Midterm Report: Realize Initiative

Innovative Business Case For L&T In LNG And RLNG Applications In India.

Group 7

Innovative business case for L&T in LNG and RLNG applications in India.

LNG Plant block scheme:

LNG/RLNG: Brief review of technology:

Currently there are four Liquefaction processes available:

C3MR (sometimes referred to as APCI): designed by Air Products & Chemicals, Incorporation.

Cascade: designed by ConocoPhillips. Shell DMR Linde

APCI technology is the most-used liquefaction process in LNG plants: out of 100 liquefaction trains (An LNG train is a liquefied natural gas plant's liquefaction and purification facility) onstream or under-construction, 86 trains with a total capacity of 243 MMTPA have been designed based on the APCI process. Philips Cascade process is the second most-used, used in 10 trains with a total capacity of 36.16 MMTPA. The Shell DMR process has been used in three trains with total capacity of 13.9 MMTPA; and, finally, the Linde/Statoil process is used only in the Snohvit 4.2 MMTPA single train.

Floating liquefied natural gas (FLNG) facilities float above an offshore gas field, and produce, liquefy, store and transfer LNG (and potentially LPG and condensate) at sea before carriers ship it directly to markets. The first FLNG facility is now in development by Shell, due for completion in around 2017.

Review of current global scenario in natural gas business:

Global Scenario:

In 2011 total trade has increased nearly five times from the 1990 level, to just over 240 million tonnes. There are 18 exporting countries and 25 importing countries spread worldwide, with many more aspiring to enter the market. We have seen the emergence of new technologies including shipboard regasification and floating production open up new markets and new supplies respectively. The LNG trade is now truly global. Cargoes routinely move between the Atlantic and Pacific regions. The proportion of trade contracted on a short-term basis (defined by GIIGNL, the LNG importers group, as four years or less) has risen from around 4% in 1990, to 18% today. Multiple buyers in different regions often compete for the same supply, while multiple sellers in different regions often compete for the same buyer. In short, LNG has been instrumental in driving the globalisation of the international gas trade.

In experts opinion these changes in the industry over the past two decades have been driven by a number of key events:

Diversification of trade: As trade has diversified it has brought new markets, new suppliers and most importantly new players into the industry. These have come with new ideas as to how the industry should develop and what should be possible.

Cost reductions (of the 1990s): A reduction in unit liquefaction costs in the mid-1990s brought LNG supply costs down to a level that made LNG economically viable into the US. This resulted in the start-up of Atlantic LNG in Trinidad and Tobago in 1999 and later in the 2000s the development of four mega-trains in Qatar that were back-stopped against the US market.

Linkage of the US gas market to the global LNG trade: Although the expectations of the mid-2000s that the US market would grow to rival Japan were short-lived, the impact of the US market on the global LNG trade has been profound. The commoditised nature of the US gas market allowed LNG volumes to be diverted to other markets. As a result an impressive global connectivity has developed with “flexible” LNG seeking the highest value markets worldwide.

Emergence of India and China as importers: Just as it seemed that the traditional LNG markets were starting to mature and growth would perhaps start to slow, in the 2000s we saw the emergence of two potentially large-scale importers. The rate of growth of LNG imports into these markets has been rapid, with China and India set to become the second and third largest markets worldwide by 2025 according to some commentators.

Yet, if we look more closely at today’s industry we will notice that, despite the significant changes since 1990, some things remain unchanged:

Oil indexation: The majority of LNG is still indexed against the price of crude oil and crude oil products. The regionalised nature of LNG markets, the lack of gas-on-gas competition in Asian markets, plus a buyer and seller familiarity with crude oil has led oil-indexation to continue to prevail as the pricing mechanism of choice in most sales.

Asian focus: The LNG trade remains focused on Asia. Although the share of Asian imports as a percentage of global trade has fallen over time, at 60% in 2010 Asia still accounts for the majority of LNG imported today.

Not commoditised: Despite globalising, the industry has yet to commoditise. Volumes are not truly fungible due to commercial mindsets, technical issues and the fact that both buyers and sellers remain differentiated.

Long-term contracts: The majority of contracts are still long-term, with terms of 20 years or longer. According to GIIGNL 82% of contracts still have a term of five years or greater.

For all the change it seems hard for the industry to escape from what appears to be its key defining characteristic. It is capital intensive. This assertion appears to be backed-up by recent project cost estimates in Australia which have topped a reported $US30 billion in some cases. It is this capital intensity that results in many of the key sustaining characteristics of the industry: a lack of swing production capacity, a preference for long-term sales, limited spare volumes, low liquidity and a need for a high utilisation factor.

India Scenario:

India is fast emerging as the focal point for the future development of the Asian natural gas market. In recent years, the Indian gas sector has received a progressively growing attention from global companies and has made rapid strides. The rapid growth of the Indian economy in the X Plan has greatly contributed to the development of the Indian energy sector as a whole and provided a major trigger for the growth of the gas sector as well. While gas occupies only about 9-10% of the total energy basket, primarily due to supply constraints all these years, the scenario is fast changing.

With the advent of LNG and progressive de-regulation of the gas prices, the natural gas sector in India is moving towards certain degree of maturity with better understanding of the pricing mechanisms. Reflecting this, the first spot cargo of LNG brought in by GAIL truly launched India on the global gas map with global suppliers showing serious interest on the Indian gas sector.

On the supply side, there are two LNG terminals at Dahej and Hazira in Gujarat which are already operational with a total existing capacity of 7.5 MMTPA. The third terminal in Dabhol with a capacity of 5 MMTPA is under commissioning. There is another terminal at Kochi which is taking a final shape for implementation.

In terms of transmission pipelines, there is an existing network of 6,300 km including the Hazira-Vijaipur-Jagdishpur (HVJ) network, Dahej–Vijaipur Pipeline (DVPL) and other regional networks. During the X Plan, pipelines like the DVPL, Kelarus–Malanpur Pipeline, Thulendi–Phulpur Pipeline got commissioned. A number of pipelines, including those by the private sector, are at various stages of implementation and are likely to be implemented during the XI Plan.

The city gas distribution sector has simultaneously grown with the gas sector growth. From coverage of just 2 cities at the beginning of the X Plan, the city coverage has grown to 10 in 2005-06 across the western, northern and southern regions of the country. Currently, there is a total city gas distribution network of about 6,000 km. As far as Compressed Natural Gas (CNG) supplies are concerned, there are 278 stations dispensing CNG in the country and the number is expected to continuously grow in the coming years.

Challenges and opportunities in LNG/RLNG sector in India:

Opportunities

Some of the factors boosting growth in gas consumption in India are growing economy, need to provide electricity supply to nearly 25% of India’s 1.25 billion people, fifth largest LNG importer in the world and country’s aim to have energy independence by the year 2030. Alongside China, India would be the “engine driving LNG import demand in Asia through 2035.”

Power sector will be a prominent driver for gas demand. However, currently the sector uses coal as the dominant fuel. In the Indian power mix, out of the total installed capacity of 180.4 GW, coal is being used for 101 GW while hydro takes 39.3 GW and natural gas usage comes third at 28.8 GW.

Usage of natural gas in the mix is forecast to increase to 47.4 GW in the total installed capacity of 282.4GW by 2017. However, coal will still remain the dominant fuel.

L&T can take advantage of this opportunity and develop itself as a major green power generation company using LNG.

L&T can also step into the CGD (City Gas Distribution) for the use of RLNG/LNG in the households as there will be a growing demand and an anticipated deficit in domestic gas.

Challenges

Some of the main challenges faced by the natural gas sector in India are high price sensitivity, administered price regime, gas infrastructure, competition from alternate fuel, no regulation on burning and competition from other global consumers.

Although India has a large appetite for gas, the market is highly price sensitive. Administered prices continue to hinder development of gas industry.

There have been some reforms on the gas pricing front recently. In June, India’s Cabinet Committee on Economic Affairs (CCEA) headed by Prime Minister Manmohan Singh has approved Oil Ministry's proposal to hike price of all domestically produced natural gas to $8.4/mmBtu from $4.2/mmBtu. The new price regime will come into effect from fiscal starting April 1, 2014 and will valid for five years. Also, the price would be reviewed every quarter.

Commenting on the move to hike domestic price, there still remains a risk of litigation as a public interest litigation (PIL) has already been filed by some parties and response of the government is awaited on this topic.

On the infrastructure front, India needs to build more LNG terminals, domestic and transnational pipeline, gas storage facilities and unbundle transmission and marketing entities, Wilson said.

India currently has four operational LNG terminals: Dahej terminal (Petronet LNG), Hazira terminal (Shell), Kochi terminal (Petronet LNG) and Dhabol terminal (Ratnagiri Gas and Power).

Some proposed terminal expected to come online by 2017are at Ennore (Indian Oil Corp), Mundra (GSPC) and Gangavaram (Petronet LNG).

Another major challenge faced by gas sector in India is availability of cheap and abundant coal. India has the world’s 5 largest reserves of the coal in the world and there are no formal regulations on burning.

In addition to domestic issues, India also faces competition on the global stage. Japan and South Korea, being two biggest LNG buyers, pose a serious competition to India in the global market place. Apart from large buyers, these are high prices markets, Wilson said.

Traditional LNG buyers aside, India may have to fight for the fuel from some new emerging markets like China, Singapore, Thailand and Malaysia.