The global gas industry is currently in a state of oversupply. This is good news for India which is determined to increase the share of natural gas in its energy mix and is building a number of liquefied natural gas (LNG) terminals to increase imports. However, what is required is to set up robust infrastructure for gas transportation, which will allow India to import gas at prices determined by the consumer and not by the producer. Prabhat Singh, managing director and chief executive officer, Petronet LNG, shared his views on the current status of LNG in India, recommended ways to increase adoption of LNG and highlighted the need for India to enhance its bargaining power as a gas importer…
There is a general feeling across the industry that the golden era for the gas sector has arrived. The industry now has to take the necessary steps to reap the benefits. After the recent discoveries of shale gas across the world, the reserve to production ratio for gas has increased significantly at a global level. This has made gas more sustainable in nature and has ensured its supply for a number of generations to come. Thus, the industry feels that the reserve to production ratio has lost its relevance in the current scenario.
Over the past decade or so, technology has seen major advancements. Today, almost three and a half times the volume of gas as compared to what was being previously produced can be produced at one-third the original cost. This has brought down the gas production costs to about one-tenth of its previous level. Taking into account the newly discovered reserves of shale gas, a scenario of oversupply has emerged. The US is now producing very large volumes of gas that are being offered at a very low price and the country is increasingly facing the challenge of gas evacuation. This oversupply scenario is leading to a decline in the price of gas. However, this has significantly helped buyers, making the global gas market buyer-driven.
There is an increasing need now for setting up infrastructure for bringing the gas from the wellhead to the end consumer. For this, the existing gas transportation infrastructure needs to be debottlenecked and new infrastructure needs to be created. This also needs to be supported by initiatives such promoting the use of liquefied natural gas (LNG) as a fuel. In fact, Petronet LNG is taking measures to promote LNG as a fuel in trucks and buses. However, there is a lot of reluctance on the part of stakeholders such as original equipment manufacturers of trucks and buses, truck fleet owners and oil marketing companies that supply diesel to these trucks as they cannot see any benefit for themselves. There is thus a need to constitute a regulatory body that will issue guidelines from time to time as well as spread awareness about the benefits of using LNG as a transportation fuel.
Need to set up LNG infrastructure across the supply chain
At present, India has massive plans to expand its LNG infrastructure. However, most of these plans involve the setting up of LNG terminals. There is an urgent need to come up with plans to build a strong LNG supply chain through investments in procuring/building LNG ships and laying adequate pipeline networks to connect gas fields to liquefaction plants without which it will not be possible to transport gas. For example, Indian companies could set up liquefaction plants abroad, for example in the US, Mozambique, etc., along with pipeline infrastructure to transport the gas from the basin to the liquefaction plant and then load the gas on to ships.
Currently, India is paying about $5 of premium per unit on average on the LNG imported every year. This amounts to a total expense of $5 billion. This amount could instead be utilised for setting up a 5 million tonne (mt) liquefaction terminal and the associated pipeline infrastructure in the US. In the long run, this would be an asset for the (gas) buyer, as this will enable it to source the gas from the wellhead at whatever price it deems fit.
Creating new demand for LNG
City gas distribution (CGD) and transportation are the two segments which will absorb most of the price increase resulting from increased import of LNG. In the 1970s, the Varadarajan Committee was constituted for evaluating the atmospheric environmental quality and preserving the Taj Mahal and other monuments in Agra. The report submitted by the committee proposed a concept of imputed economic value of gas, wherein the consumer who pays the highest price for gas supply should be selected. As per the calculations proposed in the report, the CGD segment gave the highest imputed economic value for gas supply, implying that gas supply to the CGD segment should definitely be increased.
Currently, subsidised liquefied petroleum gas (LPG) cylinders are being supplied across the country. Many of these connections are in urban areas where the purchasing power is higher. Natural gas connections could be provided to these areas without much difficulty. Thus, LNG importers should capture the potential of this market. Another segment where there is significant opportunity for LNG is the trucking industry. This industry consumes 28-30 mt of diesel per annum. As compared to LNG which costs $12-14 per million metric British thermal units (mmBtu), diesel price is in the range of $25 to $30 per mmBtu. Thus, LNG should replace traditional fuels such as coal and diesel that are not only costly but also cause pollution. In fact, the government’s policy think tank NITI Aayog is planning to make it mandatory for all long distance haulage in the country to switch to cleaner fuels going forward.
Need for consumers to take responsibility
Until now, most of the gas supply infrastructure has been set up by the gas producers themselves. The time has now come for a change in the mindset. Consumers must take the responsibility for setting up gas supply infrastructure. It is a buyers’ market today and the buyers must work together to disrupt any cartelisation on the supply side to gain control over gas prices.
The government has taken many positive steps towards this. The country is already in dialogue with other large gas consuming nations such as China and Japan and is thinking of forming a buyers’ association to have more power while negotiating the prices of oil and gas. The Indian government also feels that producers should take into account the challenges that the consumers are facing to rationally determine the price of gas. This must be put forth through various consumer forums across the world.
Further, there is also a need to encourage small entrepreneurs to come forward and set up retail infrastructure such as compressed natural gas (CNG) stations across the country. A small CNG station can be set up with an initial investment of Rs 20 million-Rs 30 million. Many companies are willing to invest this amount. This should be encouraged by eliminating clauses such as the need of obtaining a CGD licence prior to setting up a CNG station.
Further, the gas markets should be opened up to allow LNG to coexist with the already existing infrastructure. For example, the retail of LNG can be undertaken at existing CNG retail outlets. The government should encourage setting up of such facilities. Petronet LNG is also conducting a pilot study by converting 4,000-5,000 km of highways into LNG-supplied highways where about 28 LNG outlets will be opened. Petronet has also agreed to pay the difference between the price of a traditional bus and an LNG bus, for buses plying on this route. This is intended to act as a pilot project for the rest of the country to follow and will bring in a number of benefits such as increased savings and lower pollution, and will showcase the benefits of using LNG.
The golden era for the gas sector has arrived and the industry is prepared to support it. Gas has proven its worth as a safe fuel for both commercial and domestic purposes. The need of the hour is to increasingly replace the traditional dirtier fuels such as coal and diesel with gas. To accelerate this, a continuous supply of gas to the country must be ensured. At present, India is developing a number of LNG ports to import gas. However, that is only half the story. Indian LNG buyers must increasingly set up the necessary infrastructure to transport the gas from the wellhead to the consumers near the gas wells. Indian buyers have the wherewithal to do this. This will also ensure that when the gas ultimately arrives in the country, it will be at the price determined by the buyer and not by the producer.