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Natural gas: Fuel for future - I

Mar 5, 2007

Natural gas is the cleanest source of energy available at the disposal of the mankind. It forms 23% of the total energy consumption globally, while in India it accounts for just 9% of the Indian energy matrix. The lower share could largely be attributed to supply side constraints. The demand side of the story continues to be buoyant with the same consistently outpacing supply. Supply side constraints were largely a factor of government regulation in Exploration and Production (E&P) along with the regulations on the pricing of natural gas. With increased E&P activity due to success of NELP (News Exploration Licensing Policy), the supply side business also looks promising. Going forward, major gas supplies are likely to come from private players (majorly Reliance), which in turn, is likely to deregulate the pricing of natural gas in the country. The government has allowed private players to market their gas directly to the consumers; following this stance the Panna-Mukta-Tapti consortium (joint venture between ONGC, British Gas and Reliance) has started selling gas at price of US$ 4.75 per MMBTU (million metric British thermal units).

Supply side firming up...
With increased supplies from the private sector players, the Indian gas market is set to liberate over the next 4-5 years. Reliance is going to commence production of 80 MMSCMD (million metric standard cubic meters per day) in the Krishna-Godavari basin from FY09 onwards. GSPC (Gujarat state petroleum corporation), a government of Gujarat enterprise, is also likely to commence production thereafter. There will also be increased gas volumes via the LNG (liquefied natural gas) terminal with scaling of capacities in Petronet's Dahej terminal (increase of 20 MMSCMD) along with commencement of operation at Kochi terminal (addition of 10 MMSCMD). Increased gas availability from the cross border pipeline via Iran-Pakistan-India (IPI) pipeline (supply of 60 MMSCMD) is also likely to boost the supply side.

A closer analysis of the above charts reveal the fact that major consumers of natural gas in the country are power utilities and fertilisers (contributing over 63% of the total consumption in FY06). Captive consumption by producers accounts for a significant 20% (majorly used for production of petrochemicals). Historically, the price of natural gas has been highly regulated by the government. The reasons for the same being inefficiency in power and fertiliser sectors on the back of subsides.

What does it means?
With increased availability of natural gas from various sources, it is set to increase its share in the energy matrix of India. Bulk of the supplies is likely to come from private players along with cross border pipelines (at the international prices). We are also likely to witness deregulation of the Indian gas market, though in a very gradual manner. However, we believe that the Indian gas market is not homogeneous and every industry and region has its own paying capacity, which in turn will decide the consumer mix and prices of the natural gas going forward.

Over the next few articles, we will try to peep into the future of natural gas in the country. We will also look into various companies in the gas chain (upstream and midstream).

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