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Ignition of LNG in India
The Cabinet Committee for Economic Affairs (CCEA) recently approved the proposal to hike the natural gas price by approving the Rangarajan committee's formula for gas pricing. The Rangarajan formula uses long-term and LNG import contracts as well as international trading benchmarks to arrive at a competitive price for India. The new price will apply uniformly to all producers, be it state-owned firms or private sector. Based on the price increase, it is expected that gas prices would be at the levels of about USD 8/MMBtu which is a sharp increase from the prevailing price of USD 4.2 /MMBtu.

The need for such a sharp increase was mainly felt owing to India's burgeoning primary energy needs. The country's primary energy consumption has more than doubled over the last two decades. India is currently the fourth largest consumer of energy in the world and is facing an increasing deficit scenario as its domestic energy resources are not able to keep pace with the growing demand.

India Domestic Demand Supply for Gas:
India is facing significant shortage of domestic gas supply. In India, the natural gas production in 2012-13 was around 104 mmscmd, while LNG imports are estimated to be around 50 mmscmd. Some of the key importers during the year include Petronet LNG, GSPC, Reliance Industries and GAIL. The domestic gas output from the country’s largest gas fields in the east coast operated by Reliance Industries Limited (RIL) has declined rapidly to about 15 mmscmd from around 60 mmscmd in 2009-10. This has led to significant stranded gas based end-use capacity in the country. Thus, with decline of domestic production, the LNG imports are expected to further increase. According to Central Electricity Authority (CEA), the gas based power plants in India are operating at low plant load factor(s) of 30-35 percent. Given this backdrop, the Government approved the gas price increase with the view of increasing investments domestic exploration and production in the country.

It is also evident that given the demand –supply gap, there still would be a significant requirement of LNG imports even if the supply were to ramp up owing to increase in investments in the domestic fields. According to the working group report for XII five year plan, the dependence on LNG which is currently around 40 per cent is likely to grow to 55 per cent by 2017.

LNG Imports in India
The planned LNG import infrastructure reflects the yawning deficit scenario being faced by India. The country has become the fifth largest importer of LNG after Japan, South Korea, the United Kingdom and Spain, with a 5.5 per cent share in LNG trade. Currently, the three RLNG terminals operational in India are at Dahej, Hazira and Dabhol all at the west coast of India. Dabhol terminal (5 MTPA) is expected to operate at partial capacity of 1.5 MTPA for the initial period due to lack of breakwater facility at the terminals port. The graph below represents the proposed increase in regasification capacity from the land based RLNG terminals in India.

Since land based terminals have a longer construction period and are capital intensive, a large number of players have proposed to set up Floating Storage and Regasification Units (FSRU) to meet the natural gas deficit. Some of the proposed FSRU projects are at Kakinada, Dighi Port, Pipavav, etc. Companies like GAIL, APGDC, Shell, GDF Suez, Reliance Power, HPCL, Swan Energy Ltd., H-Gas, etc. have shown keen interest in setting up FSRUs at various locations. All in all, several projects are either planned or expected to come up in the coming years. However, some of the key enablers that would enhance viability of such projects include:
• End-user affordability
• Adequacy of gas infrastructure
• Enabling policy and regulatory support

Affordability
It may be appreciated that the power tariff from coal based stations in India is around Rs 4-5.50 per unit. This is expected to increase owing to increase in imports, pass through of the losses and rising costs suffered by distribution companies. However, despite the increase in tariff, the power distribution companies may not be in a position to afford LNG based power for base load requirement as it evident in the table below

However, if the high cost LNG were to be pooled with domestic gas, the affordability of end-consumers like power plants could increase to offtake LNG. Thus, as an example as indicated in the table below, if the industrial power tariff for a state is Rs 6.7 / Kwh, the power plant would have an affordability of $ 13 per MMBtu for LNG. However, if 50 per cent domestic gas is available at an assumed price of USD 8/ MMBtu, the affordability for LNG increases to USD 18/MMBtu.

For one of the states, the State Electricity Regulatory Commission has allowed the electricity distribution companies to implement Expensive Power Supply Scheme based on procurement of expensive power using RLNG from state Independent Power Producers (IPPs). Thus, consumers wishing to avail continuous round the clock supply will have to make applications indicating the electricity requirement and the load factor. The electricity distribution companies would procure the power from the IPPs and supply it to the consumers on "no profit-no loss basis". The increase in domestic gas prices would reduce the difference in domestic gas based generation and LNG based generation thus encouraging few more states to enable such schemes.

Thus, even at high prices LNG offtake can happen in sectors such as power, fertilizer if the domestic gas allocation is restricted to certain defined percentage of the plant requirements or if innovative policy interventions are used. Further if there is a specific policy encouraging gas for peak power generation the affordability is likely to be higher. The other gas consuming segment i.e Industries and City Gas have comparatively better affordability for LNG as the competing fuels are liquid fuels such as Furnace Oil, LPG etc the prices of which are linked to international prices.

Given the rapidly changing global gas pricing dynamics, it would be equally important to have innovative price formulation and efficient sourcing of gas in order to increase LNG offtake in the Indian markets.

Adequacy of Gas Infrastructure
In India, the present pipeline infrastructure is around 13,000 Kms with a total design capacity of around 334 mmscmd. The major pipeline capacity is confined to Northern and Western parts of the country.

It may be pertinent to highlight that given the proposed increase in domestic prices to spur investments and planned RLNG infrastructure it is critical to implement the country-wide gas grid as envisaged. The proposed national grid would be essentially connecting many states that don’t have pipeline infrastructure. Though implementation of pipelines is typically assumed to be less intensive on time as compared to the implementation of RLNG infrastructure or development of wells, there have been case examples of extensive delays in laying pipeline infrastructure. Hence, there is a need to provide adequate thrust by the Government on pipeline infrastructure.

A transparent mechanism that addresses the issues of right of way, land acquisition and other issues is required to be put-in place. An empowered coordinating mechanism at the Central Government level could help in faster execution of projects. On tariff determination, it is important that a level playing uniform methodology is followed. Any retrospective tariff implementation orders could send negative signals to investors and lead to sub-optimal investments in the long run.

Investment Outlay
The total capital investments in the gas midstream and downstream sector for the XIIth five year plan has been summarised in the table below:

With expected investments in the gas infrastructure facility of around USD 200 billion in the next five years, natural gas is poised to play an important role in the Indian energy mix. But, this will be a reality only if enabling policy and regulatory measures are in-place.

Summary
In summary, given the demand supply scenario, LNG would have an important role to play in the Indian energy mix. Given the requirements, a number of LNG infrastructure facilities have been planned. There is an increased focus on floating storage regasification units (FSRU) as it takes less time for implementation as compared to land based terminal. The affordability of key consuming sectors especially power is on the rise and could afford LNG with innovative mechanisms in place. Thus, it is important to ensure a stable policy and regulatory regime to develop gas infrastructure throughout the country. Furthermore, gas sourcing at the appropriate price is the single most important factor that can decide the extent of LNG penetration in Indian markets.