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Going down the tubes

Exploiting Reliance’s gas discovery needs significant investment in a pipeline and distribution system

Written by Vikram S Mehta | April 8, 2009 4:22:04 am

Gas has started to flow from Reliance’s gigantic East Coast discovery.  This has significance not simply because of the monetary benefits that will accrue to the company and the government (the two principal shareholders),or because of the uptick in power generation and fertiliser production that it will enable,or indeed because of the savings on account of a reduced oil import bill and lowered financial subsidies — but also because it will accelerate the shift of our economy towards a ‘cleaner’ energy basket.  We all acknowledge the importance of containing carbon emissions and of weakening the link between our economic growth,energy demand and environmental pollution.  But as yet  our actions have not matched  our rhetoric.  The significance of the Reliance discovery is that it will compel  a broader constituency of interest groups to advocate the benefits of a relatively clean fuel.

Gas is an environmentally preferred fuel to oil and coal.  It emits fewer noxious fumes.  It is also operationally more efficient.  A combined cycle gas fired power plant can achieve thermal efficiencies of more than 60 per cent compared to 40 – 45 per cent for the latest coal technologies.

Notwithstanding,we have been slow in establishing gas as the fuel of choice. This is because unlike oil,a gas discovery can only be monetised if the associated pipeline transmission and  distribution are in place and the producers and consumers have agreed on the terms of the sales and supply contract.  Gas is not a fungible commodity and it is not possible under normal circumstances to store it other than for short periods and without special underground caverns that have been specially created for the purpose. It has to be consumed upon production (or else flared). Reliance,for instance,could only commence production after it had completed its 1440 km long East-West  gas pipeline from Kakinada in Andhra to Bharuch in Gujarat and upon finalisation of sales and supply agreements with the various fertiliser and power companies located en route this pipeline,built earlier by GAIL.  The gas discoveries in Tripura or the reserves in Bangladesh have on the other hand  remained undeveloped because there has been no comparable downstream infrastructural development and because there are no “bankable” customers within proximity of these discoveries.  I should add that the cost of forging an umbilical relationship between the gas producer,the pipeline company and the various customers is massive and that most bankers have generally been reluctant to finance as projects other than those promoted by companies with solid balance sheets.

The Reliance discovery will not,of course,ease these complexities but it should  refocus the policy limelight on the importance of developing a nationwide pipeline infrastructure.  Today despite the investments made by GAIL and Reliance,the south and large parts of central and north India cannot access gas supplies.  There is no pipeline network in this geography connecting potential customers to supply sources.  This is a constraint on economic growth and in particular power generation.  It also complicates environmental management. 

The opportunity cost of inadequate pipeline infrastructure has risen in recent months because of the sharp decline in the price of Liquefied Natural Gas (LNG).  Had the infrastructure been in place,potential customers would have had the option of shifting from environmentally polluting fuels to gas on  competitive rates. 

A few months back spot LNG was trading at over $20/mmbtu. Today it is available for under $5/mmbtu.  This is because of the impact of the ‘great recession’ on the demand for gas in Japan,Korea and Taiwan. These three countries accounted for 69 per cent of the global LNG market in 2008.  Today these countries are in an economic doldrum. The slowdown in demand is compounded by an emergent supply overhang. 12 new LNG ‘trains’ are slated for commissioning over the next 12 months in the Middle East and Indonesia. The fact is that the LNG market which was until recently a resource constrained sellers market has now moved decisively into a demand  constrained buyers market.  Of course the power and fertiliser companies in western India where a pipeline network has been built by GAIL and the Gujarat government and where there is substantial import capacity can,if they have the risk appetite,lock into long term supplies at competitive rates.  The last time they had such an opportunity was in 2003-4 but they did not avail of it on the ground that any price above $3 was not competitive. I suspect they regretted this decision because not only did the price of LNG shoot up into double digits but the price of coal also followed the upward trajectory of other commodities.  Whether they do so now is however not the real issue.  The issue is whether the combination of the flow of gas from the Reliance discovery and the likelihood that imported gas may be available at attractive terms will spur the stakeholders into creating the necessary infrastructure.

Investments in a gas pipeline network raises many questions.  Who should be responsible? The central government,the state government; the public sector; the private sector; and/or all of them. Hitherto GAIL has had the mandate but the Gujarat government has also invested in pipelines and of course Reliance too.  This has caused ruffles in the relationship between the Centre and the state and,one reads,also between GAIL and Reliance. 

Pipelines are a utility. They should be accessible to all producers on terms that are fair and which assure the pipeline investor a fair return on the capital invested.  The rules should also ensure against conflicts of interest. A producer should not be the authority that determines pipeline access. Ultimately the government and the regulator have to create conditions that lead to a competitive and efficient gas market — one that encourages competent players to invest in the infrastructure and which at the same time protects the consumers from price gouging and discrimination? If such conditions are not created then the blueprint of a national pipeline gas grid will remain just that — a blueprint.

The writer is chairman of the

Shell Group of Companies in India. The views expressed are personal

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