Future of Gas - The India story - GAIL (India)

ENERGY CHEMICALS AND UTILITIESFuture of GasThe India storyGokul Chaudhri1February 2, 2004

India on the fast track…The Largest Economies in 2050GDP(2003 US$ tn)50454035302520151050ChinaUSIndiaJapanBrazilRussiaUKFranceItalyOvertaking the G6:When BRICs’ US$ GDP would exceed G6Source: Goldman Sachs Global Economics Paper 992 February 2, 2004

Fuelling the future9000800070006000500040003000200010000Per capita Energy Consumption in 2000 (Kgoe)USA France Japan UK China India6050403020100Primary Energy Mix in 2002 (%)Oil Natural Gas Coal Nuclear HydroIndiaRest of WorldSubstantial growth of the economy is expected tofuel demand for oil and gas in IndiaSource : BP Statistical Review of World Energy 2003• While developed countries like USA have per capita primary energy consumption of 8,100 kgoe,India is lagging behind at 295 kgoe with the world average around 1,445 kgoe• Primary energy mix in India is skewed in favour of coal3 February 2, 2004

The growing divideDemand / Domestic Prodution of Natural Gas (MMSCMD)Demand / Domestic Prodution of Natural Gas (MMSCMD)4003914003503002502001501005015178 73 80 76 8131323158 45 3635030025020015010050176 179 179145 15571.99 75.73 81.53 78.89 79.80'99-00 '00-01 '01-02 '06-07 '11-12 '24-250'02-03 '03-04 '04-05 '05-06 '06-07Domestic productionDemandSupplyDemandSource : Hydrocarbon Vision 2025Source : Sub-Group Report on Petroleum Sector forthe Tenth Plan• On the supply side, in view of the deficit, the Hydrocarbon Vision 2025 has laid the framework toguide upstream sector policies for next 25 years, recognizes natural gas as the fuel of the future forIndia and has identified the imperatives in this regard• On the demand side, the power and fertilizer sectors are expected to be the biggest consumers ofgas, however, for the demand projections to be realistic, reforms in these sectors are imperative4 February 2, 2004

Bridging the divide…67%67%Total Area - 0.36 million sq kmPre-NELP PSCsNOC's on nomination basisTotal Area - 1.05 million sq km11%33%Pre-NELP PSCs NOC's on nomination basis NELP22%Domestic production• New Exploration Licensing Policy success story – 3 foldincrease in exploration area in 3 years• Cairn was first (under NELP) to discover oil and gas in deepwaters of eastern offshore and shallow waters of westernoffshore, and onland in Rajasthan• Reliance discovered giant gas fields (analogus to Gulf ofMexico) in block D-6, current reserves estimated at 10.5 tcf• Niko has discovered gas and oil in Surat onland block ofCambay basin• ONGC has discovered giant gas field Vasai in westernoffshore and oil and gas in one of their deep water blocksalong east coast and recently in the KG basin• Increased production levels have been achieved in Pre-NELP fields like Hazira, Panna-Mukta-Tapti, Ravva, PY-3.Cairn has discovered a number of oil and gas bearingstructures in Cambay Block, and Rajasthan block5 February 2, 2004

Bridging the divide…(cont.)6 February 2, 2004Unconventional hydrocarbon resources• About 26% of natural gas production in USAcontributed by unconventional reservoirs like tightgas sands, coal bed methane (CBM) and gas shales• Such reservoirs need special simulation techniqueslike HF for production• Cambay, Cauvery and KG basins hold potential fortight gas sands and gas shales• India estimated to have vast CBM potential (about 110million cubic meters per day) from its abundantlyavailable Tertiary and Gondwana coal reserves• First round of bidding, 7 blocks offered; 2 inJharkhand, 3 in Madhya Pradesh, 1 in Rajasthan and 1in West Bengal, 16 bids received from 5 companies for6 blocks; 5 of these blocks awarded in January 2002 toReliance, IOC, ONGC and Essar• Second round of bidding, 8 block offered;14 bidsreceived;evaluation to be concluded by Jan 15 andapproval of Cabinet to be granted by Feb 15, 2004

Bridging the divide…(Cont.)LNG• Hazira (Shell) – 2.5 Mmtpa• Dahej (Petronet) – 5 Mmtpa• Kochi (Petronet) – 2.5 Mmtpa• Dabhol (Enron) – 5 MmtpaCross Country pipelines• Connect Iran's South Pars field with the HBJ pipeline, through a 2,700 km longpipeline, either sub-sea or onshore through Pakistan• Connect Bangladesh's Bibiyana gas field in northeastern Bangladesh with India'snorthern gas markets through 1,363 km pipelineOverseas acreages• OVL has acquired Talisman’s equity in Greater Nile• OVL has also acquired equity in offshore Sakhlin block and Vietnam• GAIL has recently acquired blocks overseas7 February 2, 2004

Crystal ball gazing??3010Gas Supply 2010 (125 MMSCMD + ??)2010PLL Dahej Unocal Shell Hazira KakinadaDabhol Reliance LNG Ennore LNG KochiBG Pipapav RIL Jamnagar10202015• Status of the UnocalBangladesh gas project,Kakinada LNG project, KochiLNG project, Pipavav LNGproject and RIL JamnagarLNG project are unclear• As per latest reports the supplyfrom the Reliance find in KGBasin will be 30-40 MMSCMD,accordingly, the total pie mayincrease by another 10MMSCMDProjected demand supply deficit for year ’11-12 is 268 MMSCMD,with an incremental supply of 125-135 MMSCMD,there would still be a large deficitSource: Crisil Advisory Services8 February 2, 2004

Economics of gas• The statistics discussed in the previous slide may suggest that the gasdemand curve in India (in view of the excess demand over limited supply)is largely inelastic, focusing on the overriding aim on ensuring thatdemand is always met• Key aspects:– Gas demand projections encompass unmet gas demand, switchinggas demand (from consumers using alternate fuels who may switch togas), announced expansion / greenfield gas demand, gas demandfrom additional capacity requirements (based on long term industryprospects etc)– Traditionally, gas prices have been controlled and maintained atartificially low levels, hence the existing unmet demand, and otherkinds of demand may also be (to some extent) a function of the lowpricesThis brings into focus, the need for balancing toolsin the Indian marketplace in the future!!9 February 2, 2004

Balancing act• Variety of tools are typically available to balance supply and demand forgas at any time• The tools fall into three categories:– Aimed at increasing supply flexibility– That provide buffer stocks– Those that reduce demand at times of peak gas use• On the supply side the obvious response to a sudden need for additionalgas is to increase ones own gas production, if possible, and to increasethe volume of gas received under domestic or import purchase contracts,if possible, within any entitlement not fully used• On the demand side gas suppliers often conclude interruptible contracts.In return for a discount on the price they pay for gas, the customers takeon the contractual obligation to stop taking gas under specifiedconditions10 February 2, 2004

Demand side measuresInterruptible contracts• Buyer gets to buy gas at a discount ranging from 2% to 20% in exchangeof which the supplier may interrupt the gas flow as per mutually agreedcriteria• In some cases, supplier may interrupt deliveries as he finds fit andcustomers in turn are free within limits defined by a minimum take-orpayobligation-which may be nil on a particular day – to vary the amount ofgas they receiveFuel switching• It is possible to switch from gas to another fuel without any interruptionin the production process• Gas use most suitable for fuel-switching is in boilers, either for steamraising or for power generation11 February 2, 2004

Flexibility of supplyLine Pack• Storing of gas inside the pipeline network by boosting the line pressureabove the delivery pressure• May be used as an initial means to balance demand/ supply• Limited tool requiring time to build up• Extra compression or a larger pipe may be a useful alternative to storageby increasing the potential for line-packStorage• Major source of temporary supplementary gas supply12 February 2, 2004

ImperativesSome imperatives to facilitate use of the flexibility tools include:• Regulatory framework– Road-map for de-regulation of the market, all gas, domestic andimported free to find buyers– Pricing of gas to be determined by competitive forces – complete decontrol– Open access to infrastructure ie pipelines etc to all players• Institutional measures to facilitate development of natural gasexchanges• Development of an extensive network of transportation grid for gas• Technological aspects which can facilitate use of measures like line-packand storage to manage supply of gas• Appointment of a gas regulator to address the needs of India being in adevelopment mode13 February 2, 2004

In the right direction…Draft Policy for Development of Gas Pipelines Network• Transportation of all gas will be through a network of pipelines laid inaccordance with authorization granted by the Regulator• The Regulator who will consider financial capability, existing gas network,expected utilization of pipeline capacity and linkage with gas producing andconsuming areas to evaluate applications• Any person desirous of transporting gas owned by it will negotiate with thepipeline owner on term of transportation as may be mutually agreed• The Regulator will prepare a long term plan for Gas Pipeline Network, forthe growth of gas pipeline network in various States and across variousRegions in consultation with the State Governments to enable industrialgrowth• All gas pipelines except captive transmission gas pipelines laid forexclusive use of a large consumer will be built on common carrier principle• Tariff for the transmission pipeline and/or for the distribution pipelines wouldbe approved by the Regulator which should be applied as a cap to enablelower negotiated rates based on market prices14 February 2, 2004

In the right direction…National Gas Grid• GAIL has been nominated to construct a national pipeline grid by theGovernment of India• Expected to be completed by the year 2008 at an estimated cost of Rs20,000 crores• The grid will comprise a nationwide pipeline network covering a length of7,900 km• As part of this grid, Kolkata will be linked to Kakinada (Andhra Pradesh)in the south through a 1,150 km gas pipeline and will also be connected toJagdishpur in Uttar Pradesh through another 980 km pipeline• The gas grid will comprise of 12 or 13 segments, which will be taken upseparately. Work on each segment will proceed so that it is synchronizedwith availability of gas in the region15 February 2, 2004

In the right direction…Petroleum Regulatory Bill, 2002 (introduced in Lok Sabha)• Seeks to set up a Petroleum Regulatory Board to oversee and regulatethe refining, processing, storage, transportation, distribution, marketing andsale of petroleum and petroleum products• According to Petroleum Minister, Mr Ram Naik, the proposed Board wouldoperate at an arm's length from the Central Government• Basic objective - to provide for a regulatory mechanism which wouldfacilitate uninterrupted and adequate supply of petroleum and petroleumproducts in all parts of the country, including remote areas, at fair price,promote competitive markets and access to monopolistic infrastructure inthe nature of common carrier on non-discriminatory basis by all entities• Provisions made in the Bill to ensure redressal of grievances, protection ofconsumer interest, as also resolution of disputes among entities betweenan entity and any other person• Till a Regulator is appointed under the Bill, Government will perform itsfunctions16 February 2, 2004

In the right direction…Gas Price Review• The group of ministers (GoM) has suggested certain changes in the pricingstructure:‣ Gas prices for consumers be increased by Rs. 350 / tcm‣ The HBJ gas pipeline transportation charges be raised by Rs. 10 / tcm.‣ The NOCs be allowed to sell gas from joint-venture fields at marketdeterminedprices (exception for the 1 MMSCMD of gas produced atthe Cairn Energy operated Ravva field)‣ The gas pool account be limited to lower of Rs 1 billion per annum, orthe actual compensation provided for concessional gas prices in theNorth-east and other purposes• Tariff committee to be set up to study the cost structure of ONGC and OILfor natural gas, and suggest a reasonable price till gas prices arederegulated completely• For new fields, price be delinked from the administered pricingmechanism and be made market determined17 February 2, 2004

The woods are lovely,dark and deepbut I have miles to gobefore I sleep,and miles to gobefore I sleep…18 February 2, 2004