Policy
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Modi Govt. Grants Infrastructure Status To Hydrocarbon Sector
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India’s Ambitious Plan For Doubling Its Refinery Capacity
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Splitting Gas Transportation & Marketing Major GAIL
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RIL- BP To Activate Gas Marketing Joint Venture IGS
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Regulation
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Industry Initiative For Crisis Management In Oil Fields?
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After A Long Gap PNGRB Begins To Function
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Alternative Energy / Fuel
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New Projects
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GAIL Places Order For Rs 4.40 Bn Urja Ganga Pipeline Contract
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Essar Oilfields Wins Contract From ONGC
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Market Watch
LPG Dealership Expands
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Companies
Air Products
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ONGC Announces Discovery From Cauvery Basin
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BPCL Q3 Net Profit Plunges, GRM At $7.89 Per Barrel
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IOC Reports GRM Of $ 8.8 Per Barrel, Doubles Profit
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Welspun Corp Receives Orders For 232,000MT Of Pipes
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Press Release [FREE Access]
Petro Intelligence » Terminal Illness: Castles Built On Hot Air

by R. Sasankan

“Apple made 0.7 per cent of its global revenue in India in the year to March 2017. Facebook, though it has 241 million users in India, probably the most in the world in one country, registered revenues of just $ 51 million in the in the same period. Google is growing more slowly in India than in the rest of the world. Mobile phones have become popular as their price has tumbled – but more handsets sold are basic devices than the smart phones that are ubiquitous elsewhere in the world. Fast food chains once spoke of a great market. Their eyes were bigger than the Indian stomachs. Despite two decades of investment McDonald’s has hardly any more joints in India than in Poland or Taiwan… Starbucks says it has big plans for India but has opened about one new coffee shop a month over the past two years, bringing the total to around 100 -- on a par with Utah or the UAE. A new Starbucks opens in China every 15 hours, adding to 3000 already operating.”    

—The Economist, January 13th-19th, 2018

India could reclaim the honour of becoming the fastest-growing major economy in the world in the next fiscal – a tag that it lost to China last year when its growth rate started to stutter after the effects of the demonetisation in November 2016 and the introduction of goods and services tax in July 2017.

But this recovery masks a harsh truth that characterises the Indian economy – and investors in this mammoth economy with a population of 1.3 billion can disregard only at the peril. The Economist article quoted in the epigraph brings out this stark truth when it talks about the biggest challenge in the mobile phone business: business is booming but it is at the bottom-end of an extremely price-conscious market.

That is the terrible truth about India: it is an ancient country with a rich minority, a large struggling middle class and a huge population hovering around the poverty line. And as a result it is extremely price sensitive.

What is true in the case of the mobile phone market is equally true in other areas of industry including the oil and gas industry. Sadly, this harsh reality seems to have escaped the notice of the promoters of LNG regasification terminals in the country and the LNG suppliers overseas.

Investors have scrambled to file a stack of proposals to establish LNG terminals in the country but have not thought through the consequences. Can India really afford to have so many LNG terminals? There is a risk that if these projects hit the wall, the government may have to come out with a rescue package to bail them out.

The power producers in the country, who were originally reckoned to be among the largest consumers of natural gas, have been shying away from this feedstock, preferring a thermal option. The consequences of such preferences have already impacted the Kochi terminal of Petronet LNG which has been rusting since inception with a capacity utilisation ranging from five to ten per cent though the only power plant of National Thermal Power Corporation (NTPC) in the state is not very far from Kochi. The cost of power is politically sensitive and the electricity boards are run by state governments most of which are bankrupt, with their electricity boards in a financial mess.

Electricity boards simply cannot afford to pay the price that the gas importers are demanding. With the power sector opting out of gas, the government’s declared aim of raising the share of gas in the country’s energy mix from 6.5 per cent at present to 15 per cent can take years before it is realised.”The commercial viability, based on rigged prices of delivered regasified LNG, is in grave doubt. We are simply not thinking through all this and Kochi is the best example of this lack of understanding, planning and foresight,” says an energy expert.

Reckless projections about gas demand made by the so-called energy experts seem to have misled many business houses to come up with proposals to set up LNG regasification terminals. At the risk of repetition, permit me to recall the sequence of events that led to the present mess in the gas sector. A few years ago, an expert group appointed by the previous United Progressive Alliance (UPA) government, projected the country’s natural gas demand at 473 mmscmd (million metric standard cubic metres per day) in FY 2016-17. Almost simultaneously, an industry group put out what it called a more "realistic" assessment by projecting gas demand in 2016-17 at 378.08 MMSCMD. But when India’s financial year for 2016-17 ended in March 2017, official data came out with a more sombre estimate of actual gas consumption: 152 MMSCMD, which shows how completely out of whack projections can be.

What about future demand? Projections look equally overblown. An official Working Group has projected the country’s gas demand by 2021-22 at 606 mmscmd. The latest in the demand projection series is the one made by KPMG/NGS India which estimates demand to increase to 342 MMSCMD by 2026-27 and 418 MMSCMD by 2030.

It would be risky to build project plans on dodgy forecasts. Why do forecasters go so wide of the mark? Their projections may ultimately materialize, but that time gap could well be 20-25- years. They seem to have got almost everything right except the price of gas which is the most crucial aspect in a country like India.

The country has four LNG regasification terminals already in operation with a total annual capacity of 27 million tonnes. If the proposed terminals become a reality, the total capacity could reach a minimum of 60 million tonnes. Some of them are Floating Storage and Regasification Units (FSRUs) which can come up faster than the land-based terminals.

The shocking truth is that multinational oil companies understand the Indian demand scene better than Indian businessmen. As I had pointed out in an earlier article, Shell and Gaz de France pulled out of the FRSU proposed in Andhra Coast because they realised that the East coast of the country could not afford another terminal in the near future as the 5 million tonne annum regasification terminal of Indian Oil Corporation at Ennore near Chennai is in an advanced stage of construction. Being a public sector company, IOC can afford to sustain the terminal even if the capacity is grossly underutilised.

We are now familiar with the theory of "Limits to Growth" which applies to India’s gas sector. The country is large and is starved of energy but the industry’s ability to afford costly gas is limited. These limits can be crossed only if the commodity becomes affordable. Domestic gas output is expected to double in the next four to five years but that cannot last for long as the fields that are being put into production are small and marginal. Petronet LNG Ltd (PLL) with its Dahej terminal and Shell’s Hazira unit are more or less sufficient to meet the basic demand as it exists today. Remember, PLL has the subsidised the fertiliser sector as it is a major consumer.

The government is marketing LPG which is a subsidised item. To make it affordable to its targeted group, the government has abandoned its plan to increase the price of the subsidised domestic LPG in small doses. The government cannot be expected to subsidise regasified LNG. This does not mean that the share of gas in the country’s energy mix will not rise. It will, but the target year may have to be extended to 2050 instead of 2030. Remember, China has a lower share of gas than India in its energy mix.

The new LNG terminals will face the problem of finding takers as the price of their regasified LNG will be higher than the affordable rate. PLL tied up its consumers through a take-or-pay agreement before it went into operation. This cannot happen again. The result could be massive underutilisation of capacity. Faced with the added problem of finding associate network to distribute regasified LNG, the new terminals will find the going extremely tough.

Another threat looms. Russia’s plan to build a transnational pipeline through Pakistan and a competing offshore pipeline from the Middle East could wreck the fortunes of these proposed terminals if these pipeline projects reach fruition. Gas supplied through these pipelines will obviously be cheaper. The investors in these terminals would then perforce have to morph into a lobby group with the sole objective of scuttling these pipelines.

The Indian market is important for gas producers. The ultimate success will go to those who can reach it to Indian consumers at an affordable price. Those who argue that gas at any price can be sold in India because the market is vast and the country is the fastest growing in the world simply do not understand India. The theory of limits to growth applies more forcefully in India than anywhere else.



To download the latest issue 'Volume 24 Issue 21 - February 10, 2018', click here
Petro Intelligence [FREE Access]
Terminal Illness: Castles Built On Hot Air
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The Great Game: Pakistan Becomes The Cat’s Paw
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Putin’s Great Game: A Gas Pipeline To India
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ONGC: More Sinned Against….
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Foreign Investment
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RIL-BP JV To Start Selling Imported LNG In 12-18 Months
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Overseas Investment
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Gas Scene
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Gas Sector Growth - China and India
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Gas share in Energy-Mix India
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Gas Share in Energy in select countries
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Domestic Gas Prices in recent months
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Domestic Natural Gas Scene In December 2017
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Sector-wise Consumption of Natural Gas in November 2017
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List Of Importers & Source-Wise LNG Imports In November 2017
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Gas pipelines under execution / construction as on 1st November, 2017
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Capacity Utilisation of Gas Pipeline Network as on 1st October, 2017
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Status of Coal Bed Methane Gas development in India (Sept 2017)
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Status of Shale Gas and oil development in India
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Sectoral Consumption of gas in October 2017, far below demand projections
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LNG Imports and Domestic Gross Natural Gas Production In October 2017
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Update: CNG Stations & Vehicles and CNG Sales
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Update: CGD Factsheet as of September 2017
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Domestic Gas Price (November 2014 -March 2015 to October 2017 - March 2018)
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Source-Wise LNG Imports In September 2017
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ONGC Asset-wise gas flaring in FY 2016-17
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Data Section
Monthly Upstream Data
Monthly Downstream Data
Historical database
Data Archives
Special Database
HPCL: Infrastructure & Capacity Expansion Projects
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Impact of Petroleum Prices On CPI & WPI
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Fuel & Loss
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Month–wise price in Indian crude basket
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Power deficit: Region-wise position for December, 2017
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India’s Crude Imports From OPEC Countries Registers Further Decline In December 2017
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HPCL’s unique position in India’s oil industry
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Total reserves of ONGC group as on April 1, 2017
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End-Use Sectors of High Speed Diesel
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IOC’s Unparalleled Cross -Country Pipeline Network, Market Share, Throughput and Capacity Utilisation
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Petroleum products demand & Gross Domestic Product (GDP) during five year period
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Retail Selling Prices of Petrol and Diesel: India vis-a-vis Developed Countries
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Status of blocks under NELP (2017-18)
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Petroleum Sector’s Contributions To States Through Taxes
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Revenue from the Petroleum Sector and Payout from Government for petroleum subsidy
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Important terms in pricing of petroleum products
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India’s Region-Wise Crude Imports in November 2017
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Retail Selling Price (RSP) of major products in India & neighbouring countries
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High Sulphur Crude Processing Hits An All Time High
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Oil India Ltd Cost Structure
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Specific energy consumption (MBN number) of PSU refineries
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Uptrend Stalled In Distillate Yield Of PSU Refineries
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Oil India Ltd : Large and Diversified Domestic Reserve Base
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Tenders [FREE Access]
Vedanta Limited
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