GAS AUTHORITY OF INDIA LIMITED

16, Bhikaiji Cama Place, New Delhi-110 066. Tel: +91-11-6182117 Fax: +91-11-6182119 email: hpchandna@gail.co.in
H.P. CHANDNA Director (Planning) D.O. No.GAIL/ND/D-PLG/47 May 2, 2002 Dear Mr. Riemer, Subject: 17th World Petroleum Congress Gas Authority of India Limited (GAIL) is Indias largest company in the field of Natural Gas transmission and distribution and has significant presence in production of LPG and Petrochemicals. With reference to your discussions held on 25.3.2002 with the advance team from the Oil Industry in India, I am enclosing herewith the Paper in the required format, which I would like to present during the above Conference. I am enclosing herewith the hard copy of my paper titled Import of Natural Gas & Commercial Issues An Indian Perspective. Shall be grateful for a line in reply towards confirmation of receipt of the paper. Regards, Yours sincerely,

(H.P. Chandna) Mr. Pierce Riemer Director General World Petroleum Congress Suite 1, 4th Floor 1 Duchess Street, London W1N 3DE United Kingdom

Import of Natural Gas & Commercial issues - An Indian Perspective

Introduction
India is witnessing major economic reforms and the energy sector is no exception. Under liberalized policy the Oil and Gas industry, which was hitherto heavily controlled, is steadily moving towards decontrol at all levels. Being the largest democracy in the world, the energy requirements of India are immense. Though the average per capita consumption of petroleum in India is just 113 Kg against the world average of 927 kg, the demand for hydrocarbons in is growing very rapidly. Over the years the consumption of energy has grown at 6-7 per cent per annum whereas the world average is 1.5 per cent per annum. The consumption of petroleum products in India is expected to grow from a level of 97 million tons (MMT) in 1999-2000 to about 180 MMT in 2006-07 and further to around 370 MMT by 2024-25. The demand of Natural gas is expected to be 230 MMSCMD by 2006-07 and to increase to about 390 MMSCMD by 2024-25. Indian Oil and Gas sector, till the mid 1970s, was operating as a free market and many of the multinational oil companies had a significant presence in India. Nationalization of the oil industry resulted in these players being taken over by the government. Since then state owned Public Sector Undertakings (PSUs) have played a dominant role in the Oil and gas sector and the prices of end products were controlled by the Federal Government through a system of Administered Prices. However, Government of India has now dismantled the Administered Pricing Mechanism (APM) and has moved to the market determined pricing for petroleum products from 1st April 2002.

Gas use in India

Presently about 67 MMSCMD of natural gas is consumed by industries in India. Major consumption is by the core sectors of Fertilizer and Power, which together consume nearly 75 % of the total gas consumption.
SHRINKAGE & INTERNAL CONSUMPTION 10%

OTHERS 10%

SPONGE IRON 7%

FERTILISER 36%

POWER 37%

As one of the fastest growing markets for energy in Asia , Indias demand for energy is increasing by leaps and bounds and Natural Gas is poised to play a prominent role in the future.The India Hydrocarbon Vision-2025 has projected that the demand for gas will increase from a level of 151 MMSCMD at present to 231 MMSCMD by 2007, to more than 313 MMSCMD by 2012 and almost 391 MMSCMD by 2025. The growth in the gas demand would be mainly driven by new capacities required in the power sector and the fertilizer sector.

400

391

300

313

322

MMSCMD

231
200

216

151 117
100

166

70

58

45

36

0 2002 2007 2012 2025 LOW DEMAND HIGH DEMAND SUPPLY

Year

The burgeoning gap between demand and supply of natural gas has impelled the Govt. to promote import of natural gas. India is one of the largest emerging gas markets in the world. The share of gas in the commercial energy consumption is about 9% and the domestic gas production is likely to peak shortly to about 90 million cubic meters per day. India would, therefore, need large energy supply to support commissioning of 7000 to 8000 MW of new power generation capacity every year to meet the electricity demand as well as peak shortfall. Gas is pre-dominantly used in India by the fertilizer and power sectors, though the real demand of industry, domestic and commercial sector could also be very large. Present assessment indicates that India would need increasing volumes of imported gas/LNG for meeting the growing demand. In order to meet the gap between demand and supply, several initiatives have been taken by the Government, foremost amongst them is the opening up of upstream side to private participation. India is one of the least explored regions with one of the lowest well density per thousand sq. kms. However, huge capital investments are required to augment exploration efforts. Accordingly, the government, in 1997-98, formulated New Exploration Licensing Policy (NELP). The National Oil Companies would now have to compete for E&P acreages. In addition to this the liberalized policies encourage development of projects for gas imports.

Prospects for import of Gas to India

Geographically, India is very strategically located and is flanked by large gas reserves on both the east and west. India is relatively close to four of the worlds top five countries in terms of proven gas reserves i.e. Iran, Qatar, Saudi Arabia and Abu Dhabi. This provides an excellent opportunity for developing projects for import of natural gas through pipelines from Iran, Myanmar, Bangladesh etc. Iran has the second highest level of proven reserves after Russia. Considering that natural gas in the Gulf area is typically priced from $ 0.50 to $ 0.75 per MMBTU, preliminary estimates show that it could be possible to deliver pipeline gas from Iran to the Indian market at $ 2.50 per MMBTU. Similar projects can be developed for bringing gas from Bangladesh and Myanmar. However, important issues concerning long-term security of supply, cross border transit and wheeling charges, and geopolitical considerations etc. need to be resolved before these projects can mature and considering the magnitude of gas demand in India, it may be well worth the effort. Besides above, in order to encourage gas imports, the Government of India has kept import of LNG under Open General License (OGL) category. Thus LNG can be imported, regasified and distributed by any developer setting up the LNG facilities. However, the developer has to obtain approval for foreign investment from FIPB. The Government of India is also in the process of formulating an integrated LNG policy to further promote the development of LNG projects in the country. Considering the vast coastline of India it provides a good opportunity to prospective LNG suppliers, both from the middle east as well as from east Asian locations, to access the vast Indian market. Some of the proposed terminals are shown below:

GAS IMPORTS OPTIONS

Turkmenistan

Iran
Delhi

INDIA
DAHEJ

Qatar, Oman Yemen

COCHIN

Bangladesh Myanmar

Malaysia, Indonesia Australia Gas P/L Import LNG Import

PROPOSED LNG TERMINALS IN INDIA

DAHEJ

JAMNAGAR PIPAVAV HAZIRA TROMBAY DABHOL KAKINADA

MANGALORE

ENNORE

KOCHI

Pricing considerations for gas import projects:

The Federal Government has decided the price of Natural Gas in India since 1987. In 1987, the delivered price of natural gas for consumers located along the HBJ trunk line was about $ 2.30 per MMBTU. In 1992 the delivered price was increased to about $ 2.60 per MMBTU with an annual increase of 0.10 $/ MMBTU applicable every year till 1995. However, it was increasingly being felt that price of natural gas needed to be market related to reflect its true value. Accordingly in Oct. 97, the price of gas was linked with a basket of LS/HS Fuel Oils and a floor of 2.60 $ / MMBTU and a ceiling of 3.00 $ / MMBTU (as per Rs. / $ rate in 1997) was decided in respect of the delivered price to consumers located along the HBJ trunk line. The price of domestic gas is expected to achieve 100 % parity with the Fuel Oils shortly. In addition to this, small gas finds under the new exploration and licensing policy (NELP) are being sold at negotiated prices of around $ 3.5 per MMBTU. In order to meet the gap in potential demand and current availability of Natural Gas many LNG projects are being planned. Since a major share of re-gasified LNG shall be utilized by the core sectors of Power and Fertilizer, re-gasified LNG would have to be so priced as to enable generation of Power and production of fertilizers at affordable costs. Considering the proximity of Indian market to the supply sources of Iran and Bangladesh, any LNG sourcing would need to retain its competitiveness over piped gas sources in the long run. There are various options available for pricing of LNG / imported gas such as indexation with crude prices, Fixed Pricing, and Pricing with Floor and Ceiling etc. Though indexation with crude prices has been the traditional approach, such an approach may not be appropriate for the new and emerging gas markets such as India. Indias coal reserves can last in excess of 300 years at the current rate of consumption and therefore, any other fuel must establish its competitiveness vis--vis indigenous coal. The cost of coal based power would be in the range of Rs 2.3-2.4/KWh ( 5 cents) at pithead and may increase to Rs 2.6-2.8/KWh depending on the distance of transportation of coal. The corresponding price of re-gasified LNG at terminal flange (on the west coast) works out to about $ 2.5 to $ 2.75 per MMBTU. This also compares favourably with the prices at which natural gas is available to power plants in the developed countries. It could also be possible to achieve an even more competitive price of LNG if a swapping arrangements between LNG sources of Gulf and South East Asia is worked out to reduce the shipping distances and time. Indias experience with the Enron promoted Dabhol Power Company remains an important lesson for those embarking on development of successful LNG and Power projects. DPC was designed as base load plant right from inception and a very high PLF of 90% was envisaged. This erroneously promised a very low and competitive power tariff. However in reality the power tariff became exorbitant as it had to be operated for peak requirements due to very high fixed as well as fuel cost.. Indias Urea plants that are using Naphtha as feedstock are also potential consumers of re-gasified LNG / imported gas. The price of Naphtha for fertilizer use in the Indian market has fallen sharply in the recent past. Corresponding price of delivered gas at plants works out $ 3.30 per MMBTU. Beach price again works out $2.5 to $ 2.75 / mbtu.

Other Contractual Issues

Considering the nature of an emerging market such as India, the contractual terms for sourcing natural gas would require innovation and flexibility to meet the test of time. In particular, it would be essential to have a provision for Contract Review (say every five years) to alleviate the distress, if any, of either party. It would also be important to limit the volatility of the price through a mechanism of Floor and Ceiling or indexation with alternate fuel for power like coal or directly with prevailing power tariff in the country. Besides this, any developer of an LNG / gas import project would have to contend with the impact of Merit Order Dispatch adopted by the State Electricity Regulators in India to determine which power

plants can be permitted to produce power in a given scenario of power demand. Under this concept, power plant generating the most expensive power in a given system is backed down first. Therefore, under the Merit Order regime, the LNG / imported gas based power plants would run the risk of being shut down since their Variable Cost would any way be higher than the Coal based units. With assured payments only of the Fixed Costs and no guarantee for payment of fuel charges under Merit Order shut-down, the Take or Pay provisions of the LNG / imported gas contracts may not remain sustainable.

CONCLUSION
Though the LNG industry originated in Europe, it is the markets of Far East that have provided growth to the industry. Further growth in the industry shall come from the large emerging markets of India and China. However, this requires setting up of LNG / gas import projects that take into account the nature of these markets where the demand of gas is highly price sensitive. The re-gasified LNG / imported gas must result in affordable power tariff of about Rs. 2.50 (5 cents ) per Kwh. The LNG supplies / gas exports would need to build flexibilities in the contracts with moderate Take or Pay levels. The indexation methodology shall need to account for indigenously available fuel options and would also need to ensure that the volatility of prices is minimised. All these require innovative departure from the traditional practices adopted for the far eastern LNG markets and will further expand the global LNG / natural gas business. It is noteworthy that most existing Japanese contracts, accounting for 50 % of the global demand, are coming up for renewal during the period 2003 2013. Significant changes in the terms and conditions of LNG contracts are thus expected during this period. Besides these aspects, the emerging markets of India and China also hope to benefit from the anticipated overcapacities in the future and would look for contracts of short/medium term duration, flexibilities in off take, and above all a competitive price that can stand its ground in face of competition from other fuels including coal.

The author agree with the following declaration: I certify that I have obtained all customary permission to use any copyright material which appears in my paper for the 17th World Petroleum Congress, and also permission from my organization for the paper to appear as pre-prints and published in the Proceedings of the 17th World Petroleum Congress and any other official WPC publications I assign the copyright of this paper to the Executive Board of the World Petroleum Congresses, to be used in all media, e.g. paper, CDROM, Internet. I agree, also, that in the event of the Congress being cancelled for any reason at all, my paper may be published in book form or other media even though it was not possible to present it. Paper Title: IMPORT OF NATURAL GAS & COMMERCIAL ISSUES AN INDIAN PERSPECTIVE Block Number Forum Number: RFP-7 Author (1) Full Name (CAPITALS) Author (1) Signature HAR PARKASH CHANDNA _______________________

NOTE: Please submit this to the SPC Secretary at lamia@world-petroleum.org

Biography RFP# 7 Oil and Gas Prices: Perpetuated Coupling? Author / Panelist / Poster Presenter (Circle or bold the appropriate choice) Mr. HAR PARKASH CHANDNA First Name: Last Name: Present Post: Company / Institution: Education: Professional Career: HAR PARKASH CHANDNA DIRECTOR (PLANNING) GAS AUTHORITY OF INDIA LIMITED BACHELOR OF ENGINEERING (ELECTRICAL) 33 YEARS OF EXPERIENCE IN THE OIL & GAS INDUSTRY

Professional Association: Awards, Major Publications: Address: GAS AUTHORITY OF INDIA LIMITED, 16, BHIKAIJI CAMA PLACE, NEW DELHI-110 066, INDIA. 0091-11-6182117 0091-11-6182119 hpchandna@gail.co.in

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