Natural gas in Indias energy management

Muhammad Azhar

Abstract Thanks to the continuous implementation of liberalisation and reforms, the Indian economy has become a significant energy consumer. Further, the fast growing economy is expected to result in massive and unprecedented growth in energy consumption in India. This is sure to have important ramifications for the domestic energy sector, as well as global energy market. At the domestic level, this resulted in new discoveries of hydrocarbon resources. However, the growth in energy consumption is so high that the old, as well as newly discovered hydrocarbon resources would not be able to fulfil the growing demand for energy in the Indian economy. Hence, Indian economy would remain dependent on the global market for the supply of hydrocarbon resources. India has been adopting various strategies to manage her energy requirement and Natural gas is slated to play an important role in Indias energy management. This paper therefore, attempts to study the importance of natural gas in this context.

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Muhammad Azhar is reader (economics) in the Centre of West Asian Studies at the Aligarh Muslim University, Aligarh, India.

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HE CONTINUOUS and uninterrupted implementation of liberalisation and reforms in the Indian economy for over one and half decades has resulted in India becoming one of the highest growing economies of the world. During 200506, it was observed that India had achieved an economic growth rate of eight per cent. Buoyed by this success, the prime minister of India, Prof Manmohan Singh, announced that India shall be targeting ten per cent growth in coming years. Looking at the steady progress in Indias economic reforms and its positive impact on her economic growth, World Bank sources have also observed that this was very much possible and achievable.1 Thus, there is no doubt that Indian economy is slated to observe significantly high

growth rate in the coming years. However, this high growth rate has been accompanied with significant increase in energy consumption in the Indian economy. Primary energy consumption in India has grown very fast. From 25.48 million tones of oil equivalent (mtoe) in 195354, the primary commercial energy consumption in India increased to 177.61 mtoe in 199091. However, energy consumption has grown very fast since liberalisation and reforms were introduced in 1991. The primary commercial energy consumption in India grew to 345.3 mtoe in 2003. From the above mentioned data, it is established that growth in energy consumption in the Indian economy in the period of liberalisation and reforms has been substantially higher than in the pre reforms era. By 201112, the consumption of primary commercial energy in India has been estimated to grow to 553.68 mto.2 Yet another important aspect of Indian energy consumption profile has been its low per capita energy consumption. The data about the world energy consumption has been provided in table 1. It is found that per capita energy consumption in India is not only very much low compared to the same in developed countries like Canada, the United States and Japan, but also, significantly lower than the per capita energy consumption in developing countries like South Korea, Hong Kong and Malaysia. The annual per capita energy consumption in India stood at 325 kilogram of oil equivalent (kgoe), which was quite lower to the global per capita consumption of 1,553 kgoe. Not only that, Indian per capita consumption has been substantially lower to the Brazilian per capita energy consumption of 1,025 kgoe and Chinese per capita energy consumption of 915 kgoe. Therefore, it can be concluded from the above data that India contains the largest potential of growth in energy consumption. The steady and successful implementation of liberalisation and reforms and the consequent rise in economic growth has generated a phenomenon which is bound to result in massive and unprecedented growth in energy consumption in India. Estimates indicate that by 2025, the consumption of primary commercial energy in India may grow to about 820 mtoe.3 As far as the components of Indias energy consumption were concerned, coal constituted over 50 per cent of the Indian energy consumption, whereas hydel and nuclear sources of energy provided only three per cent of Indian energy consumption. Oil and gas contributed 35 per cent and seven per cent respectively, to Indias total energy consumption. Table 2 gives information about the share of energy March 2007
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Table 1 World energy consumption, 2003 (mtoe) Petroleum oil 113.3 914.3 248.7 96.4 105.7 84.1 23.9 13.1 275.2 3,636.6 Natural gas 27.1 566.8 68.9 78.7 24.2 14.3 25.6 1.4 29.5 2,331.9 Hydroelectric 15.6 60.9 22.8 68.6 1.6 68.9 1.7 64.0 595.4 Total consumption 345.3 2,297.8 504.8 291.4 212.0 181.4 54.4 21.0 1,178.3 9,741.1 Per capita consumption (kg) 325 7,896 3,944 9,106 4,417 1,025 2,176 3,000 915 1,553

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Countries India United States Japan Canada South Korea Brazil Malaysia Hong Kong China World

Coal 185.3 573.9 112.2 31.0 51.1 11.0 3.2 6.6 799.7 2,578.4

Nuclear 4.1 181.9 52.2 16.8 29.3 3.0 9.8 598.8

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Source: Energy, Economic Intelligence Unit, Centre for Monitoring Indian Economy, Mumbai, May 2005.

Table 2 Share of future energy supply in India (%) Year 199798 200607 201011 202425 Coal 55 50 53 50 Oil 35 32 30 25 Gas 7 15 14 20 Hydroelectric 2 2 2 2 Nuclear 1 1 1 3

Source: India Hydrocarbon Vision 2025, Government of India, New Delhi.

supplies in India. Coal reserves in India are sufficient and sustainable. Despite heavy reliance on coal, at the present rate of production and consumption, the coal reserves are estimated to last for 235 years.4 Thus, for coal, India seems to be in a comfortable position for a very long time. Oil is the next important source of energy for India. Although the share of oil in Indias energy consumption has been envisaged to decline from 35 per cent in 199798 to 25 per cent in 202425, it would however remain the second important source of energy in India. Not only that, the absolute volume of the oil consumption would also grow substantially, despite the decline in its share in total energy consumption in India. In contrast to the availability of coal, Indias position in the case of availability of oil is uncomfortable. Domestic sources have been able to supply only 30 per cent of the oil demand/consumption in India, whereas 70 per cent is supplemented by imports. The Member Countries of the Organization of the Petroleum Exporting Countries, OPEC, are the main source of oil supplies to India. Together, they supply about 80 per cent of Indian oil imports.5 Following the global trend, India also envisages to reduce the share of oil in its total energy consumption to 25 per cent by 202425 and increase the share of gas to 20 per cent by that period. Despite the reduction in the share of oil, the absolute volume of oil consumption is not going to decrease. Rather, it would increase substantially on the basis of massive rise in total energy consumption in the country during the above period. The future supply/demand data for petroleum products released by the Government of India, where it is found that there is going to be massive growth in Indias demand for oil and gas are depicted in table 3. The Hydrocarbon Vision document projects the requirement of oil and gas at 368 million metric tons (m mt) by 202425. Oil and gas is projected to constitute 45 per cent of total Indian energy consumption by 202425. Therefore, the total primary commercial energy demand in India by 202425 would be about 820 m mt. Thus, despite a decrease in the share of oil, the total demand for oil would also grow substantially in the Indian economy. Which means that despite all the efforts directed at augmenting the domestic oil supplies, India would remain dependent on external sources for its oil requirement in the long run. On the one hand, the country is contemplating reducing the share of oil in its energy consumption. But on the other hand it aims at increasing the share of gas in energy consumption. According to the March 2007
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Table 3 India: future supply/demand petroleum products (mmt) Year 199899 200102 200607 201112 202425 Demand (without meeting gas deficit) 91 111 148 195 368 Demand (with meeting gas deficit) 103 138 179* 195** 368 Estimated refining capacity 69 129 167 184 358 Estimated (crude requirement) 69 122 173 190 364

* Assuming 15 mmt per annum of LNG import by 2007. ** Assuming that by 2012 adequate gas is available through imports and domestic sources. Source: India Hydro Carbon Vision 2025, Government of India, New Delhi.

vision document, the share of gas in the countrys total energy consumption is projected to rise to 20 per cent. Therefore, gas is going to play an increasingly important role in the Indian energy management.

Natural gas in India

The natural gas reserves (table 4) in India, just like the oil reserves, are limited. By 2004, Indias natural gas reserves were estimated at 923 billion cubic meters, with an estimated life span of 29 years. Which implies that at the current rate of production, the existing natural gas reserves could last for 29 years. However, there are serious ongoing efforts in India to discover new gas and oil reserves. In continuation with the programme of liberalisation and reforms, the Government of India removed the limit on foreign direct investment in the oil and gas sector and permitted 100 per cent foreign direct investment in this sector.6 The emphasis on explorations in India could be seen from the fact that the public sector undertaking Oil and Natural Gas Corporation (ONGC) has plans to invest about $7.6 billion during 20042009 on oil and gas exploration, discovery and asset building. ONGC spends roughly $1 million every day on the running of its three exploration ships, two of which are active in the KrishnaGodavari delta of Andhra Pradesh and another at the Probandar Coast in Gujarat.7 Furthermore, the consortium of Gas Authority of India Ltd and Gazprom of Russia is active in searching for gas in the Bengal offshore location.8 The policies and efforts at discovering new gas deposits have resulted in new finds also as there has been new discovery of gas deposits at the offshore Krishna Godavari basin, near Vashi. The gas reserves at Krishna Godavari basin have been estimated at 14 trillion cubic feet by the energy consultant, Wood Mackenzee of the United Kingdom. Reli58
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Table 4 India: natural gas reserves m cu m Year 199192 199596 199697 199798 199899 19992000 200001 200102 200203 200304 Onshore 255,690 266,170 273,800 276,410 279,000 299,000 301,000 315,000 327,000 339,000 Offshore 479,770 377,170 418,260 398,340 369,000 461,000 462,000 436,000 527,000 584,000 Total 735,460 643,340 692,060 674,750 648,000 760,000 763,000 751,000 854,000 923,000 Life of reserve (in years) 39 28 26 25 23 26 26 24 27 29

Source: Energy, Economic Intelligence Unit, Centre for Monitoring Indian Economy, Mumbai, May 2005

ance India Ltd (RIL) has 90 per cent stake in this venture, while the remaining ten per cent stake is held by Canadas Niko Resources. Reliance India Ltd has decided to invest approximately $ 5.7 bn during 20052010 for developing and marketing gas.9 Yet another important gas discovery has been in the Rajasthan basin. The UK based Cairn Energy Plc struck gas in Barmer in a conventional reservoir in the Fatehgarh formation and Raageshwari in non-conventional volcanic reservoirs.10 Encouraged by the successful discoveries, the Ministry of Petroleum and Natural Gas decided to introduce new norms for exploration companies. Until now, the government used to specify the blocks for exploration and the blocks used to be very large. But the ministry has decided to divide the blocks into smaller sizes and introduce the open acreage system, where companies can themselves, identify an exploration block, where upon the ministry will put an open tender for the block and award it accordingly.11 The new policy is expected to substantially enhance the participation of international companies, resulting in significant benefits for the exploration activity in India. However, to get the exact picture of the economics of natural gas in India, it would be useful to discuss the production and consumption aspects of natural gas in India. The data about the production and utilisation of natural gas in India is provided in table 5. By 200304, Indias gross production figures for natural gas was estimated at about 32 bn cu m. The gross production figures also include the amount of gas flared and the amount of gas re-injected in the field. Since 199596, no re-injection of gas has been reported.12 Furthermore, the amount of gas flared has declined drastically. The volume of gas which was flared, declined from 4.1 bn cu m in 199192 to March 2007
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Table 6 India: consumption of natural gas m cu m Year 199192 199596 199697 199798 199899 19992000 200001 200102 200203 200304 Total 14,441 18,091 18,632 21,513 22,489 26,885 27,860 28,037 29,964 30,900 Captive 2,65 589 6,18 5,69 9,11 4,876 5,042 5,409 5,545 6,128 Power utilities m cu m 4,774 6,836 6,935 8,114 8,714 8,829 8,801 9,214 10,510 11,478 Fertilizers 5,509 7,602 7,625 8,752 8,869 8,592 8,480 7,957 7,955 7,889 Others 1,993 3,064 3,454 4,078 3,995 4,588 5,537 5,457 5,954 5,405 Captive 15.0 3.3 3.3 2.6 4.1 18.1 18.1 19.3 18.5 19.8 Power utilities % 33.0 37.8 37.2 37.7 38.7 32.8 31.6 32.9 35.1 37.1 38.1 42.0 41.0 40.7 39.4 32.0 30.4 28.4 26.5 25.5 13.8 17.0 18.5 19.0 17.8 18.1 19.9 19.5 19.9 17.6 Fertilizer Others

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Note: Data excludes captive consumption by ONGC from 199596 to 199899, while it includes from 19992000. Source: Energy, Centre for Monitoring Indian Economy, Mumbai, May 2005.

1.1 bn cu m in 200304. This resulted in substantial hike in the availability of the natural gas for utilisation in India. By 200304, the percentage of gas flared had come down to 3.3 per cent with 96.7 per cent of gas produced becoming available for utilisation. Consequently, the net production of natural gas in India increased to about 31.0 bn cu m by 200304. The data regarding the pattern of consumption of natural gas in India is provided in table 6. Fertilizers and power utilities have been the two most important sectors to consume natural gas in India. Up to 199899, the fertilizer sector consumed the maximum amount of Indias natural gas, while power utilities came next. But since 19992000, the situation has altered. Power utilities consume the maximum amount of Indias natural gas, whereas fertilizers are next in consuming the natural gas. However, both sectors are suffering from the deficiency in gas supplies. Therefore, fertilizer companies were also envisaging the establishment of liquefied natural gas (LNG) facility for importing gas.13 In the power sector, RIL has been planning to set up the worlds largest gas-based power plant in the Indian state of Uttar Pradesh. The proposed project will use gas from Reliances gas fields in |KrishnaGodavari Region.14 In a nutshell, Indias domestic production of natural gas has remained insufficient to fulfil the growing demand for natural gas in the economy. In fact, gas availability from domestic production in the country is less than half of the estimated demand. Notwithstanding the recent gas discoveries by RIL and others, if the economic reforms continue smoothly, a supply deficit of over 65 per cent is estimated in India by 201112.15 (Table 7 provides data about the natural gas demand in India). By 202425 the demand for natural gas in India is estimated to rise to 391 million standard cubic metres (m s cu m). Therefore, the large deficit in the supply and demand balance of natural gas in India is going to be a long-term phenomenon. Thus, in addition to the strategies of enhancing domestic availability of natural gas, the Government of India has also to devise strategies for importing gas to fill the gap in supply. In order to facilitate this, the Government of India has appointed Petronet LNG Ltd (PLL) as the nodal agency.16 PLL has been established as a joint venture company by the four Table 7 Natural gas demand in India million standard cubic metres per day Year 1999200 200102 200607 201112 202425 Demand 110 151 231 313 391

Source: India Hydro Carbon Vision 2025. Note: As against this requirement, the domestic gas supply up to the year 2004 stood at about 84 ms cu m/d. The gap will have to be met mainly by imports.

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premier public sector undertakings in the hydrocarbon sector, namely the Indian Oil, ONGC, GAIL India Ltd and Bharat Petroleum (BPCL).17

Search for natural gas abroad

PLL has been in the process of making import arrangements for the supply of natural gas from various gas exporting countries. PLL has been successful in arranging substantial gas imports from Qatar (an important Member of OPEC). Although Qatar is a small country in size, its gas resources are enormous. Next to Russia and the Islamic Republic of Iran, it contains the third largest natural gas reserves in the world with its North Field as the largest non-associated gas field in the world. During the past decade, Qatar has been successful in organizing international syndicates in partnership with various multinational oil and gas companies. This partnership resulted in the creation of two large companies to develop Qatars gas resources. These are Qatar Gas and RasGas.18 Qatar Gas comprises the state company, Qatar General Petroleum Corporation (QGPC), Total, ExxonMobil, Mitsui and Marubeni, while RasGas is a joint venture between QGPC and Mobil. Through these projects, Qatar has already became a substantial natural gas exporter. The country is very crucial in Indias management strategy of LNG, whereas the Indian energy market is also very important for the Qatari gas industry. RasGas loaded its first shipment of Indian-bound LNG on 25 January 2004.19 This was received at Dahej LNG import terminal on 30 January 2004. This was the first ever import cargo of LNG received in India to help bridge the huge natural gas deficit. RasGas is to supply PLL five million tons of LNG per year under a 25 year contract. The next phase of the Dahej terminal is to expand its capacity from the present five million metric tons per annum (m mt/a) to 10 m mt/a by 2008.20 At Cochin, PLL has planned to set up another terminal of the capacity of 5 m mt/a. RasGas has an agreement with PLL to supply, in addition to 5 m mt/a of natural gas, a further 2.5 m mt/a of natural gas in the immediate future to be delivered at Cochin LNG import terminal. Table 8 provides the information about Indias contracted LNG imports from Qatar, where it is found that from 2006, Qatars RasGas would be supplying India with 7.5 m mt/a of natural gas. India is further exploring the possibility for an additional 1 mt of LNG for Ratnagiri power project. Efforts are being made to find fuel to restart Ratnagir Gas and Power Pvt Ltd, formerly known as Dabhol Power Company, closed since May 2001. The power plant (740 million watt phase I and 1,444 mW phase II) requires 0.64 mt LNG in 2006 and would finally consume 2.1 m mt/a of LNG. RasGas has been approached by PLL to supply the LNG required for Table 8 Indias contracted LNG imports from Qatar
2004 2005 2006 2007 2008 2009 2010 2011 2012

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2.5 2.5

3.8 1.25 5.05

5 2.5 7.5

5 2.5 7.5

5 2.5 7.5

5 2.5 7.5

5 2.5 7.5

5 2.5 7.5

5 2.5 7.5

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the Ratnagiri power project.21 It has been reported that RasGas has agreed to supply an additional 2.2 mt of LNG, which is the requirement for full operation. However, this is to be a short-term supply until mid-2009. By that time, Gas Authority of India Ltd (GAIL) is expected to arrange tie-up for long-term supplies.22 Thus, Qatar has already become an important source of gas imports for India and acquired a crucial profile in Indias energy management. IR Iran is the next important destination in Indias search for gas abroad. It is yet another OPEC Member Country with huge reserves of gas. Next to Russia, IR Iran has the largest gas reserves in the world. Iranian gas reserves were estimated to be 27.6 t s cu m.23 The Iranian Government has already invested a massive $20 bn in developing the 280 trillion cubic feet in the South Pars field. Several foreign companies, including TotalFina Elf, Eni-Agip and PLL have become involved in the Iranian gas sector.24 IR Iran was reported to have offered to India, equity in the gigantic South Pars gas field in an attempt to influence India to buy its natural gas.25 Further in January 2005, India and IR Iran signed a preliminary agreement under which India would import 7.5 mt of Iranian LNG for 25 years, beginning in 2009, while ONGC Videsh Ltd (OVL), the foreign arm of ONGC of India would be given a 20 per cent stake in the development of Irans Yadavaran oil field and an outright buyback contract for the development of the Jefeyr oil field.26 Meanwhile, the pipeline project to take Iranian gas to India through Pakistan is now under serious consideration by these countries.27 The onland pipeline was proposed to originate at Assalayeh, Bandar Abbas and then transit through Baluchistan and intersect the Pakistan gas network system and finally, meet the HBJ pipeline in North India.28 Earlier, India had expressed its reservation to the onland pipeline project for security reasons. However, the Iranian authorities extended proposals that would include the involvement of an international agency, adoption of a consortium approach, take or pay arrangement, inter-governmental agreements, insurance programme and other guarantees so that all the stakeholders in the project, including Pakistan, ensures the smooth flow of gas to India.29 Unlike the previous proposals where Pakistan was to be just transit country, Iran proposed that the pipeline would feed gas supplies to Pakistan also. Thus, the participation of Pakistan, as a buyer and investor, was likely to work as a risk-mitigation measure. Furthermore, at a point, IR Iran also offered to foot 60 per cent of the cost of laying the proposed Iran-Pakistan-India gas pipeline.30 It had a very positive effect and India, Pakistan and IR Iran held several bilateral meetings to remove the hurdles. Many of these meetings took place and finally, India and Pakistan agreed to start the construction of the over $ 7 bn Iran-Pakistan-India gas pipeline by mid-2007, so that the first gas flows by the end of 2010. It was also agreed that India would draw 60 m s cu m/d from the over 2,100 km pipeline project and ramp it up to 90 m s cu m/d in the next 23 years, while Pakistan would start with 30 m s cu m/d and double its off-take by 2013.31 Other issues relating to the project, including an integrated feasibility study, project structure and the framework agreement, were left for tripartite meeting. Also, a technical sub-working group was to be set up to decide on issues like transportation tariff, transit fee payable to Pakistan, system configuration, pipeline route and pricing mechanism. The issues of gas pricing, project structure and the tripartite framework March 2007
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agreement were to be taken up during the tripartite meeting held in Teheran on 1315 March 2006.32 However, the fate of the pipeline was again under uncertainty with Indias vote against IR Iran at the International Atomic Energy Agency and continued US sanction against Iran. But Iran confirmed that it had no plans to pull out of the $ 22 bn gas deal, which the India Oil Corporation, BPCL and GAIL have signed for import over the next 25 years. The US opposition to the pipeline was also removed with President George Bushs green signal to the proposed Iran-Pakistan-India pipeline.33 It is further being considered that the three countries built their pipeline segment on their own to avoid the US sanctions and allow American firms and technology in the pipeline segments in Pakistan and India. It was also being suggested that India would purchase gas at its border with safeguards of penalties on Iran and Pakistan in case of supply disruption. This implies that all the major hurdles in Iran-Pakistan-India gas pipeline has been gradually removed and the project would finally come through.34 Oman is yet another country from the neighbouring gulf where India has been looking to for gas supplies. In its diversification strategy to reduce its dependence on oil, Oman has been developing its gas sector rapidly.35 Oman targeted Asian countries for selling its gas. It had agreement with South Korea for supplying 4.1 mt/a of natural gas for 25 years. Its other customers included Osaka Gas of Japan and Total of France. Dabhol Power Company of India also had agreement with Oman. Oman LNG had to supply Dabhol Power Company 1.6 million tones per annum of natural gas for 20 years.36 However, with the collapse of Dabhol Power Company, this agreement could no longer materialise. The fate of the much discussed Indo-Oman gas pipeline was also sealed. The Indo-Oman deep-sea gas pipeline project had to be shelved after many years of feasibility studies. Now that the once failed Dabhol Power Company has been revived with its new nomenclature of Ratnagiri Gas and Power Pvt. Ltd, the search for gas for this company continues. During the March 2006 visit of Indias Defence Minister to Oman, discussion took place about the supply of Oman gas to Ratnagiri Project, the successor of Dabhol Company.37 Earlier, an Indian Minister of State in the Office of the Prime Minister had visited Oman for the same purpose. However, it was reported that the Oman side had not yet made any commitment on the gas supplies.38 The United Arab Emirates and Saudi Arabia are also considered to be the potential sources of gas supplies to India. Abu Dhabis ADGAS was also enlisted as supplier to the defunct Dabhol Power Company.39 Besides this, a private UAE company Al Manhal International Group (AMIG) was also reported to be planning to set up an LNG complex in the state of Orissa, India.40 Saudi Arabia, the largest oil producer and exporter and biggest source of Indian oil imports has already been an important source of liquefied Petroleum gas (LPG) imports to India.41 The Saudi authorities have been making serious efforts to develop the Kingdoms natural gas reserves keeping in consideration, the domestic, as well as the global demand.42 The Saudi Government, since the late 1990s, has been opening its gas sector and inviting international oil and gas companies to develop its gas resources. In this context, Saudi Arabia signed agreements with various international companies to develop non-associated gas.43 Indian companies have also been trying to avail themselves of this opportunity to enter the 64
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Saudi gas sector. GAIL was reported to be exploring the possibilities of participation in ventures in the Saudi gas sector.44 In its search for gas abroad, India has not left untouched its immediate neighbours Myanmar and Bangladesh. The neighbouring countries in the east have also been brought in the networking for gas supplies to India. Indian companies such as GAIL and OVL have 20 per cent and ten per cent interest respectively in the joint venture exploration project with Daewo International (60 per cent) and Kogas (ten per cent ) of Korea. This consortium was able to discover gas in A-1 block in Myanmar. The recoverable gas reserves were being estimated at 46 t cu f. The Myanmar Government has its right over 65 per cent of gas production from this block. It was reported that Myanmar offered India its entire share of gas from this block.45 India has also been eyeing 50 per cent stake of South Korean Daewoo International in an adjacent gas block. GAIL and OVL officials from India were pursuing the Myanmar Government to allocate them half of Daewoos 100 per cent holding in the A-3 block.46 For transporting natural gas from Myanmar to India, gas pipeline through Bangladesh was suggested by the Indian authorities. However, with lukewarm response from Bangladesh for laying gas pipeline, India was considering to transport gas by tankers. But it was later reported that Bangladesh had agreed, in principle, for the construction of a pipeline for the supply of natural gas from Myanmar to India.47 Like Myanmar, Bangladesh could also be a potential source of gas supplies to India. ONGC has expressed interest in exploring gas in Bangladesh especially in the offshore blocks. ONGC was reported to have proposed exploring block II together with state-run Bangladesh Petroleum Exploration and Production Company Ltd.48 Countries of the Commonwealth of Independent States have yet been another region where India is trying to explore the possibility of gas supplies. GAIL was reported to be interested in a plan to pump natural gas from Uzbekistan into the proposed 1,680 km Turkmenistan-Afghanistan-Pakistan (TAP) pipeline for onward supply to India.49 With Indias participation, the name of the project will be changed to Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline project. This would connect India with gas fields of Turkmenistan. It was reported that the Indian Petroleum Ministry was seeking the cabinets approval to participate in the 3.3 m TAP natural gas pipeline.50 During the visit of Indian Prime Minister Prof Man Mohan Singh in April 2006, Uzbekistan expressed its willingness to allow Indian companies to explore gas in its territory and the extracts could be shared by two countries on equal basis.51 The two sides also inked pacts which included a Memorandum of Understanding (MoU) for cooperation in oil and natural gas. The Caspian Sea has been termed the future store house of worlds energy. India intends to have a reasonable presence in the Caspian energy profile. The MoU has been signed with some of the countries of the region.52 In an another remarkable presence in the regions energy scenario, OVL has invested $2.1 bn in the Russian oil and gas field, Sakhalin I. The OVL has been examining various options to monetise its share of oil and gas as also possibilities of bringing gas to India. As per the initial plan, the production of gas was to begin in 200708. However, it was later advanced to help meet energy requirements of the Russian market.53 March 2007
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In addition to the focus on countries like Australia, Malaysia and Indonesia, Indian companies have also been trying to establish a foothold in African countries for gas supplies. IOC, in partnership with Oil India Ltd, submitted expression of interest for exploration in the East Ghazalat and Obeiyad concessions of Egypt as part of its plan to secure oil and gas supplies. The Indian Oil-Oil India Consortium has already bagged an exploration block in the Socialist Peoples Libyan Arab Jamahiriya.54 OVL is also in a consortium which was awarded the North Ramadan block 6 in Egypt. The first phase of exploration consists of 3D seismic acquisition and the drilling of three wells. The same consortium which includes ONGC is developing block 24 in nearby Syria.55 GAIL was also reported to have signed an agreement with Egypt to acquire 15 per cent participating interest in National Gas Company of Egypt (NATGAS). This is the largest private local distribution company for natural gas in Egypt. India entered the Sudanese energy sector with OVL acquiring 25 per cent stake in the Greater Nile Petroleum Operating Company from Canadas Talisman Energy in 2002. OVL was further allowed to acquire Austrian OMVs 26.125 per cent stake in block 5A, and 24.5 per cent in block 5B in Sudan.56 By 2006, OVL owned five blocks for oil and gas exploration in Sudan. The performance of the Indian company was so outstanding in the exploration of oil and gas that the Sudanese Government was reported to be planning to award exploration rights for two additional oil and gas blocks to Indias OVL on a nomination basis.57 GAIL has been short listed by Ethiopian Government to participate in the bidding process for two gas fields. GAIL is partnering Gujarat State Petroleum Corporation for Calub and Hilala gas fields in the Ogaden onland basin. Together, the two fields are estimated to contain about 4 tn cu f of gas.58 Algeria, a prominent gas exporter is also being roped into Indias gas management strategy. GAIL has been reported to be exploring the option of importing 0.7 to 5 m mt/a of LNG from Algeria for the Ratnagiri Gas and Power Ltd., earlier known as the Dabhol power project. Exhibiting long-term interest in Algerian gas, GAIL has also expressed interest in developing an LNG project in Algeria for supplies to India.59 GAIL purchased one spot cargo of 135,000 standard cu m of LNG from Algeria, to be delivered at the Dahej terminal in May 2006. This company was in the process of finalising the purchase of a second cargo in June 2006.60 Thus Indian companies, taking benefit of the domestic and global reforms and liberalisation, have been spreading their network far and wide all over the world to manage gas supplies to India in order to fulfil the existing and future gas deficit in the Indian economy.

Related issues

Pricing is a very important issue in the management strategy of natural gas. Gas pricing is quite different from oil pricing. Oil pricing is determined essentially by the market forces of demand and supply. Global oil-importers are basically price takers. However, gas follows a different kind of economics altogether. Gas-trading mostly follows the system of take or pay clause. This implies that the supplier has to face the price risk, while the customer faces the volume risk. Gas-trading mostly involves long-term contracts of 1 to 45 years. Although spot trading (1 to 30 days) and future trading (1 to 12 months) have recently emerged in the gas market,the overwhelming 66
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trade in gas still takes place through long term contracts.61 Another important factor in gas-pricing is the heat content. The energy values of gases differ. For example the Norwegian and Russian natural gas is reported to contain a higher energy value than the Dutch gas. Accordingly, the price determination in the contract is normally determined by its energy value. This is why gas prices are unitised in terms of dollars per (million) British thermal unit instead of dollars per cubic foot.62 Yet another feature is the regional character of gas price determination. The gas prices in the three major regions of North America, Europe and Asia Pacific were set independently from one another, which depended mainly upon the prevailing market factors in each of the regions. In the post-2000 era, a different price determination pattern began to emerge. US prices started influencing, though indirectly, the LNG dominated Asian Pacific markets through its own LPG imports. There were signs of new increasing linkages between US gas price and European gas prices also. Thus, there are indications of emergence of linkage between the price determination of gas in different markets. This may, eventually, result in the emergence of global gas prices similar to global oil price.63 Further, some of the experts have been predicting that the rising natural gas price boom in current and future gas demand and a likely lag in available liquefaction capacity growth have together been influencing the gas trade to turn from a buyers to a sellers market.64 Though the linkage of the price of gas to oil has been practiced in some of the European countries for long, it has been a recent phenomenon in the Asian gas market. Japan and South Korea first agreed to the linkage of price of gas to oil. Hence, in addition to the liquefaction, transportation and regasification costs, Japan agreed to pay a price linked to a basket of crude and its derivatives called the Japanese crude cocktail (JCC). Thus, within the agreed upper and lower limits, the price of gas would rise with a rise in oil price. Indias deal with Qatars RasGas followed the same pattern. However, with oil prices sky-rocketing, India persuaded Qatar to retain the original price band of $ 1624 per barrel of oil. Without this reprieve, the gas import prices would have also soared along with the rise in oil price. However, in 2008, this reprieve will end and the price band has to be renegotiated.65 The Iran deal was being termed as a better arrangement than the Qatar deal, because Iranian gas was expected to be cheaper than Qatari gas, once the review of Qatari price band takes place in 2008. Recent reports indicate that Iranians now have second thought over the agreed pricing formula. According to the original agreement, the Iranian LNG was linked to the oil price of $ 31/b. However, Iranians are demanding the linkage to be raised to the oil price of $ 61/b.66 At this rate, it would become the costliest gas import in the world. Thus, at present, the Iranian deal seems to be bogged down over the issue of pricing. However, it seems to be Irans strategy to extract a higher price for their gas. Transportation of the gas is another important issue. In contrast to oil, transportation of gas from field to markets is an expensive and difficult task. Natural gas transportation from the field to market is done by two methods. It is either transported by pipelines to the markets or it has to be shipped as LNG to the importing terminals, from where it is distributed to the end-users. Qatar, the first and largest supplier of natural gas to India, relies on shipping to transport gas. The Indian Government does not grant license to any chartered LNG vessels, unless it is an Indian flag vessel fully March 2007
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owned or not less than 26 per cent of the ownership of the company owning the vessel is in Indian hands.67 PLL has been using two 138,000 cu m capacity LNG ships Disha and Rah from a consortium of Japanese companies Mitsui OSK line and NYK line Shipping Corporation of India and Qatar shipping for carrying 5 mt/a of LNG from Qatar. PLL was reported to have hired a third LNG ship from a consortium of Exmar of Belgium, Indian Oil Corporation and Varun Shipping from India.68 The Government of India was further reported to be softening its attitude on LNG shipping policy. On the representation of various ministries, the Indian Government was considering to change the LNG shipping policy to allow LNG purchaser, the choice of carrier.69 India is also interested in various pipelines. As almost 75 per cent of the gas in the world is transported through the network of pipelines. The negotiations over Iran-Pakistan-India pipeline project have been completed and the project is about to enter the implementation phase. Negotiations over various other pipelines to transport gas from Central Asian Countries, Bangladesh and Myanmar are ongoing.

Conclusion

The consumption of natural gas in Indias energy mix is growing significantly. Despite the continuous liberalisation and reforms, inflow of foreign investment in Indias hydrocarbon sector and discovery of new oil and gas fields, it is estimated that the Indian economy would significantly remain dependent on foreign sources for the requirement of oil and gas. Diversification of energy consumption by increasingly moving to other forms of energy, like gas is a very significant development in Indias energy management. In this connection, the Member Countries of OPEC are again poised to play a very important role as they have been doing by supplying oil to India. Until now, only two countries, Qatar in large volumes and Algeria in small volumes, have been able to successfully deliver gas to India. Both are Members of OPEC. IR Iran, another OPEC Member Country is also poised to deliver large volumes of gas to India. The nature of the gas market is such that it provides inherent energy security on long-term basis. Furthermore, the global energy industry has been undergoing the process of horizontal integration between the producers and consumers of energy. In this context, India has been acquiring equity stakes in the oil and gas sectors all over the world. This would provide additional leverage to Indias energy management. In short, the diversification of energy consumption, towards gas and equity participation in the upstream and downstream sectors of the energy exporting countries, are important landmarks in the policy of Indias energy management. However, OPEC countries have again an important and crucial role ahead in Indias energy management. They have been performing it as the suppliers of oil and now they are poised to do it with the gas supplies. The profile of energy cooperation between India and the Member Countries of OPEC is bound to grow further.

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Notes and references:

1. World Bank: India to grow at rate of eight per cent this fiscal, The Business Age, New Delhi, 6 December 2005. Ninth and Tenth Plan Documents, Planning Commission of India, Government of India, New Delhi. Estimate based upon the data provided in India Hydrocarbon Vision 2025, Government of India, New Delhi. The Longevity of coal/oil/gas reserves are indicated by reserves/production ratio. The existing reserves of the concerned resources are divided by the current level of production. The resultant gives the life of the reserves. These estimates can vary with the variation in estimates of reserves, as well as production. Also see Energy, Economic Intelligence Unit, Centre for Monitoring Indian Economy, Mumbai, 2005. See Foreign Trade Statistics of India, various issues, Directorate General of Commercial Intelligence and Statistics, Ministry of Commerce, Government of India, Calcutta. Oil Sector foreign direct investment hiked to 100 per cent, The Asian Age, New Delhi, 16 January 2004. Rupees 33,000 crores, Oil and Natural Gas Corporation (ONGC) budget for oil and gas exploration, Times of India, New Delhi, 16 January 2004. Russian Gazprom, Gas Authority of India Ltd (GAIL) to acquire seismic data, The Asian Age, 11 February 2004. BP Keen to invest in RILs KG basin project, The Times of India, 19 October 2005. Cairn strikes gas in Rajasthan basin, The Economic Times, New Delhi, 12 January 2005. New norms for exploration firms, The Asian Age, 25 November 2005. See Energy, Centre for Monitoring Indian Economy, Mumbai, May 2005. Fertilizers planning mega alliance for liquefied natural gas (LNG) facility, The Economic Times, 13 September 2004. RIL to set up worlds largest gas-based power unit in UP, The Economic Times, 28 January 2004. Just a pipe (line) dream, The Economic Times, 1 December 2003. India joins worlds elite club of LNG, The Times of India, New Delhi, 7 January 2005. 2007 Organization of the Petroleum Exporting Countries

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3.

4.

5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

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17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34.

Petronet LNG Ltd (PLL) to list on March 26, The Indian Express, New Delhi, 12 March 2004. For details see Muhammad Azhar, Contemporary gulf economies and Indo-Gulf relations, New Horizon Publishers, New Delhi, 1999. LNG: going the extra mile, Middle East Economic Digest, London, 1218 March 2004. India joins worlds elite club of LNG, The Economic Times, 7 January 2005. LNG hunt takes government to Qatar this time, The Economic Times, 11 February 2006. Maharashtra to seal LNG deal with Qatar to sort out power shortage, The Economic Times 12 April 2006. Annual Statistical Bulletin 2003, Organization of the Petroleum Exporting Countries, Vienna, 2004. Neil Ford Khatami calls for foreign investment in Iranian oil, The Middle East, London, July/August 2002. Iran offers India equity in gas fields, The Indian Express, New Delhi, 3 February 2004. Indian Oil Corporation (IOC) sees limited MENA Reserves options, As China/India Move in Middle East Economic Survey, Nicosia, 14 February 2005. Iran-Pakistan-India pipeline back on the agenda, Middle East Economic Survey (MEES), 21 February 2005. Iran pitches pipeline to India with Pak backing, The Economic Times, 25 November 2003. Iran lobbying for gas pipeline The Asian Age, New Delhi, 25 November 2003. Teheran offers to foot 60 per cent cost of Indo-Iran Pipeline, The Indian Express, 25 November 2003. It is a deal: India, Pak to begin work on Iran pipeline, The Times of India, New Delhi, 18 December 2005. Gas pipeline talks to start in Teheran today, The Asian Age, 13 March 2006. Pipeline: Bush nod gives India an edge, The Indian Express, 15 March 2006. India to go ahead with Iran-Pak pipeline project, The Indian Express, 19 April 2006. 2007 Organization of the Petroleum Exporting Countries

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35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.

Muhammad Azhar, no. 18. New forces in the International LNG market: consequences for Middle East LNG exporters, MEES, 1 April 2002. Talks on with Oman for gas, The Hindustan Times, 12 March 2006. Pranab in Oman for talks on Dabhol gas supplies, The Hindu, 12 March 2006. New forces in the international LNG market, consequences for Middle East LNG exporters, no. 36. Al-Manhal Plans Rs. 25,000 crore LNG unit in Orissa, The Economic Times, 20 December 1999. Bharat Petroleum Corporation Ltd to import own LPG, The Economic Times, 11 February 2004. Keeping gas in mind, Middle East Economic Digest, 814 October 2004. Foreign investment in Saudi Arabias energy sector, MEES, 23 August 2004. Gas Authority of India Ltd (GAIL), Engineers India Ltd join hands for gas abroad, The Hindustan Times, 1 September 2004. Myanmar offers to sell its share of gas to GAIL, The Economic Times, 10 February 2004. ONGC Videsh Ltd (OVIL)-GAIL eye 50 per cent of Daewoo stake in Myanmar gas block, The Indian Express, 6 August 2004. India, Bdesh agree on tri-nation gas pipeline, The Economic Times, 7 September 2004. ONGC eyes Bangladesh natural gas sector The Economic Times, 28 October 2005. GAIL moving ahead to Turkmenistan-Afghanistan-Pakistan (TAP) Uzbek gas, The Times of India, 27 September 2004. Petromin seeks nod for TAP Gas Project, The Hindustan Times, 21 April 2006. PM, Uzbek Prez talk Energy The Hindustan Times, 27 April 2006. GAIL hopes for reasonable presence on Caspian Coast, The Economic Times, 7 October 2004. Early production at Sakhalin I, The Hindustan Times, 24 September 2005. IOC eyes exploration in Egypt, The Times of India, 6 March 2006. 2007 Organization of the Petroleum Exporting Countries

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55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.

OVIL enters Egyptian upstream with North Ramadan block award, MEES, 7 March 2005. Asian Firms continue to bolster Sudan presence as ONGC cleared to buy OMV Stakes, Middle East Economic Survey, 1 September 2003. Sudan awards ONGC 2 more oil blocks, The Asian Age, 10 March 2006. GAIL short-listed to bid for Ethiopian gas blocks, The Times of India, 14 April 2006. LNG from Algeria for Ratnagiri project, Hindustan Times, 17 April 2006. GAIL buys its first LNG cargo abroad, The Economic Times, 10 May 2006. Ahmed El Hachemi Mazighi The efficiency of natural gas futures markets, OPEC Review, Vol. XXVII, No. 2, 2003. Ferdinand E. Banks An introduction to the economics of natural gas, OPEC Review, XXVII, No. 1, 2003. A.M. Samsam Bakhtiari The price of natural gas, OPEC Review, Vol. XXV, No. 4, 2001. LNG demand boom creating a sellers market, says FACTS, MEES, 21 February 2005. Sudha Mahalingam LNG pricing: the relevance of crude linkage, The Hindu, 24 January 2005. LNG deal with Iran enters troubled waters over pricing issue, The Indian Express, 3 May 2006. LNG imports must on Indian ships alone, The Economic Times, 13 September 2004. Petronet to hire Exmar LNG, The Economic Times, 3 December 2005. Government plans to dilute LNG charter norms, The Economic Times, 11 July 2005.

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