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Gas Supply through Iran-India Pipeline, Shri R V Shahi, Former Secretary, Ministry of Power

Last week the President of Iran Mr. Mahmoud Ahmadinejad was in India and assured that the remaining issues connected with the Iran India Gas pipeline via Pakistan should be resolved soon. It may be recalled that this issue has been on the Agenda for last several years, commencing from early ninetees. In the new Government the matter was discussed at the Cabinet level in 2005 and necessary steps were decided to be taken so that the Iran India pipeline could become a reality.

It needs to be stated that when this issue of gas to be brought from Iran was first suggested, the prevailing price levels both of crude and gas were very low. Since then, radical changes have taken place in the fuel supply scenario in the petroleum sector. In fact, during 90's there was a general perception that gas would be the fuel of 21st Century. Unfortunately such a hope has been confronted with ground realities of ever escalating, in a highly unpredictable fashion, petroleum fuel prices. Therefore, on the whole while there does appear to be a case for a continued interest in import of gas through such a pipeline, it is also important to re-evaluate various scenarios in the context that prevails now. Secondly, when the idea of gas pipeline was first conceived several years ago, not much was known about, and in any case, not much had happened in the field of, Liquefied Natural Gas (LNG) regasification process. In last ten years India has the advantage of having developed a few LNG terminals which use the liquefied natural gas, regasify it and such a gas is then transported through the same pipeline network to customers including power plants and fertilizer plants. There is greater degree of knowledge now about this process and also about the economics of LNG. Thirdly, in last 7-8 years, a number of discoveries in gas fields in Bay of Bengal (KG Basin etc.) present a much large possibility on domestic gas, which was not known in the early ninetees. In the light of these, several issues need to be brought into focus for re-examination of the earlier conclusion that import of gas through pipeline from Iran via Pakistan is an option which is commercially viable and strategically well placed.

We now also have the advantage of the Integrated Energy Policy which was evolved in September 2006 after extensive deliberations. Several changes have taken place in the electricity sector post Electricity Act 2003. Similarly, there have been recent developments in last two years in the coal sector in which even though we do not have a Coal Act (Coal Mines Denationalisation Bill is pending consideration of the Parliament), captive coal block allotment policy and procedure have been relaxed and streamlined. Another major development on the coal front has been the initiatives both in the public sector and the private sector to acquire coal mines abroad in Indonesia, Australia, South Africa etc. A chain of coastal power stations have been conceived to be developed primarily on imported coal or domestic coal blended with imported coal. These changes should have, and in fact do have, considerable influence on how much of dependence should be placed on gas and more particularly on imported gas.

The most important development that has taken place in the last ten years which may have significant impact on evaluating this option is the sharp change in the price of crude and natural gas. The following Table -I indicates the increases in last ten years:

Table-I
Spot Crude Price

Year $/Barrel
1998 12.21
1999 17.25
2000 26.20
2001 22.81
2002 23.74
2003 26.78
2004 33.64
2005 49.35
2006 61.50
2008 120.00

The crude price has increased more than ten times from about $ 12 to $ 120 per barrel. Already there are indications that this will rise further. In the next one year, there are predications that, it would exceed $ 150. There are also predictions that the crude price would go beyond $ 200 a barrel. Similarly, increases have been experienced in the price levels of gas as well. During this period the price of natural gas has increased from $ 1.5 to $ 7 per million BTU (Table - II). Therefore, the whole economics of power generation has undergone severe changes. Power and fertilizer are the main consumers of gas, to the extent of about 85% (40 to 45% each). In the case of fertilizer, since the price of Naphtha also increased many folds in last few years, the economics of fertilizer production is being compared in two situations - one with Naphtha and another with gas. On this basis they are able to conclude that even if gas price was higher, fertilizer could prefer gas to Naphtha. Similar economics does not work with power sector because of many other options that are available. Beyond a price, power tariff would affect even more adversely the manufacturing sector.

Table-II
Gas Price (Dollar per Million BTU)

Year LNG (CIF Japan) Natural Gas (CIF Europe)
1998 3.05 2.28
1999 3.14 1.80
2000 4.72 3.25
2001 4.64 4.15
2002 4.27 3.46
2003 4.77 4.40
2004 5.18 4.56
2005 6.05 6.28
2006 7.14 8.77
2008

The Integrated Energy Policy document, while examining and recommending energy supply options, has come to the conclusion that gas based generation will continue to be at around 10% of the total power generation. They have further suggested that even if it is pushed up, at the most, it could be around 15%. An extract from the Integrated Energy Policy is given below:

As per Para 3.3.2(k) on Energy Supply option "Gas does not emerge as a major fuel in any of the scenarios. The share of gas in the energy mix remains below 11%. Even if gas is pushed for power generation, only 16% of the power generated comes from gas. This is so despite the scenarios assuming that domestic gas supplies will be supplemented with coal bed methane and in-situ gasification of coal as well as with imported LNG."

The Expert Group on the Integrated Energy Policy also examined the issue of import of gas from Iran and other countries through pipeline. When we were deliberating on the Integrated Energy Policy issues, the price levels of crude, though had increased to beyond $ 50 a barrel, the present level of beyond $ 120 had not been anticipated. Accordingly, its resultant impact on the overall delivered price of gas had not been envisaged. It would be relevant to mention the points of view of the Integrated Energy Policy on the Iran India pipeline. The Policy did capture the strategic issue of likely disruption of supply and its impact on energy security. And, in this context supply of LNG as an alternative and as a backup was definitely envisaged.

Paras 4.3.3 (b) and (c) are extracted below: -

"(b) Import of Gas Through Pipelines -

Gas imports from, say, Iran through Pakistan, or from Central Asia through Afghanistan and Pakistan or from Myanmar through Bangladesh do provide a higher degree of energy security compared to equity oil or gas. This is so because of the security of such supply. The supplying country typically invests in the pipeline and hence has a stake in maintaining the supply. Also, if supply to India is stopped, alternate buyers along the route may be difficult to find and the pipeline cannot be easily diverted like, for example, a LNG ship. Thus the risk of disruption from the supplier is relatively smaller. There is, however, the risk of sabotage of the pipeline as it transits through different countries. This can be guarded against by the following:

  1. Create an interest in the pipeline for all countries through which it transits. For example, a common pipeline shared by India and Pakistan will have substantial gains for Pakistan too. There are economies of scale that reduce costs for Pakistan over the alternative of obtaining gas through a pipeline of its own. Also Pakistan would earn transit fees. With this, a disruption should it occur, would likely be of a short duration.

  2. Get multilateral agencies to invest in the project by way of equity and debt.

  3. Enlarge the domestic buffer stock of LNG, have redundancy in regasification facilities and ensure that, in the case of a disruption, the supplier would be obligated to provide compensatory supply in the form of LNG. Such additional buffer stock can only be justified as cost of energy security.

(c) Import of LNG :

Importing LNG through long-term contracts provides a flexible alternative to pipelines. Since the global gas market has developed and LNG trade has increased, the price of natural gas is likely to match the opportunity cost of selling it as LNG. Thus, the cost advantage of piped gas is not likely to be very large and has to be balanced against the risks of pipeline discussed above".

It may be relevant to briefly present how the proposition of Iran - India Gas Pipeline has evolved and progressed over last 15 years.

  1. Talks on the 3000 KM pipeline project involving Iran, Pakistan and India started in early ninetees, but it did not progress well in view of political developments particularly between India and Pakistan.

  2. A more concrete development took place during the Joint Commission meeting held in Tehran in May 2000, when it was decided between India and Iran to evaluate (a) overground pipeline, (b) pipeline through Sea, (c) import of LNG.

  3. Gas Authority of India Limited was identified in August 2001, as the nodal agency by the Ministry of Petroleum and Natural Gas to participate in the Technical Sub Committee which was set up by the Indo-Iran Joint Committee in May 2000.

  4. The Government of India and Iran signed an MOU in January 2003 to set up Joint Ventures for investing and developing oil and gas fields. In this pipeline from Iran to India was identified as an important area of cooperation.

  5. Petroleum Ministry suggested, in December 2004, that under a bilateral Agreement Iran could deliver gas to India at India - Pakistan Border and the Agreement could provide for Take or Pay. India could off take 60-70 MMCMD of gas.

  6. Union Cabinet decided, in February 2005, an overall approach on import of gas, through pipelines, from Iran, Pakistan, Bangladesh and other countries. The Petroleum Ministry was authorized to take further action.

  7. In June 2007 in the meeting of Joint Working Group the important issues relating to price and other conditions remained unresolved.

  8. Iran suggested a tripartite meeting among India, Iran and Pakistan in Tehran in September 2007. India's position, however, was that first India and Pakistan needed to sort out bilateral issues including transportation tariff and transit fee.

A few other issues which need to be brought into the discussion while evaluating the economics of various options are as follows:

  1. At present out of 13,000 MW (slightly less than 10% of the total installed capacity) gas based power generation capacity, almost one third of the capacity remains unutilized for want of gas.

  2. For the last about one and half years approximately 2,000 MW of gas based power generation capacity projects are ready, but are not producing power at all because of non-availability of gas from KG Basin and other sources.

  3. The earlier economics of power generation on gas as the fuel, in relation to other technologies such as coal, hydro electric, was worked out keeping in view the Administered Price Mechanism (APM) which provided gas to power stations at a rate of approximately $ 3 per million BTU. Occasionally rates were changed to keep in tune with the escalation of various costs both in production of gas as well as in transportation of gas.

  4. In the context of recent developments the gas producers have started comparing gas prices with global fluctuations in price of crude and of gas. As a result, the price of gas for PMT (Panna-Mukta-Tapti) gas field which was fixed about two years ago at $ 4.75, has already been revised to $ 5.75 per million BTU form April 2008. Excluding taxes and duties, but including the marketing margin for GAIL and transportation cost, the delivered price would work out to $ 6.75 per million BTU.

  5. The price of KG Basin Gas still remains unresolved. Reliance Industries had quoted a price, in response to the global tender floated by NTPC in 2003, for their two projects at Kawas and Gandhar (both in Gujarat) 1,400 MW capacity each, and the price quoted was around $ 2.90 inclusive of transportation cost. This issue subsequently went into disputes and is awaiting a decision under the Court proceedings.

  6. Therefore, in so far as price structure of domestic natural gas is concerned, the picture is highly complex. The Petroleum and Natural Gas Regulatory Board, which was set up after long pending Petroleum Bill was enacted in 2006. But, unfortunately this Regulatory Board does not have the jurisdiction over upstream gas. The expectation of an independent Regulator of upstream gas has not so far been met. Even the Integrated Energy Policy had suggested the need for such a Regulator. When the crude price was about $ 60 a barrel, Iran had indicated, it is understood, a price of gas somewhat less than $ 5 per million Btu. It is not known whether they will stay at this price or expect more in view of crude price exceeding $ 120 a barrel. The overall price that will emerge would be approximately on following lines assuming a few alternative prices of gas: -

Gas Price $ 5.00 $ 5.50 $ 5.75 $ 6.00
Transportation 0.75 0.75 0.75 0.75
Transit fee for Pakistan 0.50 0.50 0.50 0.50
Sub total 6.50 6.75 7.00
Indian portion (transit & marketing margin) 1.00 1.00 1.00 1.00
Total 7.50 7.75 8.00 8.25

A comparison with an alternative of LNG import and setting up power plant near LNG terminal will generate the following picture:

Assuming gas price of $ 5.75 per mbtu;

Gas Price: 5.75
Liquefaction: 1.50
Transport: 0.30
Re-gasification: 0.75
Total: $ 8.30 Per mbtu

This compares with $ 8.00 per mbtu if we import, through pipeline, as the same gas price of $ 5.75 per mbtu.

We need to evaluate the risk associated with the pipeline option as compared to $ 0.30 per mbtu additional cost in the option of LNG import. It is difficult to conclusively say in favour of pipeline, though it would need a much deeper analysis. In any case, at gas/ LNG price of $ 8.00 per mbtu (landed price), the fuel cost of power generation itself will be Rs. 2.40 per kwhr and the total price will be Rs. 3.20 per kwhr. Thus, this does not seem to be a viable option for power generation.

Another issue which needs to be highlighted is about the likely cartel that may get created and the impact of such a group on the production, availability and price. Middle East controls more than 40% of World Gas Reserves and including Russia it is about 67%.

Table-III
Natural Gas Proved Reserves (end 2006)

Country / Continent Reserve Trillion Cubic Meter Share of Total % R/ R Ration
North America
USA 5.93 3.3 11.3
Canada 1.67 0.9 8.9
Mexico 0.39 0.2 8.9
Sub Total 7.98 4.4 10.6
South & Central America
Sub Total 6.88 3.8 47.6
Europe (including Russia)
Russian Federation 47.65 26.3 77.8
Africa
Sub Total 14.18 7.8 78.6
Middle East Asia (including Iran & Qatar)
Iran 28.13 15.5
Qatar 25.36 14.0
Sub Total 73.47 40.5
Asia Pacific
Australia 2.61 1.4 67.00
China 2.45 1.3 41.8
India 1.08 0.6 33.9
Total World 181.46 100.0 63.3

A Reuters report from Tehran dated 30th April 2008 in worth mentioning "Iran acknowledged on Wednesday its enthusiasm for an OPEC-style body for natural gas producers........." Though this suggestion has not been accepted by many others "Russia as well as other members of the informal Gas Exporting Countries Forum (GECF) club such as Iran, Qatar, Venezuela, Nigeria and Algeria, have said it aims at increasing cooperation between key natural gas producers so that they better understand market needs" - Financial Express, New Delhi, May 1st, 2008.

This development should not be overlooked. After all, OPEC's joint cooperation over the years has only meant a cartel approach, controlling production and increasing price (ten times in last 10 years) and thereby de-establishing the energy security scenarios of various countries.