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India's shifting gas strategy

India's gas-sector strategy was based on LNG imports and international pipelines. But big domestic gas discoveries and tough economic conditions have changed that, writes Ian Lewis

GAS IS set to play an important role in India's energy mix, as the country strives to reconcile increased energy demand with the need to keep carbon-emissions growth in check. Demand will increase from 33m tonnes of oil equivalent (toe), or 5.5% of the overall primary-energy mix in 2007, to around 113m toe by 2030, more than 10% of the total, according to the International Energy Agency.

Securing supplies to meet such an increase is a big undertaking, requiring action on several fronts. In the first half of the last decade, plans for ambitious gas-import pipelines from Iran, Myanmar (Burma) and further afield were given serious consideration and several liquefied natural gas (LNG) import projects were proposed.

However, in 2002, the country's largest gas discovery in around 30 years, in the Krishna-Godavari basin in the Bay of Bengal, began to reduce forecasts for imports. The KG-D6 gasfield (also known as KG-DWN-98/3), estimated to hold 310bn-340bn cubic metres (cm), came on stream in April 2009 (see Figure 1).

Privately owned Reliance Industries, the field operator, says it has been producing an average of 32m cm/d from KG-D6 since then, with production hitting 60m cm/d in December. The introduction of this supply has already increased India's gas production by more than 50%, while oil from the field, which started to flow in late 2008, has boosted overall oil production by more than 10%. Reliance plans to increase gas production from KG-D6 to up to 80m cm/d, while it and other operators are also evaluating further finds in the basin, some of which are likely to prove viable, increasing supply from Krishna-Godavari even further.

Block KG-DWN-98/2, next to KG-D6, may hold 55bn-85bn cm of gas, analysts say. State-owned Oil and Natural Gas Corporation (ONGC) plans to make a multi-billion dollar investment in the field, drilling six appraisal wells. In January, Brazil's Petrobras said it wanted to sell its 10% stake in the field to concentrate on domestic production; ONGC has said both Shell, which could use floating LNG technology there, and BP have shown an interest in the stake. Statoil and Cairn Energy remain in the project, each with 10%.

In November, Gujarat State Petroleum Corporation (GSPC), operator of the Deen Dayal West gasfield in block KG-OSN-2001/3, received government approval for its field-development plan. GSPC hopes to start producing from Deen Dayal in December 2011; the field, under appraisal, is thought to hold 45bn cm of gas. Meanwhile, in the Mahanadi basin, further up the east coast, operator Reliance found gas in its NEC-25 block last year. It could hold 56bn cm.

The involvement of private-sector companies in these new projects is realigning the structure of an upstream sector traditionally dominated by state-owned companies.

"Most of India's gas has been produced by state-owned companies," says Sara Pourghorbani, a regional upstream analyst at Wood Mackenzie, a consultancy. "But with the ramp-up in production from existing fields and new discoveries potentially coming on stream after 2012, private-sector companies such as Reliance, together with foreign joint ventures, could account for as much as 70% of domestic gas production in a couple of years' time – that's a significant shift."

However, she adds that international energy companies will be wary of investing in some of the recent headline finds until their viability has been firmly established.

The development of these finds and a pool of smaller ones, together with the potential of coal-bed methane and, perhaps, shale gas further down the line, has changed strategic thinking in India. A few years ago, talk was rife of ambitious international pipelines linking India to the gasfields of Iran, through Pakistan (PE 2/10 p16), and those of Myanmar and Bangladesh.

Pipeline plans on hold

But these ideas seem to have been put on hold, partly because of the political complexities that both entail, but also because India's need for additional gas has diminished. A change in government in Bangladesh to one more friendly towards India resulted in the country lifting its opposition to hosting the Myanmar-Bangladesh-India pipeline in February, but this may not result in a rapid revival of the venture. "At least in the short term, the new discoveries will help India to meet domestic demand, so it seems likely that it won't be as keen as it was to pursue some of these international pipeline projects," says Pourghorbani.

New domestic supply and stalled demand because of the recession are causing concern among investors and developers in the LNG sector, who are reassessing the viability of their projects. LNG importer Petronet says supplies may need to rise to 15.5m tonnes a year (t/y), or over 21bn cm/y, by 2012 if demand is to be met then, but the influx of KG-D6 gas has meant it has not been active in the spot market since December. The company has said it might return to the spot market to buy LNG in the second half 2010.

"KG-D6 gas definitely led to a drop in Indian LNG activity. Indian buyers have adopted a wait-and-see approach, looking at how domestic gas is allocated and whether there would be any additional volumes. LNG demand has not been very consistent," says Alexis Aik, head of the gas team in the Singapore office of FG Energy, a consultancy.

KG-D6 has already had a direct effect on LNG projects. The new Ratnagiri LNG import terminal at Dabhol, Maharashtra, western India, was to have provided feedstock for the neighbouring Dabhol power plant – India's biggest gas-fired plant, with a capacity of just under 2 gigawatts. However, in September, the federal government said it would allocate the power station 5.67m cm/d of KG-D6 gas at around 83% of the price that LNG supplies would have cost.

The power plant, now run by state-controlled Ratnagiri Gas and Power, was built by Enron and initially ran on naphtha before, in 2007, switching to LNG supplied by Petronet, which is 50%-owned by state-owned companies. It will need around 8.5m cm/d of gas when it is fully commissioned – a process that was due to have happened by the end of last month, according to Ratnagiri.

This has left the LNG terminal – also owned by Ratnagiri – in need of new markets for its gas. It is scheduled to open in the next few weeks, after a series of postponements, with an initial capacity of 1.2m t/y, rising to 5m t/y by 2013. However, its future is clouded not just by immediate demand issues, but also by the need to complete a breakwater, without which it cannot operate at capacity, and by the owner's efforts to lease capacity to a third party. Around 10 groups, including a number of state-owned entities, are believed to be interested in bidding, although the bidding process itself has yet to start.

When the Ratnagiri LNG import facility starts up it will be the third operational terminal in the country. Petronet's Dahej terminal, also on the western coast, in Gujarat, commissioned in 2004, is designed to handle 10m t/y and is working flat out. Last year, the company said it planned a $200m expansion to 15m t/y by 2012, although capacity by that date might be closer to 12.5m t/y. Meanwhile, the 3.6m t/y Hazira terminal, also in Gujarat, was shut in February for what owner Shell India described as routine maintenance. Shell holds a 74% stake in Hazira LNG, with France's Total holding the rest.

Even before KG-D6 gas became available, there had been speculation over whether the merchant model employed by Shell at Hazira, whereby LNG is effectively sold at spot prices, was viable in the present trading climate. Assuming the terminal survives in its present form, it is designed for expansion to 5m t/y, if the market warrants it.

Another terminal, the 2.5m t/y Kochi facility, is under construction for owner Petronet in Kerala, southern India – the region's first LNG project. Due for completion in first-half 2012, Kochi may be the last terminal to be built for a few years, as developers wait to see how the market develops. A joint venture of Adani Energy and GSPC has been considering for some time building a 6.5m t/y terminal in Mundra, Gujarat, but has done little to advance the project in recent months.

However, the hunt is on for supplies to serve India's new terminals. Gazprom delivered its first cargo of LNG from the Sakhalin 2 project to Total at Hazira in May 2009, and GSPC and others have been in talks with the Russian company to secure more imports.

Petronet signed its first long-term contract to take Australian LNG in mid-2009 – a 20-year agreement for around 1.5m t/y of ExxonMobil's allocation from the Gorgon project in Western Australia (PE 2/10 p30). The LNG is slated to go to Petronet's Kochi terminal, but that will need to secure supplies from elsewhere in the short term as Gorgon LNG will not be arriving until around July 2014 at the earliest.

The Indian government and Petronet have been in talks with Qatar over the possible supply of an extra 5m t/y of LNG, supplementing the 7.5m t/y – increased from 5m t/y in January – already being exported to Dahej from the RasGas project under a long-term agreement.

Distribution restrictions

Another potential limit on gas supply from LNG terminals, or offshore fields, is the capacity of India's gas-distribution network. Petronet's chief executive, Prosad Dasgupta, said last year that the existing network was already working at capacity and that more pipelines were urgently needed to stave off long-term distribution problems.

Gail, the state-owned body responsible for much of the country's gas-transmission and distribution system, has embarked on an expansion programme to relieve bottlenecks and serve more locations. Gail is building 5,000 km of new pipelines, doubling its existing capacity to 300m cm/d by 2012.

Meanwhile Reliance is constructing 8,000 km and GSPC another 5,000 km by 2014. The aim is to interlink Reliance and Gail pipelines, with the first stage of that process scheduled for completion by 2012. That will be an important landmark in India's efforts to meet the country's daunting long-term gas-supply goals.

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