NATURAL GAS: Overview

Natural gas is believed by many to be the most important energy source for the future. The abundance of natural gas
coupled with its environmental soundness and multiple applications across all sectors, means that natural gas will
continue to play an increasingly important role in meeting demand for energy in India. The estimated reserves of
natural gas in India as on 31.03.2012 stood at 1330.26 billion cubic meters (BCM). India is the 13
th
largest consumer
of natural gas consuming almost 61 bcm (~165 mmscmd). Further India is the 5th largest LNG importer (17 bcm~46
mmscmd~13Mmtpa).





DEMAND

In recent years the demand for natural gas in India has increased significantly due to its higher availability,
development of transmission and distribution infrastructure, the savings from the usage of natural gas in place of
alternate fuels, the environment friendly characteristics of natural gas as a fuel and the overall favourable economics
of supplying gas at reasonable prices to end consumers.
Power and Fertilizer sector remain the two biggest contributors to natural gas demand in India and continue to
account for more than 50% of gas consumption. India can be divided into six major regional natural gas markets
namely Northern, Western, Central, Southern, Eastern and North-Eastern market, out of which the Western and
Northern markets currently have the highest consumption due to better pipeline connectivity. However, with the
increasing coverage and reach of natural gas infrastructure in India, this regional imbalance is expected to get
corrected. Consumption for the year 2011-12 as recorded by Ministry of Statistics and Programme Implementation,
Government of India was 46.48 bcm. This demand represents the Realistic Demand for natural gas in India. Gas
based power generation is expected to contribute the highest, in the range of 38% to 49%, to this demand in the
projected period (2012-13 to 2029-30). The share of fertilizer sector in the overall gas consumption in the country is
expected to go down from 26% in FY 2013 to 15% in FY 2030 owing to higher growth in other sectors. The
contribution to the overall demand from the CGD sector is set to increase from 7% to 12% during the projected
period. The below figure represents analysis by McKinsey. It depicts how the demand for natural gas is highly price
sensitive over a range of prices.

While there in no doubt that India will emerge
as a major LNG buyer in this decade, the key
challenges can be summarized as follows:
Price of LNG and competition from alternate
fuels and sector level price challenges
LNG regasification and Gas transportation
infrastructure
Competition from Far East and China

SUPPLY
Currently, LNG is imported in India through mix of long term, short term and spot basis. India currently has long term
contracts between Petronet LNG and RasGas, Qatar for 7.5 MMTPA and Petronet LNG and Mobil Australia Resources
Limited for 1.44 MMTPA from Gorgon Project, Australia, GAIL and Chenniere Energy, USA for 3.5 MMTPA and GAIL
and Gazprom, Russsia for 2.5 MMTPA. In addition LNG is imported on 8 medium and short term basis under various
contracts between Indian Buyers and global LNG suppliers.
India over the recent years has become a major spot buyer with demand varying based on prevailing prices, clearly
depicting India as price elastic market. With the growing demand supply gap, India is expected to be one of the
major LNG importers in next 10-15 years and is on lookout for new long term deals.
The new liquefaction projects being planned in Russia, North America, East Africa, Australia are definitely focus areas
for meeting Indias growing demand. Indian companies are looking at diversifying their portfolio in terms of source
and pricing as well.


DEMAND SUPPLY GAP


Demand Supply gap has widen due to lower
than expected supply from Reliance D 6
blocks. Current production is around
40MMSCMD (as against expected
70MMSCMD). Demand Supply gap partly
being covered by LNG Imports balance left
uncovered with the result - many power plants
working under capacity or not at all working.
Fertilizer plants using costly Naptha. LNG
imports will increase substantially to cover
Demand Supply Gap.




IMPORTS

As India does not have any pipeline connection, all the gas currently imported is LNG. Current operational LNG
import capacity is 13.5 mtpa (18 bcm). India joined the global LNG market in March 2004 when the Dahej LNG
terminal went into operation. Petronet LNG Limited (PLL), a joint venture promoted by GAIL, IOCL, Bahrat Petroleum
(BPCL), GDF Suez, the Asian Development Bank (ADB) and ONGC was formed to import LNG in order to meet the
growing gas demand. PLL expanded this terminal from 5 to 10 mtpa (6.8 to 13.6 bcm) in early 2009. The second LNG
terminal is the Shell and Total 3.5 mtpa (4.8 bcm) terminal located in Hazira, which was commissioned in April 2005.
Both are located on the western coast and could be further expanded to 15 and 10 mtpa respectively. The third
terminal, the DabholRatnagiri LNG terminal, was commissioned by GAIL in January 2013, after many delays. It has a
total capacity of 5.5 mtpa (7.5 bcm), with about 2.9 mtpa (3.9 bcm) available for merchant sales.

LNG import capacity could be extended to over 80 bcm (63 mtpa), if all planned terminals come to fruition. However,
those investments are likely to face some difficulties and delays related to lack of capital and difficulties to secure
new supplies: only seven LNG liquefaction plants have taken a Final Investment Decision (FID) since mid-2005. The
Gorgon LNG facility in Australia, which took the FID in 2009, will sell 1.5 mtpa to the Indian gas market. However, the
Indian gas market might be less ready to accept LNG prices at the same level as Japan, Korea or even China whose
regasification capacity is increasing rapidly. In 2009/10, India imported 12.3 bcm of LNG from Qatar (under a long-
term contract), Australia, Trinidad and Tobago, and Russia as well as from a few other countries. LNG was imported
at the two operational terminals. LNG imports have been growing and this trend has continued LNG imports rising
from 11.6 bcm in 2008/09. The surplus of LNG, driven by lower demand in the traditional LNG importers such as
Japan and Korea and the collapse of spot prices, has enabled India to import LNG at prices around USD 4-5/MBtu.
For example, Petronet bought spot cargoes from North West Shelf (Australia) in 2009.
Other factors also came into play:
The increase of naphtha prices
falling production of the mature fields such as Bombay High
problems with securing the domestic supplies from KG-D6 field.



Imports of liquefied natural gas (LNG) by India
will soar in the next decade to fuel an
expanding economy, pitting India against China
and Japan for supplies as it domestic gas output
struggles and overland delivery remains a
dream.
Indias trillion-dollar economy is already one of
worlds largest importers of LNG. The rapid
increase in LNG demand from Japan will limit
the ability of emerging markets such as India to
source LNG as predicted by Bank of America
Merrill Lynch Head Fransisco Blanch said. The
extra supplies that India needs are more likely
to come from Qatar and Australia, experts said.
Qatar already supplies India on long-term
contracts.


PRICING

Gas pricing various gas pricing regime exists in India
Natural gas pricing in India has evolved over time, and currently several pricing regimes exist in India. Currently, well-
head prices are between USD3.56.1 per mmbtu for conventional gas and USD5.17.6 per mmbtu for coal bed
methane (CBM) gas. Although the Cabinet Committee for Economic Affairs (CCEA) on approved the proposal to hike
the natural gas price to USD 8.4 per mmbtu (metric million British thermal units) from April 1, 2014. The current
range of LNG prices is between USD1016 per mmbtu
3
.

Administered Pricing Mechanism (APM): APM gas refers to natural gas produced by state-owned ONGC and OIL,
from fields provided to them on a nomination basis. In June 2010, the APM mechanism was dismantled and gas
prices were fixed at USD 4.2 per mmbtu. The price of natural gas for customers in the North-East States has been
kept at 60 percent of that in the rest of the country.

Pre-NELP PSC pricing: The Panna-Mukta, Mid & South Tapti (PMT) and Ravva fields are under this pricing regime.
The price of natural gas is determined by the provisions of the PSC, signed by the consortium with the government.
At present, the pre-NELP PSC pricing is between USD 3.55.7 per mmbtu.

NELP gas pricing: This pricing mechanism is applicable to gas fields that were awarded by the government under the
new exploration licensing policy (NELP). The pricing of JV gas is governed by the terms of PSC provisions, which are
determined on the basis of arms length prices (market prices), subject to the governments approval.

CBM gas pricing: CBM has a small share (less than one percent) in Indias total gas production. CBM prices are
determined by the arms length principle subject to government approval.

LNG Pricing: LNG prices negotiated in India at present can be broadly classified under three categories:
Long-term contract: PLL has signed long term LNG supply contracts with Qatar and Australia. Long-term LNG
prices are generally linked to JCC crude oil under an agreed formula, and commercial negotiations
determined the linkage percentage. The Australia contract is understood to be contracted at a higher JCC
linkage than the Qatar contract. Prevailing prevalent ex-terminal LNG prices are about USD 10-11 per mmbtu
(through Qatar contract). GAIL has recently signed a term contract linked to Henry Hub.
Medium-term contract: For medium term contract it was reported that GAIL has signed a two year contract
with GDF Suez to import 0.8 million tonnes of LNG.
Spot LNG: Spot LNG prices are determined through commercial negotiations and have been in the range of
USD 1316 mmbtu over the last few months.





GOVERNMENT POLICIES

GoI plays a key role in different energy sectors through dedicated ministries. A total of five ministries or departments
oversee the energy sector: the Ministry of Power, the Ministry of Coal, the Ministry of Petroleum and Natural Gas,
the Ministry of New and Renewable Energy and the Department of Atomic Energy. Two regulators now exist for the
upstream and downstream oil and gas sectors. The main players for the gas industry are therefore the following:
The Ministry of Petroleum and Natural Gas (MoPNG) oversees the exploration and production of oil and natural
gas; their refining, distribution and marketing; and the import, export and conservation of petroleum, products and
liquefied natural gas.
The Directorate General for Hydrocarbons (DGH) was established in 1993 and can be considered as the upstream
regulator The Petroleum and Natural Gas Regulatory Board (PNGRB) was created in 2006 to oversee the
downstream part of the market.

Allocation and pricing of upstream gas
Natural gas is a scarce resource in India and GoI plays an important role in its allocation. In 2007, the large gap
between demand and available supplies prompted the government to develop a Gas Utilisation Policy and to go back
to administrative control over prices (GoI introduced a price formula for all discoveries under the first six NELP
rounds) and over volumes to be allocated to end-consumers. Therefore, in 2008, the government introduced new
guidelines called the Gas Utilisation Policy, which effectively took away gas producers rights to sell the gas they
discover on the open market. These guidelines would be applicable for the next five years and be reviewed
afterwards. The ruling of the Supreme Court in May 2010 regarding the dispute between RIL and RNRL, reaffirms the
role of the government in the allocation and pricing of gas. Currently, the rules of the General Policy for the gas
market imply that gas will be allocated according to sectoral priorities set up by the government. This does not imply
that the gas is reserved: if one customer is not in a position to take the gas, the next one on the list becomes
eligible.

Regulation of downstream markets
Historically, gas markets were entirely serviced by PSU with prices determined by the central government. From
1987 to 2005, production and transport prices were fixed by the Empowered Group of Ministers (EoGM). In 2006,
the regulator PNGRB was created to set up the bases for a competitive market and has been developing regulations
since then. In December 2006, the monopoly on transmission networks for GAIL was abolished enabling other
companies to build and operate networks. The regulator PNGRB set up the Access Code requiring third-party access
for one third of the capacity and setting the tariffs of transportation for third parties. PNGRB has therefore to
determine tariffs for existing pipelines as well as for pipelines authorised by the government (before PNGRB was
created). If they do not fulfil the obligations of the common carrier principle, the ministry can revoke the approval.
To avoid this risk, companies propose competitive pipelines often heading to the same markets. This raises the issue
of the duplication of pipelines.