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Gas-related gyan for accountants
December, 14th 2006
With the trend of high crude prices expected to continue in the short to medium term, natural gas will be more cost competitive than liquid fuels. MR ANISH DE IS ASSOCIATE DIRECTOR, TRANSACTION ADVISORY SERVICES (SPECIALIST - OIL & GAS), RNST & YOUNG.

Gas is very much in the news. Be it the Minister of Petroleum and Natural Gas, Mr Murli Deora, assuring the Parliamentary Consultative Committee that a 62 per cent rise in refining capacity would enhance India's energy security, and also make us a major global fuel exporter. Or, Reliance Industries announcing on Wednesday that it secured approval for doubling output from its gas field in the KG (Krishna Godavari) basin at an enhanced investment of $5.2 billon. Only a few weeks ago, Mr Mukesh Ambani had outlined his company's plan to supply, by 2010, piped gas to 20 million homes in a hundred cities. In this context, Business Line interviewed Mr Anish De, Associate Director, Transaction Advisory Services (Specialist - Oil & Gas), Ernst & Young, on topics that should interest accountants.

What is the economics of piped natural gas for households? Will it be cheaper than gas delivered in cylinders?

Technically, piped natural gas is 10-40 per cent cheaper than domestic LPG cylinders. In India, piped natural gas is, on an average, 10-13 per cent cheaper than LPG. The use of cost-effective technology in CNG supply infrastructure makes it cheaper than LPG, particularly in areas where there is high consumer concentration.

However, in India, feed gas for both piped natural gas and LPG are either subsidised or maintained at low levels through the administered price mechanism. In future the relative costs will depend on the extent of subsidies (for LPG) and the price of feed gas (for PNG). The prices of domestic LPG cylinders are currently subsidised by more than 40 per cent.

The prices of crude oil and petroleum products are expected to remain on the higher side. Once the subsidy on domestic LPG cylinders is removed, piped gas is likely to be more cost effective than LPG.

How do the costs of gas compare with other fuels?

Natural gas is cheaper than liquid fuels. While the prices of gas from joint venture fields and re-gasified LNG are $4-6/MMBtu (Million Metric British thermal units), liquid fuels such as naphtha and fuel oil costs 12-14/MMBtu. The domestic natural gas supplied under the administered pricing mechanism is as competitive as domestic coal (depends on the location) and is cheaper than imported coal. LNG will be more cost competitive than imported coal in the western region of the country

Would it require major capital expenditure if major users of a traditional fuel like diesel were to switch to gas? Are there offsetting benefits that ensure a quick payback?

Industrial and power supply projects can be structured to run on dual fuels. A gas turbine can be run on alternative fuel with certain modifications, and do not require large capital expenditure. For example, the Dabhol and the Anta and Auriya projects are equipped to run on naphtha if gas is not available. However, using liquid fuels significantly drives the cost of operations and the prices.

With the trend of high crude prices expected to continue in the short to medium term, natural gas will be more cost competitive than liquid fuels. The increased savings in the form of reduced operational costs and environmental benefits generally outweigh the capital expenditure required to convert liquid-fuel-based projects to gas. On the whole, natural gas is likely to have a dominant advantage vis--vis liquid fuels.

Give us some examples of successful cross-border gas transport. What are the benefits and risks?

There are many instances of successful cross-border gas transport. For example, the Canadian cross-border gas transport to the US currently accounts for about 85 per cent of the total gas supply. The Bolivia-Brazil project and the pipeline imports from Russia to Western Europe are other examples of cross-border gas transport projects.

Some of the newer cross-border projects are the BTE pipeline from Azerbaijan to Turkey and the Western Africa gas pipeline.

The major advantages of cross-border gas transport are:

Lower capital investments, particularly on on-land pipelines, compared to alternative sources such as LNG.

Pipeline transport is generally cheaper than LNG. As per studies, on-land high-pressure pipelines are more cost effective than LNG for distances up to 7,200-8000 km.

The major disadvantages are:

Lower flexibility than LNG.

Security may be a concern as the pipeline may have to pass through other countries, making the supply vulnerable to disruptions.

Project structuring, implementation and operation can be a challenge as the pipeline may pass through several countries

Are there estimates of how long the known gas reserves will last?

The total proven global reserves of natural gas was estimated to be 6,221 trillion cubic feet (tcf) as on January 1, 2006 (source, Oil and Gas Journal). In addition, the global undiscovered natural gas reserve is estimated to be 4,221 tcf. At the current rate of global consumption, it is expected the global proven reserves will last for approximately 50-60 years. The accompanying table provides the conversions of various units of measurement.

What are the alternative methods of gas supply and how do they compare financially?

The most preferred alternative methods of gas supply are pipeline transportation of natural gas, LNG and CNG. Transportation of natural gas through high-pressure pipelines is cheaper than LNG for distances of 7,200-8000 km; for longer distances, LNG is preferred. Transport of CNG over long distances involves relatively newer technology, the commercial feasibility of which is still being explored.

Do we have the infrastructure to switch to gas? E&Y report says pipeline density is `anything but healthy'.

India currently has limited infrastructure for gas pipeline because of limited supply of gas. The development of pipelines was restricted to regions where demand was high. The HBJ pipeline is currently the only major inter-State pipeline. The situation is, however, expected to change significantly with the discovery of new gas on the eastern coast. Pipeline infrastructure for LNG imports is expected to be developed to take this gas to the demand centres. Reliance proposes to construct an inter-State pipeline to transport its gas to the western and northern parts of the country. GAIL is also developing a national gas grid, the first phase of which involves the construction of 7,000 km at an estimated Rs 20,000 crore. Thus it can be expected that the pipeline network will be developed to connect the gas sources with the consuming markets.

Should there be fiscal incentives to promote the development of infrastructure, considering that gas is an eco-friendly fuel? Any global examples of such sops? Will PPP (private, public partnership) be a good option?

In India, significant investments are required for the development of trunk, regional and local gas distribution pipeline networks and gas storage facilities. An investor-friendly framework needs to be created and necessary fiscal incentives granted to the natural gas industry. The Government needs to create a level playing-field to encourage private participation in the sector. The Indian gas sector needs both public and private investments in the Indian gas sector.

Globally there are instances of incentives being provided to the natural gas sector and gas-based projects. The incentives usually are in the form of tax holidays of 3-10 years, reduced tax rates, investment tax credit allowance, etc. In addition, a number of project-specific benefits are available in many countries which are directly linked to greenhouse gas reductions.

How safe is gas, as a fuel source, for the ultimate consumer?

Gas as a fuel source is safe for end-consumers. However, it is important that necessary safety measures and standard certified equipment (recommended by the suppliers/operators) are used by the consumers.

What is the legal framework governing the industry? Which areas require changes ?

It is necessary to provide a framework for the development of downstream gas distribution which is expected to emerge as a high-growth segment. Establishment of a petroleum regulatory board, passage of the pipeline policy, formulation of a city gas distribution policy which provides a level playing-field for public and private investors and incentives for investments need to be expedited. The scenario is likely to evolve fast in the coming months.

An assessment of the industry from an investor's angle. Should the common man put his money in a gas company? Is there scope for the investment to appreciate?

There is significant potential for investment in gas companies in India. The share of natural gas in the primary commercial energy consumption is expected to almost double over the next 15-20 years. With India striving to reduce dependence on imported oil, the role of natural gas is expected to grow in the Indian economy. Further, city gas distribution and co-generation are expected to emerge as high-growth segments with tremendous potential, provided the necessary policy framework is in place. As of now new city gas distribution networks are expected to come up in 33 cities in India. Thus, the Indian gas market offers significant potential for investors.

D. Murali

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