Friday, July 25, 2014

Small Scale LNG in India

The attractiveness of natural gas as a principal source of fuel for a range of uses is predicated on several factors. Principal of them is readily available supply, growing concerns and acceptance about global warming, technological advantages of gas use in power generation and other end use sectors, growing substitutability of liquid petroleum products by gas, advances made in scaling up LNG production and shipping capacities, and, finally, emergence of new and unconventional gas resources, like Shale gas, as very credible supply sources over long term.

India, presently facing a natural gas supply crunch primarily owing to the decline of domestic gas production, and is in dire need to secure additional gas/RLNG as well as diversify its natural gas basket. However, given the domestic gas supplies outlook, sluggish progress with commercial exploitation of unconventional resources like CBM and uncertain schedule for transnational pipeline projects, it is evident that India will need larger and larger imports of LNG to meet the overall gas demand.

India, despite meeting demand gap by importing LNG the challenge still lies in supplying it within proximity to prospective buyers with the help of existing transportation infrastructure mainly through pipelines. Three years down the line, India is likely to have increased supplies of natural gas but too few pipes to carry them as infrastructure fails to keep pace with the coming supply surge. Implementation hurdles and unviable tariffs have slowed work on pipelines, threatening the target to add 15,918km of pipelines to the existing 12,144km by the end of 12th Five-year Plan in March 2017. The delays could mean that while gas supply may pick up beyond 2017 when several liquefied natural gas (LNG) terminals become operational and supplies from domestic sources improve, there will not be adequate infrastructure to transport gas, especially to the eastern and central parts of the country. Pipeline work is complete only on 2,700km, or 17% of the target, and is under way for an additional 4,000km. Projects to lay 6,200km pipelines are in different stages of being bid out by PNGRB, while there is no clarity on the final 3,700km

This means opportunity for investors in purpose-built facilities called mini- and micro-LNG plants that can be constructed close enough to natural gas supply and closer to customers that need energy.

IGU defines small-scale liquefaction and regasification facilities as plants with a capacity of less than 1 MTPA. In turn, SSLNG ships are defined as vessels with a capacity of less than 18,000 cubic meters. Small-scale liquefaction plants are built with a variety of objectives in mind, including commercializing small gas fields, shortening gas-to-market times, marketing small quantities of gas usually flared, peak shaving and direct use of LNG.

China and USA are the frontrunners in the Small Scale LNG technology and its usage in wide industry applications such as transportation, exploration & production of hydrocarbon, mining operation, power generation and as peak shavers etc.  There were 400+ LNG re-fueling stations in China at end-2012, and 12 MTPA Capacity at small-scale liquefaction plants in China. While US has 84 LNG re-fueling stations in US as of January 2014 and 29 small liquefaction stations.

India has prioritized to increase the domestic oil and gas output which puts the marginal/small size/isolated fields both onshore and offshore on top precedence for exploration and probable to use small scale LNG technology. These fields were marginalized due to size of reserves, resource constraints of NOC, access to area, availability of Consumer (s), lack of Infrastructure, tax structure and policy on pricing & marketing. Companies like Petronet and GSPC are already active in supplying LNG to the end consumers via LNG trucks.

                   InfralineEnergy Oil & Gas Research Team


The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the Infraline Technologies (India) Pvt. Ltd. (organization). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.

Monday, July 7, 2014

Iraq Civil War - Indian Energy Prospective

Much has been said and written about the movement of the unrecognized state and active jihadist militant group-ISIL (Islamic State in Iraq and the Levant) also called as ISIS (Islamic State in Iraq and Syria) and its advances across Northern Iraq which by now has control over large part of Central Iraq.

ISIS is targeting Iraq’s oil fields as part of its plan to raise revenue and build its caliphate infrastructure. Although there are few fields (Ajeel and Hamrin) in the territory captured by ISIS, its advance has disrupted the operation of pipelines and a refinery. 
But what does this means for India? Do we need to worry about this unrest? Is this war an issue of concern for us?

The answer would always be a yes, considering today’s globalized economies. The increase in International crude prices due to this war has threatened to increase the burden of the fuel subsidy and widen the Current Account Deficit as India imports more than 75% of its crude. This will further put more pressure on our plan for earlier economic recovery. 

If crude prices increase further or sustain at elevated levels for the rest of the current fiscal, the fall in gross under-recovery from INR 139,869 Crore in 2013-14 to the projected INR 91,665 Crore for 2014-15 may not take place according to ratings agency ICRA in a report.
There was some initial surge in oil prices in the immediate aftermath of breakout of violence in Iraq due to speculations. However, at the moment the prices are stabilizing.
India has been unlucky in Energy Investments overseas largely because it has invested majorly in a highly volatile Middle East.  ONGC Videsh's holdings in Block VIII of Iraq may be under threat. But as per some experts this conflict is unlikely to directly threaten the major southern oilfields, but it might cause delays in oilfield development.
As per Petroleum Ministry, the Crude oil supplies to India come from Iraq's Basra oilfields which are far from the conflict zone in the northeast of the country and so the supplies have not been disrupted yet. Iraq is India's second largest crude oil supplier after Saudi Arabia, supplying about 25 million tonnes (MT) in 2013-14, to meet over 13 per cent of India's oil needs. So we will be at a great loss if the situation in Iraq worsens.
As per the Indian Petroleum official the disturbed situation in Iraq may not affect India's oil imports at the moment. But just in case, the ministry has asked OMCs to prepare a contingency plan to meet any supply disruptions from Iraq, by exploring other suppliers in the Middle East and elsewhere.
India for its future energy security should explore more options for uninterrupted supply of Oil and Gas by shifting its Energy Investment from Middle Eastern countries to other areas which are more stable socially & political.
All said; we hope that the situation in Iraq would improve for a better future for the people of that nation and for humanity.
          InfralineEnergy Oil & Gas Knowledgebase Team


The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the Infraline Technologies (India) Pvt. Ltd. (organization). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom

Thursday, July 3, 2014

Power continues to be India’s achilles’ heel

Despite the economic challenges that India is currently facing, there is no denying the fact that rapid  economic  growth since 1991 reforms has increased the burden on the nation’s infrastructure. An infrastructure deficit is widely considered to be one of the factors that could severely impede India’s economic growth. Much has been said and done since the past two decades and policy makers have made concerted efforts to accelerate infrastructure development. Power sector is the fulcrum of economic development in any country. Putting aside the success stories posted across the sector, the reality is that power sector in India continues to lag behind.

Shortages, tariffs and dependence on imported fuel are on the rise while the poor health of distribution continues to restrict the flow of investments. NTPC — the country’s largest generator and one of the cheapest producers of power — disclosed that it had to scale down generation by 16 million units between April-August last year (compared with 3 million units in the year ago period). The company attributed this to inadequate demand from state owned distributors. Data from the Central Electricity Authority (CEA) shows that peak power deficit shrunk to 3 per cent in October 2013 against 9.4 per cent in the year ago period. The deficit further shrunk to 2.9 per cent in November and ended in December last year at 5,547 mw as per CEA data. The Load Generation Balance Report for 2013-14 of CEA forecasts the peak deficit for the ongoing fiscal at just 2.3 per cent. 

Mixed fortune in 2013-14

While there was some good news on capacity addition front in 2013-14, the sorry state of open access even after 10 years of introduction continues to pose a challenge for policy makers and likewise industry segment decision makers. Capacity addition of 17,825 mw was posted in 2013-14 against a target of 18,432 mw. With 44,026 mw already commissioned or under commissioning (including 6,578.30 mw of capacity synchronized but not commissioned at the end of March) less than 40,000 mw of thermal and hydro capacity remains to be executed during the next three years. This represents a comfortable scenario for achieving the XII Plan target.

According to a statement by the Confederation of Indian Industry (CII), the decision of two state governments to ban the sale of electricity through open access system is unfortunate. Open access transactions have been primarily used by state electricity boards (SEBs) and distribution licensees to sell surpluses or to meet the short – term power requirements in their respective regions.
Industrial customers still face problems in accessing their choice of suppliers due to restrictions such as invoking of Section 11/108 of Electricity Act 2003 imposed by several state governments / SLDCs citing shortages or non – availability of transmission infrastructure. The intention behind the series of reforms in the power sector over the past decade, from opening up generation and distribution to the private sector to breaking up state-run monopolies and freeing up power prices (albeit under regulatory oversight) to allowing both producers and consumers ‘open access’ to a modern power market was noble: allow market efficiencies to operate, thereby offering consumers better quality of service at better prices. The reality is quite the opposite. More than a decade after the reforms, all players find themselves in some kind of a mess or another, largely of their own making. 


While the funding requirements of power sector are staggering, domestic banks and financial institutions have their own constraints to meet such requirements in view of industry / group exposure norms. Off-shore banks are generally averse to taking construction and regulatory risks during construction period and they prefer to participate in loan facility once the project is operational. The profitability of existing and under construction generation assets has been severely impacted on account of uncertainties emanating from fuel availability, volatility of prices of imported coal and delay in clearances.

1. Fuel Shortage: Coal meets around 52 per cent of primary commercial energy needs in India, against 9 per cent the world over. Around 66 per cent of India’s power generation is coal based. As power plants rely heavily on coal, its shortage contributes to decreasing electricity generation. Indian power producers added 46 gw of coal based generation capacity over 2011-2013; however, domestic coal output growth could not keep pace with the capacity addition. During 2011-2013, domestic coal output could only increase by 34 million tonne (mt). Hence, there was a huge demand-supply mismatch which developers tried to bridge through imported coal, although its use was restricted.

2. The gas story has also been bleak and has led to significant stranded generation capacities (more than 15,000 mw). Gas output from KG-D6 declined to mere 15mmscmd in March 2013 from the peak of 61mmscmd in March 2010. Gas supplies were completely stopped to the power sector from March 2013. The government then evaluated the options for according equal priority to gas-based power plants and fertiliser sector but it was not accepted, being an economically inferior option. However, during August 2013, the government decided to provide any additional domestic gas available over the next three years to power sector. This policy is not likely to benefit immediately as no additional gas is likely in the immediate future. However, as new gas discoveries happen, supplies to power sector could see an increase. Meanwhile, the government is also exploring pooling of imported gas with domestic gas and a subsidy on imported LNG to restart stranded gas-based power assets. A poor policy framework on  gas allocations is to blame - priority was given to capacities which were ready and this led to capacity creation before gas allocation!

3. Project Financing: India is undoubtedly and irrevocably integrated into the global energy market. It relies on significant amounts of energy from foreign sources and, as such, India is a price taker, not a price setter. We can reduce our vulnerability to energy price fluctuation through a flexible and competent energy market, but we cannot isolate ourselves from price volatility. At the same time, to expand energy supply capacity to meet the rapidly growing energy demand of its people, India needs more investment. A significant portion of the required investment must come from foreign investors, for whom India competes with other countries. This implies the necessity of integrating India’s energy institutions and policies with global practices. In the past two years, we have seen international strategic investors (power utility companies) showing an interest in the Indian power sector. Their entry is much needed, not least because of operational capabilities, but also to bring in the much needed equity financing into the sector. In terms of the general investment environment, the Doing Business Index (DBI) by the World Bank ranked India at 132nd out of 183 countries in the world (World Bank, 2012). The areas in which India performed particularly poorly were “dealing with construction permit” (ranking at 181st) and “Enforcing contract” (ranking at 182nd), both of which are critical for infrastructure and energy investment. One of the bigger concerns today is lack of new pipeline of projects since most of the existing set of players are stressed (aggregate debt-equity of 2.64 and cash losses of `124 crore) and would not be in a position to bring much equity.

Positive signs

Positive trends have begun to emerge in the power sector in terms of payments being made to traders, generators and capital goods suppliers, thus lowering debtor days and improving cash flow from operations of these entities. Recently, CCEA also approved changes to the mega power policy which would allow an additional 15 projects to be classified as mega power projects thus providing the benefits of zero import duty. Most steps initiated by the government have long-term implications. However, some positive impact is likely in the short term. Financial restructuring plan (FRP) of discoms is progressing well. In order to achieve planned growth target and to sustain the growth momentum, the power sector needs large investments. The contribution of private sector in capacity addition has increased from 10 per cent in X Plan to 42 per cent in XI Plan and during XII Plan it is expected to be more than 50 per cent. In the XII Plan projected investment requirement for power sector is `15,01,666 crore which is more than double the level of `7,28,494 crore in XI Plan. There have also been major developments on foreign investment front. In past couple of months the following acquisitions have been reported.

Way to go

Following short-term solutions can be adopted for sustainable growth in power sector:

▪ The domestic lending community is precariously poised towards the sector due to potential  on performing assets (NPAs) on account of various projects that have got delayed or have been unable to achieve COD due to fuel or PPA related issues. What is needed is a special dispensation liberating provisioning norms for such loans to avoid them getting classified as NPAs. This could be done only for those projects which are facing loan restructuring on account of uncontrollable factors such as coal supply related issues and issues related to environment or forest clearances. This will help unlock the financing logjam and enable a positive investment cycle to commence. Further, the Government should enable takeout financing for banks by strengthening institutions such as IIFCL to undertake the same. This will help partially address the sectoral exposure caps that banks would otherwise be constrained by.

▪ Immediate implementation of fuel cost pass-through can improve the PLF of coal based power plants to 85 percent, resulting in efficient utilization and financial turnaround of upcoming coal based capacity of 62 GW in XII plan period and commissioned capacity of 40 GW in XI plan.

▪ Allocate new coal blocks to private sector and utilities under the proposed competitive bidding process by FY14. Coal blocks with reserves of ~8 BT are identified for power sector which can produce ~195 MTPA at peak production. At least 25 percent of this, i.e. ~50 MTPA should be made possible by FY20.

▪ With Adoption of modern technology and FDI in mining, CIL should be able to ramp up the  underground mine production from the estimated 54 MT to 64 MT by FY18.

Proposed Long-term solution for sustainable growth in Power Sector:

▪ To enable strategic and other large financial investors like pension funds, to view the sector favorably, the Government should quickly resolve various uncertainties such as position on coal block allocation, implementation of imported coal pass-through, policy on M&A related to allocated mines and have a war-room approach to resolving issues related to some stuck up projects. Longer term clarity on some of the above issues will also bring in more confidence for investors looking to acquire operational projects and running them for cash flow yields.

▪ Amendments to the Electricity Act, with respect to pass-through of fuel costs, open access, stricter implementation of renewable purchase obligations, enhancement of grid security, co-existence of tariff determination and competitive bidding regime, thrust to hydro power among others.

▪ Reliable fuel supply: Reliable fuel supply in turn hinges on availability of timely clearances, a transparent framework for fuel production, and adequate quality of supporting infrastructure such as ports and railroads for transporting fuel.

▪ Greater private sector participation in power transmission and distribution. It would support on-going maintenance and upgrades of essential infrastructure.

▪ Operational efficiency linked incentives: The Discoms should be given the incentives, bailout packages and other financial support on the basis of their operational efficiency.

Power sector has achieved a lot over the last decade in the areas of policy reforms, private sector
participation in generation and transmission, new manufacturing technology and capabilities, but there is still much to achieve and a number of challenges have to be overcome before then opportunities can be leveraged. There is no doubt that the sector is going through a very testing time as it juggles increasing power demand, the poor paying capability of power distribution companies, inadequate domestic coal / gas availability, inefficient power tariff mechanism and rising financing costs. But there are reasons for optimism in 2014-15. There is also an expectation that the new government will introduce additional reforms to revive the economy providing impetus for power demand and help mitigate prevailing issues in the power sector. A holistic reform of the sector is imperative to put the country on a strong growth path. The future growth of our country critically depends on Power sector development along healthy lines.

         InfralineEnergy Power Knowledgebase Team


The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the Infraline Technologies (India) Pvt. Ltd. (organization). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.