In the pipeline: growth

During this period, quietly, and with efficiency, the ministry of petroleum went ahead with the LNG project at Dahej. The ministry recognised that a large number of industries, including fertiliser units, were dependent on natural gas from the existing GAIL pipeline, and that production from these sources was coming down. There was an urgent need to bring in gas to cater to the needs of these western and central India customers. The timely completion of this project has made this possible.

The energy situation in India has changed considerably in the last two years. New investments, expansion of manufacturing capacity, increased consumption and growth in demand has occurred simultaneously with large price increases of crude oil. With mounting energy bills, India’s energy security is again getting stressed. It is therefore natural the minister for petroleum is eager to embark on measures of oil diplomacy to source and control production of oil and gas overseas. Consumption of natural gas is expected to treble in India in the next five years. Petronet is seeking to expand capacity at Dahej to 7.5 million tonnes per annum, and add a terminal for 2.5 million tones at Kochi. East Coast discoveries would be available in the next three years for power generation, and the Enron facility is also expected to be completed. Even with all this, appetite for gas in northern and western India is expected to grow by over 8 per cent per annum.

Iran is a source of abundant natural gas, and past efforts have been to look at alternate costs of transportation of that gas including the LNG and the undersea pipeline route. Technically, feasible options did not turn out to be economically viable and the best option appears to be to revert to the land route. Landfall in India would be on the Indo-Pak border, and the hesitations arise from political sensitivities rather than techno-economic considerations. Arrival of 10 million tonnes of gas per annum will give a fillip to power generation, industry and domestic gas supply in almost the entire northern Indian belt, with options to move the gas in southwards using the GAIL grid. Commercial transportation can move over to CNG, a much cleaner fuel and, in the long run, there are opportunities for exploiting gas to liquid fuel technologies. Pakistan would benefit through royalties and rentals. The pipeline would also open up the hinterland in Pakistan for industrial investment.

The stumbling block is the creation of a fail-safe contract that will stand up to any bilateral tensions that may be encountered in the future. Optimists argue that the Indus water sharing arrangements have withstood several conflicts, and there is no reason that a win-win contract like this one should not. Others point out that there would be substantial private investments on the Indian side with private equity and public debt, which would be stressed by the unreliability of the supply contract. The meeting of the minister for petroleum with the prime minister of Pakistan on Wednesday was an attempt to find a way out of this impasse.

Yet there appear to be precedents that can be used as opportunities to work out a contract that will comfort all. One option could be that India would pay for the gas received at its border, with a suitable take or pay clause. The contract could provide that, in the event of a disruption, the supplier would make alternate arrangements to supply possible. This could be done in three ways — either, the supplier could, in the short term, supply LNG to one of the terminals, to be used in transposition, or could contract with any of the Indian suppliers like ONGC or Petronet or IOC to make up the shortfall during the disruption. Another option could be for the supplier to have an arrangement to supply third party LNG gas through a spot contract to India for this period. This back up arrangement could not only be insured internationally against failing, but even the downstream industry depending on the gas could take out insurance, which could be subsumed as part of the gas supply clause. In the past, where fuel or raw material supply arrangements to processing industries have been structured, similar steps have been successfully adopted. Innovative structuring would lead to practical solutions.

An equally important issue that the minister of petroleum needs to address is the issue of gas transportation and gas pricing. Pricing issues arise from the different sources of gas — private supply, ONGC gas, LNG, and now the pipeline gas. A method similar to the telecom sector of market determined prices over seen by a regulator needs to be in place very quickly. And, finally, the issue of gas pipelines is a larger issue of regional economic development and should be dealt with as such, not just as a supply of fuel to particular industries. Equity, not just economics, should determine the future of gas use.

The writer is a former petroleum secretary