Against the backdrop of falling domestic natural gas production coupled with peaking imported Liquefied Natural Gas (LNG) prices, over 25,000 megawatts of gas-fired generation capacity is on the verge of a total shutdown, while the fate of around 15,000 MW is hanging in the balance due to an uncertainty of gas supply.
This has triggered the need towards finding alternate solutions such as the price pooling of gas in line with proposed coal price pooling, which is also yet to be formalised by the concerned authorities. Natural gas production in India declined by 14 per cent to 37.5 billion cubic meters in the 11 months ended Feb. 28, according to the oil ministry data. The power sector has been knocked out by a double whammy owing to the fall in gas output, combined with a coal shortage worsened by mining curbs. The industry, which was already grappling with a high cost of imported coal, is now seeking government intervention to ensure fuel supply to its stranded and planned generation plants.
The county's largest gas-based power plant Ratnagiri Gas and Power Private Ltd (RGPPL), earlier known as Dabhol, will become completely redundant once again in next six months, while many other gas based power plants in the country would hardly be able to run on imported gas, according to the former chairman of RGPPL , R K Goel. Dabhol is spending Rs 200-300 crore every year on maintenance of the plant and even gas is made available from imported sources the cost of generation will be very high, said Goel.
Others such as Lanco, GVK, GMR, Essar, Torrent among others are weighing in their options to revive the generation at their plants and assure fuel supply, according to sources. Association of Power producers (APP), representatives of private power companies, have already demanded the formation of a common gas price pool for core sectors such as power and fertilizers, augmenting the domestic supply by diverting six million standard cubic meters per day (mscmd) of gas being supplied to the non-core sector and reserving the new finds of 10 mscmd for the power sector. We have already written to the power ministry and are meeting the oil & gas minister to work on some rational solution. said Ashok Khurana, director general of APP. He added that if fuel prices were going up then it should be passed over to the end users in accordance.
India is likely to embark upon a reform of its domestic natural gas pricing system in the fiscal year 2014 to encourage local gas production to fill a current shortage in supplies, according to Bernstein Research. It is increasingly obvious that India will have to raise gas prices to stimulate domestic [gas] production...to avoid an over-dependence on expensive LNG imports, the analysts said. The report said Indian domestic gas prices are currently the lowest in Asia Pacific at around $4-5/Mcf at the wellhead û roughly 25 per cent of LNG spot prices at $16/ Mcf. In comparison, gas prices in China and Thailand are around $1/Mcf and $3/Mcf higher, respectively. The analysts added that, although low energy prices have been beneficial for end-users, local gas producers have incurred losses and this would limit future upstream investments needed to boost the current low gas production. Monthly gas output from India declined by 22 per cent over the last two years from 4.5 Bcm/month to 3.5 Bcm/month, data from Bernstein showed. This could largely be attributed to the drop in Reliance's KG-D6 production, which was falling around 20% each year. To make up for the shortfall, LNG imports have increased and currently comprise of a 30 per cent of the overall gas supply in India. But Bernstein analysts said this is clearly not a sustainable policy, given that LNG prices are markedly higher than piped gas prices. The catalyst for price change also coincides with the expiry of the first five-year period of the KG-D6 contract at the end of the fiscal year 2014.
Natural gas supplies from Reliance Industries' KG-D6 block to power plants has completely stopped after output from the eastern offshore fields dropped to an all-time low 17 million standard cubic meters per day (mmscmd) early this month According to industry people, most of the power plants either had gas allocation from the state-owned Oil & Natural Gas Corp (ONGC) or had tied-up imported liquid gas (LNG). With imported LNG costing three times the $4.205 per million British thermal unit price of KG-D6 gas, power companies are finding it difficult to operate their plants based on imported fuel.
Gas availability, or rather the lack of it, is impacting our gas fired plant's load factors. However, for all our gas plants, fuel risk is with the power purchaser, says a Essar Energy spokesperson. LNG at current prices is not an alternative. Spot prices are at around $15-$18 per mmbtu range, which translates into energy cost at over Rs 6-7 per unit. This is not sustainable. We welcome policies that incentivise development of domestic gas prices as reasonable prices, he adds. According to Rahool Panandikar, principal, Boston Consultancy Group, importing gas is an expensive option and will increase the cost of generation by 100 per cent. It would be hard to sell such expensive power and it will also be not easy to pass over the cost to the end users and state utilities, which are already in bad financial health.
Meanwhile, the Prime Minister's Office (PMO) has asked the Power Ministry to come out with a detailed note on the availability of gas from various sources and implications of gas price pooling for the economy as such and individual stakeholders, in particular. Power Ministry is expected to prepare a note on gas price pooling for the consideration of the Cabinet Committee on Investments (CCI). Under the gas price pooling mechanism proposed, LNG import price would be pooled with the domestic natural gas price, and, accordingly, an average price would be worked out for power producers.
However, Oil minister M Veerappa Moily has said he would ask the government to reassess the priority list drawn up in 2007 for earmarking domestic natural gas. "Scarcity of gas is a great problem. I cannot produce gas just like that, he said after meeting the promoter of the private power players recently.
Reportedly, Anil Ambani of Reliance Power, G M Rao of GMR Group, G V K Reddy of GVK Group and Madhusudhan Rao of Lanco have met oil minister and Planning Commission deputy chairman Montek Singh Ahluwalia to push their case. The power producers have also sought changing the priority list to accord equal priority to power and fertilizer units so that domestic gas is equally distributed.(With inputs from Platts Energy)