Gas becomes important as non OECD Asia becomes an importer for first time since 2011

In Asia non OECD Asia is set to become a large importer of LNG from being an exporter of natural gas till 2011. This is with the backdrop Asia-Pacific will be the driver of global gas growth over the next decade. Demand side factors such as rising per capita wealth, urbanization, pollution concerns in China and a shift from nuclear in Asia post Fukushima, delays in the Asian shale revolution all point to major LNG and pipeline imports. With rapid demand growth, non-OECD Asia will move from net exporter to importer with the entire Asia-Pacific region forecast to have a 333 MTPA gas deficit by 2025.

India is all set to treble its LNG imports by 2020. Imports may touch 140 odd MMSCMD from 41 MMSCD currently. While India is growing regas capacity, there remains relatively few long term LNG contracts which have been signed up given the differential between affordability in India and oil linked LNG prices. India currently has signed long term contracts for 11 mtpa although one expects this to increase significantly over the coming years given gas shortages in India and the increased activity from PSUs in Mozambique and Yamal LNG projects. The GAIL Rasgas contract was signed at $14.20/mmbtu recently. However pricing is a concern. Any attempt to delink LNG prices from oil is doomed as LNG prices will be linked to oil and one cannot take an infinite bet on low US shale gas prices. LNG contract prices can still be lowered if they are kept linked to oil, by decreasing the slope, or discount to oil prices, and by putting ceilings in place say crude at $100/bbl. 

The government needs to address efficiencies in end user industries. India suffers from High T&D losses and fertiliser plants are less efficient. These efficiencies will only kick in if the Government allows gas to be sold at its true opportunity cost. In the absence of gas on gas competition and severely restricted and highly segmented markets, many CNG distribution networks make supernormal profits. Market reforms across the value chain and extending to the end user sectors are key to our survival. Power Sector end user reform a major issue and gas pricing has to be linked to efficiencies in the power and the fertiliser sectors.

More than half of India’s power stations run on coal. Slowing domestic production of the fuel over the past three years because of dwindling supply, means that the country is becoming more dependent on imports to provide for the energy hungry Indian market.

The state-run electricity distribution companies won’t be able to absorb the higher production costs because they are saddled with past losses running in to billions of dollars and the slump in rupee’s value to the U.S dollar in recent weeks would add to the cost burden of importing coal, although international prices have declined by 12% in the last year.

With CIL unable to raise output and Government not keen to let go of the Coal sector, Indian consumers will most likely have to pay 3% more per unit of power because of the higher pass through of imported coal. On average, electricity costs roughly 6 rupees per unit in India.

However further similar measures toward a more market-based energy-pricing system could be difficult. A general election next year may weigh on efforts to raise prices consumers pay. More domestic production, though, could be a major help toward India’s surging demands. Instead of wasted efforts on failed attempts to buy overseas assets, India’s oil and gas companies need more encouragement to develop the country’s abundant resources at home.

Reform also means that Power distribution companies need to be privatised along with Coal India Limited. More than half of the population, suffer either no connection or completely unreliable connections to the national grid. 

The problem is that the upcoming election is bad news for energy reforms even though the poor fiscal health of the government implies that it may have limited ability to shield consumers from rising tariffs. The result therefore could well be more fiscal mayhem.

Through the looking Glass

“Alice: Would you tell me, please, which way I ought to go from here?

The Cheshire Cat: That depends a good deal on where you want to get to.

Alice: I don't much care where.

The Cheshire Cat: Then it doesn't much matter which way you go.

Alice: ...So long as I get somewhere.

Why is India’s economic growth slowing? Why has India stalled? Where are we heading? Much like Alice, the destination is blurred.

The government reported year-over-year growth in the last quarter of only 4.4 percent. From a euphoric 9 percent in 2008 the promise of high growth has not panned out over the past four years.

The causes for this slowdown are varied. There is an attitudinal shift toward foreign business and investment. Domestic private capital is rapacious. The imperial foreigners are out to colonize us. So who needs them? Change laws withn retrospective effect, rethink all exemptions, and get back to taxing them to Kingdome come. After all the only object of the Government, as any CAG will tell you is to make as much money as it possibly can!

Stature, Contracts and policy declarations be hanged. Business deals can be taxed retroactively after incomes are earned and reported. WE don’t believe in responsible legislation or contracts. Te onkly rule of law known to this country is that the law can be changed any time. And what cant be changed by law can always be taken care of by ordinances, rules, and even simple office memos and guidelines. 

SO impose  controls on natural gas. Every minister and bureaucrat loves a good allocation and rationing policy. We love quotas and the power these give to not just petty officialdom but even Groups of Minsiters. 

What does it matter if the country is voted as the “biggest disappointment” amongst a group of anyway crumbling BRIC nations .

SO further liberalization and market-oriented reforms are out. What is in is : a relentlessly falling rupee and stock market .The current economic malaise reflected in double digit inflation while the Indian credit rating diving to the bottom of the investment grade range .

It was not so four years ago .The growth story was stoked by energy demand and supply. During the last five years, India's gas consumption had grown by 14 per cent. Supplies were assured .The Indian economy seemed to be basking in the golden age of gas , solely on the back- to -back discoveries by RIL , ONGC and GSPC in the East coast of India , hitherto unexplored deep waters. 

Then the KG D6 devil brought on a climate of distrust and scepticism .Today while India’s’ demand for energy is soaring providers of energy are seen as adversaries , which strains the confidence of India ever meeting its energy security mandate. 

The devil then seems to be on the side of he energy importers impacting GDP, Balance of payments and growth.

While the domestic discovery of Gas assured India of an energy source that can help meet the demand , subsequent decisions and the risk/reward imbalance has discouraged exploration and development of discovered gas in deep waters of India.

Uncertainty on pricing and fluctuating decisions on gas allocation make it impossible to evaluate techno commercial decisions on investments .The lack of consumer confidence in gas, both its supply and its price impact the development of the sector. 

Whatever policy the government adopts, it needs to first to undertake confidence building measures before it announces the next NELP rounds . Poor and reduced participation is an indication of how oil majors view the rounds.

The response to NELP has slowed over the years. The first five rounds of NELP attracted total investments of $7 billion, which by end of three more rounds went up to just $11 billion. In the nine rounds of NELP till date (since 1999), out of the 268 blocks offered, more than 50 per cent are now with state-owned companies.  companies .

SO what is the answer to the exploration challenges in India. In an estimated area of 3.14 million sq. km, comprising 26 sedimentary basins, there are limitations to hydrocarbon reserves. The worst dampener is the lack of confidence in the role of the DGH in developing these reserves. Planning Commission estimates that by 2015, 100 per cent of the Indian sedimentary basin area is likely to be under exploration. The DGH’s obduracy on all accounts will not help that. 

If the government is keen to realize the objective of NELP as conceived in the 1990s, which is to address the increasing demand-supply gap in energy, it has to remove the red tape on tax and pricing. No risk no gain is the principle on which exploration of oil and gas works. If the Government wants to shun all the risks it can be sure there will be no one left to explore Indian basins.

Why are experts asking questions and not offering solutions

Ever since Veerappa Moily has taken over as the Petroleum Minister and ever since the Rangarajan committee devised a rather convoluted formula that seems to have confused everyone we have seen many experts given free advice to the government on the issue of gas pricing. 

However in all the rantings of these so called experts I have failed to understand some basic issues:

1) The New Exploration Licensing Policy has been around for the last ten years if no more. How come these wise cracks took so long to wake up and that too after a few billion dollars had already been sunk under the PSCs. 

2) Some of these PSCs were signed when the NDA was around, So why are they haranguing only poor Moily. What happened to Ram Naik, Mani Shamkar, Murli Deora and Jaipal Reddy? Did they not approve and sign these PSCs and the many things that are now said to be totally wrong with them? 

3) Out of over two hundred PSCs how come we only know of one? What on earth has happened in the others? 

4) ANd finally what kind of experts are those who like Kejriwal propose that cheap (read free!) energy is the answer to all our problems. Are we hearing experts or politicians? 

Surya Sethi, prone to mimic a now famous prime time TV anchor has once again, vented his  umbrage at the Petroleum Minister by asking direct questions. Is he an expert or journalist who thinks his only job is to ask questions and not offer any solutions. After all having been in the Planning Commission and what all, where was e when these contracts were being farmed? Could he not have asked these questions, raised these objections when these PSCs were being signed? Or has he like so many others of his ilk become cleverer post retirement having had the benefit of hindsight?  As an expert Mr Sethi you should be offering solutions. And not solutions for one sector at the cost of the other but like a true Planning Commission expert, for the overall energy crisis that India faces. You cannot Dear Mr Sethi solve the problems of the power sector or the fertilizer sector a the cost of the oil and gas sector. That is what politicians and not experts do! You must suggest ways in which India can sole its overall energy problem. To enable it to get more oil, gas whatever in the long run. And the long run means not today not five years later but for the next generation.

Maybe all the private sector players are looting the country, the public sector companies are useless and the politicians are hand-in-glove with them, but what are the options left ? Is importing oil the only solution ? Is India going to be perpetual and eternal market forever transferring its wealth to foreign shores? Will we never like the US work towards energy security and make ourselves less vulnerable to manipulation by more powerful economies? 

Can M/s Sethi, Sarma and Dasgupta, who seem to have no other objective but to have held the Petroleum ministry to ransom, offer some solutions for increasing India’s oil & gas output in the next three years, instead of making unsubstantiated claims and charges. Shouldn’t India like America and China work towards energy security and ensure that the current and future generations are not held hostage to some middle eastern Sheiks who can turn our taps of energy, stifle our growth and starve our population.

Let’s hope these self-proclaimed experts do churn out some solutions instead of spending their time on slander and insinuation, emulating crab-like mentalities. 

Maybe we are in a mad world. So who better than Alice to steer us !

Fuelling the oil and gas sector

The period between 2009 and 2013 saw the nadir of Indian upstream activity. In 2009, production started at two of the largest discoveries in India—KG-D6 and Mangala. Everyone had predicted the sunrise of Indian gas and oil, with gas production doubling and the new oil from Rajasthan. More than 200 Production Sharing Contracts (PSCs) had been signed and were being implemented. Oil prices were reasonable. International companies had started looking at Indian upstream with interest. Even the petroleum ministry wanted to be involved in the contract management as it was uncomfortable with the idea of such momentous changes occurring without its guidance.

But soon, the slump came. It was around this time that various scams started surfacing. The scam-plagued government shied away from defending even those terms of the contracts (PSCs) that it had signed through a transparent bidding process. The CAG rode roughshod over a weak-kneed bureaucracy managing PSCs. The junior officers implementing PSCs could not find any senior to support and defend their legitimate decisions. Decision-making had stalled.

Decisions that could have led to increased exploration and production, new discoveries or continuation of production in the existing areas were waylaid on frivolous pretexts. 'Zero decision', or not taking one, became the safest bet.

Even the obvious decisions like more exploration in the existing producing fields took years to be cleared. Worse, officials added additional punitive conditions beyond the contract requirements—just to be doubly safe. Discoveries, development plans and declarations of commerciality for gas, etc, were not cleared under rather simplistic fig leafs like “gas development at a (artificial) price of $4.2/mmBtu”. This happened even as the country imported LNG at over $10/ mmBtu. The industry had come to a standstill. The final result is that only a handful of the 200+ PSCs signed are in operation today. The sad fact is that all this happened in a country that is energy deficit and forex constrained. The situation was exacerbated by factors that were within the control of the administration.

The AOGO-A T Kearney Index of the Attractiveness of India as a Global Upstream Destination slipped. With a possible score of 5, (Minimum 1, maximum 5, average 3), India made it to 2.7 last year. This was despite boasting of the best PSC terms, most transparent bidding system, level playing field, tax benefits, etc.

The number of bids per block was propped up only by “S” (small) blocks, where new domestic entrants could take the entry risk. In significant horizons often it was only the PSUs that kept the bid-box open.

The withdrawal of private sector defeated one of the prime objectives of the NELP, viz. attracting increasing exploration risk capital from private investors. Meanwhile, friendlier new provinces in East Africa and the Mediterranean opened up to explorers.

Why did the shine rub off so fast?

A well-crafted contract with a reasonable flexibility for companies to work independently had been usurped by the bureaucracy. In the process, the contract lost the objective of enhancing energy security of the country. Administrators forgot that the contract was designed as a win-win or lose-lose preposition and could not be administered as a win-lose exercise. In this case the regulator wanted to be administrator as well! Quick successive discoveries also gave rise to the fear of loss of crown jewels. Just when the industry should have expanded, given the robust international market, it contracted. The CAG did the rest. Thus, the best allocation and management systems got sabotaged.

The fall arrested

With a stalemate in all quarters, the government set up the Rangarajan Committee to break the logjam. Rangarajan identified the ills but his prescriptions were economically compromised to make them bureaucratically and politically acceptable. His suggestions—remove financial issues from the model, or since gas price calculated under PSC shall mean a higher fertiliser subsidy, increase it only halfway, etc—stand as evidence. He was hampered, no doubt, by the quality of data provided. But, the negative impact of the inappropriate model for Indian geology, or the continuation of uncertainty over gas prices remained unaddressed by the committee.

The increasing CAD, the rupee's downward spiral, increasing energy imports ultimately forced the government to attempt a more holistic view. Economist Vijay Kelkar has now been entrusted with coming up with a long-term vision for the Indian upstream sector.

In the last few months, the industry has seen a number of measures to reduce the backlog. These include holding MC meetings, confirming minutes of meetings and even routhine things like the appointments of auditors. The industry now sees a genuine effort by the petroleum ministry to generate a faster response. These decisions would be unremarkable in a normal environment. However, for an industry that has been struggling to breathe, these are a whiff of fresh air. Even the half-hearted change of gas price determination using RR formulation (which is still inadequate) is being accepted as a first step and a move in the direction of basing it on formula pricing.

The department secretary or the minister admitting that the system is process-driven and not focussed on results and press releases owning up to the backlog offer hope—after all, acknowledgement of problems has to be the first step for any course correction!

The way forward

What the government needs to do is, first, set a clear mission, objective and policy. The commitment to implement should be, and be seen to be, absolute. Like defence and foreign affairs, energy security should be made a national priority and kept above petty politics of the day. The Cabinet also needs to endorse all honest decisions taken towards fulfilling the policy objectives and ensure that these shall be supported and defended at the senior-most level. Such assurances need to be written, as the normal systems and verbal assurances have lost their credibility.

The government also needs to separate its sovereign function from its regulatory and administrative ones. The regulator should guard the national assets. The contract administrator 's mission should be to get the contract implemented in time and facilitate maximisation of exploration and production. Both these jobs don’t belong to the policy maker. The demand by the industry for an empowered upstream regulator has been ignored for over the last fifteen years. The paralysis of the last few years shows how detrimental this omission has been.

With regulating functions isolated, the administrators of contract (the government) and the executors of the contract (the operators) have to be on the same page. If there is an alignment in vision there is no reason that they should not be able to brainstorm together to find the best ways forward.

Source: Financial Express

Gas price hike will draw investments into exploration, say experts

Lack of clarity in gas pricing is the biggest hurdle for fresh investment in the gas exploration sector. Increase in gas prices by the government will directly attract investments into exploration and result in increased output.

This was the view expressed by industry leaders and experts at an energy summit organised by the Indian School of Business here. Karunakaran Hari, Head (Commercial) Cairn India, said gas pricing was a major driver for exploration and production companies to put in fresh investments.

The current price at which producers can sell gas is $4.2 per mmBtu. The Rangarajan Committee recommendations, which suggested uniform gas pricing based on volume-weighted average of international prices, could push up the price to $8.4 mmBtu.

Hari said studies have shown that if gas is priced at $6, there could be an additional 4.9 trillion cubic feet of gas production, as producers would be encouraged to put in fresh investments. At $8 per mmBtu, there could be additional 20 TCF of gas production and at $10 , the total additional production could even go up to20 TCF. There is a direct link between gas prices and fresh investments.

Debasish Mishra, Senior Director, Deloitte India (Energy Practices), agreed that there was no price signal for investors in India to put in fresh investments in the gas exploration sector. “No explorer will be willing to pump in investments if he is not clear at what price he could sell the gas,” he said.

He however felt that India would have to depend on coal for power production. “Shale gas will remain a local commodity. We expect gas prices could touch $11.5 and even at this level, gas-based power will be more expensive than coal, which today has a share of 72 per cent in the energy basket,” he pointed out.

N.K. Bansal, Executive Director (Corporate Planning) of Indian Oil Corporation, said investment plans in the Indian oil and gas sector for the 12{+t}{+h} Plan was Rs 436,250 crore, including Rs 311,000 crore for exploration and production.

On gas supplies, Bansal pointed out that the domestic gas demand could rise to 473 mmscmd by 2016-17, by which time domestic supplies could barely touch 209 mmscmd. He underscored the need for beefing up gas import infrastructure, including port handling and storage.

Source: HBL