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LNG the emerging fuel in India Content: Research report on LNG as an emerging fuel in India detailing the demand supply dynamics,

infrastructure, sourcing, pricing, transportation and distribution of LNG in India

Yudhishthir Ruia

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FOREWORD

I am a firm believer in the concept that we have a responsibility to preserve

our environment and pass it on to the next generation in better state. I have a

strong interest and passion for subjects focused on improving the

environmental conditions and sustainable development. My passion to

preserve the environment has come from the study of “environmental

Systems and Society” in school. In this subject, we studied the various

aspects of the environment that are in danger, and the plethora of ways to

conserve it. To fuel this passion and hone my interests, I have participated in several

courses/curriculum on environment impact and mitigation of pollution.

There is a strong need to reduce pollution and reduce carbon foot print in India. Fuels are a major

cause of the pollution in India and it is necessary to strive to create an industrial economy which

utilizes clean and environment friendly sources of energy. Keeping this in mind, I had conducted

research on the different fuels used by Industries and had found a surprising fact – the energy/fuel

basket of India primarily consists of oil/petroleum products (~ 29 % share of basket) and coal (~ 57%),

while natural gas which is more environment friendly and cleaner fuel only consists of 6% of the

India’s energy basket. Further, this percentage is significantly lower than the share of natural gas in

the global energy basket which is approximately 24%.

I had also researched the uses and demand and supply dynamics of natural gas in India. Natural gas

is one cleanest, safest, and most useful forms of energy in our daily lives. It is an important source of

energy for power generation, industrial fuel requirements, feed for the fertilizer plans and also used as

process material for various industries such as steel plant and petroleum refineries.

Almost half of India’s natural gas consumption comes from imports in the form of Liquefied Natural

Gas (LNG). LNG imports are essential to bridge the demand supply gap and increase the usage of

natural gas which in turn improves the environment footprint in India.

For the above reasons, I have focused my research and writings on the importance of natural gas in

India and the import, storage and distribution of LNG in India which will improve the usage of natural

gas thereby improving the Environment in India. I feel that I was able to use my knowledge from

school in order to engage with the LNG market extremely well.

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Contents 1. Abbreviations .................................................................................................................................. 4

2. Executive Summary ......................................................................................................................... 5

3. Natural Gas – A Clean Hydrocarbon Fuel ........................................................................................ 7

4. Demand and Supply Scenario in India ............................................................................................ 8

4.1 Demand of Natural Gas in India .................................................................................................... 9

4.2 Supply .......................................................................................................................................... 10

4.3 LNG Imports .......................................................................................................................... 11

5. LNG Sourcing ................................................................................................................................. 12

6. LNG Shipping ................................................................................................................................. 13

7. LNG pricing .................................................................................................................................... 14

8. LNG Infrastructure in India............................................................................................................ 15

9. New Concepts of LNG import terminals ....................................................................................... 16

10. Pipeline Connectivity ................................................................................................................ 18

11. Road Movement of LNG............................................................................................................ 20

12. Case Study ................................................................................................................................. 21

13. Conclusion ................................................................................................................................. 23

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1. Abbreviations

LNG Liquefied Natural Gas

MMSCMD Million Metric Standard Cubic Meter per Day

NOx Oxides of Nitrogen

CGD City Gas Distribution

DFDE Dual Fuel Diesel Electric

TFDE Tri Fuel Diesel Electric

ONGC Oil & Natural Gas Corporation

RIL Reliance Industries Limited

PLL Petronet LNG Limited

GAIL Gas Authority of India Limited

FSRU Floating Storage and Regasification Unit

FSU Floating Storage Unit

MoPNG Ministry of Petroleum and Natural Gas

BTU British Thermal Unit

MMTPA Million metric tons per annum

MTPA Million tons per annum

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2. Executive Summary

Natural gas is one of the important energy source catering to approx. one fourth of energy

requirement of the world. Approximately one third of the total natural gas production are traded in the

international market. Approx. two third of the natural gas are traded through pipelines while one third

of the gas are traded in the form of Liquefied Natural Gas (LNG). Overall LNG trade is approximately

one tenth of the natural gas production or approx. 2.4% of the world energy basket.

At a global level, liquefaction capacity for LNG is 340 Million Metric Tonnes per Annum (MMTPA), as

against that 258 MMTPA of LNG was exported during calendar year 2016 indicating a capacity

utilization of 75%. Total 18 countries exports LNG, out of which Qatar, Australia, Malaysia, Nigeria

and Indonesia are prominent exporters contributing 70% to the total export volume.

LNG prices have declined with increase in the liquefaction capacity and decrease in price of crude oil.

LNG prices are either linked to crude prices or gas prices. In last three years both crude prices and

gas prices have decreased leading to fall in LNG prices.

Natural gas has share of only 6.2% in total energy basket of India which is approx. one fourth of the

world average. India has consumed 138 Million Standard Cubic Metres per day (MMSCMD) of natural

gas during Financial Year 2016-17 (April 2016 to March 2017). During FY 17, approx. 50 percent of

natural gas requirement was imported in the form of LNG. Considering the low penetration of natural

gas in the energy basket of India and dependence on LNG for availability of required natural gas,

India is a very prospective market for growth of LNG infrastructure, regasification and distribution

market. As of 2017, there are four LNG terminals in India with over 25 MTPA of regasification capacity

which include Petronet Dahej, Petronet Kochi, GAIL Dabhol and Shell-Total Hazira Terminals.

LNG terminals are of various configurations which include land based terminals, Floating Storage and

Regasification Unit (FSRU) and Floating Storage Unit (FSU) and land based regasification terminals.

At a typical LNG Import terminal, LNG is imported via LNG Carriers (LNGCs), stored and regasified

into natural gas. Natural gas is then distributed via pipelines to the end consumer. Several gas

pipelines exist in India which have been developed by organizations such as Gas Authority of India

Ltd. (GAIL), Gujarat State Petronet Ltd. (GSPL) and Reliance Gas Transportation Infrastructure

Limited (RGTIL) etc. Alternatively, LNG is directly delivered via road tankers to the customer location.

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Road movement of LNG will increase significantly in the near future and will increase the user base

for LNG. Road movement of LNG is safe as LNG is transported in double walled insulated cylinders.

This research paper highlights the importance of natural gas/LNG to fuel industries in India and

details the demand supply dynamics, infrastructure and distribution of LNG in India. The paper also

provides a case for strong need for increased adoption of natural gas /LNG in India.

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3. Natural Gas – A Clean Hydrocarbon Fuel

Natural gas is a naturally occurring hydrocarbon gas mixture consisting primarily of methane. It is one

of the cleanest, safest, and most useful forms of energy in our day-to-day lives. It is an important

source of energy for power generation, industrial fuel requirements, feed for the fertilizer and also

used as process material for various industries like steel plant and petroleum refineries.

As volume of natural gas is approximately 600 times its volume in liquid form, to facilitate ease of

transportation, natural gas is converted into liquefied natural gas (LNG) and transported via ships to

destination countries. At the destination, LNG is regasified back into natural gas and transported via

pipeline to the end consumer. Alternatively, LNG is transported via trucks and regasified at consumer

location/factory.

Use of LNG compared to Diesel as fuel have following environmental benefits:

Greenhouse gas emission for LNG is approx. 15% lower

NOx emission is 80% lower

Particulate emission is 75% lower

LNG spills does not require cleaning up of land as it evaporates and being lighter than air

does not settles in the lower atmosphere.

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4. Demand and Supply Scenario in India

As per BP Statistical Review of World Energy 2017, contribution of Natural gas in energy basket of

India is only 6.2% compared to world average of 24.2%. India is not self-sufficient in natural gas and

gas need to be imported as Liquefied Natural Gas (LNG) to meet the requirement. India had

consumed approx.138 MMSCMD of natural gas in 2016-17 out of which approx. 67 MMSCMD was

imported in the form of LNG.

As against LNG share of 6.2%, share of coal and oil in India’s energy basket are 56.9% and 29.4%

respectively. Indian Government has focus on development of clean, environment friendly sources of

energy. Although natural gas generates carbon footprints but greenhouse effect on per energy basis

is lower compared to oil and coal, also burning of natural gas generates lower pollutants into the

atmosphere. Due to environment friendly nature, share of natural gas in energy basket is expected to

increase significantly.

In India natural gas is used primarily in power generation, fertilizer plants for urea production,

refineries of petroleum products, petrochemical plants, sponge iron based steel plants, as fuel for

transportation (buses, cars etc.), domestic gas and industrial usages.

Recent fall in LNG prices has made LNG imports in India a viable option for a variety of sectors such

as the power sector where natural gas can be used to operate gas based power plants which are

currently idle and this is likely to spur growth in gas consumption.

Various studies on gas demand in India have found that there is a huge demand of gas in the country

across the sector. Actual gas consumption is much lower than the realizable demand due to lack of

distribution infrastructure such as gas pipeline connectivity to various parts of eastern India. Several

pipelines are currently under development which will bridge the gap between actual demand and

realizable demand in India.

Considering the huge untapped gas demand of nearby industries, fall in LNG prices and positive

outlook on development of distribution infrastructure, there is a strong case of development of LNG

import terminals in India to meet India’s natural gas requirement.

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4.1 Demand of Natural Gas in India

Source: Ultra LNG Ltd representation, MoPNG, CRISIL Research

Chart 1 – Historical & Projected Natural Gas Demand in India: Natural Gas Demand (net of

internal consumption by gas producing companies) is expected to increase to 209 MMSCMD by

2025. Demand to be led by Fertilizer, Power and CGD sectors.

Sectors which lead consumption of LNG include Power, Fertilizers and Industry Sectors:

Power: Currently power sector consumes around 32 MMSCMD of natural gas while the power plants

operate at PLF of less than 20%. The supply demand gap is fueled by the fact that gas based power

plants are operating much below their capacity. More than 25,000 MW of gas based power plants are

installed. Further, cost of power generation through coal is increasing and with the power deficit

increasing, natural gas plants will eventually become a competitive and viable option.

Fertilizer: Urea constitutes 50% of India’s total fertilizer demand. Natural gas is required in the

process for the production of urea. Demand for Urea is expected to grow due to price competitiveness

of Urea vis-à-vis other fertilizers. Government initiatives such as capacity additions under New Urea

44 42 45 45 45 46 46 49 55 56 57 58

31 28 32 32 29 32 34 35 35 43 52 60 20 19

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126 121 127 136 133

143 151

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209

0

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100

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FY14 FY15 FY16 FY17 FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F

Overall Demand

Fertilisers Power CGD Petrochemicals Refinery Others Demand

mmscmd

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Investment Policy and price pooling mechanism and conversion of naphtha based plants to gas

based plants will significantly increase natural gas demand in the fertilizer sector.

Auto & CGD: In India, geographical areas are auctioned for development and operation of city gas

distribution network. Through this auction based allotment process, more and more Indian cities are

getting connected through city gas distribution networks. For these city gas distribution networks,

there are three different uses –compressed natural gas as fuel for automobiles, gas for industrial fuel

and domestic consumption of gas for cooking and related usage. Current consumption of natural gas

is approx. 20 MMSCMD.

Other sectors: Other sectors which contribute to natural gas demand include Petroleum Refinery,

Petrochemicals and Steel industries. For these industry natural gas is important feed for the process.

Natural gas is also used as fuel in these industries as a substitute to liquid fuels.

4.2 Supply

Source: Ultra LNG Ltd representation, MoPNG, CRISIL Research

Chart 2 – Historical & Projected Domestic Supply of Natural Gas in India: Domestic gas

production which is currently at ~ 69 MMSCMD is expected to increase to 102 MMSCMD by 2025.

RIL & ONGC Onshore and Offshore fields are main sources of domestic production of natural gas.

79 73

69 68 70 72 74 77 83

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FY14 FY15 FY16 FY17 FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F

mmscmd

Domestic Production Growth

Net production (Excluding losses, flaring and internal consumption)

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Key sources of Domestic production of natural gas in India include ONGC & RIL onshore and offshore

fields as well as Coal Bed Methane (CBM) fields. Production growth over the next 5 years is expected

to be led by ONGC’s western offshore fields and rising CBM output. While premium pricing policy and

other initiatives are expected to assist domestic gas output, growth is expected to be subdued.

4.3 LNG Imports

Source: Ultra LNG Ltd representation, MoPNG, CRISIL Research

Chart 3: Historical & Projected Imports of LNG in India: LNG Imports in India are expected to

grow significantly in India. LNG imports are expected to grow to 107 MMSCMD by FY25.

Over the short term (FY 17 to FY 22), LNG Imports by Fertilizer and CGD sectors are set to increase.

Over the long term, ramp up in gas demand from fertilizer plants setup under the new Urea

Investment Policy and improved demand from the Power sector is expected to lead the ramp up in

LNG demand.

47 48 58

68 63 71

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FY14 FY15 FY16 FY17 FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F

mmscmd LNG Imports

LNG Imports

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5. LNG Sourcing

Global liquefaction capacity for the LNG is 340 MMTPA, as against that 258 MMT of LNG was

exported during calendar year 2016 indicating a capacity utilization of 75%. Total 18 countries exports

LNG, out of which Qatar, Australia, Malaysia, Nigeria and Indonesia are prominent exporters

contributing 70% to the total export volume. Chart below shows the LNG export in 2016 from top

countries.

Source: IGU 2017 World LNG Report

Chart 4: Summary of LNG exports in 2016: Major exporting countries include Qatar, Australia &

Malaysia

As per International Gas Union 2017 World LNG report, 35 MMTPA of LNG liquefaction capacity was

added during 2016 and as on January 2017, 114.6 MMTPA capacity of LNG liquefaction plants were

under construction out of which 47 MMTPA is expected to be commissioned in 2017. As against

capacity addition of 35 MMTPA in 2016, LNG trade has increased by 13 MMTPA during 2016

resulting in lower capacity utilization and downward pressure on LNG prices. Out of 114.6 MMTPA of

LNG liquefaction capacity under construction, USA will contribute to 57.6 MMTPA while Australia will

contribute to 31.1 MMTPA.

Natural Gas is sourced in India (~ 69 MMSCMD in FY 16) from ONGC & RIL onshore and offshore

fields as well as Coal Bed Methane (CBM) fields. Production growth over the next 5 years is expected

to be led by ONGC’s western offshore fields and rising CBM output.

77.2

44.3

25 18.6

16.6

76.3

LNG Export in 2016 (MMT)

Qatar Australia Malaysia Nigeria Indonesia Others

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6. LNG Shipping

Currently there are 413 LNG carriers in the market transporting LNG from countries having

liquefaction plants to counties having regasification facilities. India receives most of the LNG from

Qatar which is only two days shipping from LNG import terminals in west coast of India. Prices of LNG

transportation through ship has decreased substantially in last three years. Spot charter rates hit

historical highs in 2012 after Fukushima disaster, however prices has reduced substantially in last

three years and currently it is at historical low level. 29 new build ships were added during 2016

leading to 4.5% increase in capacity of the LNG carriers leading to downward pressure on LNG

charter rates.

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7. LNG pricing

LNG prices have declined with increase in the liquefaction capacity and decrease in price of crude oil.

LNG prices are either linked to crude prices or gas prices. In last three years both crude prices and

gas prices have decreased leading to fall in LNG prices.

Chart 5 –Trend in LNG Prices: LNG Prices have witnessed a fall in recent years

Fall in LNG prices had led to higher demand of LNG especially in India where latent demand is high

and sensitivity of demand with respect to price is high. Currently spot LNG for India is at approx. USD

6 per MMBTU. At this price LNG might be competitive for gas based power plant as well especially if

we can manage some pooling with domestic gas. Average charter rates for steam vessels during

2016 was USD 20,500 per day while that of DFDE/TFDE vessels were USD 33,500 per day.

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8. LNG Infrastructure in India

As of 2017, there are LNG terminals with over 25 MTPA of regasification capacity:

Petronet LNG Limited (PLL) commissioned its Dahej terminal in April 2004 and has increased

capacity to 15 MTPA and then further incremental capacity of 2.5 MTPA. PLL sells gas to

GAIL, IOCL and BPCL that sell to consumers in Gujarat and other Northern States.

Shell-Total together commissioned the LNG regasification terminal at Hazira and with a total

capacity of 5 MTPA. Hazira LNG has entered into contracts with both Gujarat State Petronet

Limited & GAIL for transporting gas within Gujarat.

GAIL Dabhol Terminal has a capacity of ~ 1.7 MTPA (Development in first phase without

breakwater) which is expected to expand to 5 MTPA.

Petronet LNG Limited (PLL) Kochi has a capacity of 5 MTPA. Utilization at this terminal

currently is low due to connectivity issues to the hinterland.

LNG Regasification Infrastructure (FY2017 H1):

Name Ownership Stake Existing

Capacity (MTPA)

Incremental Capacity (MTPA)

Utilisation

Dahej Petronet LNG 100% 15 2.5 97%

Hazira Shell Gas B.V. 74%

5 76% Total 26%

Dabhol GAIL 26% 5 (1.6 due to

lack of breakwater

56.3% NTPC 26%

Kochi Petronet LNG 100% 5 ~ 5 %

Evacuation infrastructure for LNG Terminals (FY 2017 H1)

Name Evacuation pipeline Entity Capacity

(mmscmd) Utilisation

Dahej DVPL GAIL 54 ~ 49%

Hazira

HVJ GAIL 53 ~ 64%

DUPL GAIL 20 ~ 63%

EWPL RGTIL 80 ~ 25%

Dabhol DUPL GAIL 20 ~ 63%

DBPL GAIL 16 ~ 8%

Kochi KKBM GAIL 6 ~ 18%

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9. New Concepts of LNG import terminals

Generation 1: Land based LNG terminals - LNG terminals world over stated with large size land

based LNG import terminal. These terminals are good for large scale operation with connectivity of

the demand centers to the LNG terminal through gas pipelines. These terminals require high

investment in the order of USD 700-800 million hence larger market size of 3-5 MMTPA for the

financial viability. Currently there are 106 of land based LNG terminals.

Generation 2: Floating Storage and Regasification Units (FSRU) – High project cost of large land

based terminals are not suitable for smaller demand centers. Also, there is no flexibility to move the

location of the terminal if demand scenarios changes. Considering this FSRUs become popular which

are nothing but LNG ships with regasification unit installed over it. Currently there are 26 FSRUs

based terminals across the world. Project cost for these type of terminals are approx. USD 400-500

million.

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Generation 3: Floating Storage Unit (FSU) and land based regasification – Now a new concept

LNG terminals based on Floating Storage Unit and land based regasification are being developed.

This combination provides much higher flexibility compared to plain vanilla FSRU. One can hire any

LNG carrier without any significant investment for operating as FSU hence there is a flexibility in

chartering of the vessels. Regasification system can be installed on land which will require small

space. This concept further reduces the project cost and cost of such terminals are in the range of

USD 200-300 million. One terminal in Melaka, Malaysia is operational for more than 3 years.

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10. Pipeline Connectivity

Pipeline connectivity is extremely important to deliver natural gas to industries such as fertilizer and

power plants which are stranded. Once completed, the expanded pipeline infrastructure will enable

actual consumption to increase closer towards the realizable demand. Development of new LNG

import terminals will be required to meet the enhanced consumption generated as a result of newly

developed pipeline infrastructure.

Key Pipelines expected are as follows:

Jagdishpur to Haldia Pipeline (extension of HVJ) by FY 2020

Kochi-Mangalore-Bengaluru Pipeline (KBMPL) by FY 2019

Shahdol – Phulpur by FY 2017

Ennore – Nellore by FY 2020

Kakinada – Srikakulam by FY 2019

Ennore-Thiruvallur-Bengaluru-Puducherry--Nagapattinam-Madurai-Tuticorin by FY 2020

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Upcoming LNG import and Pipeline infrastructure

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11. Road Movement of LNG

To cater to sectors/industries which are not accessible by gas pipeline or pipeline connectivity is yet to

be developed, LNG is delivered via road tankers. LNG is transported to end customers via road

tankers/semi-trailers. Road movement of LNG will increase significantly in near future and will

increase the user base for LNG. Road movement of LNG is safe as LNG is transported in double

walled insulated cylinders.

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12. Case Study

Interview was conducted with the Director - Project and Commercial at Ultra LNG Limited, a company

focused on development of LNG terminals in India.

Shyam Bagrodia

Director Project and Commercial

Ultra LNG Ltd.

Excerpts of the discussion are detailed as follows:

1. Can you shed some light on demand for natural gas in India?

Contribution of Natural gas in the energy basket of India is only around one third of the contribution of

natural gas in the world energy basket. India is not self-sufficient in natural gas and gas need to be

imported as Liquefied Natural Gas (LNG) to meet demand. Approximately half of the India’s gas

requirement is fulfilled through import of LNG.

Various studies on gas demand in India have found that there is a huge demand of gas in the country

across sectors. Natural gas is a clean and efficient fuel unlike coal which has lower efficiency and

higher levels of environment concerns. Government of India has launched several initiatives to

increase the usage of natural gas and thereby safeguard the environment.

Actual gas consumption is much lower than the realizable demand due to lack of distribution

infrastructure such as gas pipeline connectivity to various parts of eastern India. Several pipelines are

currently under development which will bridge the gap between actual demand and realizable

demand in India.

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2. What is the future of LNG Imports in India?

There is a strong potential for LNG Imports in India. Over the short term, LNG Imports will be driven

by Fertilizer and City Gas Distribution (CGD) sectors. In the long term, ramp up in gas demand from

fertilizer plants setup under the new Urea Investment Policy and improved demand from the Power

sector is expected to lead the ramp up in LNG demand.

Fall in prices of LNG have made LNG imports in India a viable option for sectors such as power sector

where natural gas is used for operation of gas based power plants which are currently idle. LNG is a

cleaner fuel source as compared to coal and the government has taken many measures to increase

the usage of natural gas in the country.

Fall in LNG prices and developments of distribution infrastructure such as pipeline connectivity

provide a strong case for development of terminals to import LNG in India.

3. What are the challenges faced in the natural gas sector in India?

LNG is highly price sensitive and rebound of prices may hamper the viability and cost effectiveness of

LNG as coal which is a cheaper fuel source is abundantly available in India.

Catering to demand of various industries in Eastern India is largely dependent on the development of

pipeline connectivity to industrial hinterlands. Delay in obtaining clearances and construction of

pipelines can significantly hamper the distribution of natural gas in India. It is important that pipelines

are developed at a quick place to cater to plants such as power and fertilizer plants which are

currently idle due to lack of availability of natural gas.

4. Can you put some light on distribution of LNG in India?

Natural gas/LNG is distributed in India via pipeline and road. LNG is usually imported via ships and

then stored in large cryogenic tanks at -160 degree celcius and vaporized into natural gas. Natural

gas is then distributed via pipelines to the end customer. Several gas pipelines exist in India which

were setup by companies such as GAIL which provide natural gas to several industries.

Alternatively, LNG is directly delivered to the end customer via road tankers or trailers. Road

movement of LNG will significantly increase in the near future as LNG can be delivered to customers

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which are not connected on the pipeline grid. Road movement of LNG is safe as LNG is transported

in double walled insulated cylinders.

13. Conclusion

LNG is environment friendly fuel which is also cheaper than liquid hydrocarbon fuels. Energy

value of LNG on per ton of fuel consumed is highest while carbon emission, NOx emission

and particulate matters emission is lowest.

Gas use in India is much lower than world average and its use should be promoted through

use of LNG.

Cost of development of LNG infrastructure is reducing which will reduce the net cost of LNG

for the users.

Support should be provided for use of LNG in transportation and other services.

Road movement of LNG will increase significantly in near future and will increase the user

base for LNG.