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Indian fertiliser feeds huge gas-import growth

Government demands for a switch to natural gas in urea production will further boost Indian demand, but domestic output cannot keep up with soaring consumption

INDIA is set to consume and import more natural gas as it strives to achieve self sufficiency in fertiliser production.

Government officials are encouraging fertiliser factories to switch feedstocks – from expensive crude-oil derived naphtha to natural gas, which will increase the sector’s gas consumption by 25%. But despite ramping up domestic gas production over the past few years, India will have to import significantly more liquefied natural gas (LNG) to achieve its ambition.

Fertiliser is crucial to the Indian economy not just because it helps improve crop yields; the agricultural sector also provides 70% of India’s population with employment.

While some fertiliser production requires imported minerals such as phosphates and potash, urea production uses mostly naphtha or natural gas. Urea – used to make nitrogen-release fertilisers – can be used on a wide variety of crops, while potash and phosphate are crop-specific.

Expensive subsidies

But because urea is subsidised, and because naphtha is a more expensive feedstock relative to natural gas, India is looking to convert all its naphtha-based urea plants to gas to save money on its massive subsidy bill. The fertiliser subsidy for the last financial year was Rs658.36 trillion ($14.27 billion), according to government figures.

Even imported LNG is cheaper than naphtha. India has bought spot LNG cargoes at around $10/million British thermal units (Btu), equating to around $52 a barrel, compared with Singapore naphtha, which was trading at around $105/b at the end of August.

“We expect 80,000 barrels a day (b/d) of naphtha demand to be displaced in the fertiliser sector, based on our analysis of naphtha use to make just over 3 million tonnes a year (t/y) of urea,” said Vivek Mathur, head of petrochemicals at consultancy ESAI.

Consequently, “incremental demand for gas in the fertiliser sector should be 4.77 billion cubic metres a year (cm/y), with consumption growing to about 20 billion cm/y by 2015,” he added. Mathur forecast this would lift total Indian gas demand to 85 billion cm by 2015. According to Cedigaz, Indian consumption in 2010 was 64.5 billion cm.

The Indian government had hoped to convert all naphtha-based plants to gas by 2008, but this was later adjusted to 2012. ESAI estimates 15% of India’s nitrogenous fertiliser production is derived from naphtha. Government figures show nearly 30% of domestic gas production is contracted to the fertiliser sector, while power producers receive 45%, with the rest going to other industries and residential use.

Naphtha switch

Urea production rose by 4% to 21.88 million tonnes in financial year 2010/11, with the government forecasting that 2011/12 production would rise by another 2% to 22.3 million tonnes. Indian urea demand for 2011/12 is expected to hit 28.5 million tonnes, with the difference to be made up by imports.

However, even with LNG imports at capacity (12.5 million t/y at present), the policy to phase out naphtha in fertiliser production is likely to result in a gas-supply shortfall. “Forecast domestic gas demand, when compared with likely domestic supply of 150 million cm/d, indicate a short-term supply shortfall of a least 100 million cm/d,” according to the Oxford Institute of Energy Studies (OIES). Even with 20 million t/y of LNG capacity by 2012, the OIES believes the supply shortfall will still be around 50 million cm/d. This shortfall translates to an additional 13.25 million t/y of LNG, or a 66.25% increase in import capacity.

Petronet estimates the present shortfall to be between 34 million cm/d and 40 million cm/d, but expects this to rise to between 180 million and 200 million cm/d by 2015. The Indian LNG importer operates the 10 million t/y Dahej import terminal on the west coast, and plans to increase this facility’s capacity by another 5 million t/y. It is also building a 5 million t/y terminal at Kochi, which should be commissioned in the third quarter of 2012.

India’s other operating LNG terminal is the 2.5 million t/y Hazira facility, run jointly by Shell and Total. In the pipeline are Ratnagiri Gas and Power’s much-delayed 2.5 million t/y Dabhol terminal, which may be commissioned next year; and a planned 5 million t/y terminal at Mundra, for which Gujarat State Petroleum (GSPC) and the Adani Group are expected to take a final investment decision later this year.

During the last four years, India’s domestic gas output has also increased, after the government raised domestic prices (see box below), encouraging more exploration and production. According to Cedigaz, Indian output has risen by 87%, to 52 billion cm, since 2005, reflecting the runaway demand. But with domestic production failing to meet ambitious output forecasts, consumers were forced to turn to LNG. Imports reached 8.922 million tonnes in 2009/10, nearly doubling in four years, according to government figures.

Krishna-Godavari woes

India’s Reliance Industries discovered huge gas reserves in the KG-D6 block, in the offshore Krishna Godavari basin, in 2002. KG-D6 holds an estimated 400 billion cm of gas and 140 billion barrels of oil. It started producing at around 60 million cm/d last year, meeting about 35% of Indian demand, according to Reliance, which plans to increase output to 80 million cm/d.

But production has been disappointing this year, with flows dropping to 44.8 million cm/d in mid-August and averaging 48.6 million cm/d for the second quarter. Reliance blamed technical problems for the fall and plans to drill 11 more wells by April in a bid to boost output. But there are doubts that the schedule will be met.

UK supermajor BP, which bought a 30% stake in 23 Reliance-held blocks, including KG-D6, earlier this year, says raising production will take two years.

The decline in KG-D6 output forced customers into the LNG spot market, with imports reaching near capacity at India’s import terminals for the three months from June to August. Petronet expects Dahej to run at 100% utilisation next year and for spot imports to fill non-contracted capacity.

Petronet has a long-term contract for 7.5 million t/y with Qatar’s RasGas, signed in 2003, with prices at around $3/million Btu. In 2008, it signed a short-term contract for 1.5 million t/y for $8.5/million Btu, also from RasGas. Petronet has also been active in the spot market, paying nearly $14/million Btu for some cargoes over the summer.

Also this year, Russia’s Gazprom signed four 2.5 million t/y memoranda of understanding with Indian companies Gail, GSPC, Petronet and Indian Oil for long-term deals for up to 25 years. If firmed up, these would more than double India’s present LNG imports.

Gas-market reform

India continues to reform its domestic gas prices, moving away from centralised planning and towards a liberalised market. If the government achieves its aim of encouraging gas exploration and boosting production, the country could reduce its dependence on LNG imports.

In May 2010, the government raised gas prices under the old Administered Pricing Mechanism (APM) to $4.2/million Btu from $1.8/million Btu. While output from gasfields under APM had been declining before the rise, volumes from outside the APM were increasing.

The new gas price is now level with that under the New Exploration Licensing Policy (Nelp), which was introduced in 1999 and takes a price discovered by gas producers and processed through a ministerial committee’s formula. Output covered by the Nelp system includes volumes from KG-D6.

The government hopes the higher APM price will drive increased production, but it may not be enough. In the 12 years since the higher Nelp price system, only three foreign firms – BP, BG Group, and Cairn Energy – have been producing substantial amounts of gas in India.

Also tainting the sheen for LNG imports was a government panel rejecting calls for India to subsidise LNG. State-owned Gail and Petronet were lobbying for LNG imports to be averaged out with cheaper, domestically produced gas, with long-term contract prices set to rise to $14.5/million Btu in 2014. But this plea was rejected in the final copy of the Planning Commission’s report.

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