New Delhi: India’s biggest natural gas field will transform the energy landscape when production begins this month, eventually doubling the nation’s supply of the cleaner-burning fuel and lessening its reliance on oil.
Reliance Industries Ltd’s (RIL) $8.8 billion (Rs45,408 crore) project will mean many things to India’s one-billion-plus people: more power supply from idled generators starved of gas; lower carbon emissions than its coal-generator sector; less need for costly naphtha or imported liquefied natural gas (LNG) for fertilizer companies aching for local alternatives.
But for investors, the D-6 field in the Bay of Bengal heralds a more important, but less apparent, sea change.
Sea change: A file photo of RIL’s D6 control-raiser platform. The $8.8 billion project means many things to India’s one-billion-plus people. Reuters
The gas will be sold at more than twice the price fixed by the government for sales from fields of state firms, and about the same as what customers pay for gas from British Gas Plc.-operated Panna-Mukta and Tapti fields.
While it is only the first of many steps needed to spur investment by deregulating more of the protected energy industry, still riddled with state-owned refiners and pricing distortions caused by state control over power and fuel, it represents an acknowledgement that market mechanisms play a vital role.
“The government has implicitly accepted that the market can indicate a price level that will allow accelerated development of gas in a way bureaucracy cannot do effectively,” said Al Troner, head of Asia Pacific Energy Consulting.
It will also deliver cleaner feedstock to fuel-starved power stations and raise capacity by 4,000MW, or nearly 3%, replace subsidized liquefied petroleum gas with piped gas at a lower cost and cut use of naphtha, a swing fuel for fertilizer and power plants.
Higher supply will also reduce emissions as India’s tax system makes it attractive for motorists to switch to compressed natural gas, which has already helped clean the air in the few cities where it has been rolled out widely over the past decade.
As the fields ramp up towards a plateau of 80 million standard cubic metres a day (mscmd) by 2010, gas may take up to one-fifth of the current liquid fuels market in Asia’s third largest oil consumer, which imports about 70% of the oil it consumes. They will produce enough gas to meet about one-third of the UK demand.
The oil ministry has mandated which sectors will get priority in gas sales, but unlike the supply of cheap gas from state companies with rigid contracts, RIL is negotiating supply conditions with key customers such as fertilizer plants. It is selling the gas at a base price of $4.2 per million British thermal units.
RIL faces controls on its gas sales, but analysts take comfort from the fact that so far the ministry has imposed these curbs only for the first 40mscmd of output and for only five years, potentially allowing more freedom for the other half.
Analysts say the changes indicate the government considers it better to encourage more investment in domestic resources than keep subsidizing low prices at the risk of ever-rising imports.
“That’s a very big change in thinking. A lot of people don’t realize how much change there has been,” Troner said.
India has swept aside controls on most sectors of the economy in nearly two decades of market-friendly reforms, but still sets prices of petrol, diesel, cooking gas, kerosene and gas, while power and fertilizer prices are also controlled. A government official said complete pricing freedom was difficult as key customers, fertilizer and power plants, themselves faced price controls on their output.
The share of market-priced gas will rise further as ageing fields of state exploration firm Oil and Natural Gas Corp. Ltd(ONGC) are past their prime, and recent finds by RIL and the Gujarat State Petroleum Corp. Ltd spur more offshore exploration.
RIL’s discovery in 2002, now proven to hold about 10-11 trillion cubic feet of gas, put India on the exploration map for foreign firms searching desperately for accessible reserves, with Exxon Mobil Corp., ChevronCorp. and BP Plc. casting an eye on exploration rights in the once-overlooked nation.
While state firms such as ONGC have sunk billions of dollars in dry wells for many years, RIL and others such as Cairn Energy Plc.—which made India’s biggest oil discovery in over three decades in Rajasthan desert—have flourished. With coal still fuelling about 70% of the nation’s power generators, the most immediate impact of the new gas may be on India’s demand for fuel oil and naphtha, typically the power fuels of last resort and less efficient than others.
The start of LNG imports in 2004 helped curb fast growing domestic oil demand from the power and fertilizer sectors, but greater gas availability could squeeze another 20% of liquid fuel out of power plants.
But analysts caution that the changes may not be lasting unless the government takes steps to attract private investment to discover and develop new fields, a more difficult task now than a year ago as collapsing global prices have cut spending.
“Reliance’s natural gas field has a plateau period of seven years. Power and fertilizer plants look at a longer horizon,” said T.N.R. Rao, a former secretary at the petroleum and natural gas ministry.