COMMODITY MARKET

FUNDAMENTAL &TECHNICAL
ANALYSIS

FOR

NATURAL GAS

Done by:

Kunal Jagasia-110

Namrata Puri-143

Urvi Thakkar-148

Priyank Choudhary-95
INTRODUCTION TO NATURAL GAS

Natural gas is a vital component of the world's supply of energy. It is one of the cleanest,
safest, and most useful of all energy sources. Despite its importance, however, there are many
misconceptions about natural gas. For instance, the word 'gas' itself has a variety of different
uses, and meanings. When we fuel our car, we put 'gas' in it. However, the gasoline that goes
into your vehicle, while a fossil fuel itself, is very different from natural gas. While
commonly grouped in with other fossil fuels and sources of energy, there are many
characteristics of natural gas that make it unique. Below is a bit of background information
about natural gas, what it is exactly, how it is formed, and how it is found in nature.

What is Natural Gas?

Natural gas, in itself, might be considered an uninteresting gas - it is colorless, shapeless, and
odorless in its pure form. Quite uninteresting - except that natural gas is combustible,
abundant in the United States and when burned it gives off a great deal of energy and few
emissions. Unlike other fossil fuels, natural gas is clean burning and emits lower levels of
potentially harmful byproducts into the air. We require energy constantly, to heat our homes,
cook our food, and generate our electricity. It is this need for energy that has elevated natural
gas to such a level of importance in our society, and in our lives.

Natural gas is a combustible mixture of hydrocarbon gases. While natural gas is formed
primarily of methane, it can also include ethane, propane, butane and pentane. The
composition of natural gas can vary widely, but below is a chart outlining the typical makeup
of natural gas before it is refined.

Typical Composition of Natural Gas

Methane CH4 70-90%
Ethane C2H6
Propane C3H8 0-20%
Butane C4H10
Carbon Dioxide CO2 0-8%
Oxygen O2 0-0.2%
Nitrogen N2 0-5%
Hydrogen sulphide H2S 0-5%
Rare gases A, He, Ne, Xe Trace

In its purest form, such as the natural gas that is delivered to your home, it is almost pure
methane. Methane is a molecule made up of one carbon atom and four hydrogen atoms, and
is referred to as CH4. The distinctive “rotten egg” smell that we often associate with natural
gas is actually an odorant called mercaptan that is added to the gas before it is delivered to the
end-user. Mercaptan aids in detecting any leaks.
Formation of Natural Gas

Natural gas is a fossil fuel. Like oil and coal, this means that it is, essentially, the remains of
plants and animals and microorganisms that lived millions and millions of years ago. But
how do these once living organisms become an inanimate mixture of gases?

There are many different theories as to the origins of fossil fuels. The most widely accepted
theory says that fossil fuels are formed when organic matter (such as the remains of a plant or
animal) is compressed under the earth, at very high pressure for a very long time. This is
referred to as thermogenic methane. Similar to the formation of oil, thermogenic methane is
formed from organic particles that are covered in mud and other sediment. Over time, more
and more sediment and mud and other debris are piled on top of the organic matter. This
sediment and debris puts a great deal of pressure on the organic matter, which compresses it.
This compression, combined with high temperatures found deep underneath the earth, breaks
down the carbon bonds in the organic matter. As one gets deeper and deeper under the earth’s
crust, the temperature gets higher and higher. At low temperatures (shallower deposits), more
oil is produced relative to natural gas. At higher temperatures, however, more natural gas is
created, as opposed to oil. That is why natural gas is usually associated with oil in deposits
that are 1 to 2 miles below the earth's crust. Deeper deposits, very far underground, usually
contain primarily natural gas, and in many cases, pure methane.

Natural gas can also be formed through the transformation of organic matter by tiny
microorganisms. This type of methane is referred to as biogenic methane. Methanogens, tiny
methane-producing microorganisms, chemically break down organic matter to produce
methane. These microorganisms are commonly found in areas near the surface of the earth
that are void of oxygen. An example of biogenic methane is landfill gas. Waste-containing
landfills produce a relatively large amount of natural gas from the decomposition of the waste
materials that they contain. New technologies are allowing this gas to be harvested and used
to add to the supply of natural gas.

A third way in which methane (and natural gas) may be formed is through abiogenic
processes. Extremely deep under the earth's crust, there exist hydrogen-rich gases and carbon
molecules. As these gases gradually rise towards the surface of the earth, they may interact
with minerals that also exist underground, in the absence of oxygen. This interaction may
result in a reaction, forming elements and compounds that are found in the atmosphere
(including nitrogen, oxygen, carbon dioxide, argon, and water). If these gases are under very
high pressure as they move toward the surface of the earth, they are likely to form methane
deposits, similar to thermogenic methane.

In addition to being found in a traditional reservoir such, natural gas may also be found in
other 'unconventional' formations.
Types of Natural Gas Energy

FOSSIL NATURAL GAS

In the 1800s, natural gas was usually produced as a by product of producing oil, since the
small, light gas carbon chains come out of solution as it undergoes pressure reduction from
the reservoir to the surface, similar to uncapping a bottle of soda pop where the carbon
dioxide effervesces. Unwanted natural gas can be a disposal problem at the well site. If there
is not a market for natural gas near the wellhead it was virtually valueless since it must be
piped to the end user. In the 1800s and early 1900s, such unwanted gas was usually burned
off at the wellsite. Often, unwanted gas (or 'stranded' gas without a market) is pumped back
into the reservoir with an 'injection' well for disposal or depressurizing the producing
formation. In locations (such as the United States) with a high natural gas demand, pipelines
are constructed to take the gas from the wellsite to the end consumer.
TOWN GAS
Town gas is a synthetically produced mixture of methane and other gases, mainly the highly
toxic carbon monoxide, that can be used in a similar way to natural gas and can be produced
by treating coal chemically. This is a historic technology, still used as 'best solution' in some
local circumstances, although coal gasification is not usually economic at current gas prices.
However, depending upon infrastructure considerations, it remains a future possibility.
BIOGAS
When methane-rich gases are produced by the anaerobic decay of non-fossil organic matter
(biomass), these are referred to as biogas (or natural biogas). Sources of biogas include
swamps, marshes, and landfills (see landfill gas), as well as sewage sludge and manure[7] by
way of anaerobic digesters, in addition to enteric fermentation particularly in cattle.

CRYSTALLIZED NATURAL GAS - HYDRATES

Huge quantities of natural gas (primarily methane) exist in the form of hydrates under
sediment on offshore continental shelves and on land in arctic regions that
experience permafrost such as those in Siberia (hydrates require a combination of high
pressure and low temperature to form). However, as of 2010 no technology has been
developed to produce natural gas economically from hydrates.

It costs anywhere between once and twice as much to produce usable natural gas from
crystallized natural gas, using current technology.
USES OF NATURAL GAS

Power generation
Natural gas is a major source of electricity generation through the use of gas
turbines and steam turbines. Most grid peaking power plants and some off-grid engine-
generators use natural gas. Particularly high efficiencies can be achieved through
combining gas turbines with a steam turbine in combined cycle mode. Natural gas burns
more cleanly than other fossil fuels, such as oil and coal, and produces less carbon
dioxide per unit energy released. For an equivalent amount of heat, burning natural gas
produces about 30% less carbon dioxide than burning fuel oil and about 45% less than
burning coal. Combined cycle power generation using natural gas is thus the cleanest
source of power available using fossil fuels, and this technology is widely used wherever
gas can be obtained at a reasonable cost. Fuel cell technology may eventually provide
cleaner options for converting natural gas into electricity, but as yet it is not price-
competitive.

Domestic use
Natural gas is supplied to homes, where it is used for such purposes as cooking in
natural gas-powered ranges and/or ovens, natural gas-heated clothes
dryers, heating/cooling and central heating. Home or other building heating may include
boilers, furnaces, and water heaters. Compressed natural gas (CNG) is used
in rural homes without connections to piped-in public utility services, or with
portable grills. However, due to CNG being less economical than LPG which is liquified
propane, butane or a mixture of both, LPG is the dominant source of rural gas.

Transportation fuel
Compressed natural gas (CNG) is a cleaner alternative to other automobile fuels such as
gasoline (petrol) and diesel fuel. As of December 2008, the countries with the highest
number of CNG vehicles, ranked numerically,
were Pakistan , Argentina, Brazil, Iran and India. The energy efficiency is generally
equal to that of gasoline engines, but lower compared with modern diesel engines.
Gasoline/petrol vehicles converted to run on natural gas suffer because of the
low compression ratio of their engines, resulting in a cropping of delivered power while
running on natural gas (10%-15%). CNG-specific engines, however, use a higher
compression ratio due to this fuel's higher octane number of 120–130.

Fertilizer
Natural gas is a major feedstock for the production of ammonia used in fertilizer
production.

Aviation
Russian aircraft manufacturer Tupolev is currently running a development program to
produce LNG- and hydrogen-powered aircraft. The program has been running since the
mid-1970s, and seeks to develop LNG and hydrogen variants of the Tu-204 and Tu-
334 passenger aircraft, and also the Tu-330cargo aircraft.
MEASURING NATURAL GAS

Natural gas can be measured in a number of different ways.

As a gas, it can be measured by the volume it takes up at
normal temperatures and pressures, commonly expressed
in cubic feet. Production and distribution companies
commonly measure natural gas in thousands of cubic feet
(Mcf), millions of cubic feet (MMcf), or trillions of cubic feet
(Tcf). While measuring by volume is useful, natural gas
can also be measured as a source of energy. Like other
forms of energy, natural gas is commonly measured and
expressed in British thermal units (Btu). One Btu is the
amount of natural gas that will produce enough energy to
heat one pound of water by one degree at normal
pressure. To give an idea, one cubic foot of natural gas
contains about 1,027 Btus. When natural gas is delivered
to a residence, it is measured by the gas utility in 'therms'
for billing purposes. A therm is equivalent to 100,000 Btu,
or just over 97 cubic feet, of natural gas.thermogenic
methane.
In addition to being found in a traditional reservoir such, natural gas may also be found in
other 'unconventional' formations.
Global Scenario
The world's proven natural gas reserves as on January 1, 2009 are estimated at 185.2 trillion
cubic metre, of which almost three-quarters are located in the Middle East and Eurasia.
Russia, Iran, and Qatar together account for about 57% of the total reserves.

Natural gas consumption has increased strongly over the past decade. However, despite
this rising consumption, reserves-to-production ratios for most regions are substantial.
Worldwide, the reserves-to-production ratio is estimated at 63 years.

The total global production of natural gas in 2008 is estimated to be 3065.6 billion cubic
metre with the main producing countries being Russia Federation (602 billion cubic metre),
US (582 bcm), Canada (175 bcm) and Iran (116 bcm).

The total global consumption of natural gas in 2008 is estimated to be 3018.7 billion cubic
metre with the main consuming countries being US (657 bcm), Russia Federation (420
billion cubic metre), Iran (117 bcm), Canada (100 bcm) are the major consumers.

Globally, industries consume the largest portion of natural gas, followed by the power
sector. Industrial consumption is expected to be around 40% of total global consumption
by 2030 as projected by Energy Information Administration.

The total global trade in 2008 as piped natural gas and as LNG is reported to be 587.3 bcm
and 226.5 bcm. While major exporters of piped natural gas are Russia (154 bcm), Canada
(103 bcm) and Norway (93 bcm), the major importers are US (104 bcm), Germany (87 bcm)
and Italy (75 bcm). The major exporters of CNG are Qatar (40 bcm), Malaysia (29 bcm),
Indonesia (27 bcm) and the major importers are Japan (92 bcm), South Korea (36 bcm) and
Spain (30 bcm).
Scenario for Natural Gas

Over the past 20 years, natural gas has become very important, both as a source of fuel and
feedstock. This can be gauged from its share in total global primary energy consumption
increasing from 20.2 per cent in 1982 to 24.1 per cent in 2008. In India, natural gas accounted
for around 8.6 per cent of total primary energy consumption in 2008.Natural gas is used both
as feedstock and fuel. As feedstock, it finds application in fertiliser and petrochemical units.
As fuel, it is used in power plants using combined cycle technology, and in other industries
such as glass, ceramics, sponge iron and tea estates. In western countries, natural gas is used
as heating fuel (for residential and commercial buildings) and domestic fuel.

In the power sector, the thermal efficiency of power plants based on gas turbine technology
(using combined cycle) has risen considerably.

In the petrochemicals sector, the ethane/propane fractions of natural gas are used to produce
ethylene, the basic raw material used to make plastics (polyethylene). Plants are also
designed to operate on dual feedstock (naphtha and natural gas) to ensure continuity of
supply. However, this could result in higher capital costs.

For LNG suppliers, the main markets globally comprise the power and fertilisers sectors,
with the power sector comprising a larger share. This is because LNG suppliers perceive
fertilisers as a higher risk sector, as the product is commoditised, and prices and demand-
supply are greatly influenced by international events. However, as power is not a commodity,
it is easier to manage risks in the power sector. Thus, the power sector is the largest consumer
of LNG across the world.

Sector wise consumption of Natural Gas

Domestic consumption of natural gas

Pricing

Indian gas prices have been regulated and remained low, with APM gas constituting most of
the gas supply in the country. In 2008-09, of the total natural gas supply of 93.2 mmscmd,
about 60 %was APM gas, 20 % JV gas and 20 % firm LNG. As a result, the overall weighted
average price of gas remained low in the country.
However, since gas from ONGC's major fields are declining, so will the supply of APM gas.
Conversely, gas availability from new discoveries is expected to dominate future gas supply.
Besides, with increasing emphasis on de-regulating natural gas prices, the prices of APM gas
are expected to be brought to the levels of free market gas in the medium term. As a result,
the pricing scenario of natural gas is expected to transform in the medium term with average
prices increasing from current levels

Types of Pricing

Administered Pricing

Under administered pricing, the price of gas is fixed through government mandated pricing
mechanism. Natural gas produced by ONGC and Oil India Ltd (OIL) from nominated blocks
is governed by the government and categorised as APM gas.

JV Pricing

The pricing of imported LNG and domestically produced gas from JV fields is market driven.
The price of firm LNG is governed by the sales purchase agreement (SPA) between the LNG
seller and buyer whereas spot cargoes are purchased on mutually agreeable commercial
terms. The gas prices of JV fields such as Panna-Mukta-Tapti (PMT) and RIL's D-6 block are
governed by the terms of the PSCs signed with the government. Further, under NELP, the
government does not have a control over prices. Only the pricing formula has to be approved.
The formula for determining the landfall price of gas produced by RIL from its D-6 block has
been approved by the Empowered Group of Ministers (EGoM) and linked to the price of
crude oil (Dated Brent) with a floor of $25 per barrel and capped at $60 per barrel. Based on
the formula, the landfall price of gas comes to $4.2 per mmbtu when price of crude oil is
above $60 per barrel.

LNG PRICES

The price of firm LNG is governed by the SPA between the LNG seller and buyer, whereas
spot cargoes are purchased on mutually agreeable commercial terms.From January 2009, the
price has been linked to Japanese Crude Cocktail (JCC), there would be a gradual linkage of
LNG prices to JCC, thereby preventing a sudden spurt in prices.
GAS VOLUME MIX AND PRICING

Currently, the country's gas supply is dominated by APM gas. Consequently, the weighted
average price of gas is low in the country. However, with the decreasing supply of APM gas
and new supply of gas to be available at market-determined prices, we expect the average
prices of gas to increase in the medium term. Also, the price of APM gas is likely to be
increased to levels of free market gas, which is further expected to raise gas prices.

Existing gas volume mix and prices

(2008-09 ) Unit APM - APM - JV/pvt LNG - Weighted Weighted

priority others gas firm average - average -
domestic gas India
overall
Volume sold mcm 16,983 3,509 6,671 6,844 27,163 34,007
Volume sold mmscmd 46.5 9.6 18.3 18.8 74.4 93.2
$ per
Delivered price mmbtu 2.9 5.4 6.2 5.2 4.0 4.3
Delivered price Rs per tcm 4,510 8,358 9,670 9,084 6,274 6,840

Projected gas volume mix prices

(2013-14 P) Unit APM - APM - JV/pvt LNG - Weighted Weighted

priority others gas firm average - average -
domestic India
gas overall

Volume sold mcm 13,893 - 53,861 10,779 67,754 78,533

Volume sold mmscmd 38.1 - 147.6 29.5 185.6 215.2

Delivered price $ per mmbtu 4.8 5.4 6.0 8.7 5.8 6.2
Delivered price Rs per tcm 7,445 8,456 9,020 15,056 8,697 9,570

As can be seen in the above tables, the weighted average delivered price of gas (excluding
sales tax) in India is expected to increase from $4.3 per mmbtu in 2008-09 to $6.2 per mmbtu
in 2013-14. The increase in gas prices will be primarily on account of a rise in APM gas
price, higher share of free market price gas in the overall gas mix and an increase in LNG gas
price.
KEY DEVELOPMENTS

The Government of India (GoI) has finally complied with the long-standing demand of public
sector (PSU) gas-producing companies, Oil and Natural Gas Corporation Ltd (ONGC) and
Oil India Ltd (OIL), to bring Administered Pricing Mechanism (APM) gas prices on par with
gas sold by private players. On May 18, 2010, the GoI raised the price of APM gas from Rs
3,200 per tcm to Rs 6,818 per tcm. In addition, the GoI has allowed Gas Authority of India
(GAIL) to levy a marketing margin of Rs 200 per tcm on APM gas sold by the company.

Up to now, gas produced by ONGC and OIL from their nominated fields were sold at
administered prices, which were considerably lower than the price realized by private gas
players. With the advent of liquefied natural gas (LNG) and Reliance Industries Ltd’s
Krishna-Godavari (KG) D-6 gas, the share of APM gas in India’s total natural gas supply has
been declining. Besides, natural depletion of the existing nominated fields of the PSU players
is likely to precipitate the decline in APM gas volumes. Due to this, consumers would
increasingly need to shift to higher priced gas, supplied by private players. Against this
backdrop, PSU gas producers have long suggested the need to do away with APM and bring
about a level playing field with private players. The GoI’s move to increase the APM gas
price as a positive, and believes it to be a step towards creating a uniform gas price market in
India.

Share of APM gas in India’s total gas supply

HIKE WILL RESULT IN APM GAS LOSING ITS COST COMPETITIVENESS VIS-À-VIS COAL

APM gas has been cost competitive as against imported coal. However, going forward,
with the rise in price, although APM gas is expected to cost marginally lower than
imported coal, the huge price differential that it enjoyed vis-a-vis imported coal is
expected to diminish.

Comparison of APM gas prices with other alternative fuels

Gas would continue to be preferred by end consumers, but in the immediate term, the price
hike is likely to have a varying effect on key consumers and producers of gas. These are:

 Positive for PSU gas producers - ONGC and OIL

 Negative for distribution companies (if not passed on to retail customers) -

Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL)

 Negative for - Power consumers, industrial consumers and compressed natural gas
(CNG) users

Urea cost of production to nearly double; impact to be neutral for the manufacturers

The price hike will result in the cost of urea production sourcing APM gas increasing by 75-
80 per cent to $120-125 per tonne. However, the price hike will be neutral for urea
manufacturers as the higher cost of production will get subsidized by the government.

Impact of price hike on cost of urea production

Revised APM gas price has been considered for the prospective period.

Prices are delivered prices in Gujarat

Delivered prices = Base price + Transport cost + Margin + Taxes + Marketing cost

POWER TARIFFS TO GO UP BY RS 0.70-0.90 PER KWH

The price hike is expected to translate to power tariffs increasing by Rs 0.7-0.9 per kWh
to Rs 2.4-2.7 per kWh. Despite the increase in tariffs, APM gas is unlikely to lose
its competitiveness vis-à-vis other alternatives.

Impact of price hike on power tariff

CNG to be dearer by Rs 5-7 per kg

For vehicles running on CNG in Mumbai and Delhi, fuel cost is likely to increase by Rs 5-7
per kg to Rs 26-28 per kg ($14-16 per mmbtu). In spite of the price increase, economics
would continue to favour CNG vis-à-vis petrol and diesel.

Impact of price hike on CNG

APM revision positive for PSU gas producers, negative for distribution companies

The price hike will benefit APM gas producing companies. However, distribution companies
will have to incur higher cost for purchasing APM gas. The distribution companies may not
be able to immediately pass on the cost increase to retail customers, and hence expects the
revision in APM price to have a negative impact on the companies.

Table 1: Natural gas country-wise consumption

REGULATORY AND POLICY ENVIRONMENT

Previously, the government regulated the pricing and licensing of all petroleum products and
returns on investments in the domestic petroleum sector through the administered pricing
mechanism (APM). Besides, only public sector companies were allowed to operate in the
sector.

However, 1991-92 marked the first steps towards deregulation with the private sector
allowed to participate in the exploration and development of oil and gas fields, and set up
refineries. Further, in 1997-98, the prices of natural gas from private fields were linked to
international prices. Subsequently, in 1998-99, the cost-plus formula for oil producers and the
retention price mechanism for refineries were abolished, and prices of naphtha, fuel oil (FO)
and low sulphur heavy stock (LSHS) were decontrolled. Since April 1998, the ex-refinery
gate prices of decontrolled products are based on import parity. Investments in the refining
sector have also been deregulated.

Existing Regulatory Structure

GAS POOL ACCOUNT

In 1992, the government established a gas pool account to spur the development of the
country's gas industry. This was also aimed at compensating companies involved in the
exploration, development and marketing of gas for the low margins on the development and
sale of gas at prices fixed by the MoP&NG. The difference between the landfall price and
producer price is credited to the gas pool account. GAIL maintains the gas pool account on
behalf of the government. Further, in 1997, the government clarified that funds in the pool
would be used to:

 Compensate producers for concessional pricing in the North-East;

 Compensate GAIL for inflation; and

 Research and development activities aimed at the exploration and development of

smaller oilfields.

Gas Linkage Committee

In 1991, the government established the Gas Linkage Committee (GLC) to re-assess the
potential of gas production and establish a priority for gas supply to projects, given the
limited availability of APM gas.

Further, under the New Exploration Licensing Policy (NELP), the government began
awarding exploration and production (E&P) blocks through an international competitive
bidding process. Under this, companies have marketing freedom for the gas produced from
NELP blocks. It is projected that while the quantity of APM gas will decline progressively,
availability of gas from other sources at market prices will increase.

DEMAND-SUPPLY OF NATURAL GAS

Natural gas primarily competes with alternate fuels such as naphtha, Fuel Oil and LPG. The
price of natural gas is not only competitive to these alternate fuels but also less volatile. As a
result, there has always been a shortfall in supply on the back of demand growth outpacing
supply. In 2008-09, total natural gas available for sale in India was estimated at 104.3
mmscmd, of which about 71 per cent (74.4 mmscmd) was gas from domestic fields while the
balance 29 per cent (29.9 mmscmd) was LNG imports. Of the LNG imports, about 63 per
cent (18.8 mmscmd) were contracted LNG and about 37 per cent (11.1 mmscmd) LNG
imported on spot basis. As against the total supply of 93.2 mmscmd, potential demand in
2008-09 was estimated at about 139.1 mmscmd, translating to a deficit of 46.0 mmscmd. This
deficit compelled several industries to source high-priced alternate fuels.

However, in the medium term, the gas deficit is expected to narrow following supply of gas
from RIL's D-6 block in the KG basin from April 2009. RIL's D-6 block is estimated to
supply 80.0 mmscmd gas once it reaches peak production, which will more than double the
current gas supply from domestic fields. Additionally, several other new discoveries,
including ONGC's UD-1 discovery and GSPC's Deendayal discovery, both in the KG basin,
are also expected to begin producing gas in the medium term, thus further increasing the
domestic supply of gas. Apart from domestic supply, a number of LNG terminals have been
planned by players, with some portion of the total LNG capacity to be available in 2013-14
already tied up for firm LNG. This will further augment the supply of natural gas.
Considering the firmed up LNG supply and expected domestic supply of new gas from
players such as RIL, ONGC and GSPC. Supply is expected to grow at a CAGR of 18 per cent
over the next 5 years to 215.2 mmscmd in 2013-14.

During the same period, potential demand for gas is likely to register a CAGR of 10 per cent,
and is projected at 225.9 mmscmd in 2013-14. This is based on assumptions on the expected
capacity additions in the power and fertiliser sectors, which are the major consumer sectors of
natural gas. Despite the power sector getting the least priority for greenfield plants in the gas
utilisation policy released by the Ministry of Petroleum and Natural Gas, it will continue to
be the largest gas consuming sector. Also, the deficit scenario, though expected to ease, will
continue. Hence, in the medium term, the deficit is to be serviced by imports of spot LNG.

Demand-supply outlook
Gas utilisation policy

In anticipation of huge volumes of RIL gas coming on stream, and taking into account the
current deficit scenario in the country, the government came out with a gas utilsation policy
for the initial 40 mmscmd of gas supply from RIL D-6 block. According to the policy, the
first priority is to be given to existing plants to ensure utilisation of capacities already created
and obtain quicker monetisation of natural gas. Accordingly, the following priority and
volumes for existing plants was decided:

• Existing gas-based fertiliser plants to be allocated 14.0 mmscmd gas

• Existing gas-based LPG and petrochemical plants to be allocated 3.0 mmscmd gas
• Existing gas-based power plants to be allocated 18.0 mmscmd gas
• Existing CGD players to be allocated 5.0 mmscmd gas
 DEMAND

Demand for natural gas has continuously outpaced supply. The demand is expected to grow
at a rate of 10 per cent to reach 226 mmscmd in 2013-14. The growth in supply is expected to
be higher than growth in demand; new supply is likely to drive new demand.

In future demand will be driven by growth in CGD and captive power plants. Power and
fertiliser sectors to remain the major consumer sectors of natural gas based on our projections
of gas-based capacity additions and switch from alternate fuels in these sectors. However, the
combined share of these sectors in total gas demand is expected to contract from 70 per cent
in 2008-09 to 61 per cent in 2013-14. Consequently, the share of CGD and captive power
plants in total gas demand is expected to increase from 16 per cent in 2008-09 to 25 per cent
in 2013-14. However, the share of petrochemicals, refineries and sponge iron plants is likely
to remain unchanged at 14 per cent in 2013-14.

Natural gas - Demand break up

2008-09
Demand 2009-10 P2010-11 P2011-12 P2012-13 P2013-14 PCAGR
E

Power 61.4 72.5 75.1 75.2 81.1 83.2 6%

Fertiliser 37.0 38.6 40.1 44.3 47.2 52.9 7%

Captive power 12.4 14.2 16.3 19.1 21.9 25.0 15%

City gas distribution 9.1 11.4 15.3 18.8 24.8 32.2 29%

Refinery 8.3 10.5 10.6 11.6 13.5 13.6 10%

Petrochemicals 6.7 6.7 6.7 6.7 11.3 11.3 11%

Sponge iron 4.4 5.0 6.2 7.4 7.6 7.7 12%

Total demand 139.1 158.9 170.3 183.0 207.3 225.9 10%

Gas demand mix 2008-09 (139.1 mmscmd)

Source: CRISIL Research

Gas demand mix 2013-14 P (225.9 mmscmd)

CGD TO BE ONE OF THE MAIN DRIVERS FOR DEMAND GROWTH

CGD involves supply of piped natural gas (PNG) to industrial and commercial
establishments, domestic households and CNG to vehicles. In the recent past, natural gas
witnessed increasing acceptance amongst consumers as an alternative fuel. The main
contributing factors towards this were evolving supportive regulatory framework and inherent
economic benefits of using natural gas. In 2008-09, the share of CGD in overall natural gas
demand was estimated at 7 per cent. Going forward, CGD will boost the demand for natural
gas. We expect CGD to register a CAGR of around 29 per cent over the next 5 years on the
back of several companies announcing plans for the development of CGD in various cities
throughout the country - the number of cities receiving gas under CGD is likely to increase
from 35 in 2008-09 to 100 in 2013-14. As a result, the share of CGD in the total demand mix
is expected to increase to 14 per cent in 2013-14.

Government's thrust for developing CGD: The usage of PNG will reduce the subsidy
burden for the government as liquefied petroleum gas (LPG) and superior kerosene oil (SKO)
consumption will contract. In addition, the usage of CNG will lower the usage of petrol and
diesel, for which prices are currently subsidised. Also, poisonous gas emissions from natural
gas are the least as compared to alternate fuels. Because of these factors, it is beneficial for
the government to promote the development of CGD. Further, the Supreme Court, vide its
order dated April 5, 2002, directed the Central government to give priority to the transport
sector, which led to increased usage of CNG in some cities. Also, with the allocation of gas
for CGD receiving higher priority than green field power plants in the gas utilisation policy,
confirms the government's thrust on cleaner auto fuels.

Increased availability of gas and high returns to players: In the past, development of
CGD was constrained due to limited availability of natural gas. Although there were 35 cities
in 2008-09 which received gas under CGD, five cities, including Surat, Ankleshwar, Baruch,
Mumbai and Delhi, accounted for 70 per cent of total CGD demand. Going forward,
availability of gas will no longer be a constraint on account of the huge volumes of gas
supplies from new discoveries. This coupled with attractive returns from CGD projects will
prompt players to aggressively pursue CGD projects.

Map depicting region-wise increase in no. of cities under CGD

E: Estimate; P: Projected
Source: CRISIL Research

The number of cities under CGD is expected to increase throughout the country.
Consequently, several industrial and commercial establishments, which are currently
consuming other high-priced alternative fuels such as naphtha and FO due to gas
unavailability, are expected to switch to gas. Also, a number of vehicles is likely to switch to
CNG because of an inherent cost advantage vis-à-vis other auto fuels. Hence, the CGD
demand is expected to increase from 9.1 mmscmd in 2008-09 to 32.2 mmscmd in 2013-14.

Segment-wise gas demand from CGD

The majority of companies in industries such as ceramics, paper, textiles, metals and tea have
either been purchasing power or have been generating power using expensive alternate fuels
such as naphtha or diesel due to lower availability of gas. However, going forward, gas
supply is expected to outpace demand. This is expected to drive the growth in gas-based
captive power plants. The increase in gas-based captive power plants will also be driven by:

Fuel economics in favour of gas: The cost of generating power using gas is highly
competitive vis-à-vis alternate fuels such as naphtha and FO.

Power tariff based on existing fuel costs

As can be seen in the above chart, power generation using gas even from private/JV fields is
competitive. Thus, we believe that captive power plants operating on alternate liquid fuels
will switch to gas. Besides, companies having constraints in putting up coal-based captive
power plants would also prefer gas as an alternate option.

Continued power deficit: Currently, there is a considerable power deficit in India, which is
likely to continue over the medium term. Further, the lowest priority in the gas utilisation
policy to greenfield power plants is expected to delay gas-based power projects. This will
widen the country's power deficit, thereby encouraging growth of captive power plants.

P OWER

In 2008-09, around 49 plants in India were operating on a combination of natural gas and
naphtha. Besides, another 10 plants were operating only on naphtha due to unavailability of
gas, mainly because of pipeline connectivity constraints. The estimated capacity of the 49
plants operating on dual feedstock (natural gas and naphtha) is 13,419 MW, accounting for
9.1 per cent of the total power generation capacity in the country. India, being a developing
country, has been facing a huge power deficit situation, which is expected to continue in the
medium term. As a result, demand from the power sector is likely to grow as new capacities
are expected to be added to bridge the demand-supply gap.

Demand estimation for power; have factored project status to consider power plant additions,
gas availability and availability of pipeline infrastructure. In addition to new power, many
plants in east and south India to switch from naphtha to gas on the back of pipeline
connectivity to these plants in the near future.

Based on these assumptions, gas demand is expected from an additional 4,800 MW

(approximate) of capacities over the next 5 years. Of this, around 1,200 MW capacities would
be switch capacities while 3,600 MW would be new additions. Some of the major projects
not considered in the projections are: Reliance Power Ltd's Dadri power project (3,560 MW),
National Thermal Power Corporation (NTPC)'s projects at Kawas and Gandhar (2,600 MW),
Maharashtra State Electricity Board (MSEB)'s 1,040 MW plant in Uran and Karnataka Power
Corporation Ltd's project at Bidadi, Karnataka (700 MW). These projects have not been
considered as fuel supply agreements (FSAs) have not yet been signed, nor has land been
acquired.

Despite power being the largest consumer of natural gas, the share of natural gas-based
power capacity is likely to decrease from the current 9.1 per cent in 2008-09 (total power
generation capacity 147,965 MW) to 8.8 per cent in 2013-14 (total power generation capacity
projected at 207,131 MW), expects to lower additions in power plants using natural gas as
fuel. With green field power plants getting last priority in the gas utilisation policy, many
players will not set up gas-based power plants, while coal-based power plants would receive
a fillip.

F ERTILISERS
In the fertiliser sector, natural gas is used as feedstock and fuel. It is used as feedstock for
producing ammonia, which is used as an intermediate in the production of urea. Urea
constitutes about 60 per cent of total fertiliser demand. As a fuel, gas is used for generating
steam and electricity. The estimation of gas demand from the fertiliser sector is based on the
energy consumption (combination of feedstock and fuel) per tonne of urea for various plants.
It is also based on the outlook on the likely capacity additions through brownfield projects
and re-opening of some closed plants. Also, the government has emphasised that fertiliser
plants based on naphtha/FO/low sulphur heavy stock (LSHS) should convert to natural gas by
March 2010, failing which the higher production costs will not be reimbursed.

In August 2008, the government announced a policy for new investments in the urea sector,
according to which urea manufacturers will be paid subsidy based on the international price
parity (IPP) formula, subject to a price band of $250-425 per tonne. However, the onus of
fuel linkage will be on the fertiliser manufacturer. Further, the floor and ceiling prices are
fixed based on the feedstock price of $4.2 per mmbtu, which is the current landfall price of
RIL KG basin gas. This feedstock price is fixed only for a period of 5 years from the date of
production. The policy states that the floor and ceiling price will be revised only if the
feedstock price more than doubles. However, fertiliser players are at a considerable
disadvantage since the floor and cap prices are de-linked from the price of feedstock, and will
be revised only if the feedstock price doubles. Also, in addition to the gas price, a long term
contract for gas will be imperative to give an impetus to fertiliser projects, considering the
project life to be at least 25 years. Taking into account the deficit scenario in urea capacity, it
is estimated that the government would address the above issues on priority. The gas
utilisation policy has given top priority for the supply of gas to existing urea plants. Also, the
greenfield fertiliser plants have received top priority in the greenfield projects priority list of
the gas utilisation policy. Based on the availability of gas and development of pipeline
infrastructure, there are no constraints in existing units using alternate fuels in switching to
gas over the next 5 years. Besides, some closed units to re-open and some players to come up
with new capacities on the back of optimism that all issues with respect to gas prices and long
term agreements for gas will be resolved over the next 2 years. Based on this assumption,
they expect Chambal Fertilisers and Chemicals Ltd and Indo Gulf Fertilisers Ltd to go ahead
with their expansion plans and commission urea capacities to the tune of 1.15 million tonnes
per annum (mtpa) each by 2013-14. Further, Hindustan Fertilizer Corporation Ltd's plant at
Barauni is expected to be revived by 2013-14, which will add another 1.15 mtpa of urea
capacity. Thus, taking into account new capacities and switches, overall gas-based urea
capacities are expected to increase from 17.6 million tonnes in 2008-09 to 25.9 million tonnes
in 2013-14.

SUPPLY
IN 2008-09, FIRM NATURAL GAS SUPPLY AVAILABLE IN INDIA WAS ESTIMATED AT 93.2 MMSCMD , OF

WHICH ABOUT 80 PER CENT (74.4 MMSCMD ) WAS GAS FROM DOMESTIC FIELDS WHILE THE

BALANCE 20 PER CENT (18.8 MMSCMD ) WAS FIRM LNG IMPORTS . BEGINNING 2009-10, THE

SUPPLY SCENARIO WILL WITNESS AN ACUTE SHIFT FOLLOWING THE START OF PRODUCTION OF

RIL'S KG APRIL 2009. RIL GAS SUPPLY FROM THE D-6 BLOCK COUPLED WITH
BASIN GAS IN

SEVERAL OTHER NEW DISCOVERIES , FIRM LNG IMPORTS , SUPPLY OF GAS FROM EXISTING FIELDS

AND COAL BED METHANE (CBM) IS EXPECTED TO INCREASE THE SUPPLY OF GAS TO 215.2

MMSCMD IN 2013-14.

Currently, the existing fields dominate the supply scenario. However, some of the existing
fields have matured, and started exhibiting a declining production profile. Hence, going
forward, incremental supply is expected to come from the new discoveries, which will
dominate the supply mix.

Gas supply mix in 2008-09 E (93.2 mmscmd)

E: Estimate

Supply does not include imports of spot LNG.

Source: CRISIL Research

Gas supply mix in 2013-14 (215.2 mmscmd)

P: Projected

Supply does not include imports of spot LNG.

Source: CRISIL Research

Natural gas supply trend

SUPPLY FROM ONGC FIELDS TO FALL SHARPLY

In 2008-09, ONGC's share in total gas supply was estimated at 51.0 mmscmd (55 per cent).
Out of this, 45.9 mmscmd (90 per cent) was the supply from ONGC's western offshore fields,
which included Mumbai High, Bassein and Satellite fields. These fields are matured fields
and ONGC is using various technologies to enhance the recovery of oil and gas from them.
However, despite efforts, the supply of gas from these fields is expected to decline sharply
over the next 5 years. For ONGC, the drop in supply from primary fields is likely to be made
up, to some extent, by the development of small and marginal fields. However, the overall
decline in supply is expected till 2012-13. In 2013-14, some production from the company's
new discoveries in the KG basin is expected to commence, which will augment supply.

Domestic supply break-up of ONGC and OIL gas fields

(mmscmd) 2008-09 P2009-10 P2010-11 P2011-12 P2012-13 P2013-14 PCAGR

ONGC 51.0 44.9 38.9 37.2 37.3 41.4 -4.1%
OIL 5.1 5.1 5.1 5.1 5.1 5.1 -0.1%
Total 56.1 50.0 44.1 42.3 42.4 46.5 -3.7%
P: Projected
Source: CRISIL Research

FIRM LNG IMPORTS TO SUPPLEMENT SUPPLY

In 2008-09, the contribution of LNG imports to total gas supply in the country was estimated
at 29.9 mmscmd, which was 29 per cent of total gas supplied. Of the LNG imports, about 63
per cent (18.8 mmscmd) was firm LNG and about 37 per cent (11.1 mmscmd) LNG imported
on spot basis.

The historic demand-supply of gas has provided an impetus in the setting up and expanding
the existing LNG terminals. However, with huge volumes of new domestic gas supplies
coming on stream, the share of LNG in the total gas supply is expected to reduce
considerably.

SUPPLY FROM COAL BED METHANE BLOCKS

CBM is gas found in coal deposits. Natural gas supply in the form of CBM was non-existent
till 2006-07. In 2008-09, CBM gas supply has been estimated at a mere 0.1 mmscmd, which
is only about 0.1 per cent of total gas supply in the country. However, with India accounting
for 7.1 per cent of total global coal reserves of 826 billion tonnes (according to BP Statistics)
and the government's thrust on exploring unconventional sources of energy, it is estimated
that there is huge potential for CBM gas supply in India.

REGION-WISE DEMAND-SUPPLY OF NATURAL GAS

The majority of new gas supplies are coming from south India combined with major trunk
pipelines being laid throughout the country. Currently, the existing pipeline network is
concentrated in northern and western India, augmenting demand for gas in these regions.
Going forward, demand for gas will increase in southern and eastern India as development of
pipeline infrastructure in these regions will enable the regions to source gas. Also, at present,
western India is the major supplier of gas in the country. With supply of gas from some of the
key western offshore fields in decline, and major gas finds in the KG basin, going forward,
southern India will dominate gas supplies. Demand and supply of gas is expected to grow at a
faster rate in southern and eastern India. However, in terms of incremental gas demand,
western India will continue to have the largest share in the pie.

Region-wise incremental gas supply and demand

2008-09 to 2013-14 Supply Demand Sectors driving demand

(mmscmd (mmscmd
) )
North 0.0 20.1 CGD, fertiliser
South 120.2 24.0 CGD, power, captive power
East 8.1 10.3 CGD, power, fertiliser
CGD, power, captive power,
West -6.3 32.4 petrochemicals
122.0 86.8
Source: CRISIL
Research
Technical Analysis

A break between prices on a chart that occurs when the price of a stock makes a
sharp move up or down with no trading occurring in between. Gaps can be created by
factors such as regular buying or selling pressure, earnings announcements, a change
A bearish candlestick pattern that is used to predict the reversal of the current uptrend. This pattern consists
of three consecutive long-bodied candlesticks that have closed lower than the previous day with each
session's open occurring within the body of the previous candle.

A chart pattern that consists of a small white candlestick with short shadows or tails followed by a large
black candlestick that eclipses or "engulfs" the small white one.