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Decimal Digest
01 Sep 2016

A push towards Natural Gas
Chart 1: Usage of natural gas in India sector wise(2014)

According to McKinsey, the share of imports in energy’s basket is going to rise to 51%. India’s foray into renewable energy is not going to remove dependence on fossil fuels completely. As India grows and urbanizes, pollution will become an important issue. It is an imperative that we optimize usage of fossil fuels taking into account their true costs. Compared to coal based plants natural gas based plants emit 50 to 60% less carbon dioxide. The use of CNG in vehicles provides 22% and 55% savings in running costs compared to diesel and petrol run vehicles respectively1. The use of CNG also reduces pollution as on average the carbon monoxide, nitrogen oxides and hydrocarbon emissions is significantly lower.

According to Hiroki Sato of Jera co, there will be 40 to 50 million tons of homeless LNG by 2020, this is a huge gas glut which India can benefit from2. As Asia drives 72% of the global demand for LNG demand, it raises a possibility of energy deficit countries like South Korea, Japan and India coordinating their purchases and forming a group to their advantage.

The current scenario is that natural gas only accounts for 7% of our energy basket3. The contribution of fuel and power to WPI inflation in India is 33.4%4, taming long term costs in fuel and power will also reduce food costs by reducing the logistical costs of food transport and costs of fertilizer. The shift from Naphtha based plants to natural gas related urea production will help government reduce subsidies as natural gas costs decline, the fertilizer subsidy on urea is set to decline next year by around 5000 crores due to lower natural gas costs5. A decline in natural gas prices means that piped natural gas becomes competitive with subsidized LPG thereby reducing the need for subsidies as piped natural gas grid expands in cities. A higher fiscal deficit on account of higher subsidies restricts investments required to mend supply-side issues by putting upward pressure on interest rates. A shift to natural gas will help reduce overall costs in the supply chain of various critical industries easing inflationary pressures in the economy.

The current re-gasification capacity remains underutilized at 58% capacity utilization due to lack of pipeline connectivity between re-gasification plants and demand centers. There is also requirement of increase in regasification facilities to accommodate future increase in imports. India’s current pipeline network stands at 14,987 km with additional 15,000 km needed to be constructed out of which 11,900 km has already been authorized6. However, 1,175 km of the ennore to tuticorin pipeline is pending award due to a court case pending in the supreme court. Such issues should be dealt with quickly by the government as these are issues of national importance7.

Another imperative is promoting exploration of hydrocarbons, the government released the Hydrocarbon exploration licensing policy. It has allowed for greater pricing freedom but due to lower fossil fuel prices the price cap determined by their formula is low. Allowing for higher prices will also mean that subsidies will have to be given but it also means energy security in case prices of hydrocarbons rise in the future. Every hedge has a cost and a utility for the future is uncertain.

Along with domestic gas pipelines there is need for pipelines connecting nations exporting natural gas to India. There are several transnational pipelines in consideration namely between Iran, Oman, Bangladesh, Myanmar and Russia. The pipeline between Iran and India through a land route has been cancelled due to security issues as it was passing through Pakistan. The new pipeline being proposed is the India, Iran and Oman gas pipeline which will be an underwater pipeline which will again be subject to Iran complying with the nuclear deal as imposed by UN security council. The pipeline between Russia and India will pass through China which makes it difficult as geopolitical tensions are on the rise. The pipeline connecting Bangladesh, north eastern states and Myanmar will help transport gas to the demand centers but it is execution which is lacking.

A major push for natural gas will help India realize its growth potential whilst taming inflation.



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