INSIGHT: India draws a new energy landscape with Reliance gas

15 April 2009 16:24  [Source: ICIS news]

By Malini Hariharan

Chairman Mukesh Ambani of Reliance IndustriesMUMBAI (ICIS news)--The long-awaited start of gas production by Reliance Industries Ltd off the east coast of India marks a major milestone in the development of the country’s oil and gas industry.

Output from the deep-sea KG D-6 field will initially be only about 5m standard cubic metres per day (MMSCMD). But Reliance expects to pump out 40 MMSCMD in the next few months and hit 80 MMSCMD next year, which would double India’s gas production.

The government estimates that gas and oil production from the KG D-6 field would meet about one-sixth of the country’s total consumption and, at current prices, reduce India’s annual energy import bill by $9bn (€6.75bn).

The increased availability of gas locally promises to have far-reaching implications across a number of sectors.

Gas from the KG D-6 field has been priced competitively at $4.20/mmbtu at well head, with the landed price likely to be in the range of $5.70/mmbtu-$6.20/mmbtu.

Burdened with a heavy subsidy bill, the government has prioritised gas allocation to the fertilizer sector, which is set to receive around 15 MMSCMD of the 40 MMSCMD production planned in the first phase.

The rest of the output would be directed to power and liquefied petroleum gas (LPG) production as well as distribution to cities.

Indian naphtha exports are expected to climb as fertilizer and power companies increase their dependence on gas. Additionally, the country is also seeing expansions in refining capacity.

Naphtha shipments are expected to increase by 200,000-250,000 tonnes/month, contributing to an overall surplus in the East of Suez market, according to oil and gas consultancy Purvin & Gertz.

However, the power and fertilizer sectors are still short of feedstock, and companies could turn to naphtha if the price is right.

This was evident in the last quarter of 2008, when low naphtha prices made it an attractive feedstock.

A big change to India’s naphtha balance is expected only after the start-up of Indian Oil Corp’s (IOC) new 857,000 tonne/year naphtha cracker at Panipat in 2010 and ONGC Petro-additions Ltd’s (OPaL) 1.1m tonne/year dual-feed cracker at Dahej in late 2012.

The major beneficiary of the KG D-6 gas is the fertilizer sector. Production is forecast to expand as plants that are constrained by a lack of competitively priced feedstock will be able to raise operating rates.

Many Indian fertilizer plants switched from naphtha to gas a few years back when liquefied natural gas (LNG) availability increased. 

FE Energy, an oil and gas consultancy, estimated in a recent report that of India’s 21m tonne/year urea capacity, 63% is now based on gas, 27% on naphtha and 10% on fuel oil.

Naphtha consumption by the fertilizer sector has steadily dropped from about 130,000 bbls/day in 2005 to 80,000-90,000 bbls/day in 2008. In 2009, FE Energy has forecast that consumption will drop to 70,000 bbls/day.

The pecking order for fertilizer companies now is domestic gas, LNG and then naphtha, says an industry analyst.

A senior source from the fertilizer industry agreed, saying he believes that an immediate impact of the KG D-6 gas production will be a fall in spot LNG imports and only a marginal rise in fertilizer production.

But the analyst also cautioned that a lot will depend on steady availability of KG D-6 gas as LNG is now attractively priced.

“LNG spot prices have fallen to around the KG D-6 gas price. India has LNG terminal capacity and companies are looking for volumes. Private players will go for [LNG] if the price is right,” he said.

While the fertilizer sector has the potential to use much more than the initial allocation of 15 MMSCMD from KG D-6, this is likely to take a few more years to achieve.

The first phase of KG D-6 gas will only reach plants located along the country’s major pipelines. Other plants will have to wait for new pipelines to be built, which is unlikely to be completed before 2012, said the fertilizer industry source.

Some fertilizer plants are being debottlenecked, but this would result in only 2-3 MMSCMD of additional gas demand. New plants are being planned, but these are still in early stages of development.

Fertilizer imports are expected to continue, although the government stated in February that it wants to achieve self-sufficiency in urea within four years.

Another issue is the high cost of conversion projects for plants that still rely on fuel oil and naphtha.

The fertilizer industry source estimates that conversion from fuel oil to gas would cost about Indian rupees (Rs) 10bn/plant ($200m/plant), while conversion from naphtha to gas would cost around Rs1bn/plant.

“Companies using fuel oil will not switch to gas under the current [subsidised fertilizer] pricing system. The issue is how to make these projects viable. But there is some hope that these will take off as the government recently indicated that it will subsidise conversion projects,” he added.

Although Reliance has set a target of achieving peak gas production of 80 MMSCMD next year, many oil and gas analysts believe that the ramp-up is likely to be slower – especially if pipelines are not built in time.

($1 = €0.75, Rs49.82)

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By: Malini Hariharan
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