Development of Natural Gas Market Wrt to Power Sector

8/14/2019 Development of Natural Gas Market Wrt to Power Sector

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The per capita Power consumption in India is increasing manifolds since Independence,

due to various factors like rapid industrialization and factors like Rural electrification

under Rajiv Gandhi Grameen Vidyutikaran Yojna. Since independence over 500,000

Villages are electrified but we still have lot to achieve. According to CEA 81% of the

villages have been electrified till 31.05.07.

Coal accounts for over 70% usage as a fuel for power generation. But due to climatic

constraints and Kyoto Protocol considerations other fuel should be considered such asnatural gas that not only have high calorific value but also environment friendly and will

also help in gaining carbon credits, which will be the another source of income for power

generating companies. Huge gas finds have been announced in KG basin and Cauvery

basin. Currently, India meets 70% of its energy requirements through imports. But as

there are new natural gas reserves are found by RIL whose production is expected to start

in mid-2008 which is estimated to produce 80mmscmd and one of the biggest and most

significant discoveries of natural gas by GSPC whose production is expected to start in

2009, which is estimated to produce 65million to 70 million standard cubic meters. It

seems that natural gas will be price at market rates. This has left a cause of concern for

the power ministry.The risen prices are creating conflicts between power producers, Gas

producers and the government. Power producer demanding less prices or high subsidy,

and the natural gas producers are demanding high prices. As stated by the Indias

Ministry of Petroleum that the country will have surplus natural gas in two years and its

rapidly growing economy is likely to be fueled by it after major discoveries by state-run

and private energy companies.

The cost of power from any plant has three major components: (a) capacity cost of plant,

(b) the cost of transmission, including the losses in transmission, and (c) the fuel cost.


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The cost of fuel should not be considered in isolation instead overall view should be

taken cost of electricity also include other factors than fuel which should also be

considered like transmission and distribution losses, asset losses, operational losses. In

India, average T & D (Transmission & Distribution) losses; have been officially indicated

as 23 percent of the electricity generated. However, as per sample studies carried out by

independent agencies including TERI, these losses have been estimated to be as high as

50 percent in some states.

TABLE OF CONTENTS

Chapter 1 Introduction

1.1 Background

1.1.1 History of Natural Gas

1.1.2 Developmentof Natural Gas PricingMethodology in India

1.1.3 Taxes and duties


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1.1.4 Regulated pricing implies a regressiveapproach

1.2 Overview

1.3 Purpose of study

1.4 Objective

Chapter 2 Organization

2.1 History of Indian School of Petroleum

2.2 Technological Development

2.3 Production / Operations Process

2.4 Product Value Chain

2.5 Mission

2.6 Organization Structure

Chapter 3 Identification of Problem

Chapter 4 Literature Review

Chapter 5 Research Methodology

5.1 Data Source

5.2 Sources of error

Chapter 6 Findings

Chapter 7 Analysis of the data

Chapter 8 Conclusion

Bibliography

References


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LIST OF TABLES

Table No.

Title Page No.

1. Capacity addition during Pre-NELP and Post-NELP 23

2. Fuel Parity 30

3. Calculation of delivered price of gas 57

4. Rural Electrification. 62


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LIST OF FIGURES

Figure No. Title Page No.

1. Proved reverves at the end of 2006 19

2. World natural gas reserves by region,1980-2007 21

3. World Natural gas consumption by end use sector 22

8. Growth of generation 26

9. Per capita consumption of electricity in India(Kwh/yr) 32


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Chapter 1

INTRODUCTION

1.1 Background

1.1.1 History of Gas in India


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Oil and Gas, in India, were first discovered in 1886 by Mr. Goodenough of McKillopStewart Company, near Jaypore in Upper Assam. However the find remained non-commercial as he failed to establish adequate production. In 1889, the Assam Railwayand Trading Company discovered an oil and gas well at Digboi, Upper Assam. The areawas then acquired by Burmah Oil Co. But, during this period, gas was not considered as

viable for commercial production. The associated gas during oil production was ventedthrough a pipe at the top and set ablaze in order to avoid any potential hazard. Despitethis practice the petroleum companies kept their interest in gas since it was considered asa faithful companion to oil.

Till 1955, the business of exploration of hydrocarbon resources, in India, was largelycarried out by private companies. In 1955, the Government of India, decided to developoil and Natural gas as strategic resources through public sector initiative. By late 1955, anOil and Natural Gas Directorate was established under the Ministry of Natural Resourcesand Scientific Research, constituting of a core of geoscientists from the GeologicalSurvey of India. In August 1956, the Directorate was raised to a status of commission.

This gave birth to Oil and Natural Gas Commission (ONGC), now one of the navratnacompanies.

ONGC initially restricted itself only to the inland areas. In October 1959, ONGC wasconverted into a statutory body by an act of the Indian Parliament, which enhanced its powers. In 1961, the Government of India and Burma Oil Company became equalpartners in OIL, which was earlier a joint venture with 1/3rd and 2/3rd shares respectively.In 1974, ONGC struck huge oil and gas field, now known as Mumbai High. Thecommercial production began 1976, however, the associated gas was once again setablaze. In 1978, giant South Bassein free gas field was discovered. In 1978, the gassupply from Bombay offshore was used for power generation and fertilizer manufacture.During the period 1975-90, though the state owned enterprises kept increasing the reservebase, yet, the country continued to be one of the underexplored regions. Till 1990, only40% of Indias estimated gas reserves were explored, hence creating a widening gapbetween domestic production and demand. Private sector investment was sought in E&Psector by offering exploration acreage through production sharing agreements withGovernment of India. In 1994, the Government awarded first of the fields to be operatedthrough joint venture between state enterprises and private companies.Still, by 1998, the exploration efforts were low at 12 per 10000 sq km of exploratorywells compared to a world average of 100 (source: GAIL Infraline Natural Gas inIndia: A Reference Book, p73). Of the 26 sedimentary basins only six were exploredresulting in huge gap between potential and existing reserves.In 1999, the Government of India announced New Exploration Licensing Policy (NELP),with objective of invigorating E&P activities by providing attractive incentives and levelplaying fields to the new entrants, including foreign companies. Since then six rounds ofNELP have already been completed and the VIIth round is about to be announced. In thesix years of the first five rounds of NELP a significant capacity addition has been madeas shown in the table below:

Table 1 Capacity addition during Pre-NELP and Post-NELP


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S.No. Indicator Pre-NELP (1993-2006)

NELP-I,II,III,IV,V(2000-06)

1. 2D Seismic Survey (LKM) 24,091 1,09,305

2. 3D Seismic Survey (SKM) 5,304 67,773

3. Exploratory Wells (Nos.) 167 934. PSC Blocks 28 138

5. No. of Discoveries (upto15.04.07)

25 40

6. Investment made onExploration

US$781.65 mn US$1451.18 mn

1.1.2 Development of Natural Gas Pricing Methodology in India

The pricing approach for Natural Gas in India has seen several variants. The approach

has been guided by the belief to secure the interest of all stakeholders equitably.Understanding pretty well that market mechanism is the best allocator of resources, thegovernment had to deviate from it in order to provide the humane touch. The tenderIndian economy of those times, when the first gas supplies commenced in 1959, may nothave withstood the pressures of market forces. Till 1970, the prices were determined byGovernment Committees, which ranged between Rs 9 - 50/tcm. In 1970, ONGCnegotiated prices with different consumer segments reaching around Rs 115/tcm. During1974 to 1977, the producers determined the prices depending upon the opportunity cost tothe consumer that included thermal equivalence of the substitute fuels. The price rangedbetween Rs 210 350/tcm. During the period 1978 82, the price for power sectorranged between Rs 1000 2600/tcm and for fertilizer sector it ranged between Rs 600

3500/tcm.

In 1986, the government decided to charge uniform price on a year to year basisdetermined through cost-plus methodology. The price of natural gas was fixed at Rs1400/tcm w.e.f. 30.01.1987, however price for North-East region was subsidized to Rs1000/tcm. Subsequently, under the recommendation of Kelkar Committee, the price wasrevised to Rs 1550/tcm w.e.f. 01.01.1992, with provision to raise it by Rs 100/tcm p.a.upto Rs 1850/tcm by 1995.

In Jan 1995, Sankar Committee was constituted to review the gas pricing. Its

recommendations, though not intended, resulted in shifting the pricing approach from

cost-plus to import parity. This was for the first time that consumers of natural gas in

India got exposed to global dynamics. The committee had intended to determine the

price based on long run average cost, calculated on basis of long term business plans of

ONGC. Through this formula the committee arrived at a price of Rs 1854/tcm. The

Committee eventually recommended a price of Rs 1800/tcm, giving due consideration to

findings of Expert Committee, which based the pricing on costs of production on that

day. However, new dimensions emerged in form of 1) higher price having been offered to


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joint venture licenses at Ravva and Panna-Mukta-Tapti fields, and 2) likely import of

large quantities LNG by end of next five years. Keeping all these developments in view,

Sankar Committee recommended that the consumer price should keep increasing at rate

of Rs 200 to Rs 250 per year. Government accepted these numbers but related it to the

price parity with the cheapest alternative fuel oil. The pricing policy was announced as

gas prices being a percentage of the fuel oil parity price in different years. Though the

prices were same as proposed by Sankar Committee, but, the principle had changed to

that of import pricing.The fuel oil basket was computed as average of four fuel oils, viz.,

Cargoes FOB, Med basis, Italy (1% sulphur); Cargoes CIF, NEW basis ARA (1%

Sulphur); Singapore, FOB, HSFO 180 cst (3.5% surplus); and Arab gulf, FOB, HSFO,

180 cst (3.5%. sulphur)) with progressively .increased fuel oil parity as given below.

Table 2 Fuel Parity

Year % of Fuel Oil Parity (Otherthan N.E.)

1997-98 55%

1998-99 65%

1999-2000 75%

This price was, however, subject to the range Rs 2150 2850/tcm. The price wasintended to be reviewed after three years with objective of achieving full Fuel Oil Parityover the years 2000-01 and 2001-02. But, it could not be achieved and the gas pricesremained stuck at the ceiling of Rs 2850/tcm that was near 34% of then Fuel Oil Price.

The gas prices did get stuck at Rs 2850/tcm, but, the gas market was becoming quitecomplex for Governments comfort. As the market increased the diversity among theplayers increased too. Amongst the producers there were some from public sector withnominated gas fields, some from public private joint ventures and some who imported thegas in liquefied form. Among the consumers were the fertilizer industry, power industry,sponge iron and others. Due to diverse backgrounds and objectives the interests toobecame diverse. A deft balancing in the pricing of natural gas was required to be done bythe Government. On July 23, 2003, a Group of Ministers, comprising of representativesfrom user and producer Ministries, met and recommended that the price of gas that hadremained static since Oct 1999 should be raised from Rs 2850/tcm to Rs 3200/tcm. Some

of the other recommendations made by the Group included the following:

1. Appointment of a Tariff Committee to study the cost structure of ONGC and OIL

and suggest a reasonable price, within six months, for the period till complete

deregulation of the gas prices could be achieved.


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2. Gas produced by the JV of Panna-Mukta and Tapti, around 8tcm, to be sold at

market-determined price. 1 tcm gas from Ravva JV to be taken by GAIL and the

higher cost to be adjusted as per the existing arrangements.

3. In order to provide a level playing field to the public sector companies the gas

produced by them (ONGC and OIL) from the new oil fields to be sold as per theNELP.

4. Price for the North-East region, which was then at 60% of the price for others,

should be brought to 60% of the new price i.e. Rs 3200/tcm.

A new gas pricing order, dated 26.06.05, was issued by the government revising the priceto Rs 3200/tcm for the following categories of consumers:

5. Power sector consumers.

6. Fertilizers sector consumers.

7. Consumers covered under court orders.

8. Consumers having allocations of less than 0.05 tcm.

9. It was further decided that all the APM gas, estimated to be around 55 tcm, will

be made available to these categories only. The price for small consumers and the

transport sector would be increased over the next 3 to 5 years to the level of

market price. With effect from 06.06.2006, the price of as for small consumers

and the transport sector was increased to Rs 3840/ tcm.

10. It was decided that price for all other than the ones mentioned in above categories

would be determined as per the market mechanism.

1.1.3 Taxes and Duties

In order to reach the Burner Tip/ Delivered Price, we add the royalty, taxes and dutiesetc., which are payable by the consumer to the price calculated as per the abovearrangement. The royalty, for the privately operated fields, is fixed on the wellhead pricesas negotiated amongst the players, and presently it is 10% of the wellhead price. ForONGC gas, it is 0.18$/MMBtu, 10% of the ceiling price of 1.80$/MMBtu. Natural gas,

being mineral, does not attract any excise duty. Sales tax is applicable depending uponwhether the sale of the gas is within the state or interstate. In case of within the state salethe tax is as per the state rate, which may vary between 0 to 22%, and in case the sale isinterstate a central rate of 4% would be applicable.

Table 3 Calculation of delivered price of gas

Consumer Price (say) $4.33 MMBtu


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Royalty $0.433

Transportation tariff* $0.5

Sales Tax ( say 10%) 0.54

Burner Tip/ Delivered Price $5.8 MMBtu

*It may be noted that GAIL is not permitted to make any margin on merchant sales, it is

entitled just to the investment on the pipeline, which is computed as follows:

Transmission charges to GAIL along HBJ pipeline Rs/tcm (Oct 1997) = 1,150 X calorificvalue of gas supplied by GAIL to consumer/8,500kcal per cubic metre.

The consumer price these days is being determined by market mechanism. Earlier, let ussay for the period Oct 97 March 98, when the price of gas had to have import priceparity (55% of the fuel basket), the consumer price was computed as follows:

Consumer price at landfall = Basket of fuel price X 0.55 X Rs/US$ Exchange Rate Xcalorific value of gas/10,000Kcal

In this analysis we will bypass the micro issues and deal with macro concern of whatactually should be the approach while pricing the gas from NELP fields.

1.1.4 Regulated pricing implies a regressive approachThe Government set up a committee, referred to as R (reform) Group, to deliberate onthe liberalization of the Petroleum Sector. It is chaired by the secretary Petroleum, andcomprises Indian Industrys elite, including Mukesh Ambani, Aditya Birla, and Chairmenof the major PSUs IOC, ONGC and GAIL. The terms of reference of the committee arequite clear a) unshackle the sector from government control b) Competition should beencouraged and the bureaucracy should be replaced by market as core determinant of

prices and resource allocation c) The committee should recommend a set actions in orderto achieve the objectives, but, in consideration with the political constraints. The reportwas submitted to the Government in 1996 and proposed three phased deregulation First,allowing private participation in exploration and production. Second, limits oninvestment in refining and distribution should be removed. Finally, private companiesshould be permitted to market transportation fuels. In the final phase, the administeredpricing mechanism should be replaced by market driven pricing. It was proposed that thethree phases should be implemented by April 1, 2002. The bulk of recommendationswere implemented on April 1, 2002. The private sector has access to E&P, refining andmarketing. The APM has been abolished and the PSUs can operate independent of thebureaucratic control. But, the present natural gas pricing imbroglio seems to be indicating

something else. There are allegations of monopolistic behavior on the part of RIL,implying that the competition is minimal. There are suggestions that the Committee ofSecretaries should determine the price, rendering all the efforts to move towards marketdriven prices as futile. The PMO suggests that power generation should largely be coalbased and natural gas be left for the interest of the fertilizer industry. Is this the way wewanted the R Group to create an environment of market based resource allocation?Looking at the present situation it seems that the recommendations of the group wouldlargely be bypassed. But, such a move would certainly erode the sanctity of the nations


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cr, in the last one year, in rental values in the top eight urban cities provided FAR normswere made even partly comparable to other land deficient cities such as Hong Kong andSingapore. Our economy is getting increasingly services-oriented resulting in demand foroffice space outpacing the GDP growth rate. The financial impact on Indian businesseswould be come further acute even as the government continues to turn blind eye this

issue.

Aviation:The recent spat between a West Asian airline and the state-owned carrier once againhighlights the misguided notion that there must be a state carrier and its monopoly has tobe protected, no matter how shoddy its performance and services are, and how much itcosts the average Indian citizen in terms of higher fares being paid out each time she hastot ravel out of India. The estimate of losses to this account could be near Rs 5000 cr pa.

Education:Over 120,000 students Indian students study abroad, since they are unable to get

admission in decent colleges despite achieving 80 -90% marks. The expenditure onstudying abroad would be over Rs 16,000 cr, which is expected to increase year on yearby 15% and hence we might result in spending more on educating our children abroadthan the entire budget of the Government of India on Higher Education.Adding the loss of the four sectors together it amounts to near Rs 1,05,000 crore perannum.It is not that the approach has not affected the Hydrocarbons sector. The governmentsinfatuation with imposing pricing controls has left the oil companies bleeding. As per areport in Business Standard, dated July 5, 2007, the oil marketing companies could see asharp rise in the subsidy, to the extent of 240% this year. Three marketing companies IOC, BPCL and HPCL will have to foot a subsidy of Rs 17000 cr this year as against Rs5000 cr last year. The under-recovery would be to the extent of Rs 55,000 cr. In theprevious financial year, the oil marketing companies bore a loss of Rs 5000 cr and totalunder-recoveries of around Rs 49,000 cr. Further, the deviation from market principleshas diluted the efficiency gains from competition, and also undermined the capability ofthe companies to fund R&D for clean technology and renewables. We find that theinternational oil companies spend the biggest amounts towards development of cleantechnology and renewable, but, Indian companies do not, may be, due to the strainedbalance sheets.Another development that needs mentioning is the tendency of the private players to lookfor foreign markets in case domestic market becomes un-attractive. Reliance, forexample, has gained export oriented unit (EOU) status for its refineries, enabling them togenerate more revenues from exports than from domestic sales. It makes good economicsense for Reliance since it can capture relatively high international margins, and byminimizing domestic sales it is able to mitigate the losses incurred in the domesticmarket. Adding to it the duty concessions it gets entitled to, indeed, benefits it a lot. But,it may not benefit the country, since this tendency can compel us to import relativelymore expensive petroleum products.

Have subsidies helped?


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No doubt the higher prices would lead to higher cost of production for fertilizer andpower companies. Talking about the fertilizer sector, as reported by Economic Times(07.07.07) the fertilizer subsidy bill is set to reach Rs 50,000 cr during 2007-08. Are gasprices responsible for this? No, it is the other inefficiencies of this sector which needs tobe curbed. Seeking solution in lower prices of natural gas leads to permeating of the

inefficiencies of one sector into other. Moreover if subsidies like this were to offersolution we would have overcome poverty long back. An article by Arvind Virmani inBusiness Standard dated 29.06.07, mentions the case of year 1999 2000. The totalsubsidies provided by the central government were Rs 25,690 cr, of which 22,680 cr werefor food and fertilizer. During the same period the central and the state governmentstogether spent another 28,080 cr on Rural development, Welfare of SC, ST and OBCsand Social Security and Welfare. Either of these was sufficient to bring all the poor tothe consumption level of the person/household at 30% level. Given that poverty was between 26.1% and 28.6% either of these if transferred directly to the poor anddisadvantaged would have eliminated poverty. Together these subsidies and povertyalleviation expenditures (Rs 53,770 crores) would have been sufficient to eliminate

poverty in 1999-2000, even if administrative costs and leakages used up half theallocation. It can be argued that most efficient social welfare policy is a direct transfer ofincome to the poor through a negative income tax.Ironically, the subsidized price of urea has prompted its overuse and hence making anadverse impact on long term productivity of the soil. Productivity loss has become one ofthe major banes for the farm sector today.In case of Power Sector, too, it needs to first mend its own house before claiming a sharefrom the riches of others. Economic Times has reported in its issue of 29.06.07, AboutRs 2,70,000 cr, one-third of the total investment of Rs 8,10,000 crores earmarked for thepower sector in the 11th Plan, will go down the drain, if immediate and effective steps arenot taken to check transmission and distribution losses, a survey has said. India would notbe able to come out of the power crisis if the T&D losses of about 30-40% are notcontrolled as these losses would result in deteriorating financial health of the powerutilities, according to Assocham Eco Pulse (AEP) study on mounting T&D losses.Instead spending time and energy on building case for getting natural gas at lower prices,it would benefit the power ministry more if it focuses on plugging the T&D losses. Onecan draw significant learning from the coal sector which provides the main fuel for thepower sector. The coal prices have not been revised for few years now, which have quiteadversely affected the production and modernization of the processes. There has been noattempt to economize on use of coal despite the fact that we might run out of it in next 50years.

1.2 Overview


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India being the sixth largest producer of electricity and the demand for electricity isincreasing continuously. The growth in generation during 2002-03, 03-04, 04-05 and 05-06 has been 3.2%, 5.1%, 5.2% and 5.2% respectively. In the year 2006-07(up to Dec-2006) a growth rate of 7.5 % has been recorded. During the 10th plan the CompoundedAnnual Growth Rate (CAGR) of generation is expected to be about 5.1%. However, if

adequate gas would have been available for the existing and new gas based plantscommissioned during 10th plan than higher growth could have been achieved.The targeted addition capacity of 41, 110 MW comprising 14, 393 MW hydro, 25, 417

MW thermal and 1, 300 MW nuclear was fixed for the 10th Plan.

Planning Commission issued the Integrated Energy Policy (IEP), during the 11th PlanGDP growth rates of 8%-9% have been projected. Only 2,114 MW gas based capacityhas been planned for 11th Plan where gas supply has already been tied up. This does notinclude NTPCs gas based projects at Kawas and Gandhar, totalling to 2,600 MW, forwhich NTPC says that it has the gas supply contract but the matter is sub-judice.However more gas based projects could be taken up for construction as and when there is

more clarity about availability and price of gas.

India is a fast growing economy and it expected to add 100,000 MW power generatingcapacity between 2002-2012. The use of coal has a limitations in terms of environmentalconsiderations, quality and supply constraints, gas is expected to play an increasinglyimportant role in Indias power sector.The Indian economy grew by 9.4 % in 2006 and is expected to grow by more than 8 % in2007. The power ministry says that to keep the economy growing at around 9.5%, thecountrys power generation will have to grow at a similar pace.Indias predicted strong economic growth the country will need to add over 150,000 MWof additional installed power generation capacity by 2025. Gas has current share of 10%and it is predicted to account for about 20% of generation capacity in that year.According to Indias Hydrocarbon Vision 2025 this would translate into a gas demand forpower generation between 56 bcm/y and 76 bcm/y depending primarily on gas pricesranging between $ 3 to $ 4 mmbtu. The power sector would account for about 50 percentof total gas consumption.

Indias gas-fired power plants required 17bcm/y to operate at a plant load factor of 90%in 2005. The first major policy paper on the future role of gas in Indias economy isissued in Hydrocarbon Vision 2025 in the year 2000. The Vision identified natural gas asthe fuel of choice for the Indian economy and projects future gas demand in the economybroken down by different demand drivers.

1.2 Purpose of study


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As we know that India is the 6th largest producer of electricity the demand of power are

rapidly increasing. The main source of power generation are :

Thermal power plants

The problem with coal fired power plants is low calorific value of coal, high ash content

and its hazard to the environment. Moreover, problems related to transportation of coal,

rate of production and its supply and quality. There are continuous reports on coal supply

shortages especially in monsoon season.

Hydroelectric power plants

Although hydroelectric power is admittedly one of the cleanest and most

environmentally-friendly sources of energy, it too has the capability to alter or damage its

surroundings. Among the main problems that have been demonstrated by hydroelectric

power is significant change in water quality. Because of the nature of hydroelectric

systems, the water often takes on a higher temperature, loses oxygen content, experiences

siltation, and gains in phosphorus and nitrogen content.

Another major problem is the obstruction of the river for aquatic life. Salmon, which

migrate upstream to spawn every year, are especially impacted by hydroelectric dams.

Nuclear power plants

The nuclear power plants are clean when it comes to electricity generation. But the

problems with them are mining and purifying uranium has not been a very clean process,

spent fuel from nuclear power plants is toxic for centuries, as yet there is no safe,

permanent storage facility for it. Transportation nuclear fuel to and from plants is very

risky and the gestation period of these plants is very high.

Solar power plants

One of the big problems with solar power has been that it costs more than electricity

generated by conventional means. But some experts think that, under certain

circumstances, the premium for solar power can be erased, without subsidies or dramatic

technical breakthroughs.

Wind turbines


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The main disadvantage regarding wind power is down to the winds unreliability factor. In

many areas, the winds strength is too low to support a wind turbine or wind farm, and this

is where the use ofsolar power or geothermal power are great alternatives. A wind

turbine can only support a specific population. Wind turbines aren't like power stations,

where you can just burn a bit more fuel to generate more energy when you need it. Wind

turbine construction can last over a year, be very expensive and costly to the surrounding

nature environment during the build process.

Natural gas is one of the cleanest, safest, and most useful of all energy sources, it burns

cleaner than otherfossil fuels. Though there is volatility in the price of natural gas and

uncertainty in the supply but even then we cannot ignore the benefits of using natural gas.

The calorific value of natural gas is higher than coal and it do not leave ash, and most

importantly it do not generate green house gases. The power generation companies who

shift to gas fired power plants can also earn carbon credits. So with the help of this study

I will be looking for the potential of natural gas for power generation.

1.3 Objective

1. To understand the world natural gas scenario.

2. To understand the Indian natural gas scenario.

3. To understand the fuel requirement by power sector.

4. To study and analyze the challenges and opportunities of Gas fired power stations.

Chapter 2

ORGANIZATION

2.1 History

The Indian School of Petroleum was set up in 2001. It is a Unit of M-Power Energy

India (P) LTD, has over the years established itself as a premier domain specific
http://www.clean-energy-ideas.com/solar_panels.htmlhttp://www.clean-energy-ideas.com/solar_panels.htmlhttp://www.clean-energy-ideas.com/solar_panels.htmlhttp://www.clean-energy-ideas.com/geothermal_power.htmlhttp://en.wikipedia.org/wiki/Fossil_fuelhttp://en.wikipedia.org/wiki/Fossil_fuelhttp://www.clean-energy-ideas.com/geothermal_power.htmlhttp://en.wikipedia.org/wiki/Fossil_fuelhttp://www.clean-energy-ideas.com/solar_panels.html


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institution providing state of the art services in the areas of Consulting, Funded Research,

Projects, and Competency Enhancement Programs and Outsourced Project Services to

the Oil & Gas Industry.

Another important achievement made by ISP when it was selected as the Indian Partner

of Energy Institute UK, and is credited with setting up India's First Energy Specific

University the University of Petroleum & Energy Studies, recognized by the University

Grants Commission of India.

Other credit to Indian School of Petroleum is that it has trained over 9,000 Industry

Professionals, and has executed with excellence, Consultancy Assignments, &

Outsourced Projects through hands on application.Having recourse to over 150 highly

skilled Energy Domain Experts , Indian School of Petroleum is well placed to offer state

of the art services across the hydrocarbon value chain

Comprehensively covering all major sectors of the Hydrocarbon Sector, The Indian

School of Petroleum provides a platform to prepare professionals with broad based

industry knowledge and provides training with extensive hands on experience.

The Indian School of Petroleum has on its Advisory Board eminent professionals from

the energy domain. The Board headed by Mr. T.N.R Rao, former Secretary, Ministry of

Petroleum & Natural Gas provides strategic advice and guidance.

The affairs of the Indian School of Petroleum are overseen by a professional Board of

Governors chaired by Mr. B.D.Gupta former President JM Morgan Stanley, Director

Finance Indian Oil Corporation and currently Advisor Finance ONGC Ltd. Other

members of the Board are drawn from the cross section of the Indian Oil & Gas sector

and has representation of eminent professionals drawn from , Reliance, ONGC, GAIL,

BPCL, HPCL, ESSAR OIL, PETRONET LNG, INDIAN OIL and others.

2.2 Technological Development

ISPS Core Competencies

The Exhaustive Domain Expertise in Oil & Gas Value Chain.

Competency Enhancement.

Consultancy Services in various facets of the hydrocarbon value chain.


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Implementation of Best Practices through Audits leading to ISP Certification.

Process Management (Mapping, Re-engineering, Training, Improvement).

Project Planning & Implementation.

2.3 Production/Operations process

2.3.1 Consulting Services

ISP has well-developed competencies in technical consulting, advisory & training

services in various facets of the hydrocarbon value chain viz Upstream, Refining, &

Petrochemical Operations, Retailing, Supply Chain Management, & Support and

Auxiliary Services.

ISP can value add with its extensive domain knowledge to:

Benchmark current performance

Identify strengths & opportunities for improvement and prioritize initiatives

Process Mapping

Planning & Implementation

Audit & Certification.

2.3.2 Competency Enhancement and Training

ISPs tailored made programs cover the following areas

The Hydrocarbon Value Chain

Exploration & Production

Refining Technology & Operations

Gas (LNG,PNG,CNG) Technology, Engineering, Economics

Retailing and Channel Management

Supply Chain Management

Petrochemicals

Project Management

Health Safety Security & Environment

Automation & IT Applications


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2.3.3 Retail Practice of ISP

ISP has a well developed practice in retail and has been very active in this sector.

ISPs Retail Practice covers:

Execution of Technical Advisory & Retail Plan implementation Services onturnkey basis.

Market Research

Surveillance Audit of Retail outlets

Development of Benchmarks and Best Practices for Operations, Maintenance,

HSE and Quality Control at product terminals

Retail Visual Identity development and brand perception

Studies on Highway Automotive Fuel Consumption & Future scenario

Study on Regulatory Compliance for setting up retail chain in Oil & Gas

BPO Services through deployment of ISP Manpower.

2.3.4 COMPETENCY ENHANCEMENT & TRAINING

ISP Competency enhancement programs provide clients the opportunity to achieve

Strategic alignment, post better results and build the bottom line, through preparing their

core manpower resources for added responsibilities

ISP offers confidential, customized program solutions to meet the training challenges of

your workforce

What ISP offer is :

Unmatched Course Development Expertise

Innovative Training Formats

Industry Expertise

Global Reach

Focus on Learning Partnerships: ISP focuses on long-term needs, and consistently

delivers forging lasting learning alliances

2.4 Product Value Chain


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The Hydrocarbon Value Chain.

Exploration & Production.

Refining Technology & Operations.

Gas (LNG, PNG, CNG)-Technology, Engineering Economics. Retail Engineering & Channel Management.

Supply Chain Management.

Pipeline Engineering & Systems.

Petrochemicals.

Project Management.

Health, Safety, Security & Environment.

Automation & Information Technology applications.

2.5 Mission

To established itself as a premier domain specific institution providing state of the art

services in the areas of Consulting, Funded Research, Projects, and Competency

Enhancement Programs and Outsourced Project Services to the Oil & Gas Industry.

2.6 Organization Structure

The institute has on its advisory board eminent professional and accomplished experts

from diverse areas of the petroleum operations. The board headed by Mr. T.N.R. Rao,

former secretary, Ministry of Petroleum and Natural Gas, Government of India, provides

strategic advice and guidance to the management team of ISP. The affairs of the school

are overseen by the Board of Governors which is chaired by Mr. B.D. Gupta, former

President, JM Morgan Stanley, Director(Finance), Indian Oil Corporation, currently

Advisor(Finance), ONGC ltd. And has practicing CEOs and Managing Directors of the

Oil Companies.

The academic affairs are supervised by the Board of Studies, which is chaired by Dr. S.J.

Chopra, former Executive Director, Centre for High Technology, Ministry of Petroleum,

Government of India.


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Dr. Parag Diwan, Director-Academic Affairs, Indian School of Petroleum provides

intellectual guidance to the management team of the school.

Mr. Sanjay Kaul, Director, is leading the school. The school has already trained various

professionals for certification, in-company and open-house programmers. Mr. Pummy

Chicker has also played a very active and important role as a former Vice President in the

institute.

Chapter 3

Identification of Problem

Earlier almost all the electricity was generated by using coal but slowly and gradually

with the development of technology and entrance of private players new fuel options

were invented like nuclear, gas fired plants, hydro power plants, but still the share of coal

is highest. With the continuous increase in electricity demand and the hazards of using

coal as a fuel give rise to the debate of using other fuels than coal for generating

electricity.

The environment friendliness and high calorific value makes the natural gas a strong

contender for power generation. As it seems that the prices of natural gas will be market

driven. This left a cause of concern for the power ministry about the subsidy and the price

at which the gas will be available to them.


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So the problem which is going to be studied is The potential and challenges of gas

fired power plants

CHAPTER 4

LITERATURE REVIEW

I studied various research papers and newspaper articles to know about the topic given tome:

The research paper titled Gas to Power- India by Dagmar Graczyk, Manager forSouth Asia, International Energy Agency (IEA), Paris, France published by IGU(International gas union). In that paper they focus on the Indias potential for gas firedpower generation. The paper shows the analysis made by the ADB which projected thatat a price of $3.5 bcm/y the capacity addition made by power generation will be 41100MW by the year 2012.The paper shows another study made in the hydrocarbon vision 2025 that at a price of $ 3the demand for gas by the power sector will be 61 bcm/y by 2012 and 76 bcm/y by 2025.At a price of $ 4 the demand will be 33 bcm/y by 2012 and 56 bcm/y by 2025.It concluded by saying that the potential for use of gas in Indias power production islarge. India has one of the strongest economic growth rates in the world and has sufficientpotential to maintain this high growth rate over a sustained period of time. The powersector will be growing in tandem with the economy. As the large discoveries have beenmade in India the scope for gas fired plants are large.

Another reports titled International energy outlook 2007by EIA, U.S. department ofenergy and BP Statistical review of world energy 2007 by British petroleum. Thesereports provide high-quality, objective and globally consistent data on world energymarkets. The Review is one of the most widely respected and authoritative publicationsin the field of energy economics. The review focuses on world energy data, from thatreport I came to know about the world natural gas reserves, production, and consumption.They also talks about the consumption of natural gas by various sectors.

The monthly reports published by CEA (central electricity authority) which shows allIndia installed generating capacity, growth in installed capacity, actual power position,targeted generation capacity etc.

The 10th and 11th plan published by Planning commission of India. The plans shows thedemand projection, targets, fuel requirements, supply position, growth in generation,initiatives made for power sector.


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Various newspaper articles that give me insight about the price of natural gas at which itwill be available for the power generation.

The research paper titled Gas to Power- India by Dagmar Graczyk, Manager forSouth Asia, International Energy Agency (IEA), Paris, France published by IGU

(International gas union). In that paper they focus on the Indias potential for gas firedpower generation. The paper shows the analysis made by the ADB which projected thatat a price of $3.5 bcm/y the capacity addition made by power generation will be 41100MW by the year 2012.The paper shows another study made in the hydrocarbon vision 2025 that at a price of $ 3the demand for gas by the power sector will be 61 bcm/y by 2012 and 76 bcm/y by 2025.At a price of $ 4 the demand will be 33 bcm/y by 2012 and 56 bcm/y by 2025.It concluded by saying that the potential for use of gas in Indias power production islarge. India has one of the strongest economic growth rates in the world and has sufficientpotential to maintain this high growth rate over a sustained period of time. The powersector will be growing in tandem with the economy. As the large discoveries have been

made in India the scope for gas fired plants are large.

Another reports titled International energy outlook 2007by EIA, U.S. department ofenergy and BP Statistical review of world energy 2007 by British petroleum. Thesereports provide high-quality, objective and globally consistent data on world energymarkets. The Review is one of the most widely respected and authoritative publicationsin the field of energy economics. The review focuses on world energy data, from thatreport I came to know about the world natural gas reserves, production, and consumption.They also talks about the consumption of natural gas by various sectors.

The monthly reports published by CEA (central electricity authority) which shows allIndia installed generating capacity, growth in installed capacity, actual power position,targeted generation capacity etc.

The 10th and 11th plan published by Planning commission of India. The plans shows thedemand projection, targets, fuel requirements, supply position, growth in generation,initiatives made for power sector.

Various newspaper articles that give me insight about the price of natural gas at which itwill be available for the power generation.RIL Gas findPresent consumption volumeRIL pricingControversyStill companies line-up for RIL gas

The article titled RIL`s gas pricing formula draws flak from users by AnupamaAiry in the Financial express dated 11 June, 2007 focuses on the criticism from majoruser ministries i.e power and fertilizer. The criticism was on the bidding process adopted


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by RIL to arrive at market determine price of $ 4.79 per mmbtu. RIL invited five powerand five fertilizer companies for bidding. Based on these bids the price quotes rangebetween $ 4.64 and $ 4.86 per mmbtu. RIL`s formula is clearly meant to maximize itsselling price for gas, which will be to the disadvantage of both power and fertilizersectors.

The article titled Going up in gas by Economic times dated 12 June, 2007 stated theproblems that are facing by RIL in the price discovery for the gas struck by it in KGbasin. RIL initiated a price discovery by invited bids from potential users for the gas. Thediscovered price, range from $ 4.30-$ 4.37 per mmbtu. Two problems were encounteredby RIL, one is the ongoing dispute between RIL and RRNL. The second relates towhether the price discovery process has been significantly transparent and broad based.

The article titled Govt. wants market driven prices for RIL gas by Rakteem Katakeyin Business standard dated 23 June, 2007. The article tells about the Government

intention that RIL gas will be sold at market driven price rather than loweredadministered price. If the gas will be sold at market driven price i.e $ 4.79 mmbtu theshare of profit that the government gets will be much higher.

Article titled Gas threat to real economyby Piyush Pandey in Economic Times on 4July, 2007. The article states that Natural Gas is one commodity that might help Indiaspublic and private corporations produce allegedly super normal profits in the comingyears. If the gas will not be available at the affordable price than the governmentsambitious target to provide affordable power for all by 2012 will be thwarted. RILs KGD6 gas field has one of the highest internal rate of return among ongoing projectsglobally and would be the companys major revenue earner in future.The two major consumers of gas i.e power and fertilizers are regulated sectors with theirend products being sold at regulated prices. In fact the power sector earns only 14%returns.The government, through its Common Minimum Programme (CMP) and NationalElectricity policy (NEP), has envisaged capacity addition to the tune of 100, 000 MWduring the Xth and XIth five year plans. Capacity addition to tune of 80, 000 MW duringthe XIth plan looks critical as government has added only 21, 180 MW during the Xthplanagainst target of 41, 110 MW. RIL has sought a price of $ 4.67 per mmbtu for powerplants. Gas at $ 4.67 per mmbtu would push the electricity tariff to over Rs 5 per unit. Inthe past also government has re-negotiated power purchase agreement (PPA) to saveconsumers from higher cost of power. So, there is a case here for changing PSC to limitthe gas price and returns to the contractors. If affordable gas will be available more than,16000 MW of gas based plants can be added. Power sector indicate that for every dollarincrease in price of gas from $2.34 per mmbtu, the governments petroleum profit will goup by Rs 17, 100 crore.

Article titled Petromin clears RIL`s D-6 gas price, with alteration by Anupama Airyin Financial Express on 9 July, 2007. The petroleum ministry, bring down the base price


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of gas to $ 4-$4.10 from $ 4.33 per mmbtu. The main change relates to dropping thebuilt-in exchange rate parity in the RIL pricing formula.

Article titled Gas biggies present formulae to CoS by the bureau of Economic Timeson 11 July, 2007. RIL and other big gas producer like ONGC, headed by Mr. Mukesh

Ambani made presentations to the committee of secretaries (CoS). RIL has held thecompany had arrived at the price of $ 4.33 per mmbtu for KG-D6 gas in transportmanner. The company claimed at apart from high revenues upsides (as profit petroleum)for the government, gas sold at a price would also bring down fertilizer subsidy by Rs6400 crores. According to ONGC, gas from the fields is selling at $ 4.75 mmbtu.

The article titled ONGC mulls 2700 MW power generation by Rakteem Katakey inBusiness standard dated 13 July, 2007 which tells that ONGC is going to add 2700 MWof gas based generation capacity, for both captive and commercial use, through threeplants.

Article titled KG basin price row may end up with Mansingh by Rajeev Jayaswal inEconomic times on 27 July, 2007. The article tells that the controversy over the pricing ofnatural gas from KG basin will end up with the newly appointed downstream regulator, LMansingh.

Article titled Imports cheaper at $ 5 per mmbtu gas: Fertilizer department byRakteem Katakey in Business standard on 31 July, 2007. The department of fertilizer hassaid that gas priced at over $ 5 per mBtu, will force the country to remain dependent onimports.RIL has discovered a well head price of $ 4.33 per mBtu, which will work out to adelivered price of between $ 5.2-$ 6.2 per mBtu after taxes and transport cost. RIL priceis opposed by power and fertilizer industry. If the price of gas in India is around $ 5 permBtu, at which fertilizer department says it can afford to buy the gas, the cost at which anew plant in Nigeria, for example, can buy the gas will be around $ 2.5 per mBtu.Fertilizer department says that if they get gas for less $ 3 per mBtu. That will make plantviable, despite the $ 3.5 per tonne freight and port handling charges.

Article titled Reliance KG gas pricing in with Doc by Rajeev Jayaswal in TheEconomic Times on 31 July, 2007. RILs gas pricing formula is independently examinedby the PMs Economic Advisory Council (EAC) chairman C Rangarajan. The seniorofficials that were involved in examining say that the end price of $ 4.33 per mmbtu isreasonable in terms of prevailing rates of natural gas in the domestic and global markets.But they have some reservation over the formula devised by RIL to derive the value ofgas. They say almost 97% of the component in RIL`s formula is the fixed component.The pricing formula adopted by RIL is subject to an approval either by the government(parent administrative ministry) or by the regulator, under the terms of the productionsharing contract.


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Article titled Wanted: a national benchmark price for gas by Varun jaitly andAnupama Airy on 1 August, 2007. The reports give insight about the intentions ofNational Spot Exchange of India (NSEI) to set up a national level electronic spot marketfor petroleum product and natural gas. NSEL said that it will help refiners sell products atbest possible rates and provide end users a place to buy at the most competitive rates. It

also said that it would stand counter party guarantor with respect to all trades besidesprovide services like quality certification, storage of goods and customized value addedservices. With India moving from being a gas deficit to a gas rich country, the spotmarket will definitely become a necessity in coming years.

Article titled Government cannot set price, supply of gas: Ministry by SiddharthZarabi in Business Standard on 27 August, 2007. The petroleum ministry has rejectedkey conclusions of two separate reports on the vexed issue of gas pricing and allocationahead of the first meeting on the issue by the empowered group of ministers ( EGoM)headed by External Affairs Minister Pranab Mukherjee.

The two reports were submitted by Committee of secretaries and PM`s EconomicAdvisory Council. The ministry said that the government could only formulate a gassupply prioritization policy that encouraged the use of gas in certain sectors. HoweverPSC under NELP, which involves private sector participation do not empowered thegovernment to allocate gas for priority sectors. These views contradict both reports thatrecommend priority based allocation of gas.The ministry also said that the governments right in pricing gas is limited to examiningwhether a proposal conforms to an arms length pricing basis or not between the buyerand seller. The government cannot impose differential pricing if the market can bearhigher price.

Chapter 5

Research Methodology

The research problem is going to be studied by using Descriptive research.

Descriptive research is used to obtain information concerning the current status of

the phenomena to describe "what exists" with respect to variables or conditions in

a situation. The methods involved range from the survey which describes the

status quo, the correlation study which investigates the relationship between

variables, to developmental studies which seek to determine changes over time.


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For research no primary data was collected, only secondary data has been

collected. No hypothesis has created and I will be discussing about the present

scenario and likely future developments.

5.1 Data Sources

Secondary Data: The secondary data was collected by visiting various Internet

sites such as ministry of power, ministry of petroleum, google search etc. The data

collected from various research papers and from various newspaper articles.

How you will process data?

5.2 Sources of Error

The data has been collected from the secondary sources so the possibility of error

is there. The results generated may have limitations as I am discussing the present

scenario and future developments which are based on present conditions. So, as

the present scenario will change the future developments will also get effected .

Chapter 6

Findings of data

6.1 WORLD NATURAL GAS SCENARIOThe primary energy consumption of the world has increased by 2.4% in 2006, down from

3.2% in 2005 and just above the 10-year average. Except nuclear power the growth

slowed for every sector. The most rapid growth is again shown by 4.9% increase in Asia

Pacific region, while North Americas consumption fell by 0.5%. China continued to

account for the majority of global energy consumption growth and its energy


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consumption rose by 8.4%. The slow consumption among energy importers and

continued strong consumption growth among energy exporters was the impact of

continued high energy prices.

The consumption of natural gas in the world grew by 2.5% in 2006, which is below than

the 3.4% growth seen in 2005 but close to the 10-year average. Increased Russia and

China consumption results in the declining of US and EU consumption. Despite an

increase in gas used for power generation, gas consumption declined for the second year

in a row in the US. High prices and warmer-than-normal weather made the European

consumption fell. UK as well as in eastern European countries that experienced large

increases in contracted prices shown a large decline in the consumption. A strong

increase in Russian gas consumption was seen and it accounts for nearly 40% of the

global increase. Chinese consumption grew by more than 20%. Gas production rose by

3% in 2006, slightly above the 10-year average. In Russia rapid growth among

independent producers led to the largest incremental growth in production. Production in

the US rose by 2.3% as it is recovering from hurricane-related outages, the strongest

growth since 2001. The worlds largest decline in 2006 is recorded by UK, with output

falling by 8.6%: in volume terms, its sixth consecutive annual decline. In 2006,

International trade in natural gas increased by 3.1%, nearly half of the 10 year average.

Due to weak demand among key importers and reduced export availability among key

suppliers pipeline shipments stagnated as a result of strong domestic demand growth. Net

exports declined from Russia, Canada and Argentina. Liquefied natural gas (LNG)

receipts in Asia, the worlds largest regional market, rose by 10%. In 2006, the shipments

of LNG rose by a strong 11.8%, well above the 10-year average. European LNG imports

rose by 20% and US imports declined slightly. Egypt, Nigeria, Qatar and Australia saw

the largest increases in LNG exports.

GTL (the conversion of gas to liquid form), LNG (liquid natural gas) transportation and

gas by wire, in which gas energy is converted to electricity close to source and

transmitted by grid, offer ways of commercializing reserves that are currently too remote.

The commercial viability of GTL remains distant but, given the prize of converting gas

into a readily transportable end fuel, the prospect of GTL breakthroughs cannot be

discounted. Significant increases in LNG, in particular, are set to provide much of the


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flexibility and hence market liquidity to move the gas market on to a more global and

dynamic footing . Current orders will result in significant increases in the global fleet of

LNG ships by 2006, with the prospect of significantly greater increases after that. LNG is

predicted to take a 10 per cent share of the global gas market in five years time, a huge

step forward for this industry. Within the US alone, there are plans in place to build eight

LNG terminals to accommodate the growing need for imported gas. Pipelines, though,

will remain the dominant transportation method. Already, investment in more orthodox

pipeline transportation is set to increase the supplies that can be taken from Russian,

Libyan and Gulf fields to markets in Europe, the Caspian Sea and China.

6.1.1 RESERVES AND RESOURCES OF NATURAL GAS

For the year 2006, proved world natural gas reserves, (proved reserves are generally

taken to be those quantities that geological and engineering information indicates with

reasonable certainty can be recovered in the future from known reservoirs/deposits under

existing economic and operating conditions.)As reported by BP Statistical Review of

World Energy June 2007, were estimated at 181.46 trillion cubic metres1.26 trillion

cubic metres higher than the estimate for 2005 showing 0.7% increase, yielding reserves

to production ratio of 63.3. Total Middle East constitutes the largest share of the proven

reserves at 73.47 trillion cubic metres (2593.53 trillion cubic feet). Among the Middle

East countries Iran and Qatar taken together constitutes 53.49 trillion cubic metres

(1778.23 trillion cubic feet) of proven reserves. Reserve to production ratio indicates that

reserves would last for more than 100 yrs. Brazil shows highest (13.5%) increase over the

previous year reserve.

.

FIGURE 1


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Source: BP Statistical Review, 2007

The regional grouping of total Europe and Eurasia accounts for the next largest proved

reserves of 64.13 trillion cubic metres (2263.69 trillion cubic feet) constituting 35.3% of

total proved reserves. Within the group the Russian Federation accounts for the largest

proved reserves of 47.65 trillion cubic metres (1682.07 cubic feet) comprising of 26.3%

of total proved reserves. If we talk of Former Soviet Union, it accounts for 58.11 trillion

cubic metres (2051.28 trillion cubic feet) of total proved reserves, which is 32% of total

worlds share.

Total Asia Pacific has 14.82 trillion cubic metres (523.15 trillion cubic feet) of proved

reserves which amount to 8.2% of total proved reserves. With the reserve to production

ratio 39.3. The major countries in this region which have remarkable reserves are

Australia, China, Indonesia and Malaysia.

Total African region has 14.18 trillion cubic metres (500.67 cubic feet) of total proved

reserves. The countries which have some remarkable reserves in African region are

Algeria and Nigeria. They together account for 9.71 trillion cubic metres (342.91 trillion

cubic feet) of the total proved reserves and contributes 5.4% in the total reserves.

Total North America has 7.98 trillion cubic metres (281.62 trillion cubic feet) of total

proved reserves, making 4.4% of the worlds total. USA is the largest contributor to this

region with 5.93 trillion cubic metres (209.15 trillion cubic feet) of the total proved


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reserves, which is 3.3% share of total proved reserves. North America has greater

potential in the Alaskan region; hence this figure can change dramatically in the coming

years.

Total South and Central America has the lowest proved reserves of all the groups with

3.8% share of the world total. It has 6.88 trillion cubic metres (242.83 trillion cubic feet)

of total proved reserves with reserves to production ratio of 47.6 which is higher than the

North American region as well as the Asia Pacific region

FIGURE 2

World Natural Gas Reserves by Region, 1980-2007

Source: www.eia.doe.gov

Middle East and Eurasia account for almost three-quarters of the worlds natural gas

reserves. In January 1, 2007, about 58 percent of the worlds natural gas reserves were

reported to be located in Russia, Iran, and Qatar. Reserves in the rest of the world are

fairly evenly distributed on a regional basis.

Over the past decade, high rates of increase in natural gas consumption are reported, most

regional reserves-to-production ratios are substantial. Worldwide, the reserves-to-

production ratio is estimated at 65 years. Reserves-to-production ratio of Central and

South America is 52.0 years, Russia 80.0 years, and Africa 88.0 years. The Middle Easts

reserves-to-production ratio exceeds 100 years
http://www.eia.doe.gov/http://www.eia.doe.gov/


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Worldwide undiscovered natural gas is estimated at 4,136 trillion cubic feet, slightly

larger than the IEO2007 projection for cumulative worldwide natural gas consumption

from 2003 to 2030.

FIGURE 3

World Natural Gas Resources by Geographic Region, 2006-2025


6.1.2 PRODUCTION OF NATURAL GAS

Total gas production in the year 2006 has been 2865.3 bcf (billion cubic feet), which

shows an increase of 3.0% over the previous years production of 2779.8 bcf. The highest

individual producer is USA, It accounts for 524.1 bcf of gas production contributing

18.5% of the total output.

Total Europe & Eurasia produces the largest volume constituting 37.3% of the total

output. It produces 1072.9 bcf in 2006 recording an increase of 1.2% over its previous

year contribution which was 1060 bcf. The output of Denmark, Germany, Italy,

Netherlands, Poland, Ukraine, U.K, declined while it increased in Azerbaijan,

Kazakhstan, Norway, Uzbekistan, Turkmenistan, Russian Federation, Romania.

North America stood as a second largest producer with 26.5% contribution in the total

output. It produced 754.4 bcf of production and recording an increase 2.3% over the


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previous year production of 736.9 bcf. Mexico shows a significant increase of 10.4%

over its previous year production of 39.2 bcf.

Total Asia Pacific continue to keep its increasing production trend, its production

recorded as the third largest contribution about 13.1% to the total output, it shows an

increase of 4% over its previous year production of 362.6 bcf, except India and other

Asia Pacific region shows a decline in its production otherwise all have positive change

in their production some shows slight changes and some are showing significant changes.

Total Africa is showing an upward trend in production since 1996, it recorded the highest

increase in production over the previous year, it shows a percentage change of 9.5% over

the previous year. Except Algeria all regions have shown increase in production, Libya

shows a significant increase of 31% change over the previous year.

Middle East production is also significant in 2006 to the total output, it contributed 11.7%

to the total output. It is showing an upward trend and contributed 335.9 bcf of gas, its

contribution is more than doubled since 1996 when it contributed 158 bcf. All countries

of the Middle East increased their production over the previous year.

South & Central America is the least contributor to the total output. However except

Venezuela whose production decline in 2006, the production of every other country has

increased over the previous year. Total South & Central America contributed 5.7% to the

total output.

6.1.3 DEMAND OF NATURAL GAS

The natural gas consumption in the non-OECD countries grows more than twice as fast

as in the OECD countries. Production increases in the non-OECD region account for

more than 90 percent of the growth in world production from 2004 to 2030.

Consumption of natural gas worldwide increases from 100 trillion cubic feet in 2004 to

163 trillion cubic feet in 2030 as reported in the International Energy Outlook (2007). By

energy source, the projected increase in natural gas consumption is second only to coal.

Natural gas remains a key fuel in the electric power and industrial sectors. In the power

sector, natural gas is an attractive choice for new generating plants because of its relative

fuel efficiency. Natural gas also burns more cleanly than coal or petroleum products, and

as more governments begin implementing national or regional plans to reduce carbon

dioxide emissions, they may encourage the use of natural gas to displace liquids and coal.


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Much of the worlds natural gas use is for industrial sector processes. The industrial

sector accounted for 44 percent of world natural gas consumption in 2004 and is

projected to account for 43 percent in 2030. With world oil prices expected to remain

high relative to historical levels throughout the projection period, natural gas is projected

to displace liquids in the industrial sector to some extent.

FIGURE 4

World natural gas consumption by end use sector, 2004-2030


An average annual rate of 1.9 percent increase was projected by EIA from 2004 to 2030

in the industrial use of natural gas, as compared with an average increase of 1.1 percent

per year for liquids consumption in the industrial sector.

Over one-half of the worlds total natural gas use was accounted by the OECD member

countries, non-OECD Europe and Eurasia accounted for one-quarter, and the other non-

OECD countries accounted for the remainder.

In the non-OECD countries natural gas consumption grows more than twice as fast as

consumption in the OECD countries, from 2004 to 2030 with 2.6-percent average annual

growth for non-OECD countries, compared with an average of 1.2 percent for the OECD

countries. Demand in the non-OECD countries for natural gas accounts for 71 percent of

the total world increment in natural gas consumption over the projection period. Natural

gas use increases from less than one-quarter of the world total in 2004 to 35 percent in

2030 in the non-OECD countries (excluding non-OECD Europe and Eurasia).


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In worlds total natural gas production the OECD countries accounted for 40 percent of

the worlds total natural gas production and 52 percent of total natural gas consumption

in 2004; in 2030, they are projected to account for only 27 percent of production and 43

percent of consumption. In the OECD nations the production of natural gas increases by

an average of only 0.4 percent per year, whereas their demand increases by 1.2 percent

per year. As a result, the projections were made that OECD countries will rely

increasingly on imports to meet natural gas demand, with a growing percentage of traded

natural gas coming in the form of LNG. In 2030, more than one-third of the natural gas

consumed in OECD countries is projected to come from other parts of the world, up from

22 percent in 2004.

In North America the consumption of natural gas is projected to increase at an average

annual rate of 1.0 percent from 2004 to 2030. In the United States the average annual

growth rate for the demand of natural gas is projected to be 0.6 percent, significantly less

than in Canada and Mexico, largely because of the impact of higher natural gas prices

and supply concerns in U.S. natural gas markets. The United States accounted more than

80 percent of the 27.6 trillion cubic feet of natural gas consumed in North America in

2004 and emerged as the largest consumer in North America.

In OECD Europe, Natural gas is expected to be the fastest growing fuel source with

demand increasing at an annual average rate of 1.4 percent, from 18.8 trillion cubic feet

in 2004 to 23.0 trillion cubic feet in 2015 and 26.9 trillion cubic feet in 2030. The

majority of total incremental growth in natural gas use for power generation is projected

to 2030. Being less carbon intensive than oil or coal-fired generation, and its cost

competitiveness over renewable energy, make natural gas the fuel of choice for new

generating capacity in OECD Europe.

Natural gas consumption in Japan is projected to grow on average by 1.4 percent per year

over the projection period, from 3.0 trillion cubic in 2004 to 4.3 trillion cubic feet in

2030. The electric power sector is projected the strongest growth in consumption,

averaging 1.7 percent annually from 2004 to 2030. The growth at an average annual rate

of 1.6 percent from 2004 to 2030 is projected for the total natural gas consumption in

South Korea. The countrys predominant source of demand for natural gas in 2004 was


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the residential sector, accounting for 39 percent of the total. The electric power sector

was a close second at 33 percent of total natural gas use, followed by the industrial sector

at 20 percent of the total.

The non-OECD Europe and Eurasia region is more reliant on natural gas than any other

region in the world. United States is the largest consumer and Russia is second in total

natural gas consumption, with demand totaling 16.0 trillion cubic feet in 2004 and

representing 55 percent of Russias total energy consumption. 44 percent of their

combined total energy needs of the other countries of non-OECD Europe and Eurasia

were met with natural gas in 2004, consuming 8.4 trillion cubic feet.

In 2004, non-OECD Asia The fastest growth in natural gas consumption among all

regions is projected, which accounted for only 8.5 percent of the world total natural gas

consumption. But total natural gas consumption from 2004 to 2030 is projected to

account for almost 30 percent increase. In non-OECD Asia the natural gas consumption

is projected more than triples, from 8.5 trillion cubic feet in 2004 to 27.4 trillion cubic

feet in 2030.

In 2006, India increased its spot and short-term LNG purchases, reportedly paying more

than $9 per million Btu for one cargo (a year earlier, Royal Dutch/Shell could not find

customers for LNG from its Hazira re-gasification terminal at a price of about $8 per

million Btu). In India natural gas shortages have reportedly left natural-gas-fired electric

power plants and fertilizer plants underutilized in the past few years. According to the

projections Indias natural gas consumption will rise rapidly in the mid-term, growing by

6.2 percent per year on average from 2004 to 2015. The acceptance of international

natural gas prices in India, and the Krishna-Godavari basin will start supplies from

around 2009-2010, domestic natural gas supply is expected to catch up with currently

underserved demand and also expand to serve new demand.

6.2 THE POWER SECTOR PERFORMANCE

Indian economy growth is targeted to be over 8%. The major role in the sustainable

development of the economy has to be played by energy. For achieving growth of such a


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magnitude, the sector wise analysis of electricity, gas and water supply sector put

together should also grow by 8%. The average growth in the economy has been

estimated to be 7% in first four years ending 2005-06, according to the Economic Survey

2005-06. The actual growth of GDP in real terms during 2002-03 was 4.2%, 8.5% during

2003-04, and 7.5 % during 2004-05. The growth of economy has been estimated to be

8.1% during 2005-06. The growth in the electricity generation growth has increased to

over 5.1% during the last three Years of Tenth Plan., which was around 3.1% towards the

end of IX Plan (2001-02).

FIGURE 5

The shortages in demand met during peak time and overall energy supply is characterized

as power supply position. All India basis the peaking shortage is about 12% however,

peaking shortage is much more in every region. On regional basis the energy shortages

are varying in magnitude and overall shortage on all India basis is about 7%. In the next

10 years in between 2006-2016 the generation capacity is required to be doubled to meet

the growing demand and shortages encountered in various regions, so that the total

demand both in terms of peak and energy can be met.

FIGURE 6


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India ranks sixth in terms Electricity Generation after United States, China, Japan,

Russia, and Canada.

The year wise growth in electricity generation has been 3.2%, 5.1%, 5.2% and 5.2%

during 2002-03, 03-04, 04-05 and 05-06 respectively. A growth rate of 7.5 % has been

recorded in the year 2006-07(up to Dec-2006). The Compounded Annual Growth Rate

(CAGR) of generation is expected to be about 5.1% during the 10th plan. However,

higher growth could have been achieved if for the existing and new gas based plants

commissioned during 10th plan, adequate gas would have been available.

The total all India generation capacity is 134717 MW as on 30.06.2007. The break up of

all India generating installed capacity in shown below in the graph as provided by the

CEA (central electricity authority).

FIGURE 7


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Sou

rce: CEA

DEMAND PROJECTION AND GENERATION ADDITIONIn the 10th plan the targeted addition capacity of 41,110 MW comprising 14, 393 MW

hydro, 25, 417 MW thermal and 1, 300 MW nuclear was fixed. For state power utilities

and IPPs, keeping in view the preparedness of various state power utilities and IPPs a

moderate target was set. The sector wise, type wise summary of this capacity addition

target is given in Table below.TABLE 4

10th PLAN CAPACITY ADDITION TARGET-SECTOR WISE

Source: Planningcommission

The capacity addition of 16,423 MW and 19,119 MW was achieved in 8th & 9th plan.

During the 10th Plan the likely achievement of capacity addition is expected to be 30641


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MW. The actual capacity addition is expected to be much higher than the earlier five year

plans, the capacity addition target of 10th plan could not be achieved. After analyzing the

10th plan lessons have been learned and reasons for the slippages have been found out.

During the first year of 10th plan, public and private sectors projects totaling to 3,009

MW could not be taken up due to various reasons which included non availability of

escrow cover by State Government to IPP projects and fund constraints.

There was also delay in super critical technology tie-up by BHEL for six units of 660

MW to be taken up by NTPC which resulted in delay in tendering. During 10th plan

projects totaling to 5,008 MW capacities could not take off, which were identified for

execution.

The target as were set in the plan by the planning commission and the achievements

made by the power sector in April 2006- March 2007 is shown in the graph below. The

achievement is less than 50% of the target set by the commission.

FIGURE 8

Source: CEA

RURAL ELECTRIFICATION

Rural electrification is a vital programme for socio-economic development of rural areas.

Economic development and generate employment are the objectives are to trigger by


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providing electricity as an input for productive uses in agriculture and rural industries, the

quality of life of the rural people is to be improved by supplying electricity for lighting of

homes, shops, community centres and public places in all villages.

Rural Electricity involves supply of energy for two types of programmes

1. Production oriented activities like minor irrigation, rural industries etc.;

2. Electrification of villages.

TABLE 5

Source: CEA

The Government of India has an ambitious mission of POWER FOR ALL BY 2012.

This is a great challenge. At the same time, this provides great opportunities fordevelopers and investors. The Electricity Act, 2003 has made special provisions for notonly de-licensing generation of power, but even de-licensing distribution of power andsystems which promote de-centralized distributed generation and supply. This challengeis converted into opportunities for development and growth, the Government of India hasput in place a very ambitious programme, namely Rajiv Gandhi Grameen VidyutikaranYojana to create a sound Rural Electricity Infrastructure.

Chapter 7

Analysis of the data


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Indian LNG Price and Sources

The LNG is being sourced through long term contracts as well as in the spot market. Theprices of LNG vary from one source to the other.The price of LNG imported from Iran being linked to Brent crude, but with a ceiling. Aunit of LNG will cost India pay $ 1.2 plus 0.065 into the Brent crude price average,

subject to the upper ceiling of $ 31 a barrel. This implies that despite Brent crude pricecrossing $31 a barrel, the applicable price would remain 0.065 of $31 a barrel, i.e. $3.215dollars per million British thermal unit. The LNG price, for the first three years ofsupplies, was fixed at $2.97 per unit in order to make imports competitive with the Qatarprice.Since the price of Brent has jumped from $31 per barrel to $70 per barrel, Iran is showingunwillingness to supply the LNG at the contracted price of $3.215 per mmbtu. Iran nowwants $4.78 per mmbtu.

The price at which Shell wants for LNG from its Hazira terminal is in between $7 to $9per mmbtu. The last consignment was delivered to Gujarat State petroleum Corporation

(GSPC) in December 2005. Since GSPC, the first and the only customer of Shell fromHazira project, decided not to extend the agreement at the exorbitantly high price of $9per mmbtu. Shell has preferred to wait for the favorable environment but not willing tocut down its prices. It is not merely a wait game, instead the company is negotiating hardwith prospective clients and feels that with rising demand and completion of gas rid inGujarat, the users of liquid fuels would see merit in shifting to gas even at high prices of$7 to $9 per mmbtu. The absence of supplies from Shell created a shortage of 0.7milliomcubic metres of gas per day in the region. The operations started in after a lull of 5months. These days the price charged by Shell ranges around $8 per mmbtu.

In 1999, Rasgas and Petronet LNG entered into a Sales and Purchase Agreement (SPA),

for 25 years, for 7.5Mta of LNG Supplies of 5 MMTPA LNG (equivalent to about 18MMSCMD), under the first phase, commenced from 2004. The agreement was furtheramended in August 2006 to implement the sale of the remaining 2.5 Mta. The delivery isto commence from 2009. The price for LNG was linked to JCC crude oil under an agreedformula. However, the FOB price for the period up to December 2008 has been agreed ata constant price of $2.53/MMBTU. This price translates to RLNG price of$3.86/MMBTU ex-Dahej terminal. After 2008, the price will be linked to JapaneseCustoms cleared (JCC) basket of crude oil within a price band of $16-$24 a barrel priceband.Encouraged by the experience a new contract has been signed for import of 1.25 milliontones of LNG to run the Dabhol plant. RasGas of Qatar will start supplying LNG at

Dahej terminal from July7, 2007. However, the price for the new contract has not beenrevealed. Petronet has said that they have committed to supply gas to Dabhol at rate of$4.93 per MMBtu. Petronet plans to achieve this price by pooling the new gas with thesupplies from the previous contract under which the price comes out to be $3.86 perMMBtu.


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In 2007 Petronet has finalized a deal with the Australian gas supplier Gorgan. The priceof the LNG will be around $5.75 per mmbtu.

The present controversy that starts after RIL invited bids from group of companies fromPower and Fertilizer industry. The objective was to discover market price for sale of gas

produced from KG D6 gas field. Five companies each from Power and Fertilizer Industrysubmitted their bids. The bids received through this mechanism range between $4.64 permmbtu to $4.86 per mmbtu, resulting in price discovery of $4.79 per mmbtu whichwould be much higher than $2.4 what is presently being paid by these two industries. Thefirst one to cry foul was R-ADAG, on the pretext that RIL had already committed itssupplies, of 28mmscmd at price of $2.34 per mmbtu, from that field to RNRL. Thoughthe decision on price was pending in Bombay High Court, but, the Court had ruled outany third party being approached for sale of this gas until further orders. Going by thisverdict, R-ADAG rendered the price discovery mechanism of RIL, through these tencompanies, as null and void since it is a breach of the interim order of the Bombay HighCourt. Next to follow suit was Department of Fertilizer (DoF), which termed the bids

submitted by the fertilizer companies as void since the companies had not soughtapproval from DoF. According to DoF, these companies could not bid for price of gasunless the subsidy component for fertilizer industry was known. Further, the departmentalleged that at such high price the subsidy bill might rise to Rs 88000 crores over the next15 years. The Ministry of Power too raised concern over the resultant high price ofelectricity at such high price of gas. Since then, there have been news articles comingfrom variety of sources politicians, news correspondents, environmentalists, expertsfrom respective fields, members of planning commission and the representatives ofaffected companies.At a presentations made by the RIL and other big gas producer like ONGC, headed byMr. Mukesh Ambani to the committee of secretaries (CoS). RIL has held the companyhad arrived at the price of $ 4.33 per mmbtu for KG-D6 gas in transport manner. Thecompany claimed at apart from high revenues upsides (as profit petroleum) for thegovernment, gas sold at a price would also bring down fertilizer subsidy by Rs 6400crores.RILs gas pricing formula is independently examined by the PMs Economic AdvisoryCouncil (EAC) chairman C Rangarajan. The senior officials that were involved inexamining say that the end price of $ 4.33 per mmbtu is reasonable in terms of prevailingrates of natural gas in the domestic and global markets. But they have some reservationover the formula devised by RIL to derive the value of gas. They say almost 97% of thecomponent in RIL`s formula is the fixed component.The pricing formula adopted by RIL is subject to an approval either by the government(parent administrative ministry) or by the regulator, under the terms of the productionsharing contract.

Indias public and private corporations produce allegedly super normal profits in thecoming years. If the gas will not be available at the affordable price than thegovernments ambitious target to provide affordable power for all by 2012 will bethwarted. RILs KG D6 gas field has one of the highest internal rate of return amongongoing projects globally and would be the companys major revenue earner in future.


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The two major consumers of gas i.e power and fertilizers are regulated sectors with theirend products being sold at regulated prices. In fact the power sector earns only 14%returns.The government, through its Common Minimum Programme (CMP) and NationalElectricity policy (NEP), has envisaged capacity addition to the tune of 100, 000 MW

during the Xth

Documents

Development of Natural Gas Market Wrt to Power Sector