Supply Options and Challenges for the Gas-Hungry Indian Market

01 June 2007

Geoffrey Picton-Turbervill and Anthony Patten, global energy team, Ashurst, London

Notwithstanding its indigenous reserves of gas and very significant coal reserves, India’s rapid economic growth (in excess of 8 per cent per annum in recent years) and large growth potential makes it a market to watch. India is expected to become increasingly dependent on imports of fossil fuels. The Petroleum Economist recently predicted that by 2020 Indian gas demand will rise more than threefold from 2005 levels to 270 (m3) per day (with demand estimated to grow at an average rate of 8 per cent per annum). Owing to its location between the vast natural resources of the Middle East and the energy-hungry far-east Asian economy, India’s energy policies are expected to have a great impact on the balance of energy supply and demand, market stability in Asia generally and also on environmental issues such as climate change. 

Much of the recent focus in India has been on the need to secure long-term supply of natural gas. There are various high-profile projects endeavouring to bring abundant supplies of natural gas to the Indian consumer. These range from politically charged pipeline projects (namely from Iran and Myanmar) to the LNG regasification terminals currently in operation in Gujarat state which continue to look for stable, secure and competitively priced LNG supply. 

This article examines the likely sources for supply of natural gas to India, some of the numerous projects proposed to import natural gas into India, the degree to which Indian gas consumers may be willing to move “up the value chain” to secure long term energy supply, and some of the issues large Indian gas consumers are likely to face in formulating their strategies. 

Some Key Players In The Indian Gas MarKet

As with their Chinese counterparts, a number of Indian companies (state-owned and private) are fast becoming household names because of their increasing size and presence outside India. These include Reliance Industries (the owner of significant indigenous natural gas assets in the offshore Krishna-Godavari or “KG” basin and upstream assets in, for example, Oman and the Kurdistan region of Iraq) and ONGC Videsh Limited (a substantial investor in foreign reserves, including in Russia and Kazakhstan). 

Perhaps the major player in the Indian gas market is the Gas Authority of India Limited (GAIL), a member of the Petronet LNG consortium of companies operating the LNG import terminal at Dahej, Gujarat and also a key participant in the proposed Iran– Pakistan–India natural gas pipeline project. GAIL is the owner and operator of most domestic Indian gas transportation infrastructure and accordingly plays a large part in delivering energy to Indian consumers. 

The National Thermal Power Corporation (NTPC) stands out as a major future consumer of natural gas. As the largest power producer in India, NTPC is evidently enthusiastic to move away from consumption of expensive fuels such as naphtha and fuel oil as feedstock for its power plants, and to facilitate future power plant expansions. NTPC has, in 2003/2004, gained valuable experience of tendering for long-term gas supply on an international basis. 

Finally, Gujarat State Petroleum Corporation (GSPC) is mentioned regularly as a future importer of natural gas, and has in recent times been successful in attracting LNG supply on a spot cargo basis, relying on Shell and Total’s Hazira LNG regasification terminal to regasify and sell natural gas for on-sale to GSPC’s customers. 

Indian firms such as GAIL, NTPC and GSPC may look to a variety of sources for their natural gas needs. Each of these sources raises distinct political and commercial issues that will need to be overcome. 

Indigenous Gas Reserves 

India has potentially significant reserves of natural gas within its own borders. Both Reliance Industries and GSPC have interests in the KG basin, which were discovered in 2002. Proven gas reserves in the KG basin, located offshore the East coast of India, were assessed in 2002 at 14tcf. These reserves are not, however, well located for the industrial heart of India in Gujarat and Maharashtra. Nor, given delays in commercial gas production and the need for new domestic transportation infrastructure, are these reserves likely to be available for some time. Once KG basin reserves are capable of being commercialised, they are unlikely to be sufficient to satisfy India’s projected gas demand. The significant transportation distance required to bring KG basin gas to India’s main centres will also have an impact on its price competitiveness. Accordingly, long-term importers will be forced to look further afield for secure natural gas supply.

Likely Supply Sources 

Although continued international investment in LNG liquefaction and shipping means that Indian markets can be served by any number of gas producers, and the acquisition of spot LNG cargoes has brought LNG from as far away as Australia, it is the vast reserves of the Middle East that are likely to form the basis for long term gas supply to India. 

Gas producers such as Oman have already played a part in the Indian gas story (Oman LNG was a committed supplier for the original Dabhol gas and power project), and while other suppliers such as Russia’s Sakhalin II project and Egypt’s Egypt LNG and Damietta LNG favour the Asia-Pacific and Atlantic basin LNG markets respectively, it is not impossible nor necessarily uneconomical for such suppliers to transport LNG to India. However, it is the consensus view that the very significant reserves in Qatar and Iran will form long-term baseload supply for India. 

As noted below, Iranian gas may be destined for India either by pipeline or LNG supply. Qatari gas already flows in India, as a consequence of the long-term (Qatar Petroleum and Exxon-Mobil sponsored) RasGas LNG supply deal to Petronet LNG’s Dahej terminal in Gujarat State. US policy with respect to the Middle East has an unusual impact on India.

US investment in Qatar and close political ties with the Qatari ruling family will see large volumes of Qatari LNG shipped to the US markets, where US customers will be able, at least for the foreseeable future, to pay higher prices than their Indian counterparts. On the other hand, US foreign policy and diplomatic pressure on India with respect to Iran–India business relations has played a part in delaying the flow of Iranian gas that cannot, for political reasons, flow to US markets. The price dispute between Iran and India with respect to their ‘government-to-government’ LNG supply deal also shows no immediate signs of being resolved. 

Notwithstanding the political issues raised by the commercialisation of Iran’s gas reserves, Iran is likely to be the most signifi- cant supplier of gas to the Indian market in the long term. 

Transnational Pipeline Projects 

It is common for transnational pipelines projects to be delayed and, in some cases, disrupted as a result of political tensions. For example, Kuwait’s proposal to import pipeline gas from Qatar was impacted adversely by Saudi Arabia’s unwillingness to allow the pipeline to pass through Saudi territorial waters. The proposal for India to import pipeline gas from Iran via Pakistan has numerous well-known political difficulties associated with it. First, relations between India and Pakistan remain tense given the continued dispute over Kashmir. Second, the US administration has been quick to discourage the Indian and Pakistan governments’ support for the pipeline. This is in line with the Bush administration’s policy, reflected in the Iran Sanctions Act 1996 (ISA), to prevent investment by non-US persons in the development of Iranian petroleum resources. 

Whether through threats of ISA sanctions or other political means, US policy has so far had a chilling effect on the progress of the I-P-I pipeline, with the US government likely to favour other pipeline proposals such as the TAP (Turkmenistan–Afghanistan– Pakistan) pipeline project, or Qatari LNG supply, to service the needs of South Asia. 

Regional politics has also had a chilling effect on a further pipeline proposal for import to India, via Bangladesh, of Myanmar’s offshore gas reserves. Difficult India– Bangladesh relations, together with Chinese pressure on the Myanmar government to pipe its gas to Yunnan province in  southern China, have combined to reduce the prospects of India securing Myanmar gas (although India is now examining closely pipeline routes which would avoid transporting Myanmar gas via Bangladesh). Although the China pipeline option remains, in our view, the most likely outcome, Myanmar is also considering construction of an LNG liquefaction plant to service the Korean and Japanese markets (in which case it is possible that some Myanmar gas may be supplied to the Indian market in the form of LNG). 

ING to the Rescue?

In an ideal world, LNG would be the perfect solution to India’s energy needs. Construction of LNG regasification infrastructure should allow Indian consumers to enter the international market for LNG supply and acquire the necessary capacity in regasification infrastructure. 

Faith in the growing Indian gas demand has led the Petronet LNG consortium to develop its 5mtpa regasification terminal at Dahej, and Shell (subsequently joined by Total) to take a final investment decision on the Hazira LNG terminal. Added to these are proposed terminals in Kochin (to be developed by Petronet) and Mundra (as reported recently, to be developed by GSPC and the Adani group). Expansion of the Dahej terminal to 12.5mtpa is also proposed. 

As noted above, GAIL, as a member of the Petronet LNG consortium, has successfully secured long-term LNG supply from RasGas of Qatar for regasification at Dahej. However, it is publicly acknowledged that the price for such LNG will be reviewed during 2008. The review is likely to lead to a higher purchase price for Indian customers, and questions remain over the ability of Indian consumers to pay international prices for LNG (particularly since the current Indian regulatory framework caps gas prices for key industries such as power, fertiliser and agro-chemical production at below international levels). 

Shell and Total’s approach at Hazira has been to rely on each sponsor’s portfolio supply of LNG. This has led a number of spot cargoes to be regasified at Hazira, but so far as publicly reported, no dedicated long-term supply. Each company has significant projects under development in the Middle East – notably in light of our conclusion above in very significant Iranian liquefaction projects, Pars LNG (in the case of Total) and Persian LNG (in the case of Shell). Added to these potential supply sources are the operational Oman LNG project (Shell share 30 per cent.) and the Yemen LNG project currently under development (Total share approximately 40 per cent.). Although Oman LNG supplies the bulk of its production to Korea, it is likely that Shell and Total’s investment in Hazira will be reliant on those companies’ fortunes in Yemen and Iran. None of the liquefaction projects in these countries is likely to be on stream until 2009, in the case of Yemen, and 2011, in the case of Iran, at the earliest. 

Notwithstanding the increased number of supply options compared with the pipeline route, in our view LNG importation into India remains heavily dependent on development of LNG liquefaction capacity in Iran for long-term supply. 

Going Upstream

An interesting phenomenon emerging in the international energy industry is the appetite for domestic utilities and gas suppliers to move further up the value chain to secure their energy needs. Centrica (formerly British Gas) has, for example, acquired upstream gas assets in Nigeria which it hopes to export to the UK by way of LNG. Sinopec, CNOOC and Petrochina are known to be active in foreign upstream oil and gas investment, particularly in recent times in Africa. 

Similarly, firms such as NTPC and GAIL are examining ways of securing upstream and liquefaction assets to secure long term energy supply. RasGas and Petronet have been reported to be discussing potential equity swaps, which would give Petronet a stake in the RasGas liquefaction project in Qatar (and RasGas a stake in Dahej). Similarly NTPC has been reported to have been in discussions with NNPC of Nigeria to discuss the possibility that NTPC may invest in upstream gas assets in Nigeria, with NTPC, as an entreé, considering investment in the Nigerian power sector. 

The trend of going upstream is likely to continue as Indian consumers compete with their Chinese and other counterparts for access to oil and gas reserves. This will require Indian firms such as GAIL, NTPC and GSPC to become familiar with the investment climate within the resource holding countries, and demonstrate to those resource holders both the importance of exposure to the Indian market and the extent to which Indian investment in the resource holding countries can benefit those countries. 

Conclusions

India is likely to play a major part in the global energy industry for years to come. Natural gas imports are likely to form a large proportion of India’s energy needs, given the high costs (whether economic or environmental) of competing fuels. Indian companies such as GAIL, NTPC and GSPC will need to focus heavily on the major resource holders to secure long term gas supply. Notwithstanding the current political climate, in our view India will need to rely heavily on Iranian gas in the long term. Until such time as Iranian pipeline and LNG liquefaction projects reach fruition, Indian companies such as GAIL, NTPC and GSPC will need to consider a range of alternative suppliers. 

Although not currently as active in the international oil and gas industry as their Chinese counterparts, in our view Indian companies such as GAIL, NTPC and GSPC, among others, are likely to become increasingly prominent in the development of pipeline projects, new LNG liquefaction projects and in the acquisition of upstream reserves.

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