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The Wall Street Journal: India’s Imports of LNG May Rise Amid Shift to Gas

By GURDEEP SINGH
December 19, 2007; Page B4D

NEW DELHI — India is likely to boost liquefied-natural-gas imports in mid-2008, even though its biggest gas discovery in recent years will come onstream at about the same time.

India, which imports more than 70% of the crude oil it uses, is also heavily dependent on imported gas, which accounts for about a quarter of the total gas available in the country.

National-gas usage in India is likely to grow. Many industrial users would be happy to make the switch from oil-based fuels like naphtha, whose prices have gone up about 50% this year. Strong economic growth is also fueling higher energy demand, and the country is trying to reduce urban pollution by encouraging motor vehicles to switch to compressed natural gas and by promoting city gas networks for domestic cooking and heating.

On the supply side, there is plenty to be optimistic about, although there is no danger of running a surplus.

Reliance Industries Ltd., India’s biggest company by market capitalization, is expected to start commercial gas output from its big find in offshore eastern India’s Krishna-Godavari basin in the middle of 2008. Production will build up to 80 million standard cubic meters a day in 2009-10 — the same volume as total output from all of India’s gas fields now.

India’s biggest LNG terminal, Dahej, which is run by Petronet LNG Ltd., will start bringing on line additional capacity, making it able to handle 10 million metric tons (11 million short tons) a year by the end next year, double current levels. Petronet will need to hunt out additional spot cargoes or short-term deals to make use of this extra capacity, as long-term supply won’t flow in until 2009.

For some six months from mid-2008, Dahej will have spare capacity of around 3.5 million metric tons on an annualized basis, said Petronet Chief Executive Officer P. Dasgupta. Dahej now processes about five million metric tons annually of LNG, bought from Qatar’s RasGas under a long-term supply contract. These term supplies are due to be increased to 7.5 million metric tons annually from 2009. Dahej already takes an additional 1.25 million metric tons annually from RasGas under short-term deals, and may extend these to import a further 750,000 metric tons by next December.

The remaining Dahej capacity could be used for importing about 32 LNG cargoes through spot and short-term contracts, Mr. Dasgupta said, but he wouldn’t talk about possible sources of this gas.

More potential supply will come from a five million metric tons annual capacity terminal in Dabhol, on the West coast, which is due to be fired up in May 2008, initially running at 20% to 30% capacity using spot market LNG cargoes.

The only other fully operational terminal in India is a Shell India facility in Hazira, also on the West coast, which exclusively processes spot LNG cargoes. This 2.5-million-tons-a-year plant has boosted imports in recent months to between two and three cargoes from two a month, but is still working slightly below capacity.

On top of all this will be the large inflow of gas from Reliance’s Krishna-Godavari reserves, which will be piped ashore at an initial rate of 40 million standard cubic meters a day.

The government says overall domestic gas output in the April 2007-March 2008 fiscal year will rise to 120 million standard cubic meters a day, but this won’t be nearly enough to meet potential demand.

“Even with the KG basin gas, the deficit projected by the government is huge,” said Mr. Dasgupta.

Average demand in the year ending March 31, 2008, is seen at 179 million cubic meters a day, and India will need as much as 262 million cubic meters of gas daily by 2010 or 2011.

“The demand is building up ahead of Reliance’s gas, which could benefit [LNG] importers…a large number of consumers in the industrialized northern and western regions [of India] are switching to gas and away from liquid fuels,” said a senior executive from a gas company. “Customers will obviously prefer Reliance gas, but it won’t be enough…LNG terminals will continue to run at full capacity even when domestic production picks up.”

Apart from their limited regasification capacity, Indian LNG importers were until a few years ago held back by the reluctance of the heavily regulated power and fertilizer sectors to pay market prices for gas.

Power generators and fertilizer companies, India’s biggest gas users, get gas at below market values from state-run oil and gas groups, as mandated by the government.

But falling volumes of the regulated portion of gas output, coupled with rising demand, means that Indian consumers today are willing to pay market prices, said Sanjay Kaul, an energy and resources adviser at business services firm Deloitte.

“Price is no longer that big a problem now [for consumers], it’s the availability of gas” said a Petronet official. “People have been coming to us asking for any amount of spare gas but we have none and we are working above our nameplate capacity,” he added.

“Every molecule of gas available in the country will get sold, only that cheaper gas will sell first and then the imported gas,” Mr. Dasgupta said. “Users are willing to pay the price, they are paying.”

India is also trying to line up long-term gas deals and multinational pipelines. Gas distributor GAIL (India) Ltd. wants to tie up term gas for the Dabhol terminal from Algeria, Australia and Qatar, and according to the government, is close to reaching a deal with Algeria’s Sonatrach. Petronet is trying to buy term LNG from Exxon Mobil Corp.’s share in the Australian Gorgon project, to feed another terminal — a five-million-metric-tons-a-year facility in the southern coastal city of Kochi, which is due to be commissioned in 2011. Indian efforts to buy gas through international pipeline routes including from Myanmar, Iran and Turkmenistan have yet to show results.

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