By R. Sasankan

Every now and then, I shake my head in disbelief when somebody masquerading as an expert floats a completely daft idea to resolve a problem that has defied a solution for years.

It happened again recently when a top executive at Petronet LNG Ltd – literally a babe in the woods in India’s hoary petroleum sector – came out of the blue and said: “India is considering creating a strategic reserve of liquefied natural gas (LNG) to protect against future price increases or supply shortages… We have witnessed the situation, and the administration also found it challenging to secure supply following Russia's invasion of Ukraine…”

Petronet LNG Ltd is a relatively new player in India’s energy market; it was, created in 1998, by the four state-owned oil and gas companies -- ONGC, IOC, BPCL and GAIL – and asked to handle LNG imports. The entity was the brainchild of Dr Vijay Kelkar, conceived when he was secretary in the ministry of petroleum and natural gas. Dr Kelkar wanted it to be promoted by the public sector oil majors but operate with the kind of freedom that private entities enjoy – basically blending the relative strengths of the two different systems. The four PSUs together hold a 51 per cent stake in PLL while the financial institutions hold the rest.

The fledgling has always struggled to live up to the ideals and virtues that its innovator had baked into its conception. One reason for this was that the people who ran the show in the early days of its formation were wily characters intent on pushing their own dubious agendas. To rein them in, the secretary in the petroleum ministry and natural gas was parachuted in to oversee its affairs. The ex-officio chaperone never disappeared, which meant that the child clung to the coat tails of the bureaucrats in the ministry and never gained the operational freedom that Dr Kelkar had envisaged.

To be a child is one thing; but to indulge in childish and inane prattle is something else. The idea that you could set up a strategic reserve for liquefied natural gas is as outlandish as it is bizarre.

“This is a crazy idea”, said a top energy expert with whom I spoke.

It is true that the war in Ukraine has created turmoil in the oil and gas markets, pushed up prices of crude oil and LNG, and disrupted supplies. Obviously, India has been badly affected along with everyone else. But the solution that the PLL executive has come up with sounds worse than the ailment.

India’s problem with sourcing LNG doesn’t stem from supply-related issues; rather it arises because it is unaffordable. The solution that our esteemed friend at PLL has suggested will only aggravate the problem because the costs of maintaining a strategic reserve will only crank up the price of already expensive LNG.

The PLL executive seems to have forgotten that LNG can only be stored in cryogenic tanks. The cost implications of such a misadventure would be unimaginable. A cryogenic tank is divided into two fundamental parts: An inner vessel made of stainless steel and designed to withstand very low temperatures, and an outer vessel made of carbon steel. Even if Energy India opts for it, how much LNG can be stored in these tanks?

“I have heard of strategic gas reserves but I have never heard of strategic LNG reserves,” said another energy expert who was equally aghast with the suggestion.

India has built quite a few gas-based power plants in the hope of running them with imported LNG. There was no Ukraine issue back in those days and the LNG price was reasonably low. Still, India’s state-run electricity boards found it way too expensive to operate these gas-based power plants. According to the Institute for Energy Economics and Financial Analytics, these plants were built at a cost of almost $8.2 billion out of which the banks had pumped in $6.3 billion. And here is the outcome: Out of a total gas-based installed power capacity of 24.824 GW, as much as 14.3 GW capacity spanning 31 gas-based plants remains ‘stranded’.

Let us be realistic and acknowledge the fact that the Indian market is highly price-sensitive. It is not willing to accommodate LNG beyond a point. In the wake of Ukraine war, when LNG prices surged to $ 45/mmBtu, Indian importers promptly cut back their LNG imports.

India relies on imports to meet almost half its gas needs, with fertilizer, transport and industries being the biggest consumers of the fuel. According to senior executives of oil and gas companies, India’s import of liquefied natural gas is expected to decline to FY18-FY19 levels in the current financial year which ended on March 31. In-bound shipments to India stood at 27,439 million standard cubic metres (MSCM) and 28,740 MSCM during FY18 and FY19. This is the stark reality in the Indian market, which is ranked as the world’s fourth largest LNG importer.

India’s long- term contract with RasGas of Qatar for 8.5 million tonnes per annum of LNG ensured that the domestic market was not rocked by the wild fluctuations witnessed in the spot LNG market. The authorities are currently involved in the process of negotiating the renewal of the contract that expires in 2028. India’s long-term contract for LNG from Russia ran into problems following the Ukraine war. Such disruptions can occur in the future also.

For a country like India which needs LNG in large quantities at an affordable price, the only sensible option is to either purchase it outright or invest in large gas fields and LNG plants overseas. In an earlier column, I had said that gas fields were available in the US, both for outright sale and equity participation. India’s oil and gas majors are in a position to invest in these plants. They are obligated to ensure the success of Prime Minister Narendra Modi’s desire to raise the share of natural gas in the country’s energy mix to 15 per cent by 2030. The current level is below 7 per cent.

Crazy ideas like the creation of a cryogenic strategic reserve of LNG will always remain a pipe dream and will never address the country’s immediate priorities.