The KG-D6 field off the Andhra coast will almost double India's gas production and could change the face of gas usage in cities Natural gas from Reliance Industries Ltd's (ril) Krishna Godavari (kg)-D6 field has just begun commercial production. With this, India's need for natural gas will increasingly be met from within our shores. But the pattern of gas usage will not change substantially. Power and fertiliser plants will continue to get a major share of the gas, while city gas distribution possibilities for domestic, auto and industrial use will continue to lag. The first deep water field in the, country to provide either oil or gas, KG-D6 is also the largest hydrocarbon find in India since the discovery of oil by ongc at Bombay High in the early 1970s. When the field is in full production, a couple of years from now, it will deliver 80 million cubic metres (mem) of gas (at standard pressure and temperature) a day to its customers. This is equivalent to 550,000 barrels of oil a day or around 27 million tonnes of oil a year. This is almost as much as the total gas production in India so far and around 50 per cent of the total oil and gas production in the country today. It is estimated that the production from KG-D6 facility will save India an annual foreign exchange outflow of $10 billion at an oil cost of $50 a barrel. ' US investment banking and securities firm, Goldman Sachs, has forecast that D6 gas will substitute about 7 per cent of India's oil consumption in 2010 and about 10-11 per cent over 2011-14. According to the firm, the total import bill could fall by 1 per cent in 2010 and an average of 3 per cent during 2011-14. The infrastructure sector will also benefit from the gas. Fertiliser units will be one of the major consumers of this gas. ril has signed gas sales and purchase agreements with 12 fertiliser customers for supply to 15 different urea manufacturing facilities for five years initially. The gas will be transported from the onshore terminal near Kakinada in Andhra Pradesh by pipeline. Several fertiliser and power units in western India will also be interconnected with pipelines of gail and Gujarat State Petronet Ltd (gspl). A decision had earlier been taken by the government to supply the initial production of 40 mem per day of gas to meet the shortfall in existing gas-based urea, lpg and power plants. "Gas will also be supplied to meet the requirement of piped natural gas (png) and compressed natural gas (cng) for residential and transport sectors," said minister of petroleum and natural gas, Murli Deora. At a peak production of 80 mmscmd, expected to be reached by 2010, the gas from KG-D6 will power approximately 1,800 mw of generating capacity in Andhra Pradesh, currently lying idle. The sale of gas to fertiliser factories is considered a priority in India. Consequently, the power and fertiliser sectors consume almost 75 per cent of gas from domestic fields. The reason for this, says S. Nand, director- technical, Fertiliser Association of India (fai) is that "Gas is cheaper than petroleum products. Since fertilisers are highly subsidised (the subsidy allocation for fertilisers was Rs95,000 crore for 2008-09), use of gas reduces the subsidy." Fertiliser companies that will be supplied natural gas from KG-D6 include Nagarjuna Fertilizers & Chemicals Limited, Rashtriya Chemicals & Fertilizers Limited, iffco, krib-hco, gsfc, gnfc, Tata Chemicals, National Fertilizers Ltd, Chambal Fertilizers & Chemicals Limited, krib-hco Shyam Fertilizers Ltd, IndoGulf Fertilizers and Shriram Fertilizers & Chemicals Ltd. With the signing of agreements with fertiliser companies, KG-D6 gas would reach all gas-based urea manufacturing units in India, and would eliminate the deficit in gas supply being currently faced by these units. The supply of natural gas to these units would result in additional production of approximately 7 million tonnes of urea per annum, thereby reducing India's import dependence and also reducing subsidies by the government. However there is another view. "The production sharing contract (psc), under which current kg gas and many other blocks are being explored, guarantees a freedom of marketing within India. A gas utilisation policy essentially skews the market, making it less efficient. It also reduces the returns to exploration companies, after they have taken the risk, which is not fair," says secretary general of Association of Oil and Gas Operators (aogo), Ashu Sagar. For the KG-D6 gas, the price was arrived at by asking customers what they were willing to pay and then basing it on the highest bids. Later, the government lowered this arbitrarily at a time when the Ambani brothers were locked in a dispute about their share of the gas. "While the country has the right to favour gas use for any application, that should be done either by fiscal support of the preferred sector, or taxation of the non-preferred sector, or by having an initial psc with clearly spelled limitations. This will help exploration companies to bid accordingly," Sagar adds. As in other areas of the economy, market forces ought to decide the prices and use of gas. Meanwhile, there is a section of analysts which feels that it would have been more beneficial to utilise this gas to supply piped gas to households. City gas is also a more convenient use of an energy source. Moreover, it will eliminate home delivery by cylinders - a highly inefficient and expensive way in the 21st century. This will free hundreds of thousands of housewives from chasing gas supplies. Further, piped gas can replace lpg cylinders in urban areas, thus enabling the diversion of lpg cylinders in rural areas, which are not yet catered to by 'clean fuels'. With the availability of a kg gas supply and consumer willingness to pay, South India is poised to become an emerging hub for natural gas demand, particularly in metros like Chennai, Bangalore and Hyderabad. Kakinada and Rajahmundry will be among the towns to have gas distribution network powered by kg gas. City gas distribution is already widespread in Gujarat and has established a beach head in Mumbai and Delhi. The Supreme Court has made it mandatory for all commercial vehicles in 11 cities to shift to cng. Plans have been drawn by various companies to extend cng facilities to cities like Kanpur, Lucknow, Agra, Bareitly, Faridabad and Pune. City gas projects in the states of Uttar Pradesh, Andhra Pradesh and Gujarat are already underway, gail plans to undertake city gas distribution in 22 cities spread across many states, and bid for Sonepat, Mathura, Kota, Dewas, Meerut and Kakinada for city gas distribution projects. According to gail, in the next five years, it is estimated that 74.34 million standard cubic metres per day of additional gas would be required for city gas projects in 298 potential cities, gail is likely to borrow $500 million for its expansion plans in the last quarter of FY 10, or in the first three months of FY11. Deutsche Bank, in a research report, points out that natural gas is India's future fuel - a clean option. "The projected surge in gas supplies could add Rs4,990 billion ($103 billion) to India's gdp over the next five years. The key success factors are exploration and production, and transportation infrastructure," the report states. "We believe that massive investments in exploration and development and transportation infrastructure are called for in order to handle the scale-up in Indian markets, starting with the near-doubling of gas production expected from ril KG-D6 gas operations over the next three years. India, according to the upstream regulator (the director general of hydrocarbons), has reserves of 37 tcf and a potential resource base of 400 tcf; but the development of these reserves requires large investments as these are mostly in deep and ultra deep waters. This, in turn, means that the reserves being developed per project need to be 10-20 tcf to justify this cost; this calls for extension of the current market envelope to cover hitherto untouched areas across the country. It is in this context that the countrywide gas supply pipeline network or gas grid becomes significant, as this expands and creates the target market for these mega gas development projects on a global scale," the Deutsche Bank reports points out. A national grid serves to level out supply-demand mismatches across the country and across seasons; it also helps create scale, making it easier to negotiate more favourable terms for supply and transportation of new gas supplies, including imports. The last mile in this - city gas and cng retailing - will improve the value proposition in the gas value chain, apart from reducing pollution by replacing more polluting fuels with gas. India's gas market slowed after an initial boom in the late 1980s. The gail gas pipeline, along the Hazira-Bijaipur-Jagdishpur (hbj) corridor, supported by 10 downstream gas-based fertiliser plants and eventually power plants, gave the initial fillip to gas production, transportation and consumption. The regulated pricing under the administered pricing mechanism for gas sold by ongc and tariffs regulated by government on the hbj pipeline made it possible for the government to stimulate gas-based industries in regulated sectors like fertiliser and power. The D6 discovery will transform the gas supply outlook. This will allow India to move towards a free market in gas.