Domestic gas production has witnessed an uptick in the past couple of years, on the back of new gas fields coming onstream. With this, the sluggish production is likely to be mitigated further in the coming years. Meanwhile, the demand for natural gas is expected to increase modestly, with the city gas distribution (CGD) segment and the fertiliser sector being the key consumers. Apart from this, consumption of liquefied natural gas (LNG) is also likely to increase owing to several new terminals coming online and subdued global LNG prices.
Domestic gas supply scenario
During 2017-18, domestic natural gas production stood at around 89 million metric standard cubic metres per day (mmscmd), witnessing a sharp decline from the highest ever production level of 143 mmscmd in 2010-11. However, in the past two-three years, domestic gas production has recorded an increase on a year-on-year basis, due to gas production from new fields. Offshore gas fields including those located in Bombay High and Bassein and satellite fields account for more than two-thirds of the gas production. Sector-wise, public sector undertakings account for 83 per cent of the total production. The Oil and Natural Gas Corporation (ONGC) alone accounts for 75 per cent of the production. With regard to the gas production from Reliance Industries Limited’s (RIL) Krishna Godavari (KG)-D6 gas field, it is currently producing around 1.9 mmscmd of gas. Production from the field had commenced in April 2009 and reached a peak of 70 mmscmd in March 2010 before water and sand ingress led to shutting down of wells and a decline in production. Further, production from the D1 and D3 fields of the KG-D6 basin will soon be terminated since these fields will become technically unviable.
With regard to the outlook for gas production, ICRA Research estimates that, in the best case scenario, domestic gas production is likely to reach 132 mmscmd in 2022. The highest incremental gas production is expected to come from ONGC’s KG-DWN-98/2 block in the KG basin. The development of the field entailed a capital expenditure of around $5 billion, and the first production from the field is expected by end 2019. Located on the east coast, peak production from the block is expected to be 15.6 mmscmd by 2022. The other sources of ONGC’s incremental gas production include ramping up of the Vasistha and S1 fields in the KG basin (a peak production of around 5 mmscmd); the C-26 cluster fields; the Daman and Vasai East fields; redevelopment of older fields such as Bassein; the B- and C-cluster blocks; the Daman offshore blocks; and Bombay High’s North and South redevelopment, Phase 3.
With regard to gas production from the KG-D6 block, both RIL and British Petroleum have committed to investing around Rs 400 billion to increase production from the block. The aggregate production from the R-series, the satellite cluster and MJ-fields in the KG-D6 basin is expected to be 30-35 mmscmd at the peak level. This capacity is likely to come up in phases by 2020-22. Apart from this, the other sources of incremental gas production include Vedanta’s Rajasthan blocks, and Oil India Limited’s Northeast blocks and coal bed methane (CBM) blocks.
Natural gas demand scenario
At present, the power and fertiliser sectors together account for around 50 per cent of the demand for natural gas, as against a 70 per cent share a few years ago. In the fertiliser sector, the demand for natural gas has been stagnant primarily due to the lack of new fertiliser capacity. Meanwhile, in the power sector, gas demand has been stagnant owing to unfavourable economics of gas-based power plants. The central government’s scheme to support stranded gas plants with the Power System Development Fund has now been discontinued, and currently, around 25 GW of capacity is stranded due to lack of gas.
One of the areas that is witnessing an increase in the demand for gas is the CGD segment. This is being driven by increasing geographical coverage, expansion within geographical areas, competitiveness vis-à-vis alternate fuels and provision of domestic gas for the compressed natural gas (CNG) and domestic piped natural gas segments.
Natural gas demand outlook and growth drivers
With regard to the demand outlook for natural gas, ICRA Research estimates that owing to the large unmet demand in the country, gas demand is expected to increase to reach 263 mmscmd by 2022. One of the biggest demand drivers for natural gas will be the CGD segment, owing to favourable conversion economics and expansion of operations to more cities. Besides, regasified LNG (R-LNG) use will get a fillip if domestic gas supply to the CNG segment is curtailed, albeit profitability of the industry will be affected as well.
In the fertiliser sector, urea plants are expected to drive the demand for natural gas. Recently, one fertiliser project has been commissioned by Chambal Fertilisers and Chemicals Limited and another project of Matrix Fertilisers and Chemicals Limited is ready for commissioning and is awaiting gas connectivity. Apart from this, three urea plants being set up by a consortium of NTPC Limited, Coal India Limited and Indian Oil Corporation Limited and one project of National Fertilizers Limited are in the pipeline.
With respect to the power sector, the prospects for new gas-based power plants are weak in view of rising competition from renewable energy sources, which have reached grid parity. Reforms such as a peaking power policy, a balancing power policy, time-of-day tariffs and gas-based power obligation remain key for new demand from the power sector. The High Level Empowered Committee appointed by the central government to suggest measures for the resolution of stressed thermal power assets recommended that the government devise a scheme in line with the earlier e-bid R-LNG scheme to revive gas-based projects.
One of the emerging consumer segments for natural gas is oil refineries. The refineries prefer gas over liquid fuels primarily owing to the lower cost of natural gas vis-à-vis liquid fuels, on an energy equivalent basis. Further, the use of gas yields better utilisation of liquid fuels for producing value-added products and higher gross refining margins and lowers the carbon footprint. With several Indian refineries embarking on revamping and expansion projects besides greenfield projects (including the Raigad refinery and the Rajasthan refinery) as well as pipeline connectivity to existing refineries, R-LNG consumption by this segment could increase significantly. Moreover, various new segments such LNG-driven trucks and buses could spur the demand for natural gas.
Globally, LNG prices have been highly volatile. In 2018, Asian LNG prices remained elevated owing to an increase in demand by China, replenishing depleted inventories, and delays in several new liquefaction plants coming onstream. However, spot prices of gas are expected to decline in the coming years. This could be a result of new liquefaction plants starting production. About 30 million tonnes (mt) of liquefaction capacity is expected to be added in 2019 primarily in Russia and the US, and over 35 mt capacity that had been added in 2018 will also ramp up production.
On the domestic front, the modified Rangarajan formula, based on the volume weighted average of the US’s Henry Hub, Canada’s Alberta Hub, the UK’s National Balancing Point and Russian gas is applicable for domestic gas (except CBM and high pressure, high temperature fields). As these international hubs are located in gas-abundant regions, prices there have been subdued and below the cost of production. As a result of these factors, domestic gas prices have been very unattractive.
Global players do not find the domestic regulatory regime attractive, and mostly medium- to small-sized exploration and production companies bid in Indian auctions. The global giants prefer to venture into regions that are more attractive on the geographical and regulatory fronts. One of the key regulatory hurdles in the country is the slow pace of approvals. Progress with respect to several gas blocks has been stalled due to the absence of requisite approvals from the Ministry of Defence and/or the Ministry of Environment Forest and Climate Change. Besides, delays in decision-making by the Directorate General of Hydrocarbons have also hampered the development of gas blocks. The increase in arbitration cases pertaining to production sharing contracts, litigations involving income tax exemptions and implementation of retrospective tax have negatively impacted the sentiments of private sector and foreign oil companies. Besides, on the pricing front, unremunerative domestic gas prices at around $3.36 per mmBtu and $7.67 per mmBtu for difficult fields is low.
Of late, there have been a number of reforms in the sector to improve investor sentiment. These include full marketing and pricing freedom in all basins, bidding out commercially unviable blocks exclusively for exploration work, improved revenue sharing, and incentivising early production. Further, for enhanced recovery, incremental gas production has been incentivised and royalty has been waived.
The share of R-LNG, despite being a costlier fuel, is steadily rising in total natural gas consumption since 2013. The consistent fall in domestic gas production and supply (except in 2017-18), increase in regasification capacity, the Supreme Court’s ban on fuel oil and pet coke for industrial use in some northern states, etc. have been favourable factors for LNG demand. Soft spot LNG prices during 2015-17 boosted R-LNG consumption.
With regard to regasification, current domestic capacity is around 23 million metric tonnes per annum (mmtpa). However, the brownfield expansion of the Dahej and Hazira LNG terminals, operationalisation of the Mundra terminal and plans to set up new terminals at Ennore, Dhamra, Jaigarh and Chhara ports are expected to increase the R-LNG supply potential to around 39 mmtpa by 2019-20 and around 61.5 mmtpa (~220 mmscmd) by 2025.
A key attractive feature of R-LNG contracts is that buyers have a number of gas sourcing strategies and options. Consumers can opt for shorter duration contracts of a few months to three-five years. On the pricing front too, new pricing structures are emerging. Consumers can also opt for hybrid contracts which are linked to both oil and Hub (Henry Hub/National Balancing Point) prices, as well as “S” curve contracts comprising floor and ceiling prices to mitigate downside price risks. Apart from this, customers can opt for flexibility in contracts based on destination, volumes, price formula and penalty.
Net, net, green shoots in the domestic natural gas sector can be seen emerging with the uptick in gas demand and supply in the past couple of years. However, in order to ensure a sustained growth trajectory, it is necessary to maintain a favourable regulatory environment with a strong focus on reviving investor sentiment in the sector.