LNG has proved to be more expensive than investors had bargained for. Yet why do investors keep returning to that option? Gaurav Semwal and Diptendra K Sarkar explain.Energy mix of a country is driven by the domestic availability of fuels and government’s energy sector policies including of major fuel consuming sectors such as power. India’s energy basket is skewed towards coal with more than 50 per cent contribution. Hydrocarbons are the next sizeable chunk of which natural gas is around 9 per cent.It is expected that by 2030 India would continue to depend upon coal as its main source of energy. Natural gas with its inherently benign nature provides a cleaner alternative to coal. However, given India’s requirement of energy to support its economic growth, experts believe gas will be in addition to and not an alternative to coal.In this article, we have attempted to capture the current interplay between the power and gas sectors; the challenges in the sector so far and how policymakers and industry players are responding to such challenges.How have we fared?India started supplementing its domestic gas production by LNG imports from Qatar in early 2004. Today, India has three existing Liquefied Natural Gas (LNG) terminals at Dahej, Hazira and Dabhol. Dahej terminal was the first to be commissioned. It is owned and operated by Petronet LNG Ltd (PLL) which has now doubled the terminal’s capacity to 10 MMTPA. Shell promoted Hazira LNG and Port Limited (HLPL) operates the Hazira terminal in Gujarat with a current capacity of 3.6 MMTPA.The 5 MMTPA Dabhol terminal of Ratnagiri Gas and Power Private Ltd (RGPPL) has achieved mechanical completion. Supplies to the terminal are expected following commissioning of the terminal. Absence of break-water facilities at the port would allow only partial capacity utilisation of the re-gas terminal once operational.Major LNG suppliers to India include the Middle East & North Africa (MENA), Australia, Russia and North Sea Belt. Quantity of LNG imported, total value of imports and average price of LNG imports in the last four years are presented in Figure 1.India has signed long term contracts with three LNG suppliers. These include contracts signed by PLL with RasGas Qatar (7.5 MMTPA) and ExxonMobil Australia (with supplies starting in 2014). The third is the recently signed GSPA between GAIL and Cheniere Energy for 3.5 MMTPA LNG from the US with supplies expected to start in 2016-17. While PLL contracts are linked to price of crude oil, the GAIL contract is linked to the US Henry Hub index.Besides supplies under long term contracts, both Hazira and Dahej terminal also import short-term and spot LNG cargoes. The decline in domestic gas production owing to dip in RIL’s KG-D6 production was accompanied by increased utilisation levels of the two existing terminals and more notably the Hazira terminal. Utilisation of these terminals is expected to remain high till such time supply from KG-D6 is restored.How is LNG market poised to grow?New LNG re-gas capacities are reported to be set up in India. PLL’s 5 MMTPA Kochi terminal is the only one at advanced stages of construction and is expected to be commissioned in 2012-13. PLL has contracted 1.44 MMTPA LNG from Exxon Mobil’s Gorgon LNG project in Australia. Other proposed project along with their project promoters and proposed capacity are presented in Figure 2. These projects have been formally announced by companies.Learnings in LNGThe foremost issue is the fact that affordability of LNG in demanding sectors such as power is very low not allowing developers to win contracts in the international LNG markets. Second, the current pipeline network needs to be expanded substantially to service the existing and new gas markets. Proactive development of infrastructure is the way forward rather than infrastructure waiting for commodity. Third, existing LNG re-gas capacity in the country is limited and that too is not freely accessible by any customer to regasify source LNG cargoes sourced on its own. Fourth, gas swapping arrangements are not being widely adopted amongst industry stakeholders seriously limiting the LNG market potential. Fifth, while the PNGRB Act, 2006 requires a company desirous of establishing and operating a LNG terminal to seek registration from the Board, the grounds for granting or rejecting such registration are yet to be notified albeit the Ministry of Petroleum & Natural Gas (MoPNG) has set on to the agenda.Till such time such challenges remain, LNG market development will not happen at the desired pace. Therefore early resolution of these challenges will expedite projects under planning and encourage development of additional new capacities.Industry responseThere is no denying the substantial demand for gas in the country, but at what price? The two demanding sectors—power and fertiliser—are recognised by the government as core sectors, critical for the economic development of the country. Inability to recover economic value of electricity and urea from market in these two anchor segments has made it difficult for the sectors to accept high prices of LNG. Price of domestically produced gas set by the government arguably to ensure affordability for such consumers, is way below LNG price. Therefore, acceptability by these two sectors of costly LNG, which is market linked, remains a challenge.A year ago, power companies were not interested in evaluating LNG as a fuel option since they were enjoying high PLFs owing to increased domestic supplies from KG-D6; most importantly at relatively affordable prices. The current turn down of the KG-D6 field has resulted in capacities lying idle prompting investors to revisit the expensive LNG import option. Given limited or no access to existing LNG terminals, project developers are planning their own re-gasification facilities – onshore or FSRU – to import LNG into India. Project developers are engaging with global LNG suppliers canvassing their requirement for long-term LNG cargoes.Will this investment in the LNG value chain work out to be economically viable for power project developers? Perhaps it may, if innovative business models are developed and adopted. Developers are setting up capacities in excess of their captive requirements with intent to market excess capacity – either in the terminal (tolling) or in LNG cargoes (gas marketing). The advantage project developers with anchor loads enjoy is that they can plan LNG projects integrated with their anchor load projects. Similar innovative approach can also be adopted on the market portfolio of the power generators. Perhaps, another enabler could be the availability of gas (Henry-Hub) linked contracts as against oil linked contracts which have emerged in the new LNG export market of the US. The investors are therefore demanding differentiated tariff for gas based power.Despite the challenges, stakeholders are exhibiting the intent to develop LNG. Change in mindset of investors, especially power sector players, is expected to result in a more holistic approach towards LNG project delivery which will bode well for LNG market development in the country. Implicit in this optimistic view on LNG market development in India is the concomitant development of adequate pipeline infrastructure to support the increased supply. Any slippage in developing requisite pipeline infrastructure capacity will adversely impact the pace of LNG market development in the country. Till now the Regulator has granted authorisation for four cross-country pipelines to be built over the next three years.Introducing regulatory mechanisms around establishing and operating LNG terminals in the country is currently being deliberated within the MoPNG. An industry debate has been initiated by MoPNG to lay down eligibility conditions for granting registration to companies desirous of establishing and operating a LNG terminal in India. Issues such as minimum capacity, open access commitments, physical specifications are being discussed.The way forwardCountries like Japan and Taiwan developed and consolidated LNG markets and relied on it for decades, have treated securing long-term LNG contracts to be the most important activity. Taking a leaf out of their books - securing long-term contracts from LNG suppliers should be accorded topmost importance by investors. Solution to other issues will probably follow.