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A K Balyan, MD and CEO, Petronet LNG

22 Mar 2011

Petronet LNG is the market leader in LNG business and is engaged in importing LNG and setting-up LNG terminals in the country.

Its MD and CEO A K Balyan shares his thoughts with InfralineEnergy's Sangeeta Tanwar on various issues including on the impact of Japan's recent nuclear crisis, the demand-supply gap of natural gas, the need to delink gas prices from crude oil prices and securing long-term LNG contracts for India from the international gas exporters.

Edited Excerpts

What impact do you see on LNG prices because of Japan's recent nuclear crisis?

It's very difficult to really make a forecast as to what the prices for LNG are going to be because various things affect prices. Japan is one of the biggest importers of LNG and power generation is one of the major usages of gas in the country. The country generates 30 per cent of power from nuclear and about one-third of power each from coal and gas.

In the present scenario because of the breakdown of transmission and generation facility I'm not sure how much of gas fired plants are working properly. If they are working then Japan will continue with its long term supply of LNG for which contracts are already in place. If there has been any disruption in the value chain be it storage or transport, this alone will result in bringing down the amount of LNG coming to Japan.

"Japan's crisis could have a linkage to market and as markets depend on perception. There could be some impact on LNG prices."

The usage of gas could go up only when additional utilities are converted to gas fired. But this appears highly unlikely at least in near future. Because coal fired plants will use coal only and nuclear plants will have to be put back on nuclear.

What Japan would need immediately is petro products for automotive industry where the storage facility and refineries have been totally disrupted. The country would be required to import those capacities of petro products.

Over the long term, if the country decides to switch some of its power generation from nuclear to safer fuels, the demand for LNG is going to increase.

In which direction are LNG prices headed given the uncertainty over Japan's gas requirements?
If for a short duration of say 15-20 days, the LNG that Japan was scheduled to import, is unable to come to storage or plant facilities, then these cargoes will be available somewhere else. These, as a result, will add to additional cargoes in the market, which could lead to fall in LNG prices. Japan's crisis could have a linkage to market and as markets depend on perception. There could be some impact on LNG prices.
What is your outlook on natural gas demand in the next five years in the country?

The long term demand of gas is only going to grow rapidly in India. By 2015, the demand for natural gas will go up from the current 90 MMSCMD to 380 to 400 MMSCMD. So the demand for natural gas is quadrupling. On the supply side, by 2015 we will be able to reach only 210 MMSCMD from domestic sources and other likely sources that might add on some gas in the next two to three years.

While the production of gas in the country is increasing, but the demand is growing at a much faster pace so the supply-demand gap is only increasing. This shows that more and more gas has to be brought from outside or some great find has to be made within the country to supplement the growing demand for gas.

So, PLL sees great opportunity and there is scope of bringing in gas in the form of LNG.

"More and more industries will be willing to switch to gas, since it's much cleaner fuel. It should be made more affordable through competitive pricing."

We also see new pipelines coming up in the next two to three years, which will enable gas to be carried to new areas and market will only give fillip to more gas consumption.

With increasing demand for LNG, how much divergence do you see as compared to Integrated Energy Policy Projections?

If you compare the Indian energy mix with average world energy mix, we find that we are still using coal to a larger extent. More than 50 per cent of our energy needs are met by coal. This is in variance to world average energy consumption mix. For world, average gas consumption is to the order of 24 per cent in its energy mix, for us it's just come up to10 per cent recently. A couple of years ago,it was only eight per cent. Now we see that contribution of gas in energy mix is going to increase. Gas is one of the fastest growing sectors.

From the perspective of policy, one must be conscious about environmental considerations. Gas fired plants are much cleaner and increasingly, the trend is to use cleaner fuel, where gas is the preferred fuel. More and more industries will be willing to switch to gas, since it's much cleaner fuel. It should be made more affordable through competitive pricing.

What is your view on linking of LNG gas prices to crude prices?

Many producers have comfort in linking LNG prices with crude oil prices. They feel the price of gas should move in tandem with crude oil price.

However, there are markets, where there is no linkage of LNG price with crude oil price. One such market is US as alternative gas is available there. Europe has also been partly affected by same phenomenon and the LNG price there too is not exactly linked to crude oil price. But traditional sellers want it to be linked with crude oil.

We have no issues with LNG prices being linked up with crude oil prices. We need to see that the pricing is affordable and it serves the Indian investors properly in the long-term and it has to be competitive from international perspective.

How competitively is LNG priced in comparison to other competing fuels?

Well, imported gas in the form of LNG would remain a costlier gas in foreseeable future. The cost of gas production, transport and re-gassification, and customs duty make LNG little costlier than the domestic gas.

"East coast needs to be examined very closely for a terminal, as it is required for balancing the grid gas availability in the country. It will also help serve new nearby markets."

But the price of domestic gas is under consideration for review because unlike oil, gas from different areas would mean different investments for production, costs and prices. It cannot be same. For example, deep water gas where investments are high, is going to be costlier than gas from other sources.

These are the considerations about which the government has been aware of. The initiative by Ministry of Petroleum to look at some kind of pool pricing mechanism is a welcome step. To some extent, the government is already practicing pool pricing. For example, if a power plant requires gas and if the government allocates only 60 per cent of gas, then the plant has to get the rest 40 per cent from somewhere else. In a way it's pooling, if not through pricing, at least from the source from which it has to seek the remaining gas.

The Planning Commission has already formed a committee for discussing the way forward on pool price mechanism. The move will bring about some kind of competitiveness in the market. We are a country where currently we have as many as six to seven prices prevailing for gas produced within the country.

We had a gas price enhancement from less than $ 2/mmbtu to $ 4.2/mmbtu. So, if there is any increase in prices, everyone has to pay the same. The power and fertiliser sectors have to realise that they cannot have gas prices always at the same low prices.

We have to be integrated with the international gas markets. We have to more or less work on the same parameters. If international prices move up, we have no option, but to adhere to them.

The challenge is that how best we negotiate with international gas exporters and get better gas prices for India. And that's what PLL is really striving for.

Cost of imported LNG continues to be higher despite increase in domestic gas price. What are the possible solutions for more affordable price contracts with international gas suppliers?

Our task is to make international gas suppliers aware of the market that exists in India. In the country, the gas is going to be used as a fuel. Either as a new requirement or the gas is going to replace existing fuels such as diesel, naptha or fuel oil.

In order to procure gas at affordable prices, we are making all efforts to apprise the sellers of the various uses of the imported gas in the domestic market. We also inform them that Indian investor will be more comfortable if there is a long term arrangement promising assured supply of gas at an agreed rate for a longer period. Many of the sellers are quite aware of the Indian market and they appreciate our position. We are hopeful that going forward we will able to tie-up more gas supplies.

Do you feel that IOC's plan to revive Ennore LNG terminal at East coast would be economically viable in view of its KG D6 neighbour?

There have been lots of talks about several LNG plants. For long several players have been talking about setting-up new LNG plants. It's good to talk because these options suggest that there is a requirement for gas.

"New sources such as Shale gas is impacting LNG demand. Markets such as US which were previously major consumers are likely to turn into exporters."

Gas presents huge opportunity and the existing infrastructure is not sufficient for the country's requirement for the gas. So, any additional capacity is always welcome.

IOC is one of our promoters and we have an MOU (Memorandum of Understanding) with them that as and when Ennore LNG project materialises, it will happen along with PLL. East coast needs to be examined very closely for a terminal, as it is required for balancing the grid gas availability in the country. It will also help serve new nearby markets.

Gujarat State Petroleum Corp. along with Adani Group is also looking forward to set up a five-million mt/year LNG terminal at Mundra in Gujarat. How big a move is this going to be for LNG business?
They have been talking about the project for quite some time. They were talking about a joint venture with the Government of Gujarat. I am not sure what finally has been agreed to. Country needs much larger quantities of gas and if Mundra LNG terminal comes up, it will only add to the existing capacity and meet some of the gas requirement.
How have the dynamics of LNG business changed since Petronet's entry in 2004?

Each period brings its own set of opportunities. In past eight years, the demand for gas has almost doubled and the nature of gas business has changed dramatically. More and more gas is now available in the long-term and short-term. Floating cargoes like crude oil are now available, which one can buy. Large numbers of re-gasification terminals have been set-up and huge liquefaction facilities have come up.

"One of the essentials is to have a comprehensive pipeline network that would include trunk, major and spur pipelines."

New sources such as Shale gas is impacting LNG demand. Markets such as US which were previously major consumers are likely to turn into exporters. The market currently is dynamic but volatile. In such an environment, we need to really take a consulted view to decide about long term procurement of LNG.

What are the critical factors for the growth of LNG?
One is infrastructure. Since the demand is established, we need to have world class infrastructure having larger component of pipeline network. Secondly, we have to have clarity on pricing so that investors are comfortable. The third is long term sourcing arrangement of LNG. These are necessary components required for sustained growth of LNG.
What are the ways in which India can develop a comprehensive gas infrastructure network?

One of the essentials is to have a comprehensive pipeline network, which would include trunk, major and spur pipelines. This critical requirement has been now recognised by the Ministry of Petroleum and by the regulator (PNGRB) which is responsible for inviting bids for laying of pipelines.

Several new pipelines have been awarded, some of which are already under construction. Some pipelines have already started and we see new areas being connected. GAIL is doing a wonderful job of creating new pipelines. In order to speed-up the process we have requested authorities to give priority to pipelines where gas is available. Our Kochi plant will get commissioned by early next year. We have spoken to GAIL. It has assured us that by the time the Kochi terminal will be commissioned early next year, the pipeline connectivity will be in place.

What are Petronet's growth plans for the next two to three years?

We will like to double our volumes in the next six years. Last year, we had 7.5 million tonne (mt) from Dahej and 2.5 mt from Kochi. So, we have a capacity of about 10 mt having added 2.5 at Dahej and another 2.5 at Kochi.

We have received permission for direct marketing of our gas. Earlier, it was being marketed through our promoters alone. We have plans of marketing our gas under a brand, which we plan to launch soon.

(InfralineEnergy thanks A K Balyan, MD and CEO, Petronet LNG for sharing his valuable insights with our readers. The column 'In Conversation', is a platform to engage experts from various sectors to share their views on the different transformations in the Indian energy sector.)