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Focused Energy Report –
XXXI
Monthly Report – December 2014
Energy Desk
GAIL (India) Ltd.
1
Table of Contents
Energy Prices 3 I.
Under-Recoveries on Petroleum Products 3 II.
Country Analysis - Azerbaijan 4 III.
A. Energy Mix .............................................................................................................................................................................................. 4
B. Oil and Gas Resources ....................................................................................................................................................................... 4
1. Natural Gas Exploration and production .............................................................................................................................. 5
C. Export Market........................................................................................................................................................................................ 6
D. SWOT Analysis ...................................................................................................................................................................................... 7
E. Key trends of oil and gas sector .................................................................................................................................................... 7
Company Analysis- CAIRN India 8 IV.
A. Portfolio of Cairn India ...................................................................................................................................................................... 8
B. SWOT Analysis ...................................................................................................................................................................................... 8
C. Strategy ................................................................................................................................................................................................... 9
D. Potentials in its E&P fields ............................................................................................................................................................... 9
E. Future Investments ............................................................................................................................................................................. 9
F. Financials .............................................................................................................................................................................................. 10
Russia’s new Energy Ally China 11 V.
A. The Deal ............................................................................................................................................................................................... 11
B. Russia Move towards East ............................................................................................................................................................. 11
C. Financing Challenge Sees Pivot from Japan to China ........................................................................................................ 11
D. Impact of Deal ................................................................................................................................................................................... 12
Accelerated Depreciation benefit for wind energy and its impact on the Renewable Energy VI.
Industry 13
A. Comparison between Wind and Solar ..................................................................................................................................... 14
B. RPO targets for the states & REC trading for the Nov-14 ............................................................................................... 14
1. State-wise Solar RPO targets .................................................................................................................................................. 15
2. REC trading for the Nov-14 ..................................................................................................................................................... 16
2
Executive Summary
The Focused Energy Report for the month of November 2014 reviews the Energy Prices taking
in consideration the comparison with last month. There’s decrease of around 21.75% in the WTI
oil prices, the prices of natural gas Henry Hub have increased by 5.38% and around 22.39%
decrease is there for crude oil prices of Brent.
Crude is in downward trend which is good for India as a net importer of crude. The fall in prices
is due to slowdown (less consumption) in China, over supply of Shale oil, OPEC’s refusal for
output cut.
The next discussion in the report is about “Azerbaijan”. Azerbaijan, one of the oldest oil
producing countries in the world, is an important oil and natural gas supplier in the Caspian
Sea region, particularly for European markets. Azerbaijan has a substantial gas resource base. In
2013, Azerbaijan exported about 240 Bcf, mainly shipping it via the South Caucasus Pipeline. In
this section we discus about its current Energy mix, Natural Gas resources, SWOT analysis,
export market and key trends of its oil and gas market.
In the next section “CAIRN India” is covered which one of the largest non-state exploration
and production companies is operating in the country. Its roots are in UK-based Cairn Energy,
formed in 1979 and becoming an investor in the Indian upstream oil sector in the late 1990s.
Cairn has now been operating in India for more than 15 years and has played an active role in
developing the oil and gas resources in the country. Ravva in eastern India was the first
offshore oil and gas field to be developed, followed by the Lakshmi gas field in western India
It’s being analysed wrt portfolio, SWOT analysis, potentials, financials, strategy and future
investments
In this section there is a discussion about “Russia’s New Energy Ally China.” Russia's new gas
deal with China has likely been accelerated by geopolitical pressures from the West owing to a
continued impasse in Ukraine. It also notes a shift in Gazprom's gas strategy in Asia-Pacific, as
practical funding needs arising from sanctions push the Russian gas firm away from its initial
target of the Japanese LNG market and towards the Chinese gas pipeline market. It is seen as
Lending Squeeze Pushes Gazprom to Asia. The details of the deal, Russia Move towards East,
Financing Challenge Sees Pivot from Japan to China with impact of the deal are covered.
In the last section there is a discussion about benefit from Accelerated Depreciation for wind
energy and its impact on the Renewable Energy Industry. New wind capacity additional peaked
in 2011-12 at about 3,200 MW which fell sharply to 1,700 MW the next year as AD benefits were
removed which the govt. removed citing its maturation. But after reintroduction of AD (80%) in
2014, investment momentum has shift again to wind due to policies and attractive tariffs. The
discussions contains Comparison between Wind and Solar industries and RPO targets for the
states & REC trading for the Nov-1.
3
ENERGY PRICES I.
WTI Crude Oil ($/barrel) BRENT Crude Oil ($/barrel) Natural Gas ($/mmbtu)
Particulars Sep.2014 (Final) Oct. 2014 (Estimated)
JCC Crude Oil ($/b) 106.22 100.7
Average International FOB Price & Exchange rate:
UNDER-RECOVERIES ON PETROLEUM PRODUCTS II.
(A) Product-wise Under-recovery of Public Sector Oil Marketing Companies(OMCs):
*additionally, a subsidy of Rs 0.82/Litre on PDS kerosene & Rs 22.58/Cylinder on Domestic LPG is provided by the
Government.
(B) The OMCs have reported the following under recovery during 2013-14 & of 2014-15:
Price on 3rd
Nov. 2014 Price on 1st Dec. 2014 Change % Change
Brent crude oil 85.86 70.15 -15.71 -22.39%
WTI crude oil 80.54 66.15 -14.39 -21.75%
Henry Hub Natural Gas 3.87 4.09 0.22 5.38%
Particulars Unit 28th
November 2014 Fortnight
(13- 28 -Nov-14)
Crude Oil(Indian Basket)
- In US Dollar
- In Indian Rupees
($/bbl)
(Rs/bbl)
70.29
4355.87
71.40
4421.09
Exchange Rate (Rs/$) 61.97 61.92
Product Unit Under-recovery (eff. 1st Dec. 14)
Diesel (Rs/Litre)
PDS Kerosene* (Rs/litre) 25.69
Domestic LPG* (Rs/Cylinder) 279.91
Product 2013-14
(Rs/Crore)
2014-15 (H1)
(Rs/Crore)
Diesel 62,837 11,656
PDS Kerosene 30,575 14,857
Domestic LPG 46,458 24,597
4
35.97%
61.35%
0.02% 2.66%
Energy Mix 2013 - Azerbaijan
Oil
Natural Gas
Coal
Hydro electric
COUNTRY ANALYSIS - AZERBAIJAN III.
Azerbaijan, one of the oldest oil producing countries in the
world, is an important oil and natural gas supplier in the
Caspian Sea region, particularly for European markets.
Although traditionally it has been a prolific oil producer,
Azerbaijan's importance as a natural gas supplier will grow
in the future as field development and export
infrastructure expand. The conflicting claims over the
maritime and seabed boundaries of the Caspian Sea
between Azerbaijan and Iran continue to cause
uncertainty, with Iran challenging Azerbaijan's
hydrocarbon exploration in offshore areas claimed by both
sides.
Oil and gas production and exports are central to
Azerbaijan's economy. The country's economy is heavily
dependent on its energy exports, with more than 90% of
total exports accounted for by oil and gas exports,
according to data from the International Monetary Fund.
A. Energy Mix
Natural gas accounted for about 61% of
Azerbaijan's total domestic energy
consumption in 2013. Oil accounted for
36% of total energy use, and hydropower
contributed a marginal amount. Overall,
Azerbaijan is a net energy exporter. The
country swaps small volumes of natural
gas with Iran—the Nakhchivan exclave
receives all of its natural gas from Iran,
because it is not connected to Azerbaijan's
pipeline network.
B. Oil and Gas Resources
Azerbaijan has a substantial gas resource base, although reserves estimates vary significantly. According to the
US Energy Information Administration (EIA), proved reserves stand at 980bn cubic metres (bcm); although the
Azeri Ministry of Industry and Energy estimates 2.2trn cubic metres (tcm). Oil reserves are slightly more limited, at
around 7bn barrels (bbl), according to the EIA; state sources put this figure at 11bn bbl. BP, which has a strong
presence in Azerbaijan, and other independent sources offer resource estimates broadly consistent with those of
the EIA.
There is significant upside potential for Azerbaijan's reserves base. The US Geological Survey (USGS) estimated
mean volumes of technically recoverable, conventional, undiscovered petroleum resources in the Caspian Sea
area at 19.6bn bbl of crude oil, 6.9tcm of natural gas and 9.3bn bbl of natural gas liquids (NGLs). The bulk of
these resources are thought to lie in the South Caspian basin, offshore Azerbaijan, Turkmenistan and Iran,
although a maritime boundary dispute between the three countries has limited exploration in the south of the
basin.
5
Table: Proven Oil and Gas Reserves (Azerbaijan 2012-2017) ( e/f = BMI estimate/forecast. Source: EIA, BMI)
Items 2012 2013 2014f 2015f 2016f 2017f
Proven oil reserves, bn bbl 7 7 6.7 6.3 6 5.7
Proven oil reserves, mn bbl 7,000.00 7,000.00 6,677.30 6,345.60 6,005.00 5,660.70
Proven oil reserves, % y-o-y 0 0 -4.6 -5 -5.4 -5.7
Reserves to production ratio (RPR),
years
20.7 22 20.6 19 17.6 16.4
Natural gas proven reserves, tcm 0.8 1 1 1.1 1.1 1.2
Natural gas proven reserves, bcm 849.5 991.1 983.5 1,065.90 1,098.10 1,180.80
Natural gas proven reserves, % y-o-y 0 16.7 -0.8 8.4 3 7.5
Natural gas reserves-to-production
ratio, years
49 55.3 56.1 60.5 61.6 68.3
The vast majority of the reserves are associated with the Shah Deniz field. Discoveries of the Absheron and Umid
formations between 2010-11 added a further 15 Tcf of resources estimated in place.
1. Natural Gas Exploration and production
Almost all of Azerbaijan's natural gas is produced in two offshore fields—the ACG complex and Shah Deniz. The
Shah Deniz natural gas and condensate field started producing in late 2006, making Azerbaijan a net gas
exporter. The ACG field provides associated gas to the Azerigaz system for domestic use via an undersea gas
pipeline to Sangachal Terminal at Baku. The Sangachal Terminal, located south of Baku, is one of the world's
largest integrated oil and gas processing terminals. It receives, stores, and processes both crude oil and natural
gas from the ACG fields and from Shah Deniz, then ships these hydrocarbons through the South Caucasus
Pipeline (SCP) for export.
6
The Shah Deniz field, discovered in 1999, is one of the world's largest gas and condensate fields. According to
BP, the operator of the development, it has approximately 40 Tcf of natural gas in place. It is located on the deep
water shelf of the Caspian Sea, in water depths of up to 1,600 feet. According to BP, the field produced about
346 million cubic feet per day of natural gas and about 53,740 bbl/d of condensate in 2013.
Shah Deniz Stage I development includes a fixed offshore platform, two subsea pipelines to bring the
hydrocarbons ashore, and a new onshore gas-processing terminal adjacent to the existing oil terminal at
Sangachal, near Baku. According to BP, since the start of Shah Deniz production in late 2006 until the end of
2013, Shah Deniz produced about 1.7 Tcf of natural gas and 100 million barrels of condensate.
Shah Deniz Stage 2, or Full Field Development (FFD), will have peak capacity of 565 Bcf (in addition to the 315 Bcf
in Phase I) according to BP, making it one of the largest gas development projects in the world. Operators expect
it to start producing in 2017 and supply European markets with natural gas in 2019. The development of Shah
Deniz FFD is currently in the front-end engineering and design (FEED) phase. Transportation of Shah Deniz gas
from the Caspian Sea to Europe will require enhancement of the existing pipelines and development of new
infrastructure.
C. Export Market
In 2013, Azerbaijan exported about 240 Bcf, mainly shipping it via the South Caucasus Pipeline. Volumes of
natural gas are also exported to Russia via the Gazi-Magomed-Mozdok pipeline. A small volume of natural gas is
shipped to Iran via the Baku-Astara pipeline. In exchange, Iran ships natural gas to Nakhchivan, Azerbaijan's
exclave situated between Iran and Turkey. The exclave is wholly dependent on natural gas supplied by Iran.
Most of Azerbaijan's natural gas is destined for Turkey, but the country supplies a small volume to Greece via the
Turkey-Greece interconnector. Under a previous arrangement, Turkey was re-exporting Azerbaijani natural gas to
Greece, but a new agreement allows Azerbaijan to directly export volumes to the European Union. The Shah
Deniz FFD will result in increased exports to the European Union once the needed infrastructure is completed.
South Caucasus Pipeline (SCP) The main conduit for Azerbaijan's natural gas exports is the SCP, also known as the Baku-Tbilisi-Erzurum (BTE)
pipeline, which runs parallel to the BTC oil pipeline for 429 miles, before landing in Erzurum, Turkey. The 42-inch
pipeline began exporting in 2007, and it has the capacity to transport about 300 Bcf of natural gas. The
government plans to add a new parallel pipeline to the existing line across Azerbaijan and Georgia, as well as two
new compressor stations in Georgia. Once upgraded, the pipeline's capacity will increase to more than 700 Bcf.
At the Georgia-Turkey border, the pipeline will link to TANAP and TAP.
Gazi-Magomed-Mozdok Pipeline This 150-mile pipeline transports natural gas from Azerbaijan to Russia under an agreement signed by SOCAR
and Gazprom in 2009. Prior to 2007, this pipeline transported natural gas from Russia to Azerbaijan, but the
agreement allowed the pipeline flow to be reversed, making Azerbaijan an exporter of natural gas to Russia. Gas
exports to Russia began in 2010 at approximately 35 Bcf per year.
Baku-Astara Pipeline As a result of tensions with Armenia, Azerbaijan began a swap deal with Iran that provides natural gas to
Azerbaijan's geographically separate Nakhchivan exclave in late 2006. Azerbaijan ships natural gas into Iran via
the Baku-Astara Pipeline, and Iran then delivers the gas via the Salmas-Nakhchivan pipeline. Iran receives a 15%
commission on transit fees.
TANAP and TAP
The Trans Anatolian Natural Gas Pipeline (TANAP) will transport the Shah Deniz natural gas through Turkey. This
56-inch pipeline will run from the Georgia-Turkey border to the Turkey-Greece border. The Trans Adriatic
Pipeline (TAP) will link to TANAP and transport Azerbaijan's natural gas exports through Greece and Albania to
7
Italy. BP announced in June 2013 that the Shah Deniz consortium selected TAP to deliver approximately 35 Bcf of
natural gas to the European Union.
D. SWOT Analysis
Strengths
Strategic location bridging Asian and
European demand markets
Strong gas production growth outlook
Expanding midstream transnational
infrastructure opening access to markets
Weaknesses
Bearish oil production growth outlook
Chronic rig shortage a threatening upstream bottleneck
Limited domestic consumption growth outlooks
Opportunities
Development of Shah Deniz II, with estimated
gas production capacity of up to 25bcm.
Range of major gas projects under
development, including Absheron, Umid and
ACG Deep Gas
Sustained exploration activity, testing high
prospective offshore plays, such as Zafar-
Mashal and Shafag-Asiman
Threats
Heavy economic dependency on oil and gas
revenue, creating structural macroeconomic
vulnerability
Poor regional cooperation and ongoing
maritime disputes in the Caspian Sea.
E. Key trends of oil and gas sector
The country boasts substantial, prospective and underexplored area, in particular offshore in the South
Caspian basin. Interest in exploration remains strong.
Oil output decreased in the first half of 2014, according to reports by SOCAR. In part this could stem
from planned maintenance works.
The gas sector is set for strong growth, driven in large part by development of the Shah Deniz II, which
reached FID in 2013.
8
COMPANY ANALYSIS- CAIRN INDIA IV.
Cairn India is one of the largest non-state exploration and production companies operating in the country. Its
roots are in UK-based Cairn Energy, formed in 1979 and becoming an investor in the Indian upstream oil sector
in the late 1990s. Cairn has now been operating in India for more than 15 years and has played an active role in
developing the oil and gas resources in the country. Ravva in eastern India was the first offshore oil and gas field
to be developed, followed by the Lakshmi gas field in western India, which was discovered in 2000 and
commenced production in 2002.
In January 2004, Cairn added the Mangala oil field in Rajasthan to its assets and this, along with the other
discoveries in Rajasthan, has become the core upstream development in India. On January 9 2007, Cairn India
Limited was listed on the Bombay Stock Exchange and the National Stock Exchange of India. In FY2010-11, Cairn
Energy agreed to sell a substantial part of its shareholding in the Indian subsidiary to Vedanta Resources and
Twin Star Holdings (a wholly owned subsidiary of Vedanta Resources). Cairn India is now part of the Vedanta
Group, a globally diversified natural resources company with wide-ranging interests in aluminium, copper, zinc,
lead, silver, iron ore and others.
During the period, Cairn established 1.2bn boe of Rajasthan hydrocarbons in-place. An additional 0.6bn boe has
been discovered and is either currently undergoing testing or is awaiting testing. The company has also extended
a significant existing gas play, with multi-tcf potential, in and around the Raageshwari Deep gas (RDG) field.
A. Portfolio of Cairn India
Cairn India is the operator of the Rajasthan block with a 70% participating interest and its JV partner ONGC has a
30% participating interest.
The Rajasthan block consists of three contiguous development
areas:
Mangala, Aishwariya, Raageshwari and Saraswati (MARS)
fields;
Bhagyam and Shakti fields; and
Kaameshwari West fields.
The Mangala, Bhagyam and Aishwariya (MBA) fields in the
northern area of the block are currently under development with
over 81 development wells already drilled on Mangala, of which
65 have been completed for initial production. Mangala
production has ramped up to the currently approved plateau rate
of 125,000b/d. In addition, Bhagyam has the potential to produce
40,000b/d and Aishwariya another 10,000b/d.
With a resource base of 7.3bn barrels of oil equivalent (boe) in
place, Cairn India believes that production potential from these
fields could now exceed 300,000b/d. Any increase in production
is subject to regulatory approval. The Mangala Processing
Terminal is designed to process crude from the MBA fields and has a capacity to process 205,000b/d of crude;
and has been designed with sufficient flexibility to be later expanded to process more crude. Four processing
trains are being built to ensure that Cairn is able to produce and process the approved peak plateau production.
B. SWOT Analysis
Strengths
Highly prospective exploration portfolio.
Major oil discoveries.
Dramatic medium-term production growth.
Good relationship with ONGC and state.
Weaknesses
Lack of immediate output growth.
Need for ongoing, high-level investment.
9
Opportunities
Strong domestic energy demand growth.
Untapped oil and gas potential.
Plenty of unexplored territory.
Threats
Rising investment requirement.
Changes in national energy policy
C. Strategy
Cairn India's strategy is to establish commercial reserves from strategic positions in high-potential exploration
plays in order to create and deliver shareholder value. In order to do this, the company focuses on material
positions that are capable of providing significant growth through exploration.
The strategic focus is on maintaining low operating costs and sustaining production in existing fields. Upholding
the current production volumes from its existing assets in Ravva and Cambay is one of Cairn's key objectives.
Both of these assets have benefited from revised gas prices and improved oil production. The completion of the
4D seismic in Ravva and the infill drilling programme in Cambay will ensure that these assets continue to
produce for an enhanced period of time.
Cairn India is unlikely get more than five years of extension for its Barmer block, with the Directorate General of
Hydrocarbons (DGH) rejecting its proposal for a 10-year contract extension up to 2030. Around 13 PSCs are
expiring between 2019 and 2025. These include the Panna Mukta Tapti fields held by ONGC, Reliance Industries
and BG. There is likely to be a policy decision by the government on handling of extensions for these fields.
Cairn India believes that there are significant reserves in Rajasthan. It is in the process of assessing how advanced
technologies can be used to help increase recovery from this resource base, harnessing hydraulic fracture
stimulation techniques. Laboratory studies have indicated that the early application of EOR techniques on the
Mangala and Bhagyam fields is expected to extend the production plateau and ultimate reserves for these fields.
An EOR pilot programme in Mangala is already in progress. Further work is also planned to determine the best
method of extracting the oil from the potentially productive Barmer Hill formation.
Appraisal of the extensive potential in the huge Rajasthan block lies in numerous prospects and leads in a
number of reservoirs in the vicinity of Cairn India's existing discoveries. Cairn India has identified more than 35
prospects in the licence area and it is building a comprehensive inventory, based upon analysis of the 2D and 3D
seismic data and various wells.
D. Potentials in its E&P fields
Recent exploration drilling and the proximity of the Raageshwari deep gas field indicate the presence of a larger
multi-trillion cubic feet gas resource base, comprising the Raag Deep, Guda Deep and Guda South structures.
'RDG (Raageshwari Deep Gas) field is estimated to hold 1-3tcf (28-75bcm) of gas in-place with an estimated
recovery factor of over 50%,' the company said in a corporate presentation. Cairn currently sells 8-9mn cubic feet
per day of gas from the Raageshwari Deep gas field, which it plans to more than double to 22mn cfd by the end
of the current fiscal year and take it to 90mn cfd by FY16.
An additional un-risked prospect inventory potential of 3bn boe has been identified by Cairn India, to be drilled
up in future exploration campaigns, beginning in FY16. A significant shift from exploration to appraisal drilling is
underway in the current financial year, to accelerate reserves conversion and monetisation. All seven new
exploration and appraisal wells drilled in the first quarter of the FY14/15 financial year encountered
hydrocarbons, opening up important new discoveries and adding significant potential resources.
E. Future Investments
The firm is looking to invest more than USD3bn over the next three years. For this, an extension in the
production-sharing contract (PSC) is crucial. In April 2013, it had written to the petroleum ministry that the PSC
should be extended in the first instance till 2030, since the block had commercial production potential till 2040.
10
The current PSC for the Rajasthan block is valid till May 14, 2020. The rejection of an additional 10-year term
comes on recommendations of DGH. 'According to DGH, the Rajasthan asset is primarily a crude oil-producing
block. So, the PSC can be extended for only five years. An extension for 10 years is generally allowed for gas
fields,' an official said.
A panel set up by the Indian environment ministry has approved Cairn India's plan to increase oil output at its
Rajasthan fields to 300,000b/d from 200,000b/d. Cairn India and its partner ONGC expect the production from
their Barmer fields in Rajasthan to rise to 300,000boe/d by 2016. The company claims it has a potential of
producing 15mn cubic feet per day of gas, which supports its claim for a 10-year PSC extension.
Cairn India is actively exploring for hydrocarbons in basins throughout India. In addition to the exploration
potential in Rajasthan, it has identified a number of leads and prospects in India, where Cairn has an interest in
other blocks. This diversification allows Cairn India to drill a large number of potential prospects with high
geologic risk, as well as explore for and drill smaller potential accumulations that carry less risk.
In addition, Cairn believes that India has significant under-explored potential, with 26 basins covering a
sedimentary area of 3.14mn sq km. As well as developing its existing exploration portfolio, Cairn is seeking out
new exploration opportunities through organic growth, acquisition and by participating in NELP rounds.
F. Financials
In the first quarter of the 2014/15 financial year, Cairn India reported revenues of INR4,483 crore (USD750mn), up
10% tear-on-year (y-o-y). EBITDA rose 3% to INR3,120 crore and post-tax profits reached INR2,720 crore.
Average daily gross operated production was 217,869boe/d (226,597boe/d including internally consumed gas)
during the quarter. Rajasthan production was 183,164boe/d, in line with FY15 guidance.
Revenues (group):
INR187,620mn (FY13/14)
INR175,241mn (FY12/13)
Net profit (group):
INR124,320mn (FY13/14)
INR 116,063mn (FY12/13)
11
RUSSIA’S NEW ENERGY ALLY CHINA V.
Russia's new gas deal with China has likely been accelerated by geopolitical pressures from the West owing to a
continued impasse in Ukraine. It also notes a shift in Gazprom's gas strategy in Asia-Pacific, as practical funding
needs arising from sanctions push the Russian gas firm away from its initial target of the Japanese LNG market
and towards the Chinese gas pipeline market. It is seen as Lending Squeeze Pushes Gazprom to Asia.
A. The Deal
Gazprom has reached another milestone as Russia and China signed a framework agreement for yet another gas
supply deal that would see the delivery of 30bn cubic metres (bcm) of gas to China per year. Signed on the
sidelines of the Asia-Pacific Economic Cooperation (APEC) summit in November 2014, the two countries agreed
to finalise the sale by 2015. This new agreement will see gas delivered via the 'western route' - from West Siberia
into China - and complements 38bcm of gas to be delivered via the 'eastern route' - from East Siberia into China
- as part of an earlier Sino-Russian gas deal signed in May 2014.
The western route is based on a 2,600-km pipeline that would carry gas from a compressor station south of Novy
Urengoi in the Yamal-Nenets Autonomous Okrug along an existing pipeline corridor and across Russia’s
Republic of Altai to the Chinese border.
B. Russia Move towards East
It is seen that Western Tensions Push Russia Further East. A second gas agreement was being considered as
quickly as a month after the conclusion of the first Sino-Russian gas deal. On June 4 2014, Kremlin Chief of Staff
Sergei Ivanov was quoted in RIA Novosti, stating that 'it is very likely that we will soon conclude a contract to
build a western [pipeline]'. However, the speed at which China and Russia agreed on the western route
agreement - a mere five months in contrast to more than eight years taken for the first gas deal - is no doubt
influenced by Gazprom's increasingly uncertain fortune as the impasse between Russia and the West over
Ukraine continues. Not only have the Russian gas behemoth's long-term growth prospects in its primary market
Europe curtailed by the region's uncertain gas demand and continued efforts at diversifying sources of gas and
energy, western restrictions on capital access are also weighing on Gazprom's ability to finance LNG growth
projects.
As President Vladimir Putin peers across the geopolitical landscape, what he sees is a Europe seeking alternative
sources of energy, an America possibly on the cusp of allowing crude oil exports and increasing LNG shipments
to the continent, and a China willing to consider Russia as a source of its energy. It comes as no surprise then
that Gazprom plans to allocate a chunk of its planned $18.1 billion investments next year on R&D for a new gas
pipeline route to China.
C. Financing Challenge Sees Pivot from Japan to China
Russia's standoff with the West has specifically changed Gazprom's eastern pivot from Japan to China. While
China does indeed present a large market opportunity, it had not always been the primary target for the Russian
firm.
Facing pressure from President Vladimir Putin to expand its presence in Asia-Pacific in 2012, Gazprom had eyed
the Japanese LNG market to grow its market share in Asia. The Vladivostok LNG project was hastily decided upon
in February 2013 in hope that it would beat new LNG producers such as North America and East Africa to the
Japanese market by 2018. A final investment decision (FID) to develop the Chayanda gas field - which could
produce 25bcm per year at its peak - and the Power of Siberia pipeline in 2013 was taken to support the
Vladivostok LNG project.
These resources are now being directed towards fulfilling Gazprom's 38bcm gas export obligation to China upon
their completion in 2018. Part of this re-direction is the result of the conclusion of the first Sino-Russian gas deal
12
in May 2014, which was accelerated due to price concessions made by Gazprom as a geopolitical move against
the West. The second is due to the difficulty Gazprom had faced securing Japanese participation and funding in
the Vladivostok LNG project. In August 2014, Japan's decision to freeze funding for new projects in Russia, as
part of G7's sanctions against Russian actions in Ukraine, further killed the prospects of Japanese finance for
Vladivostok in the near term.
This exacerbates an already dire outlook for new sources of finance for Gazprom: traditional Russian state-owned
lenders, including its subsidiary Gazprombank, are restricted from accessing Western capital markets, while
western lenders are also wary of lending to Gazprom despite it being excluded from sanctions. The firm's poor
performance in London is a good indication of the difficulty it faces raising finance overseas in this sanctions
environment.
Western capital restrictions will see Gazprom continue to look eastwards to tap new markets for finance. For
instance, it listed on the Singapore Stock Exchange in June 2014. Together with compatriots Rosneft and Lukoil,
the gas firm is also considering listing on the Hong Kong Stock Exchange, and in local currencies, according to
Economic Development Minister Alexei Ulyukayev.
While this may help alleviate some of Gazprom's financing requirements, these measures will not be sufficient to
help the firm move other long-term growth projects forward.
The new 30bcm gas deal with China further weakens the appeal of Vladivostok LNG unless Japanese
commitment to the project is secured. China's regulatory changes towards the coal industry will not
significantly diminish the role of coal and see a dramatic spike in gas consumption as a result. Hence,
greater dependence on pipeline gas imports will reduce China's LNG import requirement. As one of the
largest LNG demand growth markets, the loss of future Chinese LNG demand also loosens the market,
hitting the appeal and economics of new LNG projects.
Capital alone will be insufficient to move forward the South Stream gas pipeline project, targeted to
export up to 63bcm of gas particularly to Central and Eastern Europe (CEE). As long as the impasse over
Ukraine remains, the European Union (EU) is unlikely to green light a project that entrenches Gazprom's
influence over the CEE gas market.
D. Impact of Deal
Deliveries under the two agreements, if they’re completed, would make China the largest single customer for
Russian gas and could be expanded to a combined 160 billion cu m/year. They would put this new market in
direct competition with European markets for supplies from West Siberia, whose supergiant fields have been the
main source of Russian gas supplies to Europe. Europe has absorbed about 80% of Russian oil and gas exports,
including 160 billion cu m of gas in 2013. With European demand stagnant, Russia has sought new markets in
Asia while European countries have tried to secure supplies from outside Russia.
13
ACCELERATED DEPRECIATION BENEFIT FOR WIND ENERGY AND VI.ITS IMPACT ON THE RENEWABLE ENERGY INDUSTRY
The government has brought back Accelerated Depreciation (AD) on wind investments. Wind Power
development in India started in the early 90s. As per Section 80(J) of Income Tax Act 1961, industries were
allowed 80% depreciation on capital invested. Since then till 2012 (when the benefit was removed), Wind Power
development and growth has always relied primarily on Accelerated Depreciation (AD).
New wind capacity additional peaked in 2011-12 at about 3,200 MW, falling sharply to 1,700 MW the next year
as AD benefits were removed. The argument at that time by Government was given that wind industry had
matured, and the focus needed to shift to solar. The decline in wind investment due to withdrawal of AD
coincided with healthy growth of close to 60% in Solar Power in 2012-13 and 2013-14. The market momentum
had definitely shifted in favour of Solar. Market analysis suggests that Wind AD market had an investing capital
of close to 7300 crores. This shifted to Solar AD market which saw increase in investments worth Rs 7500 crores
during 2012-13.These can also be understood from the table and graph below.
After reintroduction of AD
(80%) in 2014, investment
momentum has shift
again to wind due to
policies and attractive
tariffs. Wind tariff in
recent years have become
very attractive and are
close to solar tariff in
many states. In Rajasthan,
Maharashtra and MP,
tariff in the range of Rs. 5,
whereas solar tariffs are
generally in the range of
Rs. 6, leaving a very small gap. With this, there is certainly being a diversion in investments from Solar to Wind
power in the times to come. The Renewable energy sector has seen a drop of 20% in the new capacity addition
during the first half of the fiscal year 2014-15, when compared to previous year. The capacity addition during the
same period in previous year was 1376 MW against the 1094 MW in the current year.
A graph below shows the sector wise capacity addition during the year 13-14 & the year 14-15.
It is easy to notice
that the capacity
addition in the
wind sector has
increased by 7%,
but at the same
time the capacity
additions in other
sectors have
dropped, specially
the solar sector,
which has
witnessed a drop
of 65%.The surge
in capacity
addition in Wind, can be attributed significantly to the recent reinstatement of wind AD, leading to more
confidence among investors.
14
Solar, however, has taken a setback due to the following reasons:
The reinstatement of AD for wind has diverted investors towards wind power.
The difference between wind and solar tariffs are moderate. Solar tariffs are in the range of 6-7 Rs.
per unit where that of wind are the range of 5-6 Rs. per Unit. Capital cost per MW is still significantly
high is case of Solar, when compared to Wind.
The poor performance of REC markets has impacted Solar more than Non-Solar.
Preferential tariffs are prevalent in only a few states, while many states have proposed reverse
bidding scheme for solar power, with power being sold in the range of Rs 5-6. This has not positively
impacted investor confidence.
A. Comparison between Wind and Solar
S.
No
Parameter Wind Solar
1. Preferential tariffs Are existent in all wind states Most states have reverse bidding
schemes
2. Extent of PPA by states Unlimited Generally capped
3. Poor REC market and weak
RPO compliance
Will not significantly affect wind
industry. RPO compliance is relatively
easier due to lower Non-Solar costs.
Uncertainty in timeline of proposed
REC price.
Will significantly affect solar
industry as they rely heavily on
REC markets. RPO compliance is
difficult due to high solar costs.
Uncertainty in timeline of
proposed REC price.
4. Wheeling & Banking
Benefits & open access Well defined in many states Not well defined in many states
5. Anti-dumping duty Wind industry will not be affected Solar costs will go up significantly
6. Forecasting and scheduling Mandatory ( no UI and financial
implications as of now on the projects)
Mandatory (no UI implications on
the projects)
B. RPO targets for the states & REC trading for the Nov-14
Renewable Purchase Obligation Targets
State 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21
Andhra
Pradesh 5.00% 5.00% 5.00% 5.00% 5.00%
Arunachal
Pradesh 4.20% 5.60% 7.00%
Assam 1.40% 2.80% 4.20% 5.60% 7.00%
Bihar 1.50% 2.50% 4% 4.50% 5.00%
Chhattisgarh 5.00% 5.25% 5.75% 6.25% 6.75% 7.25%
Delhi 3.40% 4.80% 6.20% 7.60% 9.00%
Gujarat 5.00% 6.00% 7.00% 7.00% 8.00% 9.00% 10.00%
Haryana 1.50% 1.50% 2.00% 3.00% 3.25% 3.50% 3.75% 4.50% 5.00% 5.50% 6.00%
Himachal
Pradesh 10.01% 10.25% 10.25% 10.25% 11.25% 12.25% 13.50% 14.75% 16.00% 17.50%
Jammu
Kashmir 1.00% 3.00% 5.00% 5.00% 6.00% 7.50% 9.00%
Goa & UT 1.00% 2.00% 3.00% 3.00% 3.30% 3.55% 3.95% 4.30% 4.65% 5.10% 5.50%
Jharkhand 2.00% 3.00% 4.00%
Karnataka 10%/7% 10%/7% 10%/7% 10%/7%
15
Bihar has declared solar RPO trajectory - increasing upto 3% by 2022.
HP has declared trajectory of solar RPO going upto 3% and non-solar RPO upto 16% by 2022.
Kerala has kept solar RPO constant at 0.25% while increasing the non-solar RPO to 6.35% by 2022. •
Delhi, J&K, West Bengal and Uttarakhand have declared increasing RPO upto 2016-17.
AP, Jharkhand and Maharashtra have declared their RPO upto FY 2016 but kept the RPO constant for the
last three years.
Other states yet to declare their RPOs beyond 2014-15.
1. State-wise Solar RPO targets
Kerala 3.00% 3.30% 3.63% 3.99% 4.39% 4.83%
Madhya
Pradesh 0.80% 2.50% 4.00% 5.50% 7.00%
Maharashtra 6.00% 7.00% 8.00% 9.00% 9.00%
Manipur 2.00% 3.00% 5.00%
Mizoram 5.00% 6.00% 7.00%
Meghalaya 0.50% 0.75% 1.00%
Nagaland 6.00% 7.00% 8.00%
Orissa 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
Punjab 2.40% 2.90% 3.50% 4.00%
Rajasthan
(Draft) 6.00% 7.10% 8.20% 9.00% 10.20% 11.40%
Sikkim
Tamil Nadu
(Draft) 9.00% 9.00% 9.00% 9.00% 9.00%
Tripura 1.00% 1.00% 2.00%
Uttarakhand 9.00% 10.00%
Uttar
Pradesh 4.00% 5.00% 6.00%
West Bengal 4.00% 4.50% 5.00% 5.50% 6.00% 7.00% 8.00%
State 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21
Andhra Pradesh 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Arunachal Pradesh Not regulation issued for RPO by the Power Department
Assam 0.10% 0.15% 0.20% 0.25%
Bihar 0.25% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.50% 3.00%
Chhattisgarh 0.25% 0.50%
Delhi 0.10% 0.15% 0.20% 0.25% 0.30% 0.35%
Gujarat 0.50% 1.00%
Haryana 0.00% 0.05% 0.75%
Himachal Pradesh 0.01% 0.25% 0.25% 0.25% 0.25% 0.25% 0.50% 0.75% 1.00% 2.00% 3.00%
Jammu Kashmir 0.10% 0.25%
Goa & UT 0.30% 0.40%
Jharkhand 0.50% 1.00%
Karnataka 0.25%
Kerala 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Madhya Pradesh 0.40% 0.60% 0.80% 1.00%
Maharashtra 0.25% 0.25% 0.50% 0.50% 0.50%
Manipur 0.25% 0.25%
Mizoram 0.25% 0.25%
16
2. REC trading for the Nov-14
REC trading session of Nov -14 was conducted on 26th November 2014. Below is a summary of the result : - The
RECs inventory is piling up and increasing which if seen from the demand point of view is more than the total
RECs cleared in the current financial year. In a recent proposal by CERC, the REC prices are expected to reduce to
half of existing Floor and Forbearance price.
Non Solar REC The demand for Non Solar RECs stood at 196013 RECs. The market was optimistic for Non Solar
RECs. The RECs traded at their floor price of INR 1500. Non-solar demand is picking up but not at the level to
clear the sell bids.
Solar REC The demand for Solar RECs took a hit in this trading session as it stagnated to 1149 RECs. Demand is
clearly on very low side. The Solar RECs Traded at floor Price of 9300 INR.
Market Month/year Type Buy
Bids(REC)
Sell Bids
(REC)
Cleared
Volume(REC)
Cleared
Price(Rs/REC)
IEX
November/2014
Solar 245 2,41,063 245 9300
Non-Solar 93,100 49,46,763 93,100 1500
PXIL Solar 904 2,71,209 904 9300
Non-Solar 1,02,913 55,77,324 1,02,913 1500
Note:
The data and information in the report is sourced from websites and documents available in public
domain and doesn’t purport to be official view of government or any organization. Sincere efforts have
been made to present correct data; however, errors and omissions, if any, are regretted and the same may
please be brought to the notice of Energy Desk for necessary corrective action.
Meghalaya 0.30% 0.40%
Nagaland 0.25% 0.25%
Orissa 0.10% 0.15% 0.20% 0.25% 0.30%
Punjab 0.03% 0.07% 0.13% 0.19%
Rajasthan (Draft) 0.50% 0.75% 1.00%
Sikkim Not regulation issued for RPO by the Power Department
Tamil Nadu (Draft) 0.05%
Tripura 0.10% 0.10%
Uttarakhand 0.03% 0.05%
Uttar Pradesh 0.50% 1.00%
West Bengal 0.25% 0.30% 0.40% 0.50% 0.60%