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Energy: Gas facing growth pangs - Views on News from Equitymaster
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  • Oct 20, 2001

    Energy: Gas facing growth pangs

    Gas, many believe, is the fuel of the future. But as consumption shifts towards the cleaner fuel, the sector does face hurdles in achieving future growth. Like crude oil, India's reserves of gas are not sufficient to meet demand on a sustainable basis.

    Gujarat is a key state for the gas industry. Besides, exploration and production (E&P) from gas fields, Gujarat is the gateway for gas imports in the country. Also, the state houses a significant number of large downstream consumers. Consequently, the state government passed The Gujarat Gas Act. However, the Act has come in for criticism from the centre & GAIL. In fact, the centre is likely to pass a new national gas act, which could super-cede the existing gas act in Gujarat.

    Being the nerve centre for gas activity in India, the Gujarat Gas Act was passed to facilitate development of transmission & distribution (T&D) infrastructure in the state. Petronet India Ltd. (PIL) and several other companies are planning to setting up LNG terminals in Gujarat to store imported LNG. The Petronet terminal at Dahej is expected to be commissioned by 2004. Consequently, the state will require strong infrastructure to transmit gas to consumers located in the interiors of the region. The Central Government though is of the opinion that since majority of the gas in India is via Gujarat the said act could work as a deterrent towards development of the gas industry in India. Also, reporting norms could be adversely affected with national pipeline companies having to report to more than one regulatory authority. It seems, though, the main fear of GAIL is the provision for transmission & distribution (T&D) of gas on equitable basis, which entails third party use of GAIL's assets.

    While authorities attempt to resolve the status quo, a possibly larger issue that could result in a rude shock for all is the shortage in supply of gas. The Gujarat state has reportedly been facing a shortage in availability of gas over the past year. Consequently, the state government did make a requisition for additional supply of 1 m metric standard cubic meters per day (mmscmd) of gas from the HBJ pipeline. This request, however, was partially shot down on the fear that consumers further along the HBJ could face a shortage. The Ministry of Petroleum & Natural Gas (MoPNG) did allocate an additional 0.6 mmscmd of gas to the state. However, the allocation of additional supply has run into rough weather with National Thermal Power Corporation (NTPC) claiming right to the additional supply, as it has been facing a gas availability constraint.

    Adding to the fears are recent reports of reserves at GAIL's Gandhar fields drying up. The company has informed large consumers that it may not be able to meet their entire requirements. Consequently, several of the power companies have been left in the lurch. Large consumers are looking to arrange for alternate supplies. The long-term solution, however, seems to be the import of LNG, which is likely to start only from 2003-04. In the interim, companies dependent on the resource could face a challenging task.

    While future growth of the industry does depend on substitution of alternate sources of energy to gas, the key consumption industries of the natural resource are the power and fertilizer sector. Both these industries are facing severe structural problems. New generating capacity in the country has been growing at an estimated CAGR of 3.8% over the past five years. The fertilizer sector is also in the doldrums with retention pricing defeating the need for plant efficiency. In the near term, any growth in these sectors could prove to be kickers for higher gas consumption.

    However, industry growth is dependent more on gas availability than consumption, as the energy source remains in shortage. Gas availability in the country has grown at a compounded rate of 9.1% over the past five years, which though has slowed down in recent years. Over the nineties, gas has increased its share in total energy availability by 2.2% to 7.5%.

    To overcome the availability constraints the Government has initiated measures to enhance India's self-reliance in hydrocarbons. Under the New Exploration Licensing Policy-II (NELP - II), out of 25 fields, bids were received for 23 blocks and contracts have been signed for the same. Phase - I of exploration under NELP -II is expected to draw an investment of $290 m. As per reports, the Government is planning a third round by the end of the current fiscal. Also, the Government kicked off road shows for 7 coal bed methane (CBM) blocks. The gas reserves in these blocks are estimated at 262.4 bn cubic meters (bcm) with a life span of 25 years.

    That said, at the current rate of consumption India's gas reserve life is 24 years. With success of the new initiatives still unknown the long-term solution seems to be imports of LNG. The fun, it seems, starts post FY03.



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