The Hindu : Affordability is the key

Online edition of India's National Newspaper
Wednesday, Oct 15, 2003

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Affordability is the key

By Sudha Mahalingam

FROM JANUARY next year, India will begin importing liquefied natural gas (LNG) to quench its growing thirst for energy. The first consignment will arrive at Dahej on the western coast where a terminal is being built to handle 5 million tonnes a year.

Typically, gas deposits are located away from consumption centres and therefore, for several decades, gas did not make it to markets too far away to be linked by pipelines. Now, technology has made it possible to liquefy the gas and transport it in cryogenic containers across oceans and continents. At the importing end, LNG is heated to retrieve the gas. In this process of cooling and heating, some energy is lost. Besides, setting up liquefaction and regassification facilities at the exporting and importing ends pushes up costs.

One reason why power from the Dabhol plant turned out to be expensive was because it used regassified LNG as fuel. Nevertheless, countries such as Japan and South Korea, which have little of their own oil or gas deposits, have found it useful to import LNG in tankers. So far, countries such as China and India have kept away from LNG because it is a relatively expensive fuel. Both countries use domestic gas mainly in power plants and to produce fertilizer. In India, 38 per cent of natural gas is used in fertilizer plants and 40 per cent goes to power plants using combined cycle gas turbine technology. It is a recent technology and is considered a marvellous invention because it enables the power plant to be switched on and off. Coal plants cannot do that. Once started they have to run continuously and cannot be backed down when demand goes down. Gas turbines are ideal for producing power at peak hours. But gas-fuelled peaking power comes at a steep cost.

Of the country's current installed capacity of 108,000 MW, just about 10 per cent is fuelled by gas. Domestic gas is supplied by the public sector Gas Authority of India Limited through pipelines and costs around Rs.2,850 a thousand cubic metre plus royalties of about 10 per cent and sales tax. The burner tip price comes to about Rs.3,500 per thousand cubic metre. Even at this gas price, power produced from gas turbine plants is expensive. State Electricity Boards (SEB) or their successor utilities find it unviable to buy such power.

After liberalisation of the power sector, SEBs have still to pay fixed costs to the generators whether they take the power or not, but by asking gas turbines to back down, they can avoid expensive fuel costs. The NTPC, which has constructed five gas turbine plants in the last few years, finds that power from these plants is not dispatched because it is too costly. Even at Rs.3,500 per thousand cubic metre of gas, the unit cost of electricity generated is in excess of Rs. 3 per kwh at the plant-gate. As for fertilizer plants using gas, the Government gives a huge subsidy to the fertilizer manufacturers.

It is in this scenario that LNG is set to enter the Indian market. Globally, gas accounts for nearly a quarter of commercial energy consumption. In India, the share is limited by domestic availability to just about 8 per cent. In its eagerness to catch up with the rest of the world regardless of domestic resource endowments, the Government has chosen to encourage the LNG option, slashing duties on equipment to build LNG terminals, offering tax benefits to various players and persuading public sector oil and gas companies to come together to set up Petronet-LNG exclusively to import, handleand process LNG. A draft LNG policy envisaging further tax concessions is doing the rounds of the Ministries.

Currently, Asia is a buyers' market for LNG. With Japan and South Korea turning to Sakhalin and Australia supplying the U.S. West Coast, Indonesia, Malaysia, Brunei, Oman and Qatar all vie for the custom of the remaining Asian markets, mainly India and China. Yet, Petronet-LNG has gone and contracted imports from Qatar at very steep prices, way above prevailing international rates. At the current contracted price, regassified Petronet LNG at landfall point will cost upwards of Rs.7,500 per thousand cubic metre, more than twice the price of domestic gas. If used in gas turbines, electricity will cost Rs. 4-50 per kwh or even more at the power station and this does not even include the cost of wheeling and distribution to the consumer's premises. It is not, therefore, surprising that Petronet-LNG has not yet been able to find downstream customers for its regassified LNG. Industry journals report that public sector oil and pipeline companies — which themselves are promoters of Petronet-LNG — are being persuaded to buy the regassified LNG. But since they are not users of gas, they still will have to locate end-users. Whether they can find buyers willing to cover the cost at which LNG has been imported is the critical question. Even more interestingly, Petronet-LNG has signed long-term (25-year) `take or pay' contracts with Qatar's Rasgas a la Dabhol. Now whether it takes the gas or not, Petronet will be obliged to pay Rasgas.The clock has started ticking.

(The writer is Senior Fellow specialising on energy security at the Institute for Defence Studies & Analyses, New Delhi).

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