THE NATION'S POPULATION WILL OVERTAKE THAT OF CHINA BY EARLY 2020s
MANISH VAID, OBSERVER RESEARCH FOUNDATION, NEW DELHI, INDIA
According to the International Energy Agency's (IEA) World Energy Outlook 2015, India's economy is expected to grow more than five times its current size by 2040, creating a huge surge in energy demand over the coming decades. Also, by the end of this period, India's population is expected to exceed 1.6 billion, overtaking China in the early 2020s, contributing significantly to a rise in its share of global energy consumption.
India's current share of global energy consumption, according to the BP Statistical Review of World Energy 2016 is 5.3%, compared to 22.9% to that of China. Coal and oil will form the largest chunk of India's energy basket, contributing heavily towards emissions. Therefore, it makes sense for Indian policy makers to increase the share of natural gas to keep a check on growing emissions.
According to the BP Energy Outlook 2035, the usage of coal and oil in India's primary energy consumption continues to be on the higher side, despite marginal drop in their respective shares from 58% and 28% in 2015 to 52% and 27% in 2035. Natural gas, on the other hand, remains at around 7% throughout the projected period. However, demand for gas is expected to expand by 162%, against 120% and 105% for oil and coal respectively, during the projected period.
Modern factory in Kerala, South India. © Vladj55 | Dreamstime.com
Thus, while these trends signify increased usage of natural gas compared to oil and coal, it also poses challenges to the government's ambitious target to more than double the share of natural gas to 15%. Interestingly, in the past, the share of natural gas declined from 9% in 2007 (BP Statistics 2008) to 6.5% in 2015 (BP Statistics 2016), compared with global average of 24%. India's projected gas demand, according to IEA's "Gas Medium-Term Market Report 2016" (GMTR 2016), is 6% on average until 2021.
However, given the need for India to curb its emissions, as pledged during the Paris Summit, supported by the current liquefied natural gas glut, India's push towards natural gas to fuel its economy, is rightly timed.
CHOICES AROUND NATURAL GAS
India's push towards a gas-based economy is aimed to tap the huge potential available across several sectors, which can absorb the projected increase in gas demand (see Table 1).
Keeping in view the projected demand of natural gas, government is seeking ways to augment natural gas availability as well as to create additional demand for gas. The government's plan to reduce its import dependency for crude oil by 10% from the current levels by 2022 and its plan to stop thermal coal imports in the next two to three years are steps in this direction.
India's move to promote gas usage is in line with the commitment made at the Paris meeting on climate change, which aims to reduce the country's carbon emissions by up to 35% from 2005 levels by 2030 and producing 40% of the power from non-fossil fuel sources by 2030. Thus, natural gas is a good fit for decarbonizing India's energy system, as it plays a dual role in both replacing carbon-intensive fuels and offer a trade-off with renewables.
Natural gas, when combined with renewables, can play a balancing role in intraday fluctuations in power demand, including, a complementary role to variable renewables. As noted by the IEA, gas-fired plants are flexible enough to operate at base, intermediate, and peak loads by providing an effective back-up to variable output from certain renewable sources.
However, India needs to implement realistic reforms across the natural gas value chain to meet its objective of enhancing the share of gas in its energy mix.
GUIDED REFORMS CAN ENHANCE GAS AVAILABILITY
Over the medium term, India's gas consumption is set to grow steadily due to recent reforms in its upstream sector and low global gas prices. GMTR 2016 predicts India's gas consumption to grow by 38% from 52 billion cubic meters (bcm) in 2015 to 72 bcm by 2021.
Upstream reforms have attempted to make investments more attractive, which can go a long way in enhancing the domestic production of natural gas. In this regard, the new Hydrocarbon Exploration Licensing Policy (HELP), having key features, such as, open acreage licensing policy (OALP), uniform licensing policy (ULP), revenue sharing model and reduction in the royalty rates for offshore fields has the potential to positively alter the dynamics of India's exploration and production of hydrocarbons.
OALP, for instance, can accelerate exploration activities by allowing contractors to choose the areas for E&P, ULP can further facilitate them to explore and produce any kind of hydrocarbons like, oil, gas, shale oil, shale gas or coal bed methane, or any combination of them, under a single contract. A revenue-sharing model can push for greater transparency with minimal government interference, as they would now receive a share of revenues, rather than a share of profits, from production. Lastly, given most of the new discoveries are in offshore areas, the royalty relief provides some incentive to the operators as for the deepwater and ultra-deepwater areas, they will not have to pay any royalty for the first seven years as against 5% for first seven years as per the old regime under the National Exploration Licensing Policy.
Moreover, the Indian government has announced marketing and pricing freedom for gas discoveries in challenging areas, namely, deepwater, ultra-deepwater and high pressure-high temperature (HPHT) areas to compensate for the higher costs and risks involved in producing gas from such areas.
However, reforms initiated by the government in the upstream sector needs support at the midstream segment of the value chain, where the distribution and consumption of natural gas is balanced in a better way. Natural gas consumption varies widely due to regional imbalances. At present, natural gas markets have a closer proximity to states rich in gas resources or which has good pipeline infrastructure, which needs reassessment. India, currently has more than 16,000-km of gas pipeline network, which the Petroleum and Natural Gas Regulatory Board (PNGRB) has recently planned to further expand by tendering bids for the planning and construction of another 15,000-km pipeline.
India's vision for a gas-based economy also includes increasing cheaper LNG imports. Therefore, to maximize the gains of over-supplied LNG and from its resultant low prices, the government plans to invest heavily in LNG infrastructure, which includes conventional LNG terminals, floating storage regasification units, and small-scale LNG technologies. India's LNG imports are already on the higher trajectory, as there was an overall increase in LNG imports in the current financial year up to January, 2017 by 16.14%, compared to corresponding previous year. Keeping in view India's future LNG demand, more than 65 million tonnes per annum of new regasification is planned (both brownfield and greenfield) by 2030.
Further, the government also has made LNG imports more attractive, particularly in the power and fertilizer industries. To revive and improve utilization of stranded gas power generation capacity, the supply to these plants is accomplished by importing regasified liquefied natural gas (RLNG). But to make the cost of power affordable, collective sacrifices were sought from all stakeholders, including central and state governments by way of exemptions from certain applicable levies and taxes. Power developers were also asked to forgo the return on their equity.
ADDRESSING CHALLENGES
However, despite several initiatives taken towards gas-based economy, there are some visible challenges, which needs to be addressed effectively. The biggest risks among those stems from challenges to affordability of gas in the key demand sectors, such as power and fertilizers.
Rebalancing of global oil prices could reduce the attractiveness of LNG usage by these sectors, making government scheme ineffective. Further, consistent shortfall in supply of gas from domestic source could impact the competitiveness of domestic gas-based projects against coal-based power projects.
Under upstream sector, marketing pricing and freedom to the contractors is restricted to new gas production from difficult terrains based on the formula, involving the import price of alternative fuels. The current gas price notified for such blocks is $5.30 a unit are not commensurate with the risk involved.
Further, India's pipeline diplomacy is marred with political and security risks, resulting in transnational gas pipelines - namely, Turkmenistan-Afghanistan-Pakistan-India, Iran-Pakistan-India and Myanmar-Bangladesh-India pipelines, being pursued so far, a non-starter. Though new pipeline prospects such as undersea gas pipeline initiating from Iran via Oman and from Russia through swap arrangements to India are being also examined. However, ever-changing geopolitical dynamics, such as recent sanctions being imposed on Iran by the Trump administration in the US, has created confusion among stakeholders, including, India about re-engaging with Iran.
CONCLUSION
Given India's early ratification of the Paris Agreement in October 2016 and its commitment to reset the fuel basket by enhancing its share of natural gas in various ways offers plausible hope for India to move towards a gas-based economy. India's gas sector, still in an early stage of development, should move forward with stringent policy reforms across the natural gas value chain, where the interests of both investors and consumers are secured.
In the long run, India should continue its work towards developing its National Gas Hydrates Program, as this has immense potential not only for India but could be a game-changer for the world's secure energy.
ABOUT THE AUTHOR
Manish Vaid is a junior fellow with the Observer Research Foundation in New Delhi. His research interests include energy policy and geopolitics.
The views expressed in the article are that of the author.
