The Hindu Business Line : Interest in gas flares up

GAS IS where all the action is. If the find by Reliance Industries in the deep waters of the Krishna-Godavari basin set off interest in the sector, the soon-to-mature project of Petronet LNG in Gujarat and the pricing issues that it has raised has brought the sector squarely in focus.

To be sure, Reliance's gas find, with in-place reserves of 10 trillion cubic feet as claimed by the company, is quite a remarkable event for the sector. The find has the potential to double the existing total gas production in the country of 65-million metric standard cubic metres per day (MMSCMD) and could change the energy map. It can fuel everything from power and fertiliser plants, to automobiles and kitchens.

Yet, it is not all that simple as it seems. Reliance may well find that discovering the gas was the easy part. Monetising the reserves, that is, getting the gas to shore and then to consumers at optimal costs, is the more difficult part. Reliance, as is its wont, will bring to bear cutting-edge technology in getting the gas out of the deep waters and onto shore. But, then, the key issue will be the cost at which it will be able to do that.

Besides, the entire project could involve an outlay running into thousands of crore rupees and the trick will be the mode and cost of raising such funds. Reliance already appears to be trying out a strategy where it will identify large buyers in the southern States which will then bankroll a part of the project cost. But Karnataka has already debunked such a strategy.

That brings us to the critical issue of developing a viable gas market in the eastern region where, logically, Reliance will be able to supply at the cheapest cost.

At present, there is no viable market in the east-coast States for the kind of volumes that will begin to flow. Reliance may well have to pipe the gas to the western States of Maharashtra and Gujarat where a good market exists for the gas.

But, again, there are two other important issues. One, price, as transportation costs would have to be built into the selling price.

Two, the Petronet LNG project at Dahej that will be commissioned by the end of this year. With about 2-million tonnes of gas becoming available by 2004 (climaxing at 5 million tonnes in the next two years), the gas market in the Gujarat/Maharashtra region will turn into a buyer's one where price will become the key factor.

Already a debate is on with major consumers such as National Thermal Power Corporation, which has put out a tender for 3 million tonnes per annum of gas for its plants in the region, setting a delivered price limit of $3.5 per million British thermal unit (MBTU) to its prospective suppliers.

This is a price that Petronet LNG may, in all probability, not be able to meet given the contracts that it has already signed with its supplier in Qatar. It is anybody's guess if Reliance will be able to meet such a price given the expected high costs of deep-water production.

To skew the picture further is the 5 million tonnes of LNG import capacity that is now lying idle at Dabhol's power plant.

When the complex issue is finally settled, as it indeed will be, the LNG facility will add to the projected capacity in the region complicating things further for the others.

The ultimate ownership of the Dabhol plant will also be a crucial factor; if ownership passes on to one of the existing players such as Reliance or NTPC or Gail, things could really get interesting.

Adding to the Dahej project and the existing asset at Dabhol are two others planned by multinationals — Shell (at Hazira) and British Gas (at Pipavav).

Of the two, the odds on the Shell project seeing the light of day appears better while BG's Pipavav project would depend on whether it bags the tender floated by NTPC. It is highly unlikely that BG will be able to meet NTPC's tender norms, including the price.

Meanwhile, Gail is talking of piping gas from Myanmar where it has a 10 per cent stake in an offshore field with estimated reserves exceeding 10 trillion cubic feet. Though this will happen only in three-four years, the fact is that it will only add to the supply in the country.

There are other LNG projects on the east coast that were planned such as the one at Kakinada by Indian Oil in association with Petronas of Malaysia, apart from the Ennore project that was awarded to a consortium comprising Woodside Energy, Unocal and Grasim.

These projects are now stillborn and it is unlikely that they will see the light of day.

Price controls a dampener

PRICING is a critical issue that could well decide how soon and how well the gas market develops in the country. Unlike oil, gas prices are still administered by the government. Recently, the Government revised the administered price of gas upwards from Rs 2,850 to Rs 3,200 per standard cubic metre (SCM) with the transportation charge for the HBJ pipeline from Rs 1,150 to Rs 1,160 per SCM.

It has also ruled that ONGC will be paid market price for production from joint-venture fields; this decision will result in savings of Rs 900 crore, which it was subsidising earlier. Besides, the gas pool account has also been shrunk to Rs 100 crore, which again benefits ONGC as it was bankrolling the pool. ONGC has also been given the right to charge market price for additional production from existing fields.

All this, says the ONGC Chairman and Managing Director, Mr Subir Raha, is only of partial satisfaction (see interview on page 7). In his estimate, a price closer to Rs 4,000 per SCM would have been fair to his company, he says. But then, his customers, basically fertiliser and power producers, would have none of that. And therein lies the biggest problem that the gas sector faces today — pricing.

Admittedly, in a free market, gas prices would have been closer to what Mr Raha is demanding rather than the artificially low one now. But the problem is that such a price would render users such as fertilisers producers in trouble. They would find themselves in a situation where their raw material prices are market-linked while their own finished products are still under control.

The solution, therefore, would be to decontrol pricing for fertiliser producers as well and give them the freedom to price their products at market rates. But, then, fertiliser being a political commodity, it is highly unlikely that the industry would be freed any day soon. Gas producers, it appears, have no option but to plod on with the current administered price regime for some more years to come.

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