MORE SUNSHINE FOR SOLAR POWER

Monthly Non-Fossil Fuels News Commentary: January – February 2017

India

Energy news was preoccupied with budget expectations and budget outcomes in February even though the budget was announced about a month before its usual date supposedly to break away from colonial traditions.

The Budget did not disappoint expectations from the solar sector as it let the sun shine on solar power generators. There was an announcement of another 20 GW of solar park development in phase II and a slew of duty reductions on components for fuel cell-based power generating and biogas systems, as well as wind energy equipment. The Budget announced solar power supply at about 7,000 railway stations and also proposed massive cuts in excise and customs duties on materials used in solar and wind plants. It also announced the second phase of solar park development for 20 GW capacity. Zero BCD on solar tempered glass for use in manufacture of solar cells/panels/modules from the present BCD of 5 percent was also proposed.  Reduction of CVD on parts/raw materials for manufacture of solar tempered glass for use in solar photovoltaic cells/modules, solar power generating equipment or systems, flat plate solar collector, solar photovoltaic module and panel for water pumping and other applications, to 6 percent from existing 12.5 percent was also proposed. It also proposed to reduce the BCD, CVD and SAD of 24 percent on resin and catalyst for manufacture of cast components for Wind Operated Energy Generators to 5 percent.

Opening one more window for more sun shine, the MNRE was reported to be exploring a change in the tariff structure for electricity from solar energy. The proposal is to introduce a fixed-cost component to the tariff for electricity generated from renewable energy sources such as solar or wind so as to prevent discoms from backing off from procuring electricity generated by such projects, as they will have to pay the fixed tariff component even if they do not buy the electricity contracted for. Such a tariff mechanism already exists for electricity from conventional sources such as coal and gas which has two parts—a fixed cost, which is the investment incurred towards power generation equipment, and a variable cost or the cost of fuel. This is a step in the right direction as it will actually increase the tariff of renewable energy and bring it on par with conventional energy which include a fixed part for capacity and network maintenance. The MNRE was said to be working on a set of guidelines to provide compensation to solar power generators in case they are asked to back-down capacity by distribution companies. This would offer more sunshine for the solar sector. This was supposed to ensure that power distribution companies do not arbitrarily cut off solar and wind power or ask power generators to back-down capacities. This provision should also be extended to other generators to level the playing field.  The impending imposition of GST and its impact on the bidding rate for solar power which has become the most watched number after GDP was discussed by many.  According to CEEW the solar sector was expected to see tariffs rise by nearly 10 per cent if current tax exemptions were curtailed in the roll out of the GST. Multiple GST rates and their uncertain applicability to different equipment and services for solar projects was a growing concern from solar project developers and investors, the report said. It also observed that GST could also impact the second phase of solar park development for additional 20 GW capacity announced in the budget. CEEW also felt that GST could increase capital cost of a solar project by Rs 4.5 million/MW if current tax exemptions were curtailed, setting back the sector in terms of cost competitiveness by about 18 months. Do these observations give away the dirty little secret of incentives that prop up the solar sector?

Moving to hydropower, the quiet contributor of non-fossil fuel based power, news on Pakistan’s resolution that asked India to immediately suspend the ongoing construction of the Kishanganga and Ratle hydro power projects in J&K was spotted in the international news. The two projects are being constructed on the Jhelum and Chenab rivers under the provisions of the IWT.  The resolution also asked the World Bank to set up a Court of Arbitration to mediate the dispute over the IWT between the two countries. It said that under IWT, it is the responsibility of the World Bank to play its role without further delay. It is not clear why the IWT once thought to water tight is leaking into primary domains of conflict between India and Pakistan!

The power ministry was also reported to be considering renewable energy status to supplies from large hydropower projects to help keep power tariffs low under the proposed GST.  The ministry, which has sought zero rating or deemed export status for solar power projects on the grounds that levy of GST will substantially increase tariffs, now wants the same to be extended to supplies for under-construction hydropower projects. These supplies are currently exempt from excise duty or enjoy concessional value-added tax of 0-5 percent and a central sales tax at 2 percent. Under GST all central and state taxes on goods and services are expected to be replaced by a single levy of 18 percent, pushing up the cost of these supplies, which in turn is expected to increase the cost of power. About 11 GW of hydro power capacity is expected to be added over the next five years and a GST rate of 18 percent would inflate capex by 10-12 percent.

On the nuclear side, the proposal from the DAE to construct two PFBR of 600 MW each at Kalpakkam, besides the present one of 500 MW capacity was reported.  The 500 MW PFBR, which is to be functional by October, will be the first PFBR in the world for commercial use.  It is not clear what is motivating India as it is essentially pursuing what the rest of the world has abandoned primarily on commercial and also on safety grounds. The DAE was also reported to have a proposal for building 12 nuclear reactors to ramp up power generation in the country. Of the 12 reactors 10 reactors will be indigenous PHWR while the other two will be Light Water Reactors of Kundakulam units 5 and 6 of 1,000 MW each.  Staying with Kudankulam, the second 1,000 MW unit of the power plant was expected to start commercial operations this fiscal. The second unit of the project was made critical in July 2016 and connected to the grid in August.

Rest of the World

Going by news reports, Europe is continuing to lead the charge against high carbon energy, notwithstanding Trump.  According to a new report released by the EU it is on track to reach its 20 percent renewable target by 2020, having covered 16 percent of its final energy consumption with renewables in 2014. However this does not mean that member states have reached their national goals. In 2014 all EU countries – except the Netherlands – showed a renewable energy share which was equal to or higher than their indicative pathway. In 2015, 25 Member States exceeded their indicative pathways, with some even surpassing their 2020 targets. By 2030, the EU has set a target of at least 27 per cent of renewables in energy consumption. Reaching this target would help reduce GHG emissions to meet the EU target of at least 40 per cent GHG reduction by 2030.

According to European wind association more than 12 GW of new wind capacity were added in the EU raising the installed wind capacity in Europe to 153.7 GW.  Investment in new onshore and offshore wind farms reached a record €27.5 bn. According to the GWEC, global wind additions reached 54.6 GW in 2016, raising total capacity to nearly 487 GW. Ten country accounted for 88% of total installations, with 47.9 GW installed. As in previous years, China was the largest installer in 2016 with nearly 43% of global installations. The country installed 23.3 GW in 2016 and reached 168.7 GW. This is twice the installed capacity in the US. European utilities also announced that they will not reduce their investments in renewables if US President Donald Trump lowers US climate goals.

For its part, Sweden has agreed to pass a law in the coming months to force the government to reduce fossil fuel use through tougher targets revised every four year, in order to completely phase out GHG emissions by 2045.  Sweden plans to cut its domestic GHG emissions by at least 85% by 2045, compared to 1990 levels. Remaining emissions would be offset by compensation actions, such as planting forests (carbon sinks) or investing in GHG emission cut measures abroad. The EU as a whole has already approved an 80-95% reduction target in GHG emissions by 2050.  It is not clear if the greying of the EU is behind the greening of the EU.

Not to be undone by the EU China’s installed PV capacity was reported to have more than doubled last year, turning the country into the world’s biggest producer of solar energy by capacity according to its NEA. Installed PV capacity rose to 77.42 GW at the end of 2016, with the addition of 34.54 GW over the course of the year. China is expected to add more than 110 GW of capacity in the 2016-2020 period. Solar plants generated 66.2 billion kilowatt-hours of power last year, accounting for 1 percent of China’s total power generation. The country aims to boost the mix of non-fossil fuel generated power to 20 percent by 2030 from 11 percent. It is know that China is the only force holding up the secular decline of the nuclear sector. China’s plans took a controversial turn when it announced that it plans to build 20 floating nuclear power stations in the future, which will significantly beef up the power and water supplies on the South China Sea islands. China currently has 23 nuclear power generating units in operation and 27 under construction, about one-third of the world’s unfinished nuclear units. China will reportedly prioritise the development of a floating nuclear power platform in the coming five years, in an effort to provide stable power to offshore projects and promote ocean gas exploitation. The development of the facility is said to be a crucial part of the country’s five-year economic development plan, running through 2020.

The news from nuclear stalwarts Japan and France was less sensational.  The plan to remove spent nuclear fuel from Tokyo Electric Power Co Holdings Inc’s Fukushima Daiichi nuclear plant was reportedly postponed again due to delays in preparation. Work is now set to begin in fiscal 2018 at the earliest. Removal of the spent fuel from the No. 3 reactor was originally scheduled in the first half of fiscal 2015, and later revised to fiscal 2017 due to high levels of radioactivity around the facilities. The timeline has been changed again as it was taking longer than expected to decontaminate buildings and clean up debris, the news agency reported.

The French government was reported to have reached an agreement with state-controlled utility EDF on the conditions under which the company will shut down France’s oldest nuclear plant. EDF and the French government agreed in August on a €400 million compensation package for the closure of the Fessenheim nuclear plant. The government decree to halt operations at Fessenheim would be subject to the company obtaining necessary official authorization for its new generation EPR reactor in Flamanville.

MW: Megawatt, GW: Gigawatt, BCD: Basic Customs Duty, PV: Photovoltaic, GHG: Greenhouse gas, NEA: National Energy Administration, GWEC: Global Wind Energy Council, PFBR: Prototype Fast Breeder Reactors, PHWR: Pressurised Heavy Water Reactors, J&K: Jammu and Kashmir, US: United States, IWT: Indus Waters Treaty, CVD: Countervailing Duty, SAD: Special Additional Duty, Discoms: Distribution Companies, MNRE: Ministry of New and Renewable Energy, EU: European Union, CEEW: Council on Energy, Environment and Water, GST: Goods and Services Tax, DAE: Department of Atomic Energy

Courtesy: Energy News Monitor | Volume XIII; Issue 37

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FROM A CARBON TO A HYDROCARBON ECONOMY?

Monthly Gas News Commentary: August – September 2016

India

The Minister for Petroleum announced that the share of gas in India will be increased from 6.5 percent to 15 percent when he launched the programme Gas4India. Apparently the motivation was the fact that the share of gas in Gujarat was higher than world average at 26 percent. Gujarat’s gas trajectory has more to do with its industrial base and its proximity to gas production than with the so called Gujarat model as it is often presumed. City gas is the only hope as driver of gas demand but this will not take off without a significant increase in the length of the pipelines across the country. Power generation does not show much promise as a driver of gas demand growth as the case of NTPC shows. NTPC has apparently decided to terminate a long-term supply contract for imported natural gas in power generation shows as it is unaffordable. NTPC signed a 20-year contract with GAIL (India) Ltd in 2009 to buy 2 mmscmd of gas. NTPC has been taking less than 10 percent of its contracted volume, forcing GAIL to levy so-called take-or-pay penalty charges. India’s 25 GW gas based power generation capacity are reportedly running at less than a 25 percent of their capacity. The cost of power generated from GAIL’s gas is about Rs 7/kWh more than twice the price of power in long term contracts and more than three times spot market price of power. The unaffordable policy of affordability is likely to keep India and Indians energy insecure.

But gas use in industry is picking up in India. The 60 percent fall in price of LNG has reportedly pushing IOC to buy two LNG shipments per month in the spot market for six months from October. The country plans to increase its LNG import capacity to 55 MT within five years, from about 21 MT now. Petronet of which 12.5 percent is owned by IOC has expanded the capacity of the Dahej terminal in western India, the nation’s largest LNG import and re-gasification terminal, by 50 percent to 15 MT.

GAIL which has been perennially unlucky on its ventures struck bad luck once again. It appears that gas would be 75 percent more expensive than spot gas prices in GAIL’s two long-term contracts to buy 5.8 MTPA of gas from US suppliers from 2018 at current henry hub prices.  The contract was signed amidst great fanfare of bringing gas prices down to earth in India.

Rest of the World

Oil majors seem to be betting on LNG. Exxon was reportedly taking over InterOil after its bid to take over Oil Search failed to get a larger stake in LNG exports from Papua New Guinea, which is seen as key to LNG trade to China, Japan and Korea in the decades to come.  Royal Dutch Shell was first off the block and Shell is now well on its way to become one of the largest LNG producers in the world with its takeover of BG Group.

The geo-politics of enhancing European energy security appears to be spicing up as efforts to wean Europe away from Russian gas gathered momentum in August. At a news conference in Sweden, the Vice President of the USA commented that the Nord Stream 2 pipeline involving Russia and several European energy companies was a ‘bad deal’ for Europe. Russia’s Gazprom and its European partners agreed to the project last year. The proposed pipeline will run across the Baltic Sea to Germany. Many Eastern European countries and the United States think that the pipeline could limit supply routes and the energy security of the European Union, which gets a third of its gas from Russia.   Four western Balkans nations Croatia, Albania, Bosnia & Herzegovina signed a Memorandum of Understanding with Azerbaijan’s state oil company Socar on co-operation on building the Trans Adriatic Pipeline designed to bring gas from Shah Deniz 2 field in the Caspian Sea to EU through the so-called Southern Gas Corridor after 2020.  Socar’s goal is to connect the Caspian Sea and the Adriatic Sea.

With the realization of the Trans-Anatolian Pipeline —a smaller version of the originally planned Nabucco Pipeline and now a Southern Gas Corridor project gas from Azerbaijan could reach European markets for the first time around 2019. Turkey may also obtain the position of a transit country for European gas imports but with limited influence, since only 10 BCM per year are foreseen for the European market (between 2-3% of total EU gas consumption in 2014.)

In addition to the TANAP project, the recent easing of tensions between Turkey and Russia has revitalized debates about the construction of Turkish Stream, a project that was initiated after a direct pipeline connection between Russia and Bulgaria through the Black Sea (“South Stream”) was cancelled in 2014 due to regulatory conflicts between Gazprom and the European Commission. Turkish Stream would mainly supply the Turkish market, but could also bring gas destined for the EU market to the Turkish-Greek border. A Turkish corridor would also be mandatory for all hypothetical deliveries from Iraq, Iran, or Central Asia.

European gas demand was 11% lower in 2014 than 2004. There was a slight increase in 2015 but it was still second lowest since 1995. In Germany it was down by 14% and in the UK by 9%. Efficiency in energy generation and use, subsidies for renewables and coal are blamed for the fall in gas consumption. However by 2030 EU may have to replace 45 BCM/year of gas supply and this is probably what all potential suppliers are targeting.

ExxonMobil, BP and ConocoPhilips have reportedly decided to move out of the Alaska LNG project following a report by Wood Mackenzie stating the project could struggle to make ‘acceptable returns even under US$70/bbl price’. On shale gas there was the forecast from EIA that China was poised to be the world’s second largest shale gas producer after the U.S. by 2040, when it would account for more than 40 percent of the country’s total natural gas production. China has reportedly drilled more than 600 shale gas wells in the last 5 years, producing 5 BCM of shale gas as of 2015.

MT: Million Tonnes, MTPA: Million Tonnes Per Annum, bbl: barrel, mmscmd: million metric standard cubic meter per day, LNG: Liquefied Natural Gas, BCM: Billion Cubic Meters, EU: European Union, IOC: Indian Oil Corp, kWh: Kilo Watt Hour, TANAP: Trans-Anatolian Pipeline, TAP: Trans Adriatic Pipeline

Courtesy: Energy News Monitor | Volume XIII; Issue 14

ADAPTING TO A SURPLUS POWER MARKET

Monthly Power News Commentary: January – February 2017

India

One of the recommendations by a committee set up by the government to address the surplus situation in the power market has recommended the reduction in power tariff for major consumers. This is a step in the right direction as the industry which is a major consumer of power has been paying above average prices for power at the expense of its competitiveness to cross subsidise the household and agricultural segment.

The Indian power sector is also reported to be taking advantage of the glut in the power market to phase out old inefficient power plants. NTPC is said to have decided to shut down old polluting power plants of 11 GW capacity and replace those with new ones which are highly efficient.

On the other hand with the tax holiday for infrastructure projects including power projects coming to an end in FY17 power prices are expected to increase by Rs 0.05-0.10/kWh in FY18.  According to industry experts this is expected to affect even solar power tariffs. However this may not be a significant problem in an environment of surplus power and low power tariffs.

In a move that would probably increase efficiency in lighting and in the process offer an incentive to increase power consumption, the government is said to have decided to phase out incandescent bulbs by 2020, starting with high voltage lamps. Incandescent lamps consume 80 percent more electricity than LED lamps, but are widely used in middle class and poor households because they cost much less. A 60 watt incandescent lamp costs Rs 10 while an LED lamp of the same power can be ten times more expensive without subsidies. The government expects to save 8.5 million kWh electricity consumption every day or 15,000 tonnes of CO2 by replacing 770 million conventional bulbs and CFLs as well as 35 million street lights with LEDs over three years. One can only hope that increase in efficiency does not result in increase in consumption as Jevons predicted in 1865 in the context of coal. The CEA observed that India lost 15 BU of power generation in the quarter ended December due to shortage of natural gas.  This was said to be more than 5 percent of the planned quarterly power production of 295 BU from conventional sources. Apparently the government had allotted gas supply of 9,527 MMSCMD to gas-based projects for the three months period ended December but supply stood at a mere 2,609 MMSCMD or 28 percent. While the biggest losses are reported to be for Torrent, a private power generator, NTPC’s Ratnagiri is also said to have suffered losses.  It is important to note here that the shortage is only for ultra-cheap domestic gas and not internationally traded gas which is available and can be secured through India’s LNG terminals. The problem for gas based power generators is to find buyers for expensive power generated if they use imported LNG.

Uttar Pradesh was in the news not just in the context of the elections but in the context of being the only state that is yet to sign up to an agreement with the Centre for 24×7 Power supply as part of the UDAY scheme. It would be interesting to see how the Indian federal system that has devolved power over the power sector to the State will accommodate the scheme which is primarily driven by the federal Government.

Finally a ‘Chinese are coming’ story was also spotted in the press.  The Indian power equipment manufacturers have reportedly raised alarm over vulnerability of the country’s transmission networks to hacking as Chinese companies make steady inroads into SCADA systems being added to smarten up city grids. SCADA is a computer-based industrial automation control system that practically makes factories and utilities run on their own. In an electrical system, SCADA maintains balance between demand and supply in the grid. Though the Indian power sector has always been weary of the entry of Chinese companies into the Indian power sector this time the worry is reported to be strategic rather than mere business concern.

Rest of the World

The Canadian underwater energy storage company Hydrostor is said to be interested in the $1 billion of contracts to replace decommissioned US peak power plants in the next two or three years. These peaking power plants are turned on only when demand is highest, are a critical but expensive element of the electricity grid.  Hydrostor and its engineering partner AECOM are reportedly targeting coal-powered facilities of at least 100 MW across the US that either shut down in 2016 or will shut in 2017. Hydrostor buys off-peak electricity to compress air it stores underwater in balloon-type accumulators. It then reverses the process to generate power and feed it back into the grid when demand is high. Hydrostor is expected to compete for the attention of utilities against battery companies and new, more efficient gas-powered facilities.

At the other end of the Atlantic, where hard Brexit is hitting everyone, the UK National Grid has apparently warned of costs if Britain exits EU energy market.  Currently 9 percent of Britain’s energy supplies come from EU imports.  Several power links with the EU have been planned with the objective of giving Britain access to cheaper electricity from abroad as the country faces a supply crunch by the early 2020s as old nuclear power plants and coal-fired power stations close. According to the National Grid each 1 GW of new electricity interconnector capacity could reduce Britain’s wholesale power prices by 1-2 percent, with 4-5 GW of capacity equating to $1.23 billion saving. For such interconnectors to be economically viable, they must be able to sell capacity to traders and therefore require efficient and robust trading arrangements between the two regions (UK and the EU).  Britain currently has access to tariff-free electricity trading with Europe due to its participation in the so-called IEM, but National Grid has reportedly observed that leaving the market would make cross-border trade more difficult. National Grid has also warned that the cost of delivering new projects could rise due to Britain leaving the EU.

CEA: Central Electricity Authority, LNG: Liquefied Natural Gas, MW: Megawatt, GW: Gigawatt, kWh: Kilowatt hour, US: United States, EU: European Union, CO2: carbon dioxide, US: United States, UK: United Kingdom, BU: Billion Unit, LED: Light Emitting Diode, IEM: Internal Energy Market, FY: Financial Year, MMSCMD: Million Metric Standard Cubic Meter Per Day, SCADA: Supervisory Control and Data Acquisition, UDAY: Ujwal Discom Assurance Yojana

Courtesy: Energy News Monitor | Volume XIII; Issue 36

 

DOWNSTREAM FILLING UP FOR UPSTREAM

Monthly Oil News Commentary: August 2016

India

The overseas media reported that India was planning a 13-way merger for state-owned oil and gas companies that include Oil and Natural Gas Corp (ONGC) and Oil India. This is not the first attempt at unifying various energy entities owned by the state but if all goes as planned it will be the first successful one. By some accounts if the merger succeeds, it will create a huge company on par with Russia’s Rosneft. The Indian Minister denied that there was any such efforts being made. This is the right decision as monopolies do not have a history of creating value.

Staying with upstream the Oil Minister has said that he favoured a reduction in cess on crude prices from the current 20%. India earlier charged a cess of Rs 4,500/tonne amounting to $9/bbl. This was increased to 20% in the budget for FY17. Energy cess has become a source of revenue for the government but it will become a burden for consumers who ultimately pick up the tab.

A big relief to upstream companies came in the form of government announcement that it will bear the entire fuel subsidy burden, rather than passing a part of it to upstream oil companies. The move, enabled by the steep decline in under-recoveries since FY15 due to the global oil price decline, the decontrol of petrol and diesel and cut in LPG subsidy, would boost the bottom lines of ONGC, Oil India and GAIL (India) Ltd, and make them more attractive to investors. As per media reports, upstream subsidy burden has declined from 56% to 7%.

There was some bad news for ONGC. The CAG issued a report criticising ONGC for over-reporting crude production by 12% that increased subsidy payment and interestingly also increased performance related pay to executives. Consultants who came up with performance incentives probably need to rethink their approach! As they say what is measured will get ‘managed’!

Moving to the downstream, IOCs oil imports from Iran have reportedly increased fourfold to 5 MT from 1.2 MT in FY11 on lifting of sanctions on Iran.  Saudi Arabia with over 40 MT imports remains India’s top oil supplier.  Overall the Middle East with over 65% of oil imports into India remains on the top of the list of oil suppliers to India. IOC also reported that it will invest in expanding its storage and bottling capacity in Tripura over the next three years. The interesting part of this news is that its convoy of 20 trucks would move through Bangladesh rather than through NH 44 whose roads are in need of maintenance.  Petroleum products from IOC’s Betkuchi depot in Guwahati will move to Dharmanagar depot in Tripura via Bangladesh covering atotal of 366 km, including 126 km in Bangladesh, against 386 km long-route through the Barak Valley. The convoy will enter Bangladesh through Dawki point in Maghalaya and re-enter India at Kailashahar in Tripura. As per the agreement, India will pay about Rs 1,300 per truck and limit the number of trucks to 160 at any point in time.  Obviously markets do not like borders!

There was plenty of news on new refinery projects and refinery expansions. HPCL’s plan for expansion of its Visakh Refinery has reportedly received board approval.  When current capacity of 8.33 MTPA is increased to 15 MTPA it will fill the gap between the refining and marketing volumes of HPCL. Among refineries planning expansions is NRL that is looking at a $3 billion expansion of its 60,000 b/d refinery in Assam and awaiting a response from the oil ministry on the plan to treble the refinery capacity to 180,000 b/d.

Chennai Petroleum Corp a unit of IOC in which Iran has a stake also plans to spend about $3 billion for a nine-fold capacity increase at its Nagapattinam plant in the southern state of Tamil Nadu to as much as 180,000 b/d from the current 20,000 b/d. The race to expand refining capacity is driven by forecasts of a dramatic increase in demand for lighter products such as petrol for which there is insufficient capacity. India’s 23 refineries have a capacity of 230 MT while demand was 183.5 MT in FY16.

Among private refiners, Essar Oil Ltd’s 20 MTPA Vadinar refinery is reportedly looking upgrades to improve its margins. Essar Oil Ltd expects to lower purchases from Iran after shipments from Rosneft begin once the Russian state producer completes a deal to buy a stake in the Indian company. Essar bought more than 148,000 b/d from Iran in the first six months of this year, accounting for more than 40% of India’s purchases from Iran.

Lower oil prices are now impacting even the holy grail of subsidies. IOC, HPCL and BPCL have been given the freedom (if you can call it that) to increase the retail price of kerosene sold through the PDS by Rs 0.25/litre/month for 10 months.  Hopefully this will restrict diversion as it will reduce the price difference between PDS and open market kerosene. The government is also reportedly taking steps to implement the scheme of transferring subsidy directly to the bank accounts of beneficiaries (direct benefits transfer, or DBT) on kerosene.

Rest of the World

The news that made headlines this season was the report that Russia and Saudi Arabia would cooperate to stabilize the oil markets after the leaders met at side-lines of the G20 summit in China. The two countries reportedly agreed to set up a ‘working group’ to advance cooperation on reducing volatility in the oil markets. There was no indication that there would be a production freeze but the oil market seemed to expect. Oil prices rocketed upwards but dropped after the market grasped the finer details. Iran OPEC’s third-largest producer said that it will help other oil producers stabilize the world market so long as fellow OPEC members recognize its right to regain pre-sanctions output of 4 mb/d. It pumped 3.6 mb/d in July.

Staying with the intrigue and drama of geo-politics, a new axis of Russia, Iran and Turkey was said to be emerging and the spoils of the Middle East are on the table, beginning with the Syria. Saudi Arabia courting Russia, one of its two biggest rivals on global – more specifically Asian – oil markets adding fuel to the fire of oil politics. Some observers, believe this is a scenario aimed to lure Moscow into a trap, with all the promised contracts and a quick rebalancing of the oil market in favour of Russia to be retracted as soon as Russia agrees to them.  It is believed that the very fact of agreeing will put Russia at odds with its current allies in the Middles East, Iran and Syria, which is what the Saudis want eventually undermining the influence of both Russia and Iran in the Middle East and reinforcing its own! Iran signed an agreement with Russia’s Zarubezhneft for the development of two fields in western Iran. This is in addition to an earlier announcement by Zarubezhneft that it’s ready to start developing another Iranian field, with investments of US$2.2 billion.

Adding to the drama was emergency in Turkey that raised concerns over oil trade as 3% of global maritime oil shipments pass through the Bosphorus strait, which was temporarily closed during the coup.  Russia used the opportunity to resurrect plans for a new pipeline between the Bulgarian port of Bourgas and the Greek port of Alexandroupolis that was supposed to bypass the Bosphorus. For his part the President of Turkmenistan has apparently closed the Ministry of Oil and Gas along with the State Agency for Managing Hydrocarbon Resource to consolidate his power. Libya’s recovering oil production and exports have been hit with a protest by the country’s Petroleum Facilities Guard, who claim they have not received their salaries for five months.

Amidst the turmoil OPEC got a new secretary general, Sanusi Barkindo from Nigeria. Barkindo is replacing Libya’s Abdalla Salem Badri, who served as head of the organization from 2007, making him the longest-serving secretary general in the history of OPEC. Barkindo has been elected for the next three years.

Forecasts on oil prices were not encouraging.  According to Shell, the huge global oil oversupply that has weighed on prices for the past two years may not clear until the second half of 2017. The potential return to the market of some 1.5 mb/d of supply from Libya and Nigeria and uncertainty about Iranian and Iraqi production levels could push a rebalancing further away Shell said.

The Peak summer demand in western markets (driving, air-conditioning etc) was reportedly doing little to reduce inventories that have been a burden on prices.  Bloomberg reported that more oil companies were hedging their production for 2016 and 2017 at current prices rather than gambling on higher prices in the future.  U.S. regulators have apparently lowered fleet efficiency expectations from 50 to 52.6 (mpg) miles/gallon (20.2 km/litre to 22.3km/l) in 2025 instead of the previous estimate of 54.5 mpg (23.1km/l) on account of lower gasoline prices.  The response from the auto industry was that the fuel efficiency regulations would be more difficult to meet. The EIA reported that primary energy use in the U.S. reduced by 3.5% since 2007 as buildings and vehicles have become more efficient.

According to Bloomberg, oil explorers discovered only about a tenth (2.7 billion barrels) as much oil in 2015 as they have annually on average since 1960 and the smallest since 1947. Experts expect a shortfall if oil demand grows from 94.8 mb/d in 2016 to 105.3 mb/d in 2026. There was more trouble for the global upstream industry. More than $21 billion of debt from oilfield services and drilling companies is estimated to be maturing in 2018, almost three times the total burden in 2017, according to a report from Moody’s. The burden on oilfield services companies is expected to increase by 2021, when nearly $29 billion of bonds and loans are expected to come due. Much of the maturing debt was issued between 2011 and 2015, when US drilling was at a record high fuelled by strong energy prices and new technologies.

Private oil companies were busy dealing with changes in the market. Norway’s state-run Statoil agreed to buy a 66% interest in an offshore Brazilian field from Petrobras for a consideration of $2.5 billion. But Statoil decided to divest from non-operated assets in the Marcellus shale play worth $96 million. Chevron had reportedly received a 72-hour ultimatum from several Niger Delta communities to ensure the release of five oil workers, who were arrested by the military on suspicions that they are members of the Niger Delta Avengers militant group. BP continues to struggle with the ghosts of the Deepwater Horizon disaster and has reportedly put the total cost of the 2010 disaster at $61.6 billion.

North Sea oil companies were said to be benefitting from Brexit as it had pushed the British pound to a 31 year low, helping to reduce the costs. On the dark side analysts were reportedly concerned that Brexit had increased uncertainty surrounding North Sea investments and this could accelerate the decommissioning of old oil fields and platforms.

In a boost to Saudi oil trade, Arab Petroleum Investment Corp., and National Shipping Co. of Saudi Arabia were reportedly creating the largest fleet of oil tankers in the world. The companies have reportedly setup a $1.5 billion investment fund to add 15 very large crude carriers (VLCCs) on top of its existing 46 VLCCs.

Oilfield service such as Halliburton and Schlumberger reported poor second quarter earnings. The companies were said to be expecting better days as they think that they have touched the bottom of the cycle. ConocoPhillips announced that it would cut another 1,000 workers (6% percent of workforce) mostly from the U.S. and Canada. This is in addition to the 3,400 jobs the company has already cut.

The refining sector did not fare better. The 10 largest independent refiners were reported to have earned a total of $944 million in the first quarter which is a 74% decline from a year earlier according to Reuters. According to Bloomberg, overall the combined value of the world’s oil industry declined by $2 trillion over the past two years because of falling oil prices.

MT: Million Tonnes, MTPA: Million Tonnes Per Annum, FY: Financial Year, LPG: Liquefied Petroleum Gas, mb/d: Million Barrels Per Day, OPEC: Organization of the Petroleum Exporting Countries, ONGC: Oil and Natural Gas Corp

Courtesy: Energy News Monitor | Volume XIII; Issue 13

INDIAN COAL IMPORTS LOSE STEAM

Monthly Coal News Commentary: January 2017

India

Since last year India has been hailed as the leader of imported coal demand growth rates but this month it was reported that the title had reverted back to China. India’s coal imports in 2016 totalled 194.93 MT according to Thomson Reuters. This was 5.4 percent lower than the 206.6 MT recorded for 2015, and also less than the 255.5 MT imported by China in 2016 according to Reuters.  Reuters also reported that despite the fall India was still importing nearly four times as much as it did a decade ago, and almost double the amount from five years back. CIL has a target for production of 575 MT of coal for FY17 but there is doubt if this target would be met.  Output for the period April to December was 378 MT a rate that if maintained for the final three months of the financial year would see production closer to 504 MT.  The Coal Ministry is reported to be optimistic that CIL would raise output to 660 MT in FY18 and to 1 BT by FY20.  This raises questions over prospects for imported thermal coal in India. Given that demand for power is sluggish, domestic coal production alone may be sufficient to meet demand growth in the future. Coalswarm which tracks coal power plant installation, reports that India’s pre-construction pipeline of coal-fired power generation dropped by 40 GW in 2016. Some analysts have interpreted this as a consequence of the growth in solar power generation. But industry insiders think that there is unexplained decline in the demand for power.

This month saw some reports on growing concerns over the price of coking coal. Worried over domestic coking coal price hike SAIL was reported to be in negotiations with CIL for possible reduction in price. CIL arms BCCL and CCL increased the price of coking coal by about 20 percent recently. The price of various grades of coking coal of CIL is between Rs 2,400 and Rs 5,050/tonne. SAIL has existing captive coking coal production of nearly 0.5 MTPA. According to the Indian Steel Association the global coking coal price which was at $80/tonne (Rs 5355/tonne @ Rs 66.94/$) in January last year rose to $283/tonne (Rs 18944/tonne) in December. Currently it is at $193/tonne (Rs 12919/tonne).

Staying with the price of coal, Chhattisgarh’s request for a revision in royalty rates on coal to 30 percent from the existing 14 percent ad-valorem, is expected to push up the cost of electricity by 7 percent or 10-12 paisa/kWh according to India Ratings. The state government has constituted a study group to consider the revision in the royalty rates based on the request. According to India Ratings, assuming a pithead price of Rs 720/tonne of coal, the royalty increase would lead to a higher contribution towards DMF at 30 percent of royalty and NMET at 2 percent of royalty, which translates into a higher cost of electricity generation by 10-12 paisa/kWh.  Since January 2015, coal consumers have been hit by rising prices due to the imposition of DMF and NMET (effective January 2015), taking the effective royalty rate up to 18.48 percent from 14 percent. Additionally, if the royalty rates were to increase to 30 percent, the effective royalty rate would be 39.6 percent including DMF and NMET contribution. Furthermore, the clean energy cess increased to ` 400/tonne from Rs 200/tonne in the Union Budget 2016. During May 2016, Coal India Ltd (CIL) increased the ROM prices for the most widely supplied grades of coal to the power sector by an average of 16 percent. Similarly from 1 April 2015, freight charges for coal were hiked by 6.3 percent. Therefore, the variable cost of generation for a plant situated 500 km from the mine which used to receive grade G13 coal, has increased by 24 percent to Rs 1.69/kWh. However on the positive side, coal linkage rationalisation for companies has reportedly led to a decline in the transportation costs.  Industrial power rates are a critical pre-investment consideration for manufacturers and given that bulk of the coal-based capacity in India is on a cost pass-through basis, the ultimate impact of such hikes is passed on to consumers. Such regular hikes in one form or the other are not a healthy sign for thermal power generators.

Even after the hike, the coal supplied domestically by CIL continues to be cheaper than the imported coal. Coal has seen a change in royalty rate in 2012, with the royalty being changed to the ad valorem basis at 14 percent from the earlier system of tonnage based and ad-valorem with royalty on Grade D/E coal being Rs 70/tonne plus 5 percent of CIL run of the mine price. Increase in royalty up to 30 percent for the top three states could result in an additional income between Rs 5 billion to Rs 39 billion, depending on the final royalty rate according to India Ratings.

Rest of the World

The expectation that Obama penalties on coal production and use in the USA would be reversed by Trump were proved correct as Congressional Republicans were reportedly moving swiftly to repeal Obama administration regulations aimed at better protecting streams from coal mining debris. Legislation to block the rules, which would supposedly kill jobs in the coal industry, which is reeling from competition from cleaner-burning natural gas have been prepared in such a way that it is immune to filibusters by Senate Democrats. The Stream Protection Rule that the legislation targets is the latest in a series of overreaching Obama-era regulations that have targeted America’s coal industry.  The stream protection rules would be the first of several recent Obama administration regulations to be targeted by using the fast-track procedures. While in power Obama easily repelled such moves with vetoes. The regulations would have tightened exceptions to a rule that requires a 100-foot buffer between coal mining and streams. It also would require coal companies to restore streams and return mined areas to conditions similar to those before mining took place.

Environmental groups such as the Sierra Club support the rules, saying they would protect people in coal regions from health risks from pollutants like mercury.

The first part of the commentary reported that India had lost its position as the number one coal importer to China.  If this is true then the news that China’s energy regulator had ordered 11 provinces to stop more than 100 coal-fired power projects, some of which are under construction, with a combined installed capacity of more than 100 GW is surprising.

NEA had reportedly suspended coal projects already under construction in some provinces and autonomous regions including Xinjiang, Inner Mongolia, Shanxi, Gansu, Ningxia, Qinghai, Shaanxi and other north western regions worth about $62.30 billion. The move was reportedly in line with the government’s prolonged effort to produce power from renewable sources such as solar and wind, and wean the country off coal, which accounts for the majority of the nation’s power supply. Closure of coal based power plants are generally reported as victory for renewable energy but this perspective overlooks the impact of a stagnant economy and an aging population on power demand.

MT: Million Tonnes, MTPA: Million Tonnes Per Annum, BT: Billion Tonnes, kWh: Kilo Watt Hour, CIL: Coal India Ltd, GW: Gigawatt, NMET: National Mineral and Exploration Trust, DMF: District Mineral Foundation, CCL: Central Coalfields Ltd, BCCL: Bharat Coking Coal Ltd, NEA: National Energy Administration, FY: Financial Year

Courtesy: Energy News Monitor | Volume XIII; Issue 35

 

RENEWABLES ON STEROIDS

Monthly Non-Fossil Fuels News Summary: August 2016

India

The successful commissioning of the first two units of 1,000 MW VVER, the Russian version of the pressurised water reactor at the Kudankulam nuclear power plant, despite a delay of over two years led to announcement of pre-project work for the third and fourth units. Experts have commented that units 3 & 4 will get the more powerful versions of the reactor with additional safety features. India and Russia have an agreement to build 12 nuclear plans in the next two decade. India is reportedly planning to increase nuclear power generation capacity three times in the next ten years. One should not be surprised at these targets because throwing up aspirational numbers for energy generation that touch the stratosphere is part of this government’s strategy to be ‘liked’! Naturally even the Chinese nuclear industry is reported to be attracted by these numbers.

There was plenty of news on the much troubled hydro-power sector as well. First was the 2000 MW Lower Subansiri project at Gerukamukh in Arunachal Pradesh that has been on hold for over 5 years on account of protests by people downstream of the project. The NHPC chief was reported to have assured that the dam is safe. How many would go by these announcement is anyone’s guess. NHPC was also facing problems with the 330 MW Kishanganga hydroelectric project in the Bandipora district of Kashmir due to protests in the valley. Pakistan went to the international court of arbitration over the project on the basis of the Indus Water Treaty but as the court gave the go ahead it is seen as a symbol of India’s victory over Pakistan. So much for India’s idea of victory!

Staying with hydro power there seems to be some momentum in the industry after a long pause. According to the Power Minister, of the 50 hydro proposals received from various states 35 are awaiting clearance from the CEA. But it appears that hydro-projects cannot expect a smooth ride ahead.  In a landmark judgment, the National Green Tribunal (NGT) has held Alaknanda Hydro Power Co. Ltd. liable for payment of compensation for lack of proper care in storing muck from a construction project, which allowed the material to flow during the floods in Srinagar and Uttarakhand in June 2013. The ruling was in response to a PIL filed against Alaknanda by Srinagar Bandh Aapda Sangharsh Samiti, a body formed to take up issues related to compensations for people affected by the 2013 floods that devastated the area.  This probably what India’s former Prime Minister labelled green tape!

There was far greater momentum on new renewables such as solar energy. The government was reportedly working on developing a framework for solarising agriculture pumps in order to reduce power consumption by farmers. It has already embarked on a plan to provide energy efficient agriculture pumps to farmers and has launched National Energy Efficient Agriculture Pumps Programme in this regard. Why the government wants to reduce the power consumption by farmers is not clear as the challenge facing the power sector is lack of demand.  The scheme will probably replace free power to farmer with free pumps to farmers. What will become of these pumps in the next ten years is unclear at this point but it must be noted that these pumps do not come cheap.  Though the government has said that solar pumps will result in annual savings of approximately Rs 200 bn on agricultural subsidies it is not clear if this will be sufficient to offset the one time investment on the pump sets.

India has reportedly formulated aplan to store up to 10,000 MW of through ‘pumped’ storage systems store at a fraction of the cost entailed using lithium­ion batteries (Rs 0.30-40/kWh for pumped storage vs Rs 10/kWh for batteries). The Rs 800 bn plan entails setting up hydel pump storage systems in several states over the next five to six years.  Good luck is all we can say at this point!

According to Niti Ayog, cumulative installed capacity of renewable energy has crossed 44 GW. Out of the 3,600 MW solar capacity added during in FY16, 2,700 MW has come from four southern States.  Among southern states, Tamil Nadu is reportedly number one with 1,200 MW capacity for FY16.  Lest we forget this is on the back of a generous feed-in-tariff of Rs 7.01/kWh. Anyone with a roof and loan will rush to put up solar plants – especially if they can buy utility power at an ‘amma’ discount and pass it off as solar power at three times the price!

Renewable developers are reported to be worried over the impact of GST on projects.  Renewable projects enjoy numerous tax concessions and exemptions, bothat the Central and State level but GST may bring this bonanza to an end. Around 95% of solar equipment is imported. While imports generally attract basic customs duty of 7­10%, renewable energy related components pay a concessional 5%. There is also a special additional duty of customs of 4%, which for renewable energy equipment is later refunded.

Reports said that the Government is likely to get an estimated Rs 23,944.4 crore from clean environment cess to be collected by CIL based on production targets. At present the rate of Clean Environment Cess is Rs 400 per tonne of coal. One cannot but wonder at this stage if higher production targets for CIL was driven by higher cess collection potential. The purpose of clean energy/environment cess was for financing and promoting clean energy initiatives, funding research in the area of clean energy or for any other purpose relating thereto. Thus far the cess is reportedly being used more for ‘any other purpose related thereto’ such as cleaning the Ganga. The fund would offer better results in terms of cleaning the environment if it is invested for clean coal technologies such as coal washing.

Rest of the World

The government of India has reportedly approved the budget of the ongoing 1020 MW Punatsangchhu-II Hydroelectric Project (HEP) in Bhutan expected to provide surplus power to India. The bilateral agreement to execute the Punatsangchhu-II HEP was signed between India and Bhutan in 2010 with funding by GoI with 30% grant and 70% loan at 10% annual interest to be paid back in thirty equated semi-annual instalments. There were reports that the World Bank had suspended funding for the $14 billion Inga 3 hydropower project in the Democratic Republic of Congo, after a disagreement with the nation over implementation plans. The World Bank agreed to $73 million in technical assistance for the first phase of the $100 billion Grand Inga hydropower project which would have a capacity of 44,000 MW. Inga 3 alone would have a capacity of 4,800 MW, almost double Congo’s current installed capacity. China’s Three Gorges power plant, at 22,500 MW is currently the world’s biggest power plant.

Moving to nuclear power, it appears that the tide is turning against the carbon free energy source. Reuters reported that construction starts for new nuclear reactors fell to zero globally in the first half of 2016. It blamed falling costs for renewables and a slowdown in Chinese building.  The last time there were no new reactors started over a full year was in 1995 according to the World Nuclear Industry Status Report 2016. The number of reactors under construction is in decline for a third year, with 58 being built by the end of June, down from 67 reactors at the end of 2013, the report said. Construction started on six reactors in China in 2015, three times more than the rest of the world, while eight went into operation there last year, out of 10 globally. But even in China, renewables investment and capacity additions are outstripping nuclear, the report said. Renewables investments totalled $100 billion in China last year, more than five times the amount for new reactors, which was $18 billion. The scene in the US which pioneered nuclear technology appears to be grim with only two of 18 plants proposed since 2007 under construction. As certain states allow billing consumers before construction of the plant starts, the media reported that US electricity consumers may be paying more than $2.5 billion for nuclear plants that may not be built.  Utilities are reportedly moving forward with their nuclear plans to preserve the option to build if market or regulatory conditions change. As some of the projects for which the consumers are being charged may never be built, some say that this shifts risks from share-holders to rate payers.

Entergy Corp of the USA was reported to be in talks to sell its 838 MW New York nuclear power plant to Exelon Corp. The plant produces enough electricity to power 800,000 homes, and employs 615 workers but it has been under pressure financially amid growing competition from gas based power plants. A ray of hope of nuclear power plants in New York comes from the New York Public Service Commission that has reportedly proposed to offer up to $965m in subsidies to keep nuclear power plants in service and to meet the state’s CO2 emission reduction target.

But there is some action on nuclear power in some parts of the World.  Russia was reported to have plans for construction of 11 new nuclear power reactors by 2030, including two BN-1200 sodium-cooled fast neutron reactors. The 11 units do not include those already under construction – Kaliningrad, Leningrad, Novovoronezh and Rostov – or the floating reactor Academician Lomonosov. The BN-1200 reactors are to be built at the Beloyarsk and South Urals nuclear power plants.  Russia was also reported to have plans to build 8 nuclear plants in Iran.  Iran’s first nuclear power plant, Bushehr, was built on the basis of Russian technologies.

In Japan, there are signs of revival of the nuclear industry.  Japan’s nuclear regulator had reportedly approved Kansai Electric Power’s bid to extend the life of an ageing reactor beyond 40 years, the second such approval it has granted under new safety requirements imposed since the Fukushima disaster. While opinion polls consistently show opposition to nuclear power following Fukushima, markets seem to be pushing nuclear doors open.  According to the Institute of Energy Economics of Japan (IEEJ), the country is likely to restart seven nuclear reactors by the end of March 2017 and a further 12 reactors by the end of March 2018, generating nearly 120 TWh/year of nuclear power, compared to 288 TWh in the 2010-2011 year. This would enable Japan to cut its fossil fuel imports by $45bn and also reduce energy-related CO2 emissions by 0.1 GtCO2.

Chinese nuclear group China General Nuclear Power Group (CGNPC) had reportedly commissioned the fourth unit of the Ningde nuclear power plant in the Fujian province in China in the second half of this year. CGNPC now has 17 reactors with a combined capacity of 18.17 GWe in operation, and a further eight units under construction. CGNPC has also connected the second unit of the Fangchenggang nuclear power plant, located in the Guangxi province, to the Chinese grid, and started supplying power to the network. The 1,000 MW unit is expected to enter commercial operation in the second half of 2016.

UK continues to grapple with the nuclear question.  The French utility EDF was reported to have narrowly voted to proceed with a controversial project to build two nuclear reactors in Hinkley Point, Britain.  The French government, which controls 85% of EDF’s capital argues the UK project will support the French nuclear industry over the next decade. The British government says that Hinkley Point, which will provide about seven percent of UK power, is crucial for securing power supply in the next decade.  French unions say it is too big and costly for EDF and jeopardises the survival of the company.  Opponents in Britain say the price at which the government has agreed to buy power from EDF for 35 years, at more than twice current market levels, is too high.  Others say it will help UK meet its target to cut carbon emissions by 80% by 2050. Britain is not involved in funding the upfront costs of the project, which are carried by developer EDF and its Chinese partner China General Nuclear (CGN). Britain has said that it wanted closer ties with China but resisted pressure from Beijing to sign off on a $24 billion nuclear power project that was delayed at the last minute by Prime Minister Theresa May.  The Hinkley financing deal was agreed during a state visit by President Xi Jinping last year designed to cement a “Golden Era” of relations between the two countries. Britain also sought Chinese investment in rail and other projects during the visit.

On the dark issues of nuclear waste, South Korea was reportedly looking for a site for permanent storage of its high level radioactive waste by 2028 and also consider storing spent nuclear fuel overseas. In the meantime it is also reported to be looking to expand temporary storage facilities at the country’s 25 nuclear plants, with some existing sites likely to start to fill up from 2019. South Korea is the world’s fifth-biggest user of nuclear power, which accounts about a third of the country’s electricity. South Korea opened a permanent underground storage site for low-to-medium level radioactive waste such as contaminated tools and clothes in the city of Gyeongju, 250 km southeast of Seoul.

The climate accord signed in Paris in 2015 with much fanfare is yet to be ratified by many of the big powers and the U.N. Secretary-General was reportedly urging large nations to ratify the Paris climate accord.  As of now, only 22 countries have done so, many of them small, vulnerable island nations that account for a negligible percentage of emissions. China and the United States, the world’s top two greenhouse gas emitters accounting for 40% of global emissions are yet to ratify the deal.

But China seems to be working on its own domestic plans for carbon cuts. The Chinese government has decided to put a cost on emissions of toxic smog to control pollution in industrial cities, starting with Beijing. It is estimated that the market may trade as much as $61 billion of certificates a year. China’s move marks the biggest yet to use a market-based approach to control pollution, exceeding the scale of Europe’s $55 billion market.

Finally there was news on Tesla.  The tentative agreement by Tesla to purchase its sister company SolarCity is expected to pair solar systems with the Tesla’s energy-storage batteries has apparently not gone down well with the investors.  Perhaps Tesla, the saviour, will not be able to drive the World to safety from climate change!

MW: Megawatt, GW: Gigawatt, kWh: Kilo Watt Hour, FY: Financial Year, CEA: Central Electricity Authority, GoI: Government of India, NGT: National Green Tribunal

Courtesy: Energy News Monitor | Volume XIII; Issue 12

NATURAL GROWTH IN NATURAL GAS DEMAND

Monthly Gas News Commentary: January 2017

India

India’s largest LNG importer Petronet has apparently signed an agreement with Petrobangla to set up a $950 million LNG import project in Bangladesh. The terminal is expected to have a capacity of 7.5 MTPA and is located at Kutubdia Island in Cox’s Bazar. A 26-km pipline is envisaged to connect it to the consumption markets. The project is projected to come online by 2020 and it envisions future expansion. Supply of LNG through small barges and LNG trucks to users which are not connected by gas grid is also under consideration.  The preliminary agreement signed this month is expected to be followed up by a formal pact. Petrobangla is likely to become part of the joint venture building the LNG project with a 26 percent stake but Petronet is currently seeking only assurance from Petrobangla that it will buy the gas for project securitisation.

GAIL (India) Ltd is expected to participate in the project to implement the pipeline that is to be laid to connect the import facility with consuming markets. It was reported that IOC could also join if city gas projects are to be developed. Gas demand in Bangladesh is projected to more than double to 45 MT from the current 20 MT in next 20 years. The question that comes to mind is this: how will a project that involves an Indian company located in one of the islands in an ecologically sensitive zone reported to be under threat from human activity be received by the local population. The message from the Rampal power project with very similar challenges does not offer much hope.

Upstream company ONGC was reported to be expecting peak output of about 5 MMSCMD from its Vashishta gas field in KG basin by July 2017. Vashishta and S1 gas fields, located in the KG Offshore Basin off the east coast of India, began operations in September 2016. A production of 1.1 MMSCMD from the fields currently will increase to 5 MMSCMD by July.  The fields were developed under a greenfield deepwater development project at an investment of $751.65 million.  The Vashishta field is estimated to produce 9.56 BCM over a period of nine years with peak production reaching 3.55 MMSCMD during the first five years. The S1 field is expected to deliver 6.22 BCM over a period of eight years with a peak production of 2.2 MMSCMD for the first five years.

As part of the Vashishta and S1 field development, ONGC is drilling four wells and shipping the gas from them through a sub-sea pipeline to an onshore terminal at Odalarevu in Andhra Pradesh. The Vashishta field lies in water depths varying between 500 meters and 700 meters and about between 31 and 35 km from the Amalapuram coast. While the Vashishta field is a free gas field with estimated reserves of 12.92 BCM the S1 field lies to the east of G-1 field and is a free gas field with estimated reserves of 10.37 BCM. Vashishta is the first field in the country to get the premium price for gas.  In March 2016 the government had allowed higher price for new gas production from difficulties areas like deep sea, ultra deepwater and high pressure, high temperature areas. When ONGC started production the premium price was $6.61/mmBtu against a cap price of $3.06/mmBtu for regular fields.  Other gas producers are likely to rush in to cash in on the provisions of higher price of gas.  The fact that the definition of difficult field is subject to interpretation may facilitate the case for higher prices.

The premium price for period between October 2016 and March 2017 was cut to $5.3/mmBtu based on benchmark rates in gas surplus economies. The rate for regular gas price also declined to $2.50/mmBtu.

Rest of the World

Despite uneasy relations between Europe and Moscow, Gazprom’s gas supplies to European consumers are projected to set a new record in 2016. In 2015 Gazprom delivered 158.6 BCM of gas to Europe and Turkey. In 2016 this is expected to increase by 12 percent to 180 BCM. Gazprom’s exports to the EU-28 in 2016 are estimated at around 153 BCM. Global natural gas exports of Gazprom went up from 195.7 BCM in 2015 to 210 BCM in 2016.

As EU-28 gas demand increased by around 6 per cent to 447 BCM last year out of which a third was reportedly from Gazprom. 20 BCM out of 30 BCM increase in Europe’s gas imports in 2016 were reportedly covered by Russia. Some analysts see this as evidence of Europe’s trust over Russian gas.

Gazprom prices were reported to be comparable to or even lower than record-low European spot prices. At $4/mmBtu Russian gas was reportedly 20 percent less than the spot price at the UK NBP hub, the largest gas trading hub in the EU. Domestic natural gas prices in the US NYMEX were about $3.33/mmBtu which is lower than European prices, but when liquefaction, regasification and transportation costs of about $4/mmBtu is added US LNG would be more expensive than pipeline gas from Gazprom.

Closer to home, Asian spot LNG prices were reportedly buoyed by new purchases and tenders.  The price of LNG for February delivery rose to $9.75/mmBtu. Though Japanese and Chinese demand had decreased Korea Gas Corp was reportedly open to possible purchases despite having secured a recent shipment from Angola and contracted for winter cargoes in December via a tender.  Gail India, which launched a tender to buy three cargoes between January-March, decided to just award the February shipment at an estimated price in the mid to high $9/mmBtu range. This was seen as a slack demand in a market.

As expected the US is projected to become a net energy exporter over the next decade due to rising natural gas exports and falling petroleum product imports according to the EIA. While the US has been a net energy importer since 1953, declining energy imports and growing exports that started over the past year will allow that trend to switch by 2026. In late 2015, the US government lifted a decades-old ban on US crude exports, while natural gas exports from the Lower 48 began in 2016.

MT: million tonnes, MMSCMD: million metric standard cubic meter per day, MTPA: million tonnes per annum, LNG: liquefied natural gas, BCM: billion cubic meters, EU: European Union, mmBtu: million metric British thermal units, ONGC: Oil and Natural Gas Corp, US: United States, UK: United Kingdom, EIA: Energy Information Administration

Courtesy: Energy News Monitor | Volume XIII; Issue 34