From his office in central London, Christof Ruhl, chief economist and vice president at British Petroleum (BP), analyses energy demand-supply data from around the world to produce one of the most widely consumed reports of the oil industry: BP’s statistical review of world energy. This year, Ruhl says, he was amazed by the unprecedented shifts in energy preference in countries the world over.
Utilities in the US moved decisively to gas after the shale boom made supplies cheap and plentiful. Last year, coal consumption in the US fell 12 percent, the steepest fall anywhere in the world, and gas consumption grew fastest. In Europe, the picture was like a mirror image of the US, he says. Coal found its way across the Atlantic at much lower prices. For European utilities, power produced using coal became 45 percent cheaper than gas, and users replaced gas with it.
In India, natural gas gained prominence from 2003 after large finds by the Gujarat State Petroleum Corporation (now GSPC) and Reliance Industries fuelled the excitement. Everyone bought into the dream of increased domestic gas production. Liquefied natural gas (LNG) terminals promised more imported supplies. Driven by the vision of a gas cornucopia, entrepreneurs sank hundreds of crores to set up gas-based power projects, pipelines and city gas distribution companies. Magazine covers reflected the enthusiasm, heralding India’s transition to a more efficient and cleaner “gas economy”.
The script did not go as planned. Gas supplies from the older producers—ONGC and Cairn—are falling; the new producers faltered and could not deliver on their promises. For the past two years, the Indian gas industry has been the repository of failed dreams and attendant recriminations, compounded by policy flip-flops by the government on gas pricing.
But things are changing. And not in the way that one would expect. Gas consumers who bore the brunt have begun to respond.
At a conference call last month, Essar Energy’s global CEO Naresh Nayyar said he was converting two of his gas-fired combined cycle power projects in Gujarat to burn coal. This is not a minor exercise: The company could spend close to Rs 2,500 crore for the switch. The two fuel-burning processes are completely different, and the transition will cost half as much as putting up a new coal plant. The Essar group is an astute power producer and has been among the first IPPs (independent power producers) in India. Yet, Nayyar says, the decision just had to be made. These plants at Hazira (515 MW) and Bhander (500 MW) were commissioned on APM (administered price mechanism) gas, but there is no availability of either APM gas or allocation from Reliance’s KG-D6 in offshore Andhra Pradesh. KVB Reddy, executive director at Essar Power says, “Using costly re-gasified LNG or naptha increased the cost of power to Rs 8-9.5 per unit. There was simply no buyer at that price.”
Essar may have been the first to move so much capacity from gas to coal at one go, but the writing is on the wall for gas users in India. Even as the fuel enjoys an unprecedented boost globally with many new discoveries, it is losing acceptance in India. “In India, the gas economy has all but crashed, thanks to falling domestic production and high R-LNG prices,’’ says Debashish Mishra, senior director of the energy practice at Deloitte.
Much of the action on gas in India happens in Gujarat. The state is India’s most networked in terms of gas infrastructure as well as availability. State-owned and private utilities have laid about 10,000 km of pipeline and gas has found widespread commercial and industrial acceptance. The advantage of using a cleaner, higher calorific fuel was immediately apparent to customers. Astute entrepreneurs running hundreds of factories in the state are very dynamic in their choices. Tweaking input costs to maximise profits is virtually a daily exercise.
Gujarat Gas is the biggest gas transmission and distribution company in India with millions of industrial, commercial and domestic customers. British Gas (BG) had picked up a 65 percent stake in the company in 1997. As the business looked promising, the company was able to expand into various segments for a decade.
Things look less rosy now. Over the past six quarters, there has been a sharp fall in sales volumes. Demand, particularly from small and medium enterprises (SMEs), which were earlier big customers in industrial cities like Surat, Bharuch and Ankleshwar, has fallen over 20 percent. Those who can are switching to alternate fuels. The stock price has dropped almost 50 percent in the last two years. The story is similar for state-owned utility GSPC, which has bought out BG’s stake in Gujarat Gas. GSPC is also being challenged by falling demand.
City gas distribution companies were the last-mile arms that were to bring natural gas to every home. Dozens of companies competed for the right to supply gas to homes (PNG) and vehicles (CNG), when bidding first began. As a key supplier, Reliance Industries had expressed interest in distributing gas to 60 Indian cities. Bidding had begun for supplies to dozens of cities from Kota to Kochi. Appliance makers had begun developing equipment that could use gas for air-conditioning, heating water and other applications.
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(This story appears in the 09 August, 2013 issue of Forbes India. To visit our Archives, click here.)
India never looked energy as a strategic initiative, even energy is being handled the Juggad way. We have been successful only in providing stop-gap arrangements in the energy domain. Unless we have policy makers who are connected to the international markets, we will continually fail in visualizing our requirement and needs. Academic economists, will never make room for serious businesses like energy......India will learn the lesson hard on having thinkers who make sense and who can command respect for their policies.on Sep 8, 2013
There have been celebrations in the industry due to the Gas Price Hike, based on the Rangarajan Committee report. The Oil Ministry claims that this will attract future investments in Oilon Aug 21, 2013
You have brought about the fact clearly that the Gas with all its advantages has a big disadvantage of price in Indian context. The situation in US is in favour of Gas because of new availability of cheap Shale Gas. Till we also find a cheap source we have to bear with coal.Let\'s hope new pricing will be helpful in finding more of cheap domestic Gas.on Aug 8, 2013
Imports are not a solution to the long term vision of energy independence. It only helps serve the immediate need of industries invested in gas based energy production - for internal consumption or sale. It is ironical the ministries resort to measures like restricting gold imports when policy reform is what can serve two purposes - help reduce the current account deficit and also bridge the energy supply and demand gap. They are far too busy securing their future post 2014 elections - the reforms be damned.on Jul 30, 2013
Varun: The energy demand-supply gap has grown more acute in the last few years. The future is dark.on Jul 30, 2013