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India and the shift to natural gas

   In the presentation of the union budget, finance minister Arun Jaitley announced that his government will diversify India’s energy use from a heavy dependence on crude oil to natural gas. It will start by doubling gas pipelines to 30,000 kilometres. Such a diversification is desirable and feasible.

   A shift to natural gas will help India reduce its energy import bill as well as reduce our dependence on imports from a West Asia in turmoil.

   It will help the ordinary consumer greatly. For now, petroleum products such as diesel, petrol, liquefied petroleum (LPG) and kerosene are used as fuels for transportation and in the kitchen. These four products account for almost 65% of India’s petroleum consumption at a cost of over $1 billion, and can easily be replaced by compressed natural gas (CNG).

   CNG is widely used as a vehicle fuel in Iran, Pakistan, Argentina, Brazil, and China. In Pakistan, almost 80% of four wheelers and bigger vehicles run on CNG; in Iran, it is over 25% Clearly, the large-scale use of natural gas as vehicle fuel is technically feasible.

   Two factors have enabled that success: plentiful gas and a lower price as compared to petrol. Iran is rich in crude oil and natural gas. It has inadequate petroleum refining facilities and has to import refined fuels such as diesel and petrol, which are restricted by western sanctions. But Iran has the world’s second largest reserves of natural gas, which it cannot export because of the sanctions. For Iran therefore a shift to natural gas at home was necessary.

   Pakistan is short of crude oil, but has relatively larger reserves of natural gas. Pakistan began the switch to CNG in 1996. In both Iran and Pakistan, CNG was priced below petrol to encourage consumers to shift. For locally-produced gas, this isn’t a problem because production cost is minimal once wells are drilled and the infrastructure is built.

   For the consumer, CNG-driven vehicles are more fuel-efficient than petrol (~10%), and give a slightly lower mileage than diesel (~6%). Because petroleum products such as diesel and petrol need to be processed before being used, their cost to consumers is higher. Internationally, the price of diesel and petrol is just over $120/barrel; natural gas provides the same energy at $90.

   For India, therefore, a successful reallocation will depend on three factors: the price of gas compared with oil, the availability of gas, and a delivery infrastructure. The first two factors are already in place, but India lacks the last-mile delivery infrastructure.

   India has to import natural gas, but it is difficult. Gas has to be cooled and liquefied at cryogenic temperatures into liquefied natural gas (LNG), which is then moved on special ships and to special receiving terminals—all of which requires multi-billion dollar investments.

   At present, India imports natural gas primarily from Qatar—up to 10 million tonnes a year. An additional of 7 million tonnes is assured from the U.S. and Canada. As the latter’s supply is too expensive to be used for power generation or as fertiliser feedstock, it can be a viable replacement for petroleum fuels. India is also exploring LNG supplies from old friend Russia and from new sources like Mozambique.

   Many ordinary consumers in urban India have already made the shift to natural gas. Currently, it is used as a kitchen fuel in over 1 million households in Mumbai and Delhi. In 2013, over 1.29 million vehicles—mostly in Mumbai and Delhi—were running on CNG, according to the Ministry of Petroleum and Natural Gas.

   The CNG demand of Mumbai and Delhi absorbs over 70% of India’s imports, and the requirements are rising. This is where the additional volume from the U.S. and Canada can meet foreseeable future needs. In time, the entire Indian transportation system can shift to gas.

   For now though, the use of natural gas is restricted because retail infrastructure is available in only a few states. Important demand centres such as Bangalore, Chennai and Nagpur have a limited network. Even where the natural gas infrastructure—including the supply chain—exists, it is inadequate.

   This is evident in the statistics: the number of vehicles per gas filling station in India exceeds 2,000. Compare that with 837 for Pakistan. Cities must be connected by pipelines to supply points such as gas fields and LNG terminals.

   Despite these shortcomings, everything is in place for India to shift towards natural gas. Doubling the gas grid, as the finance minister has proposed, is a positive step. It remains for him to move fast on his pledge.

                           

By Amit Bhandari, Fellow, Energy & Environment, Gateway House.

Gateway House

July 30, 2014

     
 









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