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Gas energy: Time for Govt. to wake up

Mar 16, 2011

Per capita energy consumption is one of the most important parameters to place a nation in development index. As India accelerates with the GDP growth at 9% per annum , energy issues are going to be huge. Currently, we depend on oil imports to the extent of more than 70% to meet our energy needs. But to sustain this growth rate, we need to move away from conventional and volatile oil source and towards gas energy. So how are we gearing up to meet this challenge?

One such effort in the direction is TAPI (Turkmenistan, Afghanistan, Iran, Pakistan and India) gas pipe line project. Hopes are pinned high on TAPI project post IPI (Iran Pakistan India) project failure. At a cost of around US$ 7.6 bn, the pipeline should commission by 2014- 2015 if work starts now. At 38 mmscmd, it will serve close to 10% (as per 2015 estimated need) of gas energy demand in India. But the proposed venture is fraught with political risks. India, being the last in the pipeline trail, is expected to bear highest costs.

Turkmenistan had initially come up with a demand to link natural gas price to price of naphtha . The logic was that natural gas is finally used to substitute latter. The proposition is ridiculous as we already have oversupply of fuel oil and naphtha. When it got shrugged off, the new suggestion was to link it to prices of gas imports from Australia and Qatar. It is crucial to mention here that price from both these sources is four times and double the domestic gas price respectively.

As of now, the cost that India is supposed to pay for the gas from this pipeline comes to a minimum US$ 10/mmBtu. This compares to $7.5 per mmBtu - the rate at which Turkmenistan sells gas to China. The premium that India is supposed to pay covers not only transportation charges, but the guarantee for safe passage through not so friendly neighbors. This also compares to US$ 4.2 per mmBtu of rate under APM (Administered price mechanism) regime. But why are we dumping so much of statistics here. The point we are making is - with such pricing terms, aren't we better off increasing our imports than investing in multi billion pipeline fraught with security concerns? Especially when supply from this pipeline is not even guaranteed. In brief, the discussions are too theoretical. If the project goes through with such pricing terms , it could turn out to be a retrogressive step.

The other option is to spend this capital on domestic exploration ventures . It will be much better than dumping so much of capital on the fishy pipeline . We believe it will be better to go for JVs with foreign partners and come up with a uniform gas pricing policy in India that promotes such ventures.

In this regard, RIL BP deal is a landmark in India's energy sector landscape. It has set prospects that can change the gas supply dynamics in India. If such projects are undertaken to explore deep water reserves for Shale gas , the benefits are enormous and viable from cost point of view.

Even otherwise, Indian players can invest in foreign firms' shale gas energy assets. RIL has one such investment in Atlas Energy of USA.

But these are just minor feats. Most companies are sure of shale gas prospects here. As a proof, ONGC has come up with the biggest shale gas discovery in West Bengal . What keeps them at bay are arcane policies and regulatory issues. One such hurdle is land acquisition (as exploration can't be done in small blocks). For shale gas projects, the blocks must be auctioned and resulting gas should be allowed to be sold without any price controls. Then only, foreign firms will show any interest to unlock the energy potential in India.

Recently, the Centre announced that it expects RIL's D6 basin output to increase by 12 mmscmd (@ US$ 4.32 per mmBtu) by April. This compares to 38 mmscmd at minimum US$ 10 per mmBtu through the TAPI pipeline. And this supply will be after 6 years. On the other hand, we have U.S that has made a mark in exploiting Shale gas assets and is using gas at US$ 4 per mmBtu. This is down from US$ 13 per mmBtu in the past .The price is significant as it implies a decoupling from oil prices unlike the pricing term suggested for gas from TAPI pipeline ( that will keep us dancing to vagaries of crude oil). Since this pipeline will anyway take at least 6 years, we wonder if this is a wise investment option at all.

The final picture will be clearer only once pricing terms are finalized. We can only wish for Indian Government to wake up to the need of right policies . If the same were undertaken in time, perhaps we would not have needed gas deals with Gulf nations at all, thus putting domestic energy security to ransom by not so friendly neighbours.

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