Fuelling Growth

Last month, the government announced a 20 per cent cut in the allocation of gas to eight fertiliser plants located on the Hazira-Bijapur-Jagdishpur (HBJ) pipeline to commission Indian Farmers Fertiliser Cooperative Ltds new urea plant at Aonla in Uttar Pradesh. It points to the growing demand-supply gap for natural gas in the country.

And the opportunities arising from it.

The countrys total gas production in 1996-97 was 22.74 billion cubic metres (bcm). This is projected to touch 30.5 bcm by the year 2001-02. Demand, on the other hand, is expected to touch 53.4 bcm by 1999-2000 going up to 68 bcm by the year 2004-05. The growth is in keeping with international trends. After all, the share of natural gas in primary energy consumption at home is only eight per cent compared to the world average of 23 per cent.

 

The over 20 per cent growth in demand has been spurred by the fuels versatility. A clean fuel, natural gas has normal hydrocarbons dominated by methane at 80 per cent. It can be made available on tap.

Further, a gas-based power plant can be put up in the open-cycle mode in about 18 months and in the combined-cycle mode in about 28 to 30 months compared to about five years taken to set up a coal-based power plant. Also, the thermal efficiency of a gas-based power plant is around 55 per cent compared to 33 per cent for coal-based plants. More crucially, it is a much cleaner fuel as it burns to the extent of 100 per cent. No wonder it has become the preferred fuel for power plants.

One crucial factor in favour of natural gas is that India can source the gas at competitive prices from western, central and south-east Asia because of a more even distribution of gas than oil, says B Bhattacharya, economic advisor, ONGC.

Since India is advantageously located vis a vis these countries, any political uncertainty in the oil-producing areas wont impact supply as the Iraq war did in 1991. In fact, India and Qatar signed a memorandum of understanding last month for the supply of five million tonnes of liquefied natural gas (LNG) a year.

Further impetus has been provided by the dismantling of the administered price mechanism (APM) in September 1997. Under this, gas prices were fixed under a cost plus formula. So a producer was reimbursed the production cost plus given a 15 per cent post-tax return on investment. Since September, however, the price of natural gas has been linked at the rate of 55 per cent to the price of a basket of international fuel oils. The linkage will go up to 65 per cent next year. And prices will be fully decontrolled by 2002.

Natural gas prices are now moving in tandem with trends in the international market. For instance, the price of natural gas was increased on January 11, 1998 by 12.13 per cent (for users along the HBJ pipeline) from Rs 2,150 per 1000 standard cubic metres (scm) to Rs 2,411 per 1000 scm.

On the supply side, however, domestic output is not likely to increase immediately even though the countrys gas reserves are estimated at over 640 bcm. This is because it normally takes six to seven years for exploration and subsequent commercial production to commence.

So the demand will have to be met by imports, either through pipelines or in the form of liquefied natural gas (LNG). Imports through pipelines from Oman and through Bangladesh from South-East Asia have run into political problems because both Pakistan and Bangladesh have not allowed pipelines to be laid through their respective terrain.

The other option is to import LNG. But here the problem is that the country does not have LNG import terminals. LNG is a very specialised fuel. It requires special liquefaction transportation and regassification facilities. And needs to be maintained at low temperatures under high pressure conditions. This means large investments in terminals and ports.

Even so, its an area that is attracting investors. Already, a number of multinationals have evinced interest in both LNG imports and in setting up LNG import facilities. The list reads like a virtual whos who of the oil industry. It includes Mobil Oil Corporation, British Gas, Texaco, Armaco, Royal Dutch/Shell,

Ras Laffan LNG Company Limited of Qatar, Total of France, Woodslide and Chevron of Australia, Pertamina of Indonesia and Malaysia's national oil company, Petroleum National Bhd (Petronas).

Also, unlike in the other sectors, things have moved fast here. British Gas has tied up with the Pipavav Port Trust to set up an LNG terminal with an annual capacity of 2.5 million tonne near the Pipavav port in Gujarat. The terminal, entailing an investment of $400 million, will become operational by 2001.

Shell, which is the largest commercial supplier of LNG in the world having supplied more than 5.6 million tonne in 1996, has tied up with Essar to set up a terminal at Hazira in Gujarat with an annual capacity of five million tonne. The gas from this plant will be primarily used by Essars power and steel plants. Any surplus will be sold to other industries.

Not to be outdone, the domestic oil companies -- Gas Authority of India Limited (GAIL), the Oil & Natural Gas Corporation (ONGC), Indian Oil Corporation (IOC) and Bharat Petroleum Corporation Limited (BPCL) -- have also formed a consortium, PetroNet LNG, to import and supply LNG. The company has invited bids for LNG supply and for participation in setting up terminals at Ennore, Cochin, Mangalore and Hazira/Dahej ports.

Growth in LNG consumption will, in fact, have to be supported by a growth in the countrys pipeline network. There is only one trunk transmission line, the HBJ pipeline, covering the north-west corridor. To bridge the gap, the government has allowed private companies to set up their own pipeline network to supply gas or other petroleum products to their industrial clients.

Things, then, are in place to see a rapid increase in gas consumption. But one problem persists. A mere glance at the project list shows that most of the terminals are coming up at in and around Hazira in Gujarat. Thats because the HBJ pipeline starts there and there is a ready market all along the pipeline. Even so, this could lead to an over-supply in the north-western region of the country.

The sector then needs a regulatory authority to ensure the growth is evenly spread. Now the government has proposed a Gas Act to oversee the development of the gas sector. Currently on the drawing board stage, it is expected to regulate both LNG terminals and the distribution or pipeline network. It will be ready in six months. And experts believe once the act is enforced, there will be no stopping the sector.

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Sitting on a prize cache

ONGCs discovery of coal-bed methane is crucial in view of the countrys huge coal resources.

In September 1997, the Oil & Natural Gas Corporations (ONGC) finally hit pay dirt when it struck coal bed methane (CBM) in the Jharia sub-basin in Bihar. The search, which began in 1992 in the Damodar valley, culminated in the Parbatpur block where a 670-metre well was drilled.

Like natural gas, CBM is a hydrocarbon dominated by methane held as absorbed gas in the molecular structure of coal. And, like gas, it can be used for a variety of purposes ranging from cooking and power generation to fertiliser production.

ONGC has so far found reserves in nine widely-separated wells in the Parbatpur area. It has proved to be a good well and we hope to establish the commercial viability of the project by the end of 1998, says B C Bora, chairman, ONGC.

The pilot wells are already producing around 1,500 to 2,000 cubic metres of gas a day. If commissioned commercially, the gas could be supplied to the steel industries located nearby.

But this is just the tip of the iceberg. India is sitting on estimated CBM resources of over 1,000 billion cubic metre (bcm). These are held in the countrys 194 billion tonne of coal resources.

CBM is obtained when water is pumped out from the coal seam. This causes the gas to flow out of the coal to the bore of the well. The technology used in recovering CBM is almost the same as that used for pumping out oil. It is, in fact, being used commercially in USA, where production has touched 20 bcm. ONGC too has used its existing technology to tap CBM.

According to the R group set up by the government in 1995 to advise it on restructuring the oil industry, around 8,000 to 10,000 wells need to be drilled to exploit the countrys CBM potential. The government has moved fast and announced a policy for the exploration and production of CBM. This is part of the New Exploration & Licensing Policy announced in February 1997. A memorandum of understanding has also been signed between the ministry of coal and the ministry of petroleum and natural gas for awarding exploration licenses.

The policy offers customs duty exemption on capital goods imports for CBM projects. Both domestic and international firms can hold 100 per cent equity in a CBM exploration and production company. CBM companies will also have the freedom to sell the gas in the domestic market.

So far, the policy has identified 19 CBM blocks for which bidding will take place. ONGC, which has identified CBM as a thrust area, is looking at the Durgapur and Raniganj areas in West Bengal as well as some areas in Madhya Pradesh. It plans to bid for these blocks. If the commercial development of CBM is successful, it could take some load off the burgeoning natural gas demand in future.