Ready for take-off

On 29 January 2004, India received its first ever import cargo of LNG. The LNG tanker, Disha, carrying 138 000 m³ of natural gas supplied by RasGas, reached the greenfield LNG terminal at Dahej, Gujarat, India. Since then, LNG imports in India have increased steadily, and total imports 2014 – 2015 financial year stood close to 11.5 million tpy. Presently, there are four LNG terminals operating on the west coast of India, at Dahej, Hazira, Dabhol and Kochi, with total regasification capacity close to 20 million tpy.

Even though India has developed infrastructure to import LNG, and has also secured a reliable supply of LNG with long-term contracts, LNG marketing companies, including GAIL, Petronet, Bharat Petrolium Corp. Ltd (BPCL) and Indian Oil Corp. Ltd (IOCL), have struggled to market this LNG in India, due to several factors.

Lack of an integrated gas pipeline grid

One of the major factors for the constrained growth of LNG demand in India is the lack of an integrated gas pipeline grid across the country to enable supply of regasified LNG to the end consumer. Currently, India has a network of only 13 000 km of natural gas transmission pipelines, with a design capacity of approximately 330 million m³/d. This pipeline network is expected to expand to approximately 28 000 km, with a total design capacity of approximatley 731 million m³/d in the next 5 – 6 years, but progress has been slow because of difficulties faced by GAIL in land acquisition and receiving comfort letters from the anchor customers to ensure minimum utilisation of the new pipelines to be constructed. Small scale LNG, and its distribution in cryogenic containers over road, railways and inland waterways, can be a viable alternative to a gas pipeline. Under its flagship project, ‘Sahaj Ganga’, VLNG is already developing a small scale LNG supply chain in the eastern part of India.

Alternative fuels

The other major reason for the constrained growth of LNG in India is the competitive price of alternative fuels in major sectors, such as the power and fertiliser industries. In the power sector, LNG has to compete with coal, which is available domestically and is imported in India. With the average power generation cost from coal approximately US$0.50/kWh, power produced from LNG is more than twice that produced from coal. While there has been focus on reducing emissions and using cleaner forms of energy, and gas does provide a good alternative fuel to meet these clean energy targets, the current government has been focusing more towards solar power. To date, approximately 10 000 MW of gas-based power generating capacity in India lies stranded, as there are no off-takers for the expensive power generated using LNG as fuel.

Regulated and fixed price of urea

In the fertiliser sector, as the price of urea is regulated and fixed in India, it is very difficult to fit LNG into the market. It is being argued that it is more economical to import fertilisers directly in India, in comparison to manufacturing them, with a gas delivered price of above US$14/million Btu.

Overcoming these problems

Given these factors, LNG marketing companies are struggling to market the already contracted volumes in India. For instance, GAIL is struggling to market LNG from its US contract, and is now considering trading it in global markets. Petronet’s Kochi LNG terminal currently stands at 1% utilisation, due to the delayed pipeline connectivity to the gas grid and end consumers.

Many new LNG terminals were announced in the last few years for both the east and west coast of India. However, it is unlikely that all of these projects will be realised. Recently, the terminal to be jointly developed by BPCL and Mitsui at Mangalore has been cancelled, given the low utilisation of the nearby Kochi terminal. Any LNG import growth forecast based primarily on the demand by power and fertiliser sectors in India is questionable, and may lead to disappointment amongst global LNG producers, traders and marketing companies.

For sustained growth in LNG imports in India, leading to the utilisation of the existing terminal and justification of the new terminals being announced, the industry needs to find other sectors where LNG provides a more economical alternative to existing fuels. In addition to this, more flexible LNG distribution methods need to be adopted that are different from the current approach of regasifying the LNG that is imported at the terminal and is then dependent on the gas pipeline network to distribute it to the end consumers.

Industries that can benefit from LNG

India consumes more than 80 million tpy of liquid fossil fuels, such as high sulfur diesel (HSD), heavy fuel oil (HFO), liquefied petroleum gas (LPG) and naphtha in the transportation, industries and mining sectors, and is one of the major sources of pollution. LNG targeted towards the replacement of these liquid fuels provides a good opportunity. LNG contracts are typically indexed to crude oil prices, and thus provide a natural hedge when trying to replace crude oil derivative products, such as petrol, diesel, LPG and naphtha. In India, with the removal of subsidy on diesel prices, and the existing central duty, state taxes and different cess on crude oil products, LNG is available at a competitive price. At the current level of oil prices, LNG used as a replacement for diesel can provide up to 40% fuel savings.

Sectors that can be targeted are transportation, industries, city gas distribution and mining. LNG is quickly becoming a viable fuel in long haul trucking in China, Europe and the US, and the same opportunity is available in India. Public transport can switch to cheaper LNG and help bring down the pollution level in cities, which is quickly becoming a major problem. In view of this impending opportunity, Tata Motors has already developed commercial vehicles that run on LNG, and other major commercial auto manufacturers are at different stages of rolling out trucks running on LNG. Even railways provide a promising opportunity for the use of LNG. For instance, Indian Railways has already started a pilot project, and plans to have commercial LNG operations in place in the next 3 – 4 years. Inland waterways, which are being pushed by the present government, also provide a new opportunity for LNG.

Small to medium sized industries, which are currently using diesel, LPG and fuel oil, can also absorb a significant volume of LNG at much higher prices, provided a reliable supply is ensured to them. Also, with the gradual tightening of the state pollution control boards on the sulfur and particulate matter (PM) emissions, industries will be pushed towards using clean fuels.

Heavy machinery used in coal mining currently uses diesel, but can be converted to using LNG as fuel. This has already started to happen in the US, but there is an opportunity to create this demand in India too. City gas distribution also has strong potential to absorb LNG volumes, given the push to reduce pollution levels in major cities, and as a cheaper alternative fuel to diesel and petrol.

Distribution

Most of this demand will be distributed in nature, will require aggregation at the regional level, and will be served through customised flexible supply and distribution models and not through gas pipelines. LNG distributed in small volumes from the main storage to the satellite hubs and then to end consumers using multiple modes of transportation, such as road, railways and inland waterways, will be the most effective way to serve these end consumers. This method of supplying and distributing LNG will allow serving the end consumers according to their individual requirements.

The Indian peninsula is geographically well suited to build this distributed network to supply LNG in small volumes to end consumers. It can be envisioned that, in a few years, there will be small LNG storage facilities at all of the major ports of India, connected to the big LNG terminals via small LNG carriers moving along the country’s coastline. From these small storage hubs on the ports along the east and west coast of India, LNG will be distributed to satellite hubs, LCNG stations, and to the end consumers through truck, railways and inland waterway barges in cryogenic containers.

Leading the way

India’s major challenge in the growth of small scale LNG is that the end consumer is reluctant to take any steps towards transitioning to LNG unless a reliable and continuous supply of LNG is demonstrated to them. Meanwhile, the infrastructure companies that should be building the small scale LNG distribution network are looking for a minimum demand off-take before they develop the network. VEnergy believes that the small scale LNG growth story in India will be written by small companies and new age entrepreneurs who will be able to identify small opportunities in different parts of the country and will develop solutions accordingly. Several such companies will grow in different parts of India and together they will be able to cover much of the country. Already, a few companies have announced plans to develop such facilities on different ports. As mentioned before, one such project was recently announced by VLNG, which, as a part of its flagship project, ‘Sahaj Ganga’, announced that it will develop a small scale LNG supply chain along the river Ganges on the back of National Waterway 1 to distribute LNG in the eastern and central part of India and target diesel, LPG and HFO replacement with LNG.

Conclusion

With the removal of subsidy on diesel prices, growing concerns over high pollution levels in cities, availability of LNG import infrastructure, and competitive long-term LNG contracts secured by GAIL and Petronet LNG, VEnergy believes that the small scale LNG sector is on the cusp of take-off in India, and can add up to 10 million tpy of LNG demand in the next 10 years.

Written by Vidur Singhal and Mayank Garg, VEnergy, India. Edited by Callum O'Reilly

This article was originally published in Energy Global magazine. Register here to receive your free subscription.

Read the article online at: https://www.lngindustry.com/special-reports/30052016/ready-for-take-off-4158/