A perspective on LNG Imports in India

For a country energy security is very important. Energy security is defined as the state of protection of the country, its citizens, society, state, economy from the treats to the secure fuel and energy supply. A steady long-term increase in the global demand for primary energy particularly in developing countries like India is projected.

With high economic growth rates and over 15 percent of the worlds population, India is a significant consumer of energy resources. Natural gas demand is expected to grow considerably, largely driven by demand in the power sector. The power and fertilizer sectors account for nearly three-quarters of natural gas consumption in India. Natural gas is expected to be an increasingly important component of energy consumption as the country pursues energy resource diversification and overall energy security.

Indias consumption of natural gas has risen faster than any other fuel in the recent years. Natural gas demand has been growing at the rate of about 6.5% during the last 10 years. Industries such as power generation, fertilizer, and petrochemical production are shifting towards natural gas. Indias natural gas consumption has been met entirely through domestic production in the past. However, in the last 4/5 years, there has been a huge unmet demand of natural gas in the country, mainly required for the core sectors of the economy. Electricity generation currently accounts for almost half of Indias natural gas consumption. Natural gas use by electricity utilities grew at an average rate of over 9 per cent a year, from 3.8 billion cubic metres in 1990 to 14.2 billion cubic metres in 2005. Existing gas red power plants in India require more than 19 billion cubic metres of natural gas a year to operate at full capacity. However, as a result of difficulties in securing natural gas supply, gasred power plants have been running at less than full capacity, switching to higher cost liquid fuels such as naphtha where feasible.

In 2009, India consumed roughly 1.8 Tcf of natural gas, almost 300 billion cubic feet (Bcf) more than in 2008, according to EIA estimates. Natural gas demand is expected to grow considerably, largely driven by demand in the power sector. The power and fertilizer sectors account for nearly three-quarters of natural gas consumption in India. Natural gas is expected to be an increasingly important component of energy consumption as the country pursues energy resource diversification and overall energy security.

Consumption of natural gas has been increasing due to a number of factors: Global economic growth and energy demand are increasing. Natural gas is a cleaner burning fuel than coal and oil, encouraging an increase in power plants that run on natural gas. Natural gas is widely applicable as a fuel source for industry, commerce and consumers. The consumer trend is to greater diversity of fuel sources. The natural gas market is undergoing deregulation in several key markets.

Indias economy has undergone significant transformation since a range of structural reforms were undertaken in the 1990s. These reforms included opening the economy to more international trade and investment, abolishing industrial licensing, floating the exchange rate, and increasing domestic and foreign private participation in financial markets. The reform process has stimulated strong economic growth in India, with gross domestic product (GDP) expanding at an average rate of 6.1 percent a year between 1990 and 2006. As a result, India now has the worlds third largest economy (on a purchasing power parity basis).

The expansion in economic output, supported by a large and growing population, has led to a strong rise in energy consumption in India. Primary energy consumption (excluding combustible renewable and waste) has increased at an average annual rate of nearly 5.0 per cent since 1990, and India now ranks fifth in the world in terms of energy consumption. However, unlike many other countries in Asia that have had sustained periods of high economic growth, including China, much of Indias growth has been led by the services sector. This sector is less energy intensive than the industry sector and has moderated the rate of growth in Indias energy requirements. Even so, because of Indias sheer size, the actual expansion in energy consumption has been significant.

Indias energy mix is currently dominated by coal and oil, although the role of natural gas has been increasing. Natural gas consumption grew by 7.4 per cent a year between 1990 and 2005 and accounted for nearly 8 per cent of primary energy consumption in 2005. The main natural gas consumers in India are the electricity generation and fertiliser industries, which account for more than two thirds of natural gas use. The consumption of natural gas in other industries and in households is relatively small, although growing rapidly.

While demand for natural gas in India is strong, actual consumption has been constrained by the availability of natural gas supplies. India has relatively large natural gas reserves and prospects for further discoveries are good. However, the natural gas market has been dominated by government owned companies selling gas at heavily subsidised prices, reducing incentives for private investment in production facilities. Production of gas from mature domestic fields is dwindling, and has resulted in the Indian Government restricting gas supplies to mainly the priority sectors. However, private sector participation in Indias gas market is increasing, which should lead to an increase in domestic gas production. Gas sold privately is based on market prices, creating a complex domestic gas pricing system.

Imports of liquefied natural gas (LNG) to India commenced in 2004, after more than a decade of planning. In 2005, LNG imports accounted for around a fifth of natural gas consumption in India. Two LNG import terminals are operational on the west coast of India, and a third is near completion, although imports are still well under capacity. To date, LNG imports have mainly been sourced from Qatar under a long term contract. But with high natural gas demand, India has also imported a number of spot cargoes of LNG, including from Australia. In 2006, India accounted for 6 per cent of Asias total LNG imports.

Natural gas demand is expected to continue to grow strongly in India, fuelled mainly by continued economic and population growth and hence growing demand for electricity. Continued switching to natural gas by fertiliser plants will also be a key driver of demand, particularly given the high price of alternative oil based feedstock. Realising this potential growth will depend on the availability and competitiveness of natural gas supplies, both domestic and imports, and the rate of development of gas infrastructure. Other factors likely to affect the outlook for natural gas demand include the pace of market oriented reforms in gas, electricity and fertiliser markets, including in gas pricing, and an increasing emphasis on energy security and environmental concerns.

There are plans to expand LNG import infrastructure significantly in India, although there is considerable uncertainty about the likely size of Indias future LNG market. The availability and competitiveness of other gas supplies and other fuels and the development of infrastructure will govern the penetration of LNG in India, as will developments in international LNG markets. In the next few years, the outlook for the supplydemand balance in the international LNG market is expected to become increasingly tight, in which case India would need to be willing to pay higher prices to secure additional LNG cargoes. Over the longer term, there is sufficient potential in the Middle East and the Asia pacific, including in Australia, to supply LNG to India, although many potential projects will require a commitment to long term contracts from buyers to underpin their development.

In India, gas constitutes around 10% of the current energy basket compared to the global average of 24% and hence presents a vast potential for growth. The demand for natural gas in India is expected to grow at a CAGR of 10% over the next five years and could soon be a significant player in the global gas market.

In the recent years, Indias energy consumption has been increasing at one of the fastest rates in the world due to population growth and economic development. Global consultancy firm McKinsey anticipates that natural gas demand in India is expected to increase from current 166 million standard cubic meters per day to 320 million standard cubic meters per day by 2015.

India has around 1.2 trillion cubic meters (tcm) of natural gas reserves. While current demand is around 57.32 billion cubic meters per year (bcm/y), made up of around 45.58 bcm/y from domestic supplies and the rest from imported LNG, according to the India Hydrocarbon Vision 2025, published in 2002, Indias future demand for gas could reach 113.61 bcm/y by 2015 and 135 bcm/y by 2025, depending on how the gas market develops in the country. LNG import India has placed increasing focus on LNG imports as a potential means of meeting domestic natural gas demand. LNG imports have risen steadily since the commissioning of Indias rst LNG terminal at Dahej in the State of Gujarat in early 2004. From just under 2 million tonnes that year, LNG imports reached more than 6 million tonnes in 2006. In the rst half of 2007, LNG imports by India were 4.1 million tonnes, a rise of more than 66 per cent compared with the rst half of 2006. While Qatar was the sole supplier of LNG to India in 2004 and remains the largest LNG supplier at present, the range of suppliers is becoming increasingly diverse. In 2005, India imported LNG from Australia and Oman. Additional supplies were sourced from Egypt, Trinidad and Tobago, Abu Dhabi, Malaysia and Algeria in 2006.

At present, India has two operational LNG import terminals Dahej and Hazira in Gujarat state, while a third terminal at Dabhol in the state of Maharashtra is under construction (table 8). There are several other proposed LNG terminals in various stages of planning. The projections are also based on assumptions relating to the fuel mix in electricity generation. In India there is considerable uncertainty about the expected fuel mix over the period to 2025. This is reflected in the wide range of alternative projections from Indian and international sources. In this study, the share of natural gas in electricity generation is assumed to be 7 per cent in 2025, around 2 percentage points lower than

in 2005. This reects an assumed continued expansion in nuclear and coal red electricity generation over the projection period (IEA 2006a). Projecting natural gas demand in India On the basis of these assumptions, total primary energy consumption in India is projected to expand by 4 per cent a year to reach 837 million tonnes of oil equivalent in 2025. Natural gas consumption is projected to grow by 5 per cent a year between 2005 and 2025 to reach 74 million tonnes of oil equivalent in the reference case in 2025 (equivalent to 82 billion cubic metres and 60 million tonnes of LNG) (gure B). In the high growth scenario, gas consumption is Projected to reach 89 million tonnes of oil equivalent in 2025 (equivalent to 99 billion cubic metres and 72 million tonnes of LNG). Driving this growth will be increases in demand in the fertilisers and other industrial sectors. This growth, however, will be dependent on the development of natural gas infrastructure, including transmission networks, and new sources of supply. Natural gas supply considerations India has three options to meet the anticipated growth in natural gas demand over the period to 2025 increase domestic gas production; increase LNG imports; and import natural gas via pipeline. It is assumed that there is a continued decline in production from existing mature domestic gas elds. However, the rate of this decline is expected to be slowed by the production of gas from recently discovered elds in the offshore Krishna Godavari (KG) basin from late 2008. While this and other new natural gas discoveries have the potential to expand domestic output signicantly, the production timetables of these elds remain highly uncertain.

Over the longer term, there is potential to develop pipeline natural gas imports. Several international pipelines have been under discussion in India for many years, including from Iran, Turkmenistan and Myanmar. Only the IranPakistanIndia pipeline project is considered to have potential as a source of supply to India over the period to 2025. Given the uncertainties that surround the supply of pipeline gas from Iran, a possible startup date is assumed to be after 2020.

Indias decision to import pipeline gas will depend signi cantly on geopolitical and energy security issues but the competitiveness of pipeline gas with other sources of gas will also play an important role. Distance and volume are key variables that affect the unit cost of transporting LNG and pipeline gas. While transporting natural gas via pipeline can be more cost effective than transporting LNG in some cases, the political risks associated with transiting through other countries can increase the costs of pipeline projects. In contrast, the flexibility of LNG supply can largely avoid geopolitical sensitivities and may address some of the energy security concerns of gas importing countries. Factors affecting Indias future natural gas demand

 A range of factors will affect the extent and prole of Indias future natural gas demand, including the development of a national gas pipeline network and the implementation of energy market and broader economic reforms. One of the most important factors will be the continuing deregulation of the domestic gas market. The government has made significant progress in developing a regulatory framework to facilitate open access to the pipeline network and to promote public and private investment in gas pipeline infrastructure. The establishment of an independent regulator to monitor pipeline access and gas transport tariffs is expected to facilitate the development of a market based regime in Indias natural gas sector. The continuing transition from state administered, subsidised gas pricing toward market pricing is also a key factor in improving the overall availability of natural gas in India and will affect gas demand over the outlook period. The complex mix of administered and market gas prices that vary across consumer segments reduces incentive to invest in the expansion of domestic gas production and LNG imports. The reform processes in key end use markets, such as electricity and fertilisers, are also likely to have a direct impact on future gas demand in India. Recent policy initiatives in the fertiliser industry seek to convert the majority of nitrogenous fertiliser production in India to natural gas. Electricity market reform, including government plans for substantial generation capacity augmentation, is likely to provide incentives for new investment in gas red power plants. The extent of natural gas use in electricity generation, as well as in fertiliser production, will depend to a large extent on gas availability and pricing. Natural gas is used both as a fuel and a feedstock in various industries. It is used as a fuel in the power, industrial, tea plantation, Cement, Ceramics, Glass, as city gas for cooking and heating and for transportation, as CNG, sectors. It is used as a feed stock in Fertilizer, petrochemicals, LPG industries. There has been an increase in natural gas offtake for energy purposes by nearly 20% from the period 1990-91 to 2007-08. Likewise, natural gas consumption for the non-energy purposes has increased by 9% over the same period. The figure below shows the natural gas off-takers in various sectors.

Gas fired power plants have significant advantages over coal, including a shorter construction period, high thermal efficiency, ability to meet peak load requirements, and lower levels of greenhouse gas and other pollutant emissions. The fertiliser sector is the second largest consumer of natural gas in India, accounting for around a quarter of natural gas consumption in 2005. Demand for natural gas from the fertiliser industry grew at an average annual rate of 2 per cent from 1990, to reach 8.3 billion cubic metres in 2005 (IEA 2007a).

There has been a steady increase in the number of gas based fertiliser plants. Natural gas is more efficient than alternative feedstock in urea production. At present, natural gas based plants account for more than 66 per cent of urea production capacity, naphtha is used for less than 30 per cent of urea production, and the remaining capacity is based on fuel oil and low sulphur heavy stock.

Other industrial users, including iron and steel, glass, ceramic and electronics manufacturers are rapidly increasing their share of natural gas consumption. Gas consumption in the industry sector has grown at an average rate of 14 per cent a year, from 1.1 billion cubic metres in 1990 to 8.0 billion cubic metres in 2005. While small in absolute terms, natural gas use in the residential sector has grown strongly, at an average rate of 20 per cent a year since 1990. Household natural gas consumption was virtually nonexistent in 1990, but rose to more than 0.7 billion cubic metres in 2005. Rapid economic growth and rising incomes have led to a shift in consumer preferences from coal and non-commercial fuels to more convenient and clean fuels such as petroleum products and electricity (see box 2). Natural gas constitutes a marginal share in the residential fuel mix, although use of natural gas has been growing rapidly in recent years following an expansion in gas supply infrastructure. Sector Power Fertilizer City Gas Industrial Petrochemical / Refineries /Internal Consumption Sponge Iron / Steel Total CONCLUSION Existing LNG import contract Estimated in.2011-12 126.57 79.36 15.83 19.66 33.25 7.86 282.55

India currently has one long term LNG supply contract between Petronet and Qatars Ras Laffan LNG Company for the phased supply of 7.5 million tonnes a year, with 5.0 million tonnes contracted from 2004 to 2009 and the full volume from 2009 to 2029. While other long term agreements have also been signed, including with Iran, these agreements have not been nalised and have not been included in the study

According to our research report Global LNG Market Analysis, the global market for LNG has been growing at a fast pace for the past few years. Despite the economic slowdown of 2009, the market did not seem to have been much affected as the countries globally understood the importance of using LNG. Major developments have taken place in LNG trade, production, and consumption along with market activities. Factors, such as huge investments, burgeoning demand, and environmental concerns have contributed to the fast growth of the industry.

India is one of the major LNG importing countries in the Asia-Pacific region. Majority of LNG supply to India usually comes from the Middle East. The requirement of clean fuel, decreasing oil dependency, and diversification of energy mix has led to the transformation of coal-powered thermal plants in into natural gas in India. Consequently,

It is anticipated that India LNG imports will reach around 20 Billion Cubic Meters by 2020, growing at a CAGR of over 3% since 2010.

India imported 810,000 mt of LNG in April 2011, up 24% from 651,000 mt in the corresponding month last year but down 13% compared with March imports of 933,000 mt, official data published by the Indian oil ministry's Petroleum Planning and Analysis Cell.

Its current import capacity is 13.5 mtpa. Industry executives estimated that India's liquefied natural gas (LNG) import capacity will jump to 47.5 million tonnes per annum more than three-fold by 2015-16 and will 62.5 mtpa more than quadruple by 2020.

Indian energy consumers are accepting higher international fuel rates as imports of LNG, which is three times as costly as local natural gas, are expected to jump 40% this year.

India Inks $20B LNG Import Deal with Cheniere Energy

GAIL (India) Ltd. has signed a 20-year import supply agreement with U.S. based Cheniere Energy Partners L.P. (CQP) for an annual supply of 3.5 million metric tons of liquefied natural gas (LNG).

The supply arrangement is estimated to be around $15 billion to 20 billion and could be "a game changer for the Indian market", a the "The Times of India" said of the deal.

On the other hand, at current prices of US gas and existing liquefaction and transportation rates, the price would be $10 to $11 per unit in India, cheaper by $5 to $6 compared to a recent LNG contract with an Australia firm, the Economic Times said.

India, along with China, will both become significant buyers of LNG, Edward L. Morse, managing director of commodities research at Citigroup Global Markets Inc. had earlier said.

The two countries' huge demand for the clean energy will eventually create an impact on global gas prices, especially on LNG.

The LNG deliveries into India are expected to start in 2017 from Cheniere's Sabine Pass LNG terminal located in western Cameron Parish, Louisiana.

The agreement has an option for extension by 10 years.

It is not surprising that many nations now venture or have started migrating into the use of clean energy programs and methods as they grow more increasingly alarmed and concerned over the planet's rising changing global weather patterns.

Earlier, ExxonMobil Corporation, in its latest report, "The Outlook for Energy: A View to 2040," said global usage of natural gas will grow 62 per cent by 2040, and will replace coal as the second-largest fuel supply behind crude oil by 2025.