HIGH EXPECTATIONS REVITALISE THE INDIAN OIL SECTOR

Monthly Oil News Commentary: December 2016 – January 2017

India

India’s petroleum consumption has been in the limelight for some time now. This month was no different. According to the Ministry of Petroleum, India’s fuel consumption is expected to touch 200 MT FY17. In FY16 India’s fuel consumption grew at 10.9 percent to 183.5 MT. In 2016 consumption of petroleum products was 750 MT in the United States and 500 MT in China.

It was also reported that the government was in advanced stages of awarding oil and gas blocks under the new HELP. The launch of the national sedimentary data repository is expected to provide the new exploration policy an additional thrust and help to ramp up output.

In FY17 a 60 MTPA refinery is expected to be built by the three PSU oil firms, IOC, BPCL and HPCL on the West coast. The companies have already signed an initial pact to construct the refinery at a cost of $30 billion. IOC will have the major share of 50 percent.  The oil ministry concluded the auction of 67 Discovered Small Fields in FY16 where a bulk of the participation came from new entrants. The auctions witnessed 134 e-bids from 42 companies. One of the expectations in the oil industry is an increase in oil prices on account of the OPEC decision to cut output by 1.2 MBPD. Some expect a decrease in excise duty on fuel in the budget for FY18. An increase in petroleum prices is also expected to increase the petroleum subsidy budget for FY18 and also affect oil company balance sheets.

Some of the milestones in the oil industry for FY17 included Russia’s oil major Rosneft’s decision to acquire Essar Oil and its Vadinar refinery at over $10 billion and the launch of Ujjwala Yojana that aimed to provide 50 million LPG connections to BPL families with a support of Rs 1,600 per connection in the subsequent three years.

The government was reported to have ruled out the system of subsidising petroleum but has said that it may reduce excise duties if oil prices continued to increase.  Though the government has claimed that it has passed on 50 percent of the reduction in oil prices to consumers the retail price of petroleum products has remained the same as it was when crude oil price was three times its current prices.

When oil prices fell in the second half of 2014 and early 2015, the government hiked excise duty on petrol and diesel nine times to increase its take that helped the government meet its revenue and fiscal deficit targets. In all, it raised excise duty on petrol by Rs 11.77 a litre and that on diesel by Rs 13.47. For every dollar increase in the price of a barrel of crude oil India’s import bill increases by over $1.3 billion. India spent $63.96 billion on crude oil import in FY16, about half of $112.7 billion outgo in the previous fiscal and $143 billion in FY14. For the current fiscal, the import bill has been pegged at $66 billion at an average import price of $48 per barrel.

HSBC forecast that India’s trade position of petroleum products in the country’s imports could fall from the current second place to third place between 2015 and 2030. Petroleum products fall from India’s second largest import to third largest over the forecast period, behind industrial machinery and mineral manufactures. This is in line with the government’s focus to raise the share of manufacturing in GDP to 25 percent from 14 percent currently.

Rest of the World

The IEA said that global oil prices would witness much more volatility in 2017 even if markets rebalance in the first half of the year if output cuts pledged by producers are implemented. OPEC agreed to cut output by 1.2 MBPD to 32.5 MBPD for the first six months of 2017, in addition to 558,000 bpd of cuts agreed by independent producers such as Russia, Oman and Mexico. The IEA expects US shale oil to increase production this year.

According to a poll by Reuters oil prices will gradually rise toward $60/bbl by the end of 2017 with further upside capped by a strong dollar, a likely recovery in US oil output and possible non-compliance by OPEC with agreed cuts. Brent crude futures is expected to average $57.43/bbl in 2017. The current forecast is marginally higher than the $57.01 forecast in the previous survey.

Average Brent prices are expected to improve with each subsequent quarter, starting with $53.88 in the first, to $56.61 in Q2, $58.79 in Q3 and $59.68 in the fourth quarter. Brent has averaged about $45 per barrel in 2016.

MT: Million Tonnes, FY: Financial Year, HELP: Hydrocarbon Exploration and Licensing Policy, MTPA: Million Tonnes Per Annum, MBPD: Million Barrels Per Day, BPL: Below Poverty Line, LPG: Liquefied Petroleum Gas, bbl: barrel, IOC: Indian Oil Corp, BPCL: Bharat Petroleum Corp Ltd, HPCL: Hindustan Petroleum Corp Ltd, PSU: Public Sector Undertaking, GDP: Gross Domestic Product, IEA: International Energy Agency, OPEC: Organization of the Petroleum Exporting Countries

Courtesy: Energy News Monitor | Volume XIII; Issue 33

 

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THE PROBLEM OF PLENTY HAUNTS COAL

Monthly Coal News Summary: July – August 2016

India

Just a decade ago, India was told by serious analysts from outside India that it is at the brink of a severe shortage of coal. India was cautioned that its coal resources were overestimated and that it had just 10 or less years before it ran out of coal, especially thermal coal for power generation. The recommendation was for India to repent and embrace alternative sources of energy.

Reality appears to be playing out very differently as we can see in news items reported this month. India now seems to have so much coal that it is looking to export 2-3 MT of coal to neighbouring countries. Indonesia, which was the primary source of India’s coal imports not only faces the threat of falling imports of coal by India but also the grim prospect of India capturing potential alternative markets such as Bangladesh and Sri Lanka.

In FY16 CIL increased output by 8.5% which reduced imports by 34 MT. India’s coal imports are expected to touch only 160 MT in FY16 much lower than over 250 MT predicted earlier.  Those of us analysts who instantly become cheer leaders of Western views such as the impending scarcity of coal need to be cautious in the future. Any view originating from the West seems to have their interest embedded in them (such as reducing India’s coal use to contain carbon emissions for example) rather than India’s interest.

Lower import of coal have resulted in broader economic gains. NTPC is reported to have achieved a savings of about Rs 0.30/kWh totalling a saving of about $80 million in a month. The use of higher quality coal on account of greater availability and lower prices has also resulted in the added benefit of specific coal consumption (coal consumption per kWh) falling by over 2.5%.

Indian coal is slowly moving towards having a bath before it embarks on burning itself. MCL has reportedly secured approvals for setting up a 10 MTPA washery in Talcher Orissa. The plant is expected to have zero liquid discharge to meet environment norms and also establish a pit head plant that will use rejects.

CIL, the world’s largest coal producer was also reported to be making gains in terms of quantity and quality. CIL has stated that from October 2018, it will supply 100% washed coal of grade 10 to meet environmental guidelines.

The problem of plenty seems to have domestic consequences as well.  Both Chhattisgarh and Odisha are pressing the central Government to increase Royalties on coal so as to maximise their take.  The problem is that the effective tax rate (ETR) on coal mining at over 60% is now the highest among all coal producing countries.  Any addition to existing tax and levies may reduce the competitiveness of the Indian mining industry.

On the other hand it is true that coal producing States in India are among the poorest. They are asking for a bigger share of the resource rent so that they can work their way out of the ‘resource curse’. The problem of resource curse is generally understood as a problem of poor governance that results from Dictators depending on resource rents rather than tax revenue to sustain power.  Dictators are not answerable to the people and so they are badly governed. The Indian resource curse does not follow this script. Moreover there is little evidence to show that the lack of resource rents is among key reasons for the poor economic status of coal bearing States. Higher royalties may not flow to the people as the rulers of these States claim. A better idea would be for these States to consider options that would create more opportunities for value addition using coal and other resources (such as low cost pit head power generation and industries that need low cost power) within the States.  This will create opportunities for employment and investment in infrastructure that are more sustainable in the long term.

CIL has also reported progress in the coal linkage e-auction for captive power plants.  12.95 MT out of 13.43 MT of coal linkages auctioned secured bookings at good premiums over notice price. A total of 18 MT coal linkage is expected to be auctioned.  The interest in domestic coal seems to have increased this month as the price of imported coal is increasing.  Though the much hyped coal block auctions did not structurally alter circumstances for miners as expected the Government seems to proving that it was right. The verdict of the courts announced this month went in favour of the Government as it said that the provisions of the e-auctions that allowed multiple bids in the first two rounds was fair. 31 of the 40 cases filed against the Government were either dismissed or decided against the petitioners.

Rest of the World

Global coal prices had crashed by 70% between 2011 and 2015 and many had written off coal as a source for power generation. But there were signs of a second coming for coal this month as the price of Australian thermal coal increased over 35% since mid-June almost $70/tonne.  Mine closures in Australia, USA and Indonesia and policy changes in China were said to be driving up prices.  China is said to have reduced its mining operating days by 16% to reduce it coal production by 250 MT.  Indonesian coal producers expect to sell coal at $50/tonne which is at least $2/tonne higher than their earlier target. Rains caused by La Nina also reduced production in China. Prices for Australian Coal is expected to increase to $90/tonne on account of lower production due to continuation of unfavourable weather conditions.  Some analysts dismiss the price rally as a short term phenomena but it may be too early to take a call.

China is reportedly setting up an asset management company to reduce excess capacity. China Shenhua Group, China National Coal Group Corp, China Reform Holdings Corp and China Chengtong Holdings Group have jointly set up the firm.

Moving to the anti-coal parts of the World we have the surprising news from the UK that the Banks group had secured permission to open a surface mine in 2018 to fill the gap in domestic supply left by the closure of UKs last deep coal mine.  It is expected to produce 3 MT per year.  UKs demand for coal stood at 37 MT in 2015 down by 40% since 2006.  It met 65% of demand from imported coal. Coal backers in USA that included senators from the Republican as well as the Democratic parties are said to be pushing a new legislation to expand US tax credit for carbon capture and sequestration (CCS) activities known as 45Q. The existing provision in the law enacted in 2008 advanced investment in CCS projects in the USA but incentives in the existing law are seen to be inadequate to push widespread investment in the technology. It looks like the Sun is yet to set on coal!

MT: Million Tonnes, CIL: Coal India Ltd., NTPC: National Thermal Power Corporation, MTPA: Million Tonnes Per Annum, kWh: Kilo Watt Hour, FY: Financial Year

Courtesy: Energy News Monitor | Volume XIII; Issue 10

RENEWABLES: TOO CHEAP TO METER?

Monthly Non-Fossil Fuels News Commentary: December 2016 – January 2017

India

The call to make solar roof tops mandatory for all upcoming residential societies along with a ban on use of diesel generator sets in highly-polluted urban areas like Delhi from CSE made it to the headlines.  Decline in cost of solar panels including the capital cost is said to have reduced the levelised cost of electricity from solar panels to Rs 10/kWh compared to Rs 27-33/kWh for electricity from diesel generators. While one cannot dispute the numbers, especially when the sun is shining, these widely quoted figures ignore some basic facts about electricity and the way in which users view electricity.  Electricity is a heterogeneous good along time, space, and lead time.

Laws of electromagnetism constrain storage, transmission and flexibility of electricity and different sources such as coal, diesel and solar produce different goods with different heterogeneity and marginal value.  Fuels that can be used at any time, any place and at the lowest lead time to generate electricity command a premium because users want electricity at any time, any place and with the lowest possible lead time. That is among many reasons why residential complexes in Delhi and its surrounding areas invest in a diesel generator rather than in solar systems notwithstanding the campaign by the activist groups that solar power is cheaper. If any energy fuel for electricity generation is really cheap and in addition met the expectations on reliability, robustness and lead time one would not require activist groups to promote that source of energy. The recommendation on making roof top solar mandatory also ignores the finding that when it comes to evaluating the impact of subsidies for solar, roof tops produce lower ‘bang for the buck’ than utility scale plants. Moving to transmission corridors being built especially for renewable energy, Mercom Capital report that said that infrastructural development under the green energy corridor was slow and not at par with the pace of tenders coming out was surprising. Over the next three quarters, solar projects of approximately 9 GW is expected to be commissioned, but the grid is said to be unprepared. The Power Grid Corp of India is reportedly developing the inter-state transmission corridor and the state transmission utilities are said to be responsible for setting up and strengthening the intra-state transmission infrastructure. The MNRE is reported to be providing 40 percent of project costs in the form of a grant. The argument that there is inadequate transmission capacity to evacuate power is not new and is heard even in the case of hydro power projects in remote locations. The presumption is that demand will materialise if there is transmission capacity. The reality probably that transmission capacity will materialise if there is demand.

After a long pause of many years news on bio-fuels has started appearing in the media. One was that poll-bound Punjab would get a Second Generation Ethanol Bio-refinery as the Centre at village Tarkhanwala, Bathinda. With an investment of nearly Rs 600 crore, HPCL, a Public Sector Undertaking, is setting up the project. The production of Second Generation Ethanol from agricultural residues to provide additional sources of remuneration to farmers. It is also expected to address the growing environmental concerns and support the EBP programme for achieving 10 percent Ethanol Blending in Petrol. Oil PSUs are reportedly planning to set up twelve 2G Ethanol Bio-refineries across 11 States such as Punjab, Haryana, UP, MP, Bihar, Assam, Odisha, Gujarat, Maharashtra, Karnataka and AP. IOC and BPCL are said to have a pact with the Pune-headquartered engineering company Praj Industries to set up plants to manufacture ethanol.

Moving to nuclear power, it was reported that the government had decided to increase the nuclear power generation capacity of atomic reactors at Kovvada in Andhra Pradesh by nearly 20 percent, and that a fresh Environment Impact Assessment was being carried out.  The capacity of 6×1000 MW has been increased to 6×1280 MW. The reactors at Jaitapur, being built by French company EDF, have a capacity of 1,650 MW, while the Kudankulam Nuclear Power Plant, being built with Russian assistance, has the generation capacity of 1,000 MW.

The IWT has remained in the news for some months now.  The latest development is that the World Bank, one of the original sponsors of the IWT had decided to stall the two parallel processes – appointment of a neutral expert and setting up of a court of arbitration – to resolve the disputes over Kishenganga and Ratle hydroelectric projects in J&K. The hope probably is that India and Pakistan would resolve the issues in an amicable manner and in line with the spirit of the Treaty.

Rest of the World

The global renewable finance sector has been at the forefront in declaring the death of coal. The latest is the report in Bloomberg that in 2016, countries from Chile to the United Arab Emirates broke records with deals to generate electricity from sunshine for less than $0.03/kWh half the average global cost of coal power. Auctions in other countries such as Saudi Arabia, Jordan and Mexico are expected to take the prices even lower.  According to the report, since 2009, solar prices have fallen by 62 percent, with every part of the supply chain trimming costs. By 2025, solar will be cheaper than using coal on average globally, says Bloomberg New Energy Finance. Surprisingly the report also included the rebuttal from the coal industry that cost comparisons involving renewables do not take into account the need to maintain backup supplies and that when those expenses are included, coal remains more economical.

In the nuclear sector there was disappointing news for advocates of nuclear energy in USA with the announcement that the aging Indian Point nuclear power plant will be shut down in 2021. Located along the lower Hudson River about 30 miles north of New York City, Indian Point produces 2,000 MW of electrical power, which is a quarter of the power used in New York City and Westchester County.  The plant’s two reactors went online in 1974 and 1976.

In Japan, a government panel that has held intensive meetings since October said the next six months will be ‘make or break’ for TEPCO’s reform efforts, after it earlier nearly doubled the estimated costs of the Fukushima disaster to more than $180 billion.

MW: Megawatt, GW: Gigawatt, kWh: Kilowatt hour, EBP: Ethanol Blended Petrol, TEPCO: Tokyo Electric Power Company, UP: Uttar Pradesh, MP: Madhya Pradesh, AP: Andhra Pradesh, J&K: Jammu and Kashmir,   IOC: Indian Oil Corp, BPCL: Bharat Petroleum Corp Ltd, HPCL: Hindustan Petroleum Corp Ltd, IWT: Indus Waters Treaty, MNRE: Ministry of New and Renewable Energy, CSE: Centre for Science and Environment, PSUs: Public Sector Undertakings

Courtesy: Energy News Monitor | Volume XIII; Issue 32

 

Moving from HSD to LNG?

Monthly Gas News Summary: July 2016

India

India was reported to be actively engaged in renegotiating gas contracts to get the best out of current low prices.  GAIL (India) Ltd was reported to be seeking to defer the 20 year contract to buy LNG from Gazprom until the Shtokman project beings production. GAIL signed a contract in 2012 to buy 2.5 million tonnes (MT) of LNG from Gazprom starting from 2018. Apparently GAIL is finding it difficult to lure buyers for gas despite the fall in gas prices.  If no one wants to buy even cheap gas in India it is not clear what the basis is for all the talk of India being well on its way to becoming a gas based economy?  But there was news to support this claim. According to the overseas press, LNG imports to India on short term contracts increased by 43% compared to last year. This was in sharp contrast to Western Europe where demand for gas has fallen. Many analysts expect India’s LNG purchases to increase as price of LNG at the National Balancing Point (NBP) has fallen to about $4.8/mmBtu which is less than the $5/mmBtu India pays to Qatar for LNG. Petronet’s Dahaj LNG terminal is reportedly running at over 100% its capacity. However overall import of gas for FY16 remained at 14.5 MT which was the same as that last year.

The Natural Gas Vehicles summit held in Delhi recently concluded that India could potentially use about 5 MTPA of LNG as substitute for diesel in rail and road transportation. India currently uses 70 MTPA of HSD and a 20% shift to LNG would result in a demand of 5 MTPA of LNG. LNG is said to have several advantages over CNG but CNG receives priority allocation from domestic gas which makes it the preferred choice. LNG would cover more distance per refuelling and consequently require less refuelling stops. It is also reportedly safer as it is stored at low pressure (6-8 bar) compared to CNG (> 800 bar). LNG can also be pumped at a high flow rate which would save filling time. India’s biggest commercial vehicle manufacturer, Tata Motors, has made a start by developing India’s first heavy duty LNG fuelled truck, Prima 4032.S.

One of the positive items reported by the media in July was that a joint expedition by India and the US Geological Survey (USGS) had discovered a major deposit of natural gas in the form of gas hydrates in the Bay of Bengal.  No figures were quoted on the extent of reserves of gas hydrates.  Whether this qualifies as a new ‘discovery’ through joint exploration between India and USA is debatable as the presence of gas hydrates in the oceans around India was established by ONGC as early as 1984. The key questions that remains unanswered are the extent of the reserves and when and how they could be recovered economically.

Indian Oil Corporation (IOC) was reported to be in talks to buy the Gujarat State Petroleum Corporation’s (GSPC) stake in the Mundra LNG terminal. Others in the run include ONGC and India Gas Solutions a joint venture between BP and Reliance Industries. Other than the stake sale, there are two issues that should interest readers. One is how GSPC’s debt problems were not converted into a mega scam by the media even though it had the potential to become one ($2 billion from PSU banks having vanished without a trace of gas) and how GSPCs problems are being quietly passed on to profitable PSUs. The other question is on why downstream oil companies are extending their reach into the gas business. Is it because only oil refiners who thrive on margins have the financial resources to bail out bankrupt gas companies?

Coal bed methane (CBM) was in the news in June. The Centre was reported to have assured the Government of Tamil Nadu that it will not force it to implement a CBM project by Great Eastern Energy Corporation in Cauvery river delta districts of Thanjavur and Tiruvarur.  Farmers were reported to be worried over the impact of the project on agriculture. The other news on CBM was that Reliance Industries was close to producing CBM from Sohagpur block in Madhya Pradesh. Initial production is estimated at 1 mmscmd while peak production is expected to touch 3.5 mmscmd.

Petronet LNG is reportedly planning to invest around $450-600 million in projects outside India in the next 5 years. It is planning to construct a 5 MTPA import terminal in Bangladesh and a 1 MTPA terminal in Sri Lanka. GAIL has reportedly issued a tender for 6 LNG cargoes to take advantage of low prices. While LNG sellers could rejoice over opportunities finally materialising in the Indian market, domestic producers were facing the depressing prospect of a 20% fall in natural gas prices by October. This is the fourth drop in prices in the last 18 months. The gas industry clamoured for a formula linked to international gas prices assuming that it would be a one way bet. They got a formula that they wished for but unfortunately it did not prove to be a one way bet. As they say, ‘be careful what you wish for because you might just get it’!

Rest of the World

The expanded Panama Canal was in the news as the first LNG cargo from USA passed through in June. The LNG tanker chartered by Shell carried cargo from Cheniere’s Sabine Pass LNG plant which was the first to export US shale gas to overseas markets.  The second LNG tanker to pass through the expanded Panama Canal is expected to be BPs LNG tanker that would carry cargo from Trinidad and Tobago to Mexico.  The Panama Canal expansion was the first since it was completed in 2014.  The expansion involved deepening and widening of certain portions of the Canal and the construction of additional larger set of locks.  The wider lane will allow 4 ship transits a day in addition to the 25 daily transits using the old lock system. The old lock system could only accommodate Panamax vessels while the new lock will allow wider Neopanamax vessels. The expanded canal will be able to accommodate about 90% of the world’s current LNG tankers except the Q-Flex and Q-Max tankers used for exports from Qatar.

The canal reduces distances between export plants in the Gulf of Mexico and Asia to 14,400 km from over 25,000 km and so large LNG tankers that had to sail around South America will be able to reach Asia earlier. The canal is expected to reduce travel time from the US Gulf Coast to Japan to 20 days from 31 days through the Suez Canal and from 34 days around the southern tip of Africa. By 2019 the USA is expected to produce about 60 MT of LNG annually. Many of the 550 LNG tankers that are expected to pass through the Panama Canal annually by 2021 could be carrying US LNG cargoes.  According to a new report investment in global Floating LNG facilities is projected to touch $41.6 billion over the 2016-22 period. This is an increase of 264% compared to the investment of $11.4 billion in the 2011-15 period.  According to another report MENA countries are expected to account for 6.5% of global LNG demand this year which is a sharp increase from 1% in 2013.  Imports of LNG by MENA countries amounted to 1.5 billion cubic meters (BCM) in 2015 and most of it was from Qatar.

Moving to the other gas giant Russia, Gazprom and CNPC were reported to have approved roadmaps for implementing an MOU on under-ground gas storage and gas-fired power generation in China.  Gazprom was also reported to be on track with the construction of the Power of Siberia gas pipeline that would eventually supply 38 BCM per year of natural gas to China under a 30 year contract.

There was some movement on the much anticipated delinking of gas prices from oil prices when another gas contract renegotiation surfaced in Europe.  The Danish gas marketer Dong has already successfully claimed over $500 million in refunds from one or more of gas suppliers including Gazprom and Hess. With hub trading in Northwest Europe becoming so extensive many analysts think that oil indexed contracts will become a thing of the past. Two Dong contracts for 2 BCM per year contract were signed with Gazprom when oil indexation was the norm.  The expected outcome from the re-negotiation is that the contracts would be re-indexed to hub pricing sooner or later.

Closer to home, there was news on Bangladesh signing two agreements with US LNG player Excelerate Energy to build the country’s first floating storage and regasification unit (FSRU) at Moheshkali Island.  World Bank is reportedly funding the project and it is expected to be operational by 2018.

Pakistan and Iran were reported to have agreed to amend the sale purchase agreement to extend the timeframe for completion of the Iran-Pakistan (IP) gas pipeline as Pakistan was unable to raise money for the project.  Iran has already built 900 km length of the pipeline on its territory while Pakistan still has to start work on the pipeline.  Many optimistic observers are hoping that if India eventually joins the project it may change not just the prospects for gas in the region but also for peace in the region!

Courtesy: Energy News Monitor | Volume XIII; Issue 9

COLD WINDS FAIL TO REVIVE POWER DEMAND

Monthly Power News Commentary: December 2016 – January 2017

India

The fact that average monthly spot market price of electricity remained unchanged at Rs 2.32/kWh on the Indian Energy Exchange in December compared to November raised concerns this month. One would have hoped that with the onset of winter and fog in Northern India increase in demand for power for heating would perk up prices.  The fact that demand for power has been far below projections is a concern that has failed to get the attention that it deserves.

Those who have put some thought into the issue have attributed low demand for power to growth in generation from renewable energy but this appears to be a lazy explanation that is rooted in ideological faith in renewable energy rather than in factual analysis. Data on generation from renewable energy is not as systematic and established as it is for generation from traditional sources. While the CEA reports that data is collected from renewable energy generators and the respective SLDCs, there is a built in incentive for over-reporting renewable energy generation as the financial rewards are tied to the extent of generation.

The power market received another blow from the CERC which has proposed to increase the short and medium-term transmission corridor charges for open access by 35 percent and 25 percent, respectively, from the current levels. While the regulator has comforted the market stating that this would compel participants to move towards long-term access which is critical for efficient planning of transmission networks, stakeholders such as power exchanges, private transmission companies and generators are worried. Though the volume of power traded at power exchanges has increased, the price of traded power has fallen dramatically and stakeholders are concerned that further increase in access charges will serve as a disincentive for market participants.

Demand for power generating capacity is estimated at 200 GW by 2017 but current demand is reportedly lower at 150 GW. But this glut in power generation capacity does not mean that lack of access to electricity is eliminated. 60 percent of schools and 40 percent of homes in Odisha were reported to be without power.  This contradiction has a simple explanation. After functioning as a provider of a social good for over five decades, power distribution companies and other players in the power sector value chain are all now expected to function as providers of a private good mediated by the market. Schools and households in Odisha and elsewhere in India cannot demand this private good unless they have the ability to pay for the good.

The central government has policies for increasing energy access (electricity as a public social good) as well as policies for decreasing power sector losses (electricity as a private good) such as the UDAY scheme which states are expected to embrace. If the central government purchases the surplus electricity in the market and distributes it to schools in Odisha it will be meeting both objectives-that of increasing electricity access and increasing profitability of state electricity boards (as the electricity will be paid for). The scheme may not only stimulate the economy but also prove to be a vote winner in this election season!

Rest of the World

Low electricity prices in the USA was the most interesting piece of news in the international press this month.  Cheap natural gas, subsidised wind and solar are all blamed. Industrial slowdown and increase in efficiency of energy use are also blamed. Price in the most actively traded region was reportedly at $28.78/MWh which is said to be the same price of power more than a decade ago. At current exchange rates this is just over Rs 1.9/kWh which means that power in USA is cheaper than power traded on Indian exchanges.

Moving on, China’s investments in the power sector of various countries continued to stream in this month with news of Chinese investments in the power sectors of Ivory Coast, Greece, Tajikistan, Brazil and Pakistan. China Energy Engineering Corp is said to be leading construction of the €500 million 372 MW Songon power station (gas and coal) in Ivory Coast. Greece’s state controlled power company PPC is also reported to be selling a stake in the country’s electricity grid operator to China’s State Grid in a €320 million deal. A Chinese firm has reportedly completed a power plant worth $350 million in Tajikistan’s capital Dushanbe. The State Grid Corp of China is reported to have asked the Brazilian government and regulators to speed up environmental licensing of a planned power line connecting to the Belo Monte dam in the Amazon forest. State Grid, the world’s biggest utility is said to be worried that it may have to delay construction of the line, possibly forcing the third-largest hydroelectric power dam to begin operating in 2019 below full capacity. State Grid of China is also said to be helping Pakistan build a 4,000 MW power transmission line in a project valued at $1.5 billion. The high-capacity transmission line would be the first of its kind in Pakistan and will link Matiari town in the south, near a new power station, to Lahore.  Last but not the least China’s Shanghai Electric is said to have plans to spend $9 billion overhauling electricity infrastructure in Karachi. China is said to be steeping up investment in Pakistan as part of a $46 billion project that will link its far-western Xinjiang region to Gwadar port with a series of infrastructure, power and transport upgrades.

Accusations of hacking between Russia and USA touched the power sector when a US utility reportedly found a malware code on a laptop that the FBI and DHS had touted as associated with Russian hackers. It was not clear if this is fake news or real news.

CEA: Central Electricity Authority, CERC: Central Electricity Regulatory Commission, MW: megawatt, GW: Gigawatt, kWh: Kilowatt hour, MWh: Megawatt hour, US: United States, SLDCs: State Load Dispatch Centres, UDAY: Ujwal Discom Assurance Yojna

Courtesy: Energy News Monitor | Volume XIII; Issue 31

 

MARKET FOR PETROLEUM PRODUCTS: ONE NATION, ONE PRICE?

Monthly Oil News Summary: July 2016

India

ONGC and OIL, two of India’s upstream oil PSUs were reportedly looking at a cess charge of USD 1 billion.  Indian upstream companies have a rough time irrespective of whether oil prices are high are low (please refer to Data Insight). When oil prices are high the Government imposes a disproportionate burden of subsides on them.  When oil prices are down they are weighed down by the burden of the cess imposed on them. Naturally upstream companies in India were reported to be demanding a reduction on the cess.  The cess was set at 20% ad valorem of crude price in the budget for 2016-17 from a fixed sum of Rs 4500/tonne of crude earlier.  According to media reports, Oil Industry Development Cess has increased from Rs 60/tonne in 1970 to Rs 4500/tonne now.  If we ignore all the complex interactions between oil price, inflation and exchange rates we can say that the cess in rupees has increased by an average of over 9.8% over the 46 year period ending in 2015 while crude prices in 2015 US$ has increased only by just over 3.4%. Surely there is a case for reduction in cess as it is being demanded by oil companies. A more important reason for reduction of cess relates to the fundamental question over the legality and purpose of collecting a cess.

Legal observers note that the growing number of cess charges imposed on corporates and other tax payers in India is the result of the Parliament conferring power to the Government through ‘removal of difficulty clauses’ to implement certain laws pertaining to collection of new taxes and levies under the Finance Act of 1994 amended by Finance Act of 2012. According to legal and tax experts when a law is enacted to implement a new socio-economic scheme and the legislature is not sure of the difficulties that may come in the way of implementing the law the legislature includes the said clause in the statute.  The ‘removal of difficulty’ clause enables the Government to remove any difficulty (such as the difficulty of imposing a new tax or levy for the purpose of implementing the socio-economic scheme) that may arise over implementing the law. Even if we do not want to stray into the debate on the relative powers of the legislature, executive and judiciary in India what we need to know is the socio-economic purpose for which the petroleum cess is collected. In most hydrocarbon platforms experts call for the petroleum cess to be spent within the oil sector for research and development or for investment in new and efficient technologies. This could be taken to mean that the cess is currently being spent outside the petroleum sector. If so who decides how the huge sums collected as cess is spent?

Moving on, fuel pump owners in the country were reported to be demanding ‘one nation one rate’ for petroleum products. They are definitely right.  Sales tax levied by State governments vary across the nation leading to leakages and distortions. Tamil Nadu has the highest tax rates which results in many filling up their tanks in the Pudhucherry a union territory with lower taxes. Staying with petroleum, Indian Oil Corp (IOC) was quoted as saying that India may not be surplus in refining capacity in the next 15 years. India currently has a refining capacity of 230 million tonnes (mt) which is expected to increase to 300 mt by 2030. The reason for IOCs concern is probably the fact that consumption of petroleum products rose much faster (at over 11%) compared to production growth of just 4.5%. The government was reportedly setting up a committee to review the situation. Clean energy advocates may want the Government to redirect its energies on finding ways to curb demand rather than finding ways to meet demand for petroleum products.

Rest of the World

Oil prices were not a reason to celebrate in July, at least not for producers of oil. The International Energy Agency (IEA) reported that the global glut in oil cannot be wished away despite robust demand growth and steep declines in non-OPEC production.  The IEA revised up its forecasts of 2016 and 2017 global oil demand growth by 0.1 million barrels per day (mb/d) from last month to 1.4 mb/d and 1.3 mb/d respectively. OPEC remained hopeful of a tight market in 2017 as it expected global demand for crude to increase.  It expected global oil demand to rise by 1.15 mb/p in 2017 which is lower than 1.19 mb/d expected in 2016.  OPEC forecasts supply from outside producers will decline by 110,000 b/d in 2017 after an 880,000 b/d drop this year.

Neither the ruling against China by the tribunal in The Hague, Netherlands, over breach of sovereign rights of the Philippines in the South China Sea nor the failed coup in Turkey succeed in taking oil prices above $50/bbl.  The South China Sea is a major shipping lane between Europe, the Middle East and Africa. According to Reuters at least 25 Very Large Crude Carrier (VLCC) super-tankers pass the disputed area in the Sea at any time (not counting other oil carriers).

There was news of competition for market share in India and China between leading oil exporters Iraq, Russia and Saudi Arabia.  Saudi Arabia was reported to have regained its position as China’s top crude supplier in June, after losing out to Russia in the previous three months. On the other hand Iraq was reported to have overtaken Saudi Arabia for the first time to become India’s top oil supplier in June helped by sales of discounted heavy crude that refiners have also been using to make bitumen to build roads.  The Saudi market share in India was reported to have fallen to 18% from 20% last year.

Apparently Nigeria was paying militants a stipend so as to keep them away from oil installations. Oil production in Nigeria was reported to have reduced by 700,000 b/d to 1.4 mb/d. As Nigeria is running out of money to pay stipends to its home grown militants, one can expect more attacks on oil installations in the future. When payments dry up, the Niger Delta Avengers attack which means that Nigeria needs high oil prices to keep militants at bay. The irony is that oil prices tend to increase when militants attack!

Courtesy: Energy News Monitor | Volume XIII; Issue 8

COAL DEMAND GROWTH: INDIA TAKES BATON FROM CHINA

Monthly Coal News Commentary: December 2016

India

The news that non-fossil fuels will account for 60 percent of generation capacity in India by 2026-27 grabbed the attention of most of those concerned about India’s coal use. Before declaring the victory of renewable energy over fossil fuels some underlying reasons need to be considered. First surplus fossil fuel (primarily coal) based generation capacity was created in the last decade which means additional capacity is not required in the immediate future. In the short span of five years from 2010 to 2015, coal based power generation capacity nearly doubled from 84 GW to about 165 GW which is unprecedented in the history of the Indian power sector.  Power generation capacity grew by about 7 percent between 2001 and 2015 and consumption grew by about 6 percent. However, from 2011 to 2015 capacity addition grew by about 12 percent (led by the private sector which recorded a CAGR of about 31 percent) while power consumption grew by about 7.5 percent. This also explains news items in the recent past that have declared that India has surplus power. Second the specific generation or the gigawatt hours of electricity generated per megawatt of capacity, a measure of economic efficiency (in terms of capacity utilisation) of non-fossil fuel based generation is lower than that of fossil fuel based capacity.  Among non-fossil the specific generation for renewable is one fourth that of fossil fuels. The specific generation of coal based generation fell from 6.61 in FY07 to 4.4 in FY16 mainly on account of surplus capacity. For non-fossil fuels based generation, the specific generation of nuclear power was 6.4 and that of hydro 2.9 while that of renewable 1.5. So far coal has contributed over 80 percent of generation despite the increase in share of non-fossil fuels. The share of coal may decrease to just over 65 percent by 2027 if we go by projections of the CEA but it will have an economic cost and social cost.

Moving on India was reportedly taking measures to change the negative image of coal mining India which generally portrays barefooted labourers tortured to work in blazing sun and a landscape that is devoid of water and vegetation signalling exploitation of man and nature. The first coal mine tourism opportunity was reported to have opened in WCL with support from Maharashtra Tourism. Maharashtra Tourism Development Corp and WCL will reportedly allow tourists to visit the depth of a WCL coal mine in Saoner, tour an eco-park and visit the open cast mine in Gondegaon. Children below 18 years and entry into the mines would be subject to health and fitness parameters set by WCL.

Rest of the World

The IEAs report that growth in global coal demand will slow over the next five years due to lower consumption in China and the United States and as renewable energy sources gain ground was among the key developments reported in the media last month. According to the IEA the world’s top coal consumer China could be facing peak coal demand for the first time due to measures to cap coal use to tackle air pollution and curb excess supply. Even though China’s consumption is said to have peaked, the country is expected to remain the largest coal user over the next five years. Its coal demand is expected to decrease slightly to 2.816 BTCE of coal equivalent by 2021, compared to 2.896 BTCE in 2014. The IEA expects global coal demand to total 5.636 BT by 2021, compared to 5.400 BT last year, when coal demand dropped for the first time this century. According to the IEA this equates 0.6 percent average annual growth from 2015 to 2021, below the 2.5 percent average yearly growth over the past decade.

According to the IEA, the biggest growth in coal demand will occur in India, which will have an annual average growth rate of 5 percent by 2021. Coal demand in the United States and Europe are expected to decline, falling to 475 MT and 337 MT respectively in 2021. The rebound in coal prices in 2016 driven by a sharp cut in Chinese coal output coupled with strong demand across the Asia-Pacific region and in Europe was also reported in the media. In its report, the IEA forecasts thermal coal prices to decline next year and then remain relatively flat to 2021.

China plans to reduce coal production capacity as part of efforts by the President to reduce industrial overcapacity and use cleaner energy sources amid sliding demand for the fuel was also reported last month. According to reports the world’s largest coal consumer aims to eliminate as much as 500 MT of annual output in three to five years. The country is also reported to have plans to consolidate an additional 500 MT a year of capacity among fewer miners, ramp up financial support for some coal companies and encourage mergers, according to the guidelines.

According to reports, the 500 MT target could erase almost 9 percent of China’s capacity. Including projects under development, the country coal production capacity is 5.7 BT. Only 3.9 BT is in operation. China has also reportedly suspended approvals of new coal mines for the next three years.

WCL: Western Coalfields Ltd, CEA: Central Electricity Authority, MT: Million Tonnes, BT: Billion Tonnes, GW: Gigawatt, BTCE: Billion Tonnes of Coal Equivalent, IEA: International Energy Agency, FY: Financial Year, CAGR: Compound Annual Growth Rate

Courtesy: Energy News Monitor | Volume XIII; Issue 30