The Hindu Business Line : Gassing the LNG potential

WHY would a company stop selling a product that is in high demand? Ask multinational oil and gas major, Royal Dutch/Shell, which last month stopped re-gasification and sale of liquefied natural gas (LNG) from its spanking new import terminal in Hazira, Gujarat.

The company, which commissioned the country's second LNG import terminal and received its first cargo of gas in April 2005, has been forced out of the market, as its gas is priced considerably higher than other available sources. And therein lies a story.

Even for those who revel in the oft-quoted story of India being a land of contrasts, this must be a painful irony. We have power plants either idling for want of gas or burning expensive liquid fuel and we have fertiliser producers using expensive naphtha. And we also have a Shell that is unable to sell its gas when there is such huge unmet demand out there. What explains this sad paradox?

There are two basic reasons for this. First, the flawed Government policy for the oil and gas sector and, second, (which really flows from the first), the resistance to market-driven prices from gas buyers who would rather let their plants idle or use inferior substitute fuel than settle for gas.

Just consider this. The prevailing international price for LNG is $10-12 per million British thermal units (MBTU), while gas under the administered price mechanism is sold at $2-3 per MBTU. Never mind that such gas supplies are unreliable and inadequate. From the buyer's perspective this is the benchmark price for natural gas in the country. And they want that price from Shell.

The only other re-gasified LNG seller in the country, Petronet LNG, sells its gas at a little over $4 per MBTU, thanks to the long-term agreement with its own supplier in Qatar. Petronet LNG is now operating its terminal to full capacity but the fact is that when it first entered the scene in 2004, there was considerable resistance to its pricing. The global gas market has run up so sharply in the last two years that Petronet's gas now appears cheap as air!

Petronet is now doubling its capacity to 10 million tonnes and its challenge will be to find an LNG source at prices as close to its original price as possible. But that is another story.

Returning to Shell and its travails, the multinational major, which has a different business model from Petronet's, finds itself hopelessly outpriced in the current environment. Unlike Petronet, which has a long-term agreement of a fixed quantity of supply with RasGas of Qatar at stable prices, Shell sources its gas on spot basis from its own joint venture in Australia. This means that prices cannot be stable and will vary with global trends. Thus, global (and Shell's) prices now are more than double the levels prevailing when the company commissioned its Indian terminal last year.

A part of the responsibility for the terminal going temporarily inactive should, therefore, rest with Shell and its business model, which is more suited to a mature gas market. The Indian gas market is still in a nascent stage. Shell has probably committed the same error as other multinationals from other industries — rushing headlong into the country without a strategy made for the Indian market.

Shell has imported just three cargoes of LNG in the last nine months that its terminal has been operational, and market talk is that the company could not make money even on these.

Be that as it may, a large part of the blame must be laid at the Government's doorstep. The subsidised price regime for natural gas is stunting the development and growth of the sector. While, on the one hand, it is preventing domestic producers, such as ONGC, from realising the full worth of the gas they produce, on the other, it is distorting the market dynamics with artificially low prices.

It is a paradox that even as the Petroleum Minister, Mr Mani Shankar Aiyar, is passionately arguing for foreign direct investment in the oil and gas sector (his most recent views appeared in an interview to this paper on January 3) the one big showpiece of FDI in this sector, Shell's LNG terminal, is now lying idle.

The Government should quickly address the possibility of phasing out the APM for natural gas. Granted, this is not easy given that fertiliser producers and the farming community are involved and the issue is interlinked with such politically-sensitive matters such as fertiliser subsidy. But if the Government is indeed serious on reform, and if Mr Aiyar really wants to attract FDI into the petroleum sector, the subsidy issue, be it on natural gas or on petroleum products, has to be addressed forthwith.

Royal Dutch/Shell can afford to keep its terminal closed and has pockets deep enough to absorb the losses. But from the country's perspective, it is a tragic waste of resources and facilities, especially when we are energy-deficit and desperately looking at every available source of natural gas.

The Government would do well to examine how best the existing resources can be tapped even as it looks at other challenging options such as the Iran LNG deal or the Iran-India gas pipeline.

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