision to use it involves a commitment of large investments in the form
of fixed capital. The user is constantly facing the risk of not being fully able to
pass-on the escalating cost of the input material to the final customer. This
causes friction in decision taking and in the finalization of supply contracts.
25.4 Significant investment have already been made in the power, fertilizer,
petrochemical and other areas such that it is most likely that there will be a
sustained increase in the level of natural gas consumption in the country.
25.5 As noted previously, starting from the existing consumption level (net of I/C,
flaring etc) of about 170 mmscmd, there are additional requirements from the
power and fertilizer sectors.
35
25.6 Between 2011/12 and 2012/13 an additional 12,200 MW of gas based power
capacity is expected to be commissioned which will require commensurate
additional supply of natural gas.
25.7 In the fertilizer sector 3.8 mmscmd of natural gas would be needed for the
conversion of LSHS/FO based fertilizer plants to gas based. In the next year,
or shortly thereafter, another 8.45 mmscmd of natural gas will be needed for
the change over of naphtha based fertilizer plants to gas based. Further, de-
bottlenecking and unmet demands of 4.10 mmscmd exist. In addition, there is
further possible demand from new urea projects.
25.8 Even if we were not to consider additional gas based power plants and new
gas based fertilizer plants, the total gas consumption level would approach 235
mmscmd by 2014/15. Further, sectors other than power and fertilizer would
also see growth. If we are to ascribe a modest growth of 6–7 per cent in these
areas of use (which may be quite conservative), the total demand for natural
gas is likely to exceed 300 mmscmd by 2014/15 and more than 370 mmscmd
by 2016/17.
25.10 There is enormous scope for further use of natural gas in automotive vehicles
and as cooking fuel. Conversion of vehicles, especially that in the public
transport system, from diesel to natural gas not only involves direct economic
savings to the user (even at R-LNG prices), but also creates beneficial
externalities in the form of lower pollution levels. The replacement of LPG
use in the larger urban areas with piped gas is also desirable, both in terms of
comparative economics and also keeping in view the large subsidy outgo that
36
LPG use presently entails. There are many other innovative uses of natural gas
such as that in combined power generation and cooling in large office
complexes, as also as fuel in factories. Bearing all this in mind, the inevitable
conclusion is that there is a large potential increase in the consumption level of
natural gas that is possible in this country, beyond even 370 mmscmd by
2016/17.
25.11 The domestic production of natural gas is significantly less than that of
consumption, being about 75 per cent of domestic consumption needs. Imports
in the form of LNG account for the balance. It is certain that over the next
several years, exploration and production efforts will result in an increase in
the availability of natural gas. However, even in the most optimistic
circumstances it is not possible to visualize a situation where increase in
domestic gas production will be able to meet incremental domestic
consumption. In fact, incremental domestic output is more likely that not to
fall considerably short of incremental domestic consumption.
25.12 The proportion of imported natural gas to total consumption is thus quite
likely to increase from the present level of 25 per cent to around 40 per cent if
not higher. Natural gas can be imported either through pipelines from
producing countries in the neighbourhood or in the form of LNG. The difficult
conditions that are prevalent in all the access points in the North West to gas
fields in Central Asia or West Asia place any immediate start up of pipeline
construction in some doubt. Likewise, the pipeline with natural gas fields in
Myanmar is also futuristic. In any case, pipeline construction takes time and
for the foreseeable 5–8 years (i.e. up to the end of XIIth Plan and up to 2020),
it is necessary to plan on the basis of the entirety of the incremental imports as
coming from LNG.
25.13 This would have consequences in terms of adequate handling capacity being
set up in the country as well as appropriate sourcing to be done from overseas.
37
25.14 The critical issue may seem to be the price of natural gas/LNG. The fact,
however, is that energy prices are going to rise relative to other goods and
services. This is particularly true for petroleum. As things exist today, LNG
prices are linked to crude petroleum prices with a discount. This discount has
been rapidly falling over the past few years and present LNG prices in the
Asia Pacific region imply a discount of only 3–4 percentage points. Even
assuming no further reduction in the discount but given the fact that crude oil
prices will continue to escalate, it is hard to conceive of a situation that LNG
prices will not.
25.15 It is, of course, true that the discovery and development of non-conventional
natural gas sources — shale gas, tight gas and Coal Bed Methane may work to
the advantage of the natural gas user by exercising a moderating influence on
the price. However, even in the most benign situation that can be envisaged, at
best, the implicit discount from crude may reduce somewhat from the elevated
levels presently embodied in Asia Pacific LNG prices of $14 per mmbtu. But a
return to prices of $5–6 mmbtu for LNG should not be envisaged. It is,
therefore, imperative that any operational plan to bear in mind that the best
possible prices in the future are going to be higher than that in the past and we
should be prepared for the adverse situation when prices are even higher.
25.16 In India, there is a particular situation where domestic coal prices have lagged
the general world wide increase in price of fossil fuels. In consequence, there
is a very large spread between the price of domestic coal and that of imported
coal and also between domestic coal and world gas prices. However, this
situation will also slowly correct. Rapid correction is not possible because of
the public policy need to moderate the consequent price in electricity tariffs.
This is the same reason why domestic natural gas prices are also lower than
Asia Pacific LNG prices, though it is at about the same level as natural gas
prices in the US and Canada.
38
26.0 Future Gas Sourcing
26.1 India is pushing hard to increase its domestic gas production to cater to the
large demand. Since the creation of NELP, eight rounds of bidding have taken
place. The ninth round of bidding is currently in progress. There is consensus
that a large portion of the possible sedimentary basin has been explored.
Currently, there is prevailing uncertainty over potential from the new NELP
and CBM blocks. In addition, the government is bringing out the new Open
Acreage Licensing policy towards the end of 2011 or early 2012 which could
prove to be a discontinuity against the earlier regime. The open acreage
licensing policy will have several new features as opposed to the earlier
NELP:
Flexibility of bidding throughout the year for upstream oil companies
Shifts bidding of blocks from government to investors
Helps manage risks better and E&P companies can evaluate the data in
a meaningful manner
26.2 This will result in building the National Data Repository (NDR) to archive all
E&P data. In addition, it will help E&P companies reduce their risk exposure
and attract international companies, that is, Shell, Exxon Mobil, and BP to the
Indian E&P space.
26.3 Domestic supply of gas will be limited and the primary producer of gas will be
Reliance and ONGC. Optimistic supply projection of domestic gas (Producer
wise) is given in the following Table 3.2 which is based on DGH data.
39
Table 3.2 – Optimistic Projections of Output of Natural Gas
Unit: mmscmd
Year ONGC OIL PSC CBM Total
2010-11 58.86 9.0 78.0 0.1 146.0
2011-12 68.74 10.4 75.5 0.4 155.0
2012-13 73.10 10.8 104.3 3.4 191.6
2013-14 75.10 11.0 106.5 5.8 198.4
2014-15 75.00 11.3 109.2 7.4 202.9
2015-16 102.00 11.6 116.3 8.6 238.5
2016-17 99.80 11.7 126.5 9.3 247.3
26.5 Future availability of indigenous gas (Projected) as per EGoM on 28th July,
2010 is given in the Table 3.3.
5
As regards nominated blocks given to National Oil Companies (NOCs), viz., ONGC and OIL,
information regarding expected gas availability has been obtained from the NOCs themselves.
Information regarding expected future production from Small size & Medium size fields, pre-NELP
discovered fields, NELP fields and CBM blocks has been obtained from Directorate General of
Hydrocarbons (DGH)
40
Table 3.3 – Projected Availability of Domestic Gas
26.6 As per GAIL’s internal analysis, additional domestic gas sourcing can be in
the range of 215 mmscmd to 240 mmscmd by 2015.
Source: GAIL
41
26.7 As the demand is far exceeding supply in India and there are very few new
domestic sources available, in future, additional demand can be catered to only
through LNG (unless any large domestic discovery is made) or through
transnational pipelines if and when they get constructed.
26.8 But currently, structural features existing in the closely held LNG market is
driving crude linked LNG price in an upward direction. Some of the issues
pertaining to this are:
26.9 Buyers and sellers paid a heavy price for overestimating the impact of past
supply demand mismatches.
42
CHAPTER IV
Non-conventional Natural Gas Sources
27.2 Several challenges still exist in meeting CBM production targets and
increasing production beyond 2015 which includes technical challenges
related to assessment of potential, utilization of produced methane, inferior
grade of coal in India and low production from wells on account of low
porosity and permeability, regulatory challenges related to use delineation of
blocks for mining and CBM exploitation, environmental challenges on
account of higher requirement of land and disposal of water, logistical
challenges on account of requirement to drill large number of wells at low
cost, big requirement of fracking and off-take of gas and political challenges
as most prospective coal mines lie in insurgency affected areas and pose a
threat to safe operations.
43
28.0 Shale Gas
28.1 The share of production of unconventional gas is expected to increase two-
fold globally. Unconventional gas has grown in a big way in the US and
currently accounts for 50 per cent of total gas production. Shale gas
production is the most rapidly growing segment and currently accounts for
around 15 per cent of the US gas production. Shale gas developed in the US as
a result of several tax incentives for unconventional gas production,
favourable geological features, and development of game-changing
technology. Major shale gas basins outside USA exist in Canada, Argentina,
Eastern Europe, China, India, Australia, etc. However, most of the basins are
not yet in production. Unconventional gas, particularly shale gas, can be a big
game-changer in India going forward.
44
CHAPTER V
Liquefied Natural Gas (LNG)
29.2 Current LNG re-gasification capacity in the country is 15 mtpa (12.5 mtpa at
PLL’s terminal at Dahej, and 2.5 mtpa at Shell’s terminal at Hazira). While
current capacity at the Dahej terminal is deployed for importing LNG from
Qatar and short term supplies from other sources, the Hazira terminal sources
spot cargoes. Out of current total LNG imports, 63 per cent is imported on
firm contract basis while 37 per cent is imported on spot basis. Beyond this 15
mtpa capacity, PLL is adding another 5 mtpa terminal at Kochi, RGPPL plans
to add a 5 mtpa terminal at Dabhol, GSPC-Adani plans to add a 5 mtpa
terminal at Mundra, and IOCL plans to add a 5 mtpa terminal at Ennore.
According to GAIL this will take the total re-gasification capacity in the
country to 37.5 mtpa (around 135 mmscmd). There are also possibilities of a
terminal in Mangalore and another in the East Coast.
45
Table 5.1 – LNG Terminals
29.3 One of the key drivers to expand LNG demand in domestic market will be
India's ability to source long term LNG at competitive prices. At current
prices, LNG may be cost efficient to few consumer segments like industrial
consumers, petrochemical plants and CGD.
29.4 India has huge potential but the market naturally is sensitive to price. Demand
varies with the different price point as the price affordability of the consumers
is different. In Chart–4 three scenarios have been presented by GAIL to assess
the gas demand of India – low, medium and high.
29.5 If the demand is constrained, then there will be demand of around 230
mmscmd in 2015 at a rate growth of 6 per cent pa. In this scenario, the Indian
market will consume all of its domestic production, the current contracted
LNG (around 30 mmscmd) and a further 20 mmscmd of incremental LNG.
29.6 In the medium case, if gas sales can be made at over $10 per mmbtu, then
additional demand of 45-50 mmscmd may be generated and total demand will
reach to around 276 mmscmd. At this price range, demand from additional
sectors will be unlocked as the use of natural gas will be economical, despite
of switching cost and required additional investment. This demand will be
driven primarily by refining and petrochemical industry. Gas price of $10-11
46
will increase the demand to 311 mmscmd by 2015 as there will be demand
from gas based peaking power generation. There is further potential to
increase the demand to 387 mmscmd if we can provide gas at a price point of
$6–7 per mmbtu. List of industries which can afford the various price points
are also mentioned considering their switching cost and price of crude oil at
$70 per barrel
Chart 4 – Gap between Demand and Supply - Projection for next decade
1 2 3 4
(USD 13-15) (USD 10 -13 ) (USD 09-11) USD 06-07
Industries Refineries Peaking Power Plants Power
CNG transport Industries New Fertilizer Plants
Power (CCGTs)
Source: GAIL
29.7 As on date the Priorities of allocation for core and non core sectors for APM/
Private Sector/ Joint Venture gas in terms of supply:
APM: Priority 1: CGD and Agra-Firozabad consumers
Priority 2: Power, Fertilizers
Priority 3: Other industries
47
30.0 Gas Pricing: Status of Price of Gas/LNG from Different
Sources
Table 5.2 – Current Gas prices prevailing in select gas importing countries
Source: GAIL
Table 5.3 - Price & volume of Gas from domestic sources of supplies, i.e. APM
gas, Private & JV sector gas. Price indexations and review clause, if any.
Source: GAIL
48
Table 5.4 – Customer wise and Producer wise Gas Prices as prevailing in India
Source Customers Gas Price Gas Price
(US S/mmbtu)
49
31.0 Price of Long-term LNG Imports
31.1 The prices of long term LNG are based on the following:
o For Asian market, the FOB price is presently 14-15 per cent of Japanese Crude
Cocktail (JCC) for long term supplies from projects like Australia, Qatar etc.
which works out to $15.4/mmbtu on CIF basis.
o For supplies from countries like US, Canada etc, the supplies are expected to
be indexed to 115-120 per cent of Henry Hub prices or about $4.9 per mmbtu
plus capacity charges & liquefaction costs, plus cost of liquefaction,
transportation (including boil-off) and other charges. This may give a final
CIF price of about $9–10/mmbtu on CIF basis.
31.2 Price of LNG purchased on spot, short term contract basis: For Asian market,
the FOB price is expected to be 11-12 per cent Brent for medium term supplies from
projects or current spot prices that works out to be $12–14 per mmbtu.
Source: GAIL
50
32.0 Gas Pipeline Infrastructure in India
32.1 Gas market has remained mostly limited to the states where gas sources were
found. This explains higher consumption of gas in the western region.
Pipelines have also been laid from source to developed markets and major
consumers like Fertilizer & Power Plants. States closer to the gas source have
had benefits of higher utilization of gas and local development of gas market
e.g. Gujarat, Maharashtra, Andhra Pradesh, etc. Other states/under developed
have not been able to utilize benefits of gas due to less gas availability and
lack of infrastructure e.g. Punjab, Haryana, Jharkhand, Uttrakhand, Karnataka,
Kerala, Bihar, Chattishgarh, etc. The present natural gas infrastructure in the
country is at Table 5.5 and the regional imbalance is at Table 5.6:
(A) Existing
REGION Approx. % % of States having States in the region lacking gas pipeline
of Total consum infrastructure & infrastructure
gas P/L ption consuming gas
network
Western 40 53 Gujarat, Goa
Maharashtra
Northern 20 26 Delhi, UP, Punjab, J&K, HP, Uttrakhand
Haryana, Rajasthan
Central 13 3 MP Chhattisgarh
Southern 16 14 TN, AP Kerala, Karnataka
Eastern 0.0 NIL - Bihar, W.B, Jharkhand, Orissa
North Eastern 10 4 Assam, Tripura Meghalaya, Sikkim, Arunachal, Manipur.
Nagaland, Mizoram
(28 States and 7 UT including Delhi)
51
(B) Under Execution
To remove the regional imbalances to a large extent, in 2007, MoPNG
authorized for construction around 5,500 Kms of pipelines to GAIL and 2,800 Kms of
pipeline to RGTIL. These pipelines are under various stages of implementation.
52
Table 5.9 – Pipeline through bidding process
Sr Pipeline Length Kms / Capacity mmsmcd Commissioning date
1 Mallavaram-Vijaipur-Bhilwara 1584 kms / 30 mmscmd
2 Mehsena-Bhatinda 1670 kms/30 mmscmd Estimated to be 2014-15 ie 3
3 Bhatinda-Srinagar 740 kms/15 mmscmd years from the grant of
4 Surat-Paradeep 1724 kms/30 mmscmd authorization by PNGRB
5 Durgapur Kolkata 160 kms/4 mmscmd
6 Kakinada-Srikakulam 350 kms/15 mmscmd
Total 6228 kms/124.5 mmscmd
32.2 After completion of all the above mentioned pipelines, nearly 80 per cent of
the gas pipeline infrastructure will be in place in India in next 5 years. Further
with laying of another 4,000–5,000 kms of pipelines the entire country can be
connected with gas grid for making gas available from any source to supply to
major markets. The additional pipelines can be conceptualized as below so as
to complete the National Gas Grid:
53
33.0 National Gas Grid
33.1 Therefore around 30,000 Kms of pipelines with capacity of around 700
mmscmd is expected to be completed in next 5-6 years. It is felt that after
completion of all the above mentioned pipelines, a National Gas Grid would
be formed in India which would connect the demand and supply centres
located in India. The benefits of formation of National Gas Grid/Additional
Missing pipeline links are as follows:
• This will ensure wider availability across all regions uniformly for social
and economic progress.
• PNGRB has formulated guidelines for laying of pipelines on competitive
bid basis across the country. This should be viewed in light of the
comments in the summary.
34.2 City Gas Consumers: PNGRB has a vision to implement CGD in around 250
cities within a span of few years in order to have a deeper penetration of use of
environmentally natural gas. City gas consumers in many cities do not have
access to cheap source of natural gas and Postal Tariff can help mitigate
transport costs. Domestic & automobile consumers have access to LPG and
Diesel at prices that are controlled by Government, which include controls on
allocated inland transport costs. Postal tariff on gas can bring parity with these
controlled inland freight allocations procedure in liquid fuels and LPG.
54
34.3 Development of Gas Grid: In recent round of bidding for 3 Trunk Pipelines
out of which the winning bid of 2 cross country pipelines Mallavaram-
Bhilwara and Mehsana-Bhatinda Pipeline has a near Postal Tariff (negligible
tariff in Zone 1 and almost equal tariff in all subsequent zones) and winning
bid for Bhatinda-Jammu-Srinagar pipeline is effectively Postal Tariff only.
34.4 An example: In June 2010, PNGRB had issued Zonal Tariff Order for the
HVJ, HVJ-up-gradation and the EWPL natural gas pipelines. As per this
order, the Zonal tariffs (Z-1, Z-2 etc) are as Table 5.12. As per the
aforementioned Tariff Order, the applicable pipeline tariffs, for different set of
consumers in different locations, would be at Table 5.12:
34.5 Zonal Tariffs are substantial part of the end-user gas price: The Government
approved price of the KG D-6 gas is US $ 4.2/ mmbtu on NCV basis, which
would work out to about $3.80 / mmbtu on GCV basis. As per the PNGRB’s
zonal tariff order, in Delhi, the transportation charges for receiving the KG D-
55
6 gas ($2.60/mmbtu) is almost 70 per cent of the commodity (gas) price itself.
If, the KG D-6 gas is to be further transported up to Haryana, Punjab etc, the
transportation tariff would then be almost equal to the gas price itself.
34.6 In case of CGDs, a CNG station or a PNG user would be required to pay
additional CGD network tariff also, over and above the trunk pipeline tariff,
thereby making the gas prohibitively expensive for retail users in these states.
34.7 Status on Zonal tariff declared by PNGRB: The tariffs for HVJ/DVPL and
DUPL have been notified but the remaining tariffs have been filed by GAIL
but pending for approval.
35.2 It surely is not anybody’s case that every urban centre must have a world class
airport and metro-rail transport system. Likewise the argument for equal
treatment can only be taken up to a point and cannot become an over-riding
consideration.
35.3 Therefore, the Committee is of the view that while regional demand patterns
and actual costs of pipeline construction and transportation should adequately
enter into the framework of determination of pipeline tariffs, so should an
effort be made to ensure that small users in outlying locations are not subject
to prohibitive tariffs. The regulator is the appropriate agency to take a call on
56
this based on actual data on both costs and the geographical distribution of
demand loads.
57
ANNEX-I
A study was conducted on behalf of GAIL by M/s Mercados EMI Pvt Ltd on how a
common pooled price of natural gas could be worked in India. This study was
completed in January 2010. Some excerpts from the study that has relevance to the
task of the present Committee is presented below.
Under the circumstances, a single benchmarked price of natural gas in India would be
in the larger interest of the consumers, and also benefit the market development of
natural gas in this country.
58
Various Pooling options:
Option A: A general cost based pool covering all consuming sectors and all
suppliers, excluding those of spot LNG. The option would become operational
only through a legislative mandate since the provisions of existing PSCs
relating to price discovery would be affected;
Even as this would be superior in many respects, we believe that the network
infrastructure would need to be in place on a much larger scale than at present to
ensure that the market can function. We believe that over the next 3-4 years this
should be possible, and should be considered for introduction at that stage.
All aspects considered, we believe that the sectoral pool option B above would be
most suited at this stage. It would serve the basic objectives without being heavy on
administrative arrangements and costs. It would also be facilitative of an eventual
migration to competitive markets. It needs to be noted that a cost based pool or long
term contracts could co-exist with competitive gas markets. We also believe that the
sectoral pool option would leave sufficient room for price discovery for new gas
supplies.
59
suggests that legislative changes would not be required to modify PSC terms. Instead
a sectoral pool could work through a simpler policy directive. The policy would need
to set out the detailed guidelines for constitution and operations of the pool, notify a
pool operator, set out the institutional mechanisms, and also the transition processes.
This report outlines certain key measures in this regard.
Recommendations
It is important to note Indian gas market needs a rational gas pricing mechanism to
encourage efficient consumption and development of natural gas infrastructure, while
preserving the incentives to gas suppliers. Gas price pooling (either based on cost
pooling or bid based pooling) is desirable for all the sectors consuming gas in order to
bring in price stability at the individual consumer level. However, based on the
analysis conducted by the consultant that Power and Fertilizer being the most
vulnerable sectors, it is imperative for the Power and Fertilizer sectors to have a stable
(within a range) gas price.
60
5. All existing contracts for the sectors identified for pooling should be modified
or novated to the pool as per the pool rules. This would require the pool
operator to develop standard contracts;
6. The pool should feature the necessary institutional structures and governance
arrangements discussed earlier in this report. A separate analysis of these
arrangements is suggested consequent to acceptance of the recommendations
of this report;
As mentioned, the pools are recommended for the power and fertilizer industries only.
This leaves adequate room for an alternate market to develop for other industries and
even for customers of the power and fertilizer sector (particularly the former), who
may not wish to be a part of the pool. This would facilitate price discovery for new
gas supplies, and the pooling arrangements would not be a limiting factor for
development of the industry beyond the limits that the pool can serve within its rules.
This would also provide comfort to new gas suppliers who wish to supply to such
industries.
It is important to note that the benefits of cost pooling are not necessarily restricted to
the power and fertilizer sectors only. However the benefits of central pooling in the
other sectors on the lines proposed is more complex on account of the large number of
consumers with small volumes, since this would militate against the objective of
keeping the pool administration set up and costs to a minimum. For the other sectors
such as sponge iron, petrochemicals, CGD and other small customers pooling can be
done at the gas supplier’s level. In the present scenario the gas consumers source gas
from various sources and pool it at the individual company level. Our analysis shows
that in the international markets such as Italy and France where mostly the supply is
based on contracts the gas supply company pools the gas from various sources and
supplies it to the customers at a common price to all the end consumers. As we have
mentioned in the report, we do not recommend pooling of transportation costs since
this distorts the basic economic price signals derived from the location of the
customer vis-à-vis the resource. However we do recommend the development of a
robust gas transportation system across the country based on a policy or legislative
mandate. In the initial years when the utilization is low on such pipelines, the policy
61
framework should place limits on the pipeline charges. Deficits if any can be made
good through mechanisms like Access Deficit Charges (ADC) as prevalent in the
telecommunications sector.
An important aspect to consider is the taxation regime for gas. At present there are a
wide range of taxation regimes that apply to gas from various sources, both at origin
and at point of sale. Pooling of prices would result in the costs of feed gas varying
from the sale price under the supply contract. While in case of PMT gas supplied
under the APM mechanism a similar situation has been addressed (through the Gas
Pool Account), and the same can be done for the sectoral pool, we would recommend
a relook at the taxation regime and suggest simplification of the same. In particular
since it is the stated objective of Government of India to reach gas out as a clean
source of energy across the country, according gas the status of Declared Goods
would merit consideration.
62
pooling mechanism at a common price irrespective of the rate at which gas is
contracted. This would lead to the issues of taxation as the common pooled price may
be higher than the contracted price for some and lower for others. The states are not
bound to levy VAT on common pooled price. It might be difficult to account for the
variations in taxes through the pooling mechanism. In case an effort is made to pool
the taxes, then some states may increase the VAT rates and this may lead to export of
state taxes and may lead to legal complications.
Since, there is no physical pooling of gas and the actual delivery of gas may be
different than pooled gas. Also, transportation charges would follow the contractual
path, while the physical path may be different. Swapping of gas, which is inherent in
gas pooling, would also require a clear taxation regime. To remove these anomalies
natural gas may be included in GST regime or be conferred ‘Declared Good’ status.
63
gas supplied to fertilizer and power sectors through bidding and it would be only the
pool which will be able to discover the price.
Legal Challenge
The directive for pooling of LNG prices by Petronet LNG in 2007 was challenged by
several Gujarat customers. Though Gujarat high court decided in favor of pooling 2:1,
the appeal is pending in Supreme Court. In view of the complex issues involved in
pooling of all existing gases as well as future domestic gas and LNG for creation of
two sectoral pools, it is for consideration whether an Inter-Ministerial group involving
Ministry of Finance, Planning Commission, Ministry of Power and Deptt. Of
Fertilizers may be formed and chaired by Addl. Secretary, MoPNG to resolve the
inter-ministerial issues and also devise pool operating guidelines.
Other Issues
o Imports of LNG only at reasonable price: The same would be facilitated if LNG
imports are made for upcoming power/fertilizer plants. In order to maintain that
the prices are at a reasonable level, a high empowered committee can be formed
comprising of high level officials from GAIL, MOP&NG and other administrative
Ministries.
o How convergence of price pooling and NELP could be achieved: Under the
present contract, flexibility is given for discovery of prices through market route
which would be approved by GOI. Since the pooling proposed is at consumer
level, the prices payable to producers would remain unaffected and would be
governed by provisions of PSC/NELP contracts. The prices of consumers for core
sectors would only be dictated by the pooling mechanism.
o Examine the conflict between pooled price and existing contracts with the
customers
64
The existing formulation wherein different types of gases are supplied to individual
plants seems to factor in only the existing power/fertilizer plants wherein pooling can
be operating at unit level. However, for new power/fertilizer plants, there is no access
to cheaper sources of domestic gas and hence have to rely heavily on new sources of
domestic gas at higher prices or LNG at present high price levels. Therefore, until and
unless enabling mechanism like sectoral gas pooling takes place, price moderation
would not happen and it would be difficult for these Greenfield projects to come on
stream. Therefore, in order to ensure that these projects materialize in the foreseeable
future, sectoral pooling mechanism would be needed rather than leaving it at the plant
level. It has been seen that certain states like Gujarat had derived considerable
benefits on account of higher gas usage primarily aided by factors like proximity of
gas sources as also extensive pipeline infrastructure. In order that other states in India
are also able to consume substantial quantities of gas in their energy usage basket,
pooling mechanism at sectoral level is required to be enabled so that Greenfield
projects in core sectors like power, fertilizers etc can materialize. However, this
would mean that the existing prices in individual contracts would be superseded with
sectoral pooled prices under GOI Pricing orders as was done in the past for RLNG
contracts.
o Whether pooled price should be implemented as a policy directive or through an
act: In our view the same has to be implemented through a policy directive by
MOP&NG as was done in the past for Gas Pooling Order. In case of enforcement
through Act, the process would be time consuming and may be a lengthy affair.
o Examine the option for allocations of APM/Private/JV gas to the core sectors and
non core sectors to use market price gas: The same can also be explored by
MOP&NG and is independent of the sectoral pooling option. However, GOI may
chose to take out APM gas supplies from the supply basket to non-core sectors
and supply it to core industries.
65
APPENDIX - 1
N-14026/2/2010-PET (P&E)
PLANNING COMMISSION
Government of India
(Energy Division)
Yojana Bhavan, New Delhi
Date 9thth March.2011
Ministry of Petroleum & Natural Gas has requested Planning Commission to constitute an inter-
ministerial committee to formulate a policy for pooling of natural gas prices and devise pool
operating guidelines to make the policy operational.
Accordingly, Planning Commission has constituted a committee under the chairmanship of Dr.
Saumitra Chaudhuri, Member, Planning Commission with the following constitution.
66
viii. To develop mechanism to ensure that only Regasified LNG at reasonable prices is
allowed in the pool.
ix. To study natural gas/LNG price mechanism existing in Europe, USA & other
countries.
x. Any other relevant issue considered appropriate by the committee.
2. The Secretarial & other support would be provided by the MOP&NG/GAIL (India) Ltd. to
the Committee. GAIL (India) Ltd/PLL to arrange consultants for carrying out any study
required for the report.
Sd/-
(Banarsi Ram)
Under Secretary to Government of India
Distribution
1. Cabinet Secretary, Cabinet Secretariat, New Delhi-1
2. Secretary (Revenue), North Block, New Delhi-1
3. Secretary (P&NG), Shastri Bhavan, New Delhi-1
4. Secretary, Power, Shram Shakti Bhavan, New Delhi-1
5. Secretary (Fertiliser), Sahstri Bhavan, New Delhi-1
6. Chairman, PNGRB, WTC, 1st Floor, New Delhi-1
7. Chairman & all the members of committee
8. Copy to DCH/Member (Energy)/Member Secretary, Planning Commission for
information
Sd/-
(Banarsi Ram)
Under Secretary to Government of India
67
68