LNG OPTION FOR INDIA SUDARSAN PAUL, DEPUTY GENERAL MANAGER (LNG MARKETING) BHARAT PETROLEUM CORPORATION LIMITED 13, Walchand Hirachand Marg, Ballard Estate MUMBAI INDIA ABSTRACT Just as Coal powered the industrial revolution of the 19 th century and Oil fuelled the growth of the 20 th century, Gas is emerging as the preferred source of energy to power the economics of the 21 st century and India is no exception. High growth in population, increasing urbanization, rising incomes and standards of living of the people of India are expected to result in high and steady consumption growth in petroleum products and natural gas in the country. From April 2004 commercial supply will start from Dahej LNG terminal of M/s Petronet LNG Limited. Sustained commercial operation will begin from last quarter of 2004 from Shell’s Hazira LNG Terminal. Indian market is looking for LNG from suppliers with softer terms and conditions some of which are mentioned below:  Shorter duration contracts Pricing formula Fixed price Quasi fixed Price by setting a formula Price with Floor and Ceiling Negotiated ratio of fixed elements while lowering the ratio of the crude oil-linked portion. Flexible Terms and conditions This rapidly growing energy market may evolve New Risk Distribution Model. The importers not only will demand that the suppliers bear some of the risks they have taken, but also that they may seek new profits in return for the additional risks they are going to assume by enrolling themselves into entire LNG chain. More new LNG re-gasification terminals along with pipeline infrastructure are expected to be commissioned for providing terminalling, storage, re-gasification and transportation services nearer the demand centers. Thereby utility owners shall have direct access towards ownership of the gas under long, medium, short-term contracts and access of gas under spot purchase. The major utility owners are negotiating new generation contracts as “Terminalling, Re-gasification and Transportation Agreements (TRTA)”. Indian importers shall endeavor to create an optimal portfolio of LNG contracts by negotiating different pricing formula with different contractual terms. This will enable them to match demand patterns, customer needs and lower generating costs.

LNG OPTION FOR INDIA SUDARSAN PAUL, DEPUTY GENERAL MANAGER (LNG MARKETING) BHARAT PETROLEUM CORPORATION LIMITED 13, Walchand Hirachand Marg, Ballard Estate MUMBAI INDIA Prepared for presentation at IIChE MRC Monthly Lecture-IV D.J.Sanghvi College of Engineering Andheri (W), Mumbai August 27, 2004

Before presentation of my Paper, I shall explain some aspects of LNG for the benefit of fellow students who wanted to know on LNG projects. Contents  Preamble India Hydrocarbon Vision 2025 Gas Sector Policies Natural Gas Demand in the Country What fuel price Indian Power Sector is looking for- A survey of the market Power Sector reforms in India What is the benchmark fuel price Indian power sector is looking for? Fertilizer Sector How to meet the incremental Gas Demand and at what price? Natural gas price in India Gas pricing from JV exploration- JV gas Arrival of LNG in India Proposed LNG projects in India Petronet LNG Limited LNG price and Contractual terms in Indian market Conclusions After presentation of my paper, I shall deal with the innovation on various possible natural gas Projects Coselle CNG technology Gas hydrates Gas to Liquid Technology – Fischer Trops Methanol Dimethyl Ether

Sr. NoSectorPercentage Utilization 1.Fertilizer Sector38 2.Power Sector36 3.Sponge Iron6 4.Shrinkage & Internal Consumption7 5.Others13 Preamble Just as Coal powered the industrial revolution of the 19 th century and Oil fuelled the growth of the 20 th century, Gas is emerging as the preferred source of energy to power the economics of the 21 st century and India is no exception. High growth in population, increasing urbanization, rising incomes and standards of living of the people of India are expected to result in high and steady consumption growth in petroleum products and natural gas in the country. In India, natural gas has 9% share in the primary energy consumption. Current gas supply profile Oil and Natural Gas Corporation Ltd (ONGC) Oil India Limited (OIL) Joint Ventures/Private Companies 82% 6% 12% Sector-wise end use pattern India Hydrocarbon Vision 2025 Government of India released the report “India Hydro Carbon Vision 2025” in April Comprehensive long-term framework was announced for the development of oil and gas sector in India under globally competitive scenarios. Strategy for development of  Timely and continuous review of gas demand & supply to facilitate policy interventions. Import of LNG Trans-national gas pipelines Rationalize duties and taxes Coal bed methane Gas hydrates Regulatory framework Gas Sector Policies  Import of gas, either as LNG or through Trans-national gas pipeline, is under OGL Formulated the New Exploration Licensing Policy (NELP) as well as Coal Bed Methane Policy. Process of decontrolling the Domestic Gas prices was initiated by introduction of market related price determination mechanism linked to prices of Fuel Oils in the international market. Regulatory Framework for the Gas Sector and appointment of Regulator.

SectorYear 2005Year 2010Year 2015 Power Fertilizer Other Sectors Total Natural Gas Demand in the country: Assumptions:  Gas demand assumes that the Gas supply shall remain at current level till 2004 first quarter. Gas demand projection is the incremental gas demand which includes the following: i) ii) iii) iv) Unmet demand Switching over demand – Gas demand from consumers who are currently using alternate liquid fuels. Planned expansion Greenfield projects demand  Incremental Gas demand from power sector assumes 25% of power deficit to be met by gas based power plants and currently planned projects in the region would come up as per plan. Incremental Gas Demand – All India Figs. In MMSCMD Source- CRISIL, India What Fuel Price Indian Power Sector is looking for - A survey of the market Before looking for the answer let us look into certain issues in this sector as detailed below:  Dispatch order is linked to the demand and cheapest fuel cost. If the power producer is not getting the dispatch order due to higher variable cost, he is taking risk towards ‘Take or Pay’ obligation despite he is not getting the variable cost. Power sector value chain comprises of Fuel supplier, Power Producer, Distributor & End Users. In this chain, Power production is regulated. Their pricing formulation and other variables are open for public scrutiny. The distributor is also regulated. Their pricing is also discussed in public forums before finally being decided by a regulator. Off-peak and peak differences in power demand. So when the power producer will decide the fuel he will look for transparency in pricing mechanism since around 60 percent of the power price is the fuel price. Power sector reforms in India The new Electricity Act, 2003 along with other recent initiatives resulted in a new liberal and competitive framework for the development of the power sector in the country. The Government of India has also taken several initiatives as mentioned below:  Accelerated Power Development and Reforms Program Accelerated Generation and Supply Scheme Accelerated Rural Electrification Program Hydro Electric Power generation initiative to the tune of MW Creation of National Grid

What is the benchmark fuel price Indian power sector is looking for? According to major power producers in India, benchmark will always be the comparative cost with coal. According to their opinion, the fuel cost works out around $2.06/MMBTU considering coal- based project near the coast. If the coal is moved 800 km the cost is approximately $2.36/MMBTU. Today delivered price of indigenous gas is around $2.5/MMBTU. The coal power generated at the pithead and moved 1500 kms by HVDC system will cost almost the same what the power generation cost with indigenous gas. Prudent operator will make a balancing between transport of power and transport of fuel. Fertilizer Sector At present there are 63 large size fertilizer units in the country, manufacturing wide range of nitrogenous and phosphatic/complex fertilizers. Of these, 38 units produce urea whereas 9 units produce ammonium sulphate as a by-product. Besides, there are about 79 small and medium scale units producing single super phosphate. 48% capacity is based on Gas and balance are based on Naphtha/Fuel Oil and mixed feed. With effect from Government of India approved new pricing policy for urea units, which will replace the existing retention price scheme. The primary consideration and goal of the new pricing policy is to encourage efficiency parameters of international standards based on the usage of the most efficient feedstock, state-of-art technology and also ensure viable rate of return to the units. Gas is a preferred feedstock for urea manufacturing plants due to ease of operation, lower energy consumption, environment friendly, lower capital cost. With the change in fertilizer policy demand of gas in this sector is going to increase which has been estimated in previous para under Natural Gas Demand in the country. How to meet the incremental Gas Demand and at what price? To meet the incremental Gas Demand, the gas supplies are expected to materialize from number of possible sources  Supplies from presently developed fields and possible upside from these due to better reservoir management practices and improvement in recovery factors. Supplies from proved but not yet developed gas reserves. Potential supplies from successful exploration in NELP blocks. Potential supplies from coal bed Methane exploration. LNG imports Gas imports – Trans-national gas pipelines. Recently significant gas discoveries have been reported in Krishna Godavari Basin, Cambay Offshore and on land blocks. Commercial supply and development of related pipeline infrastructure will take some time. Piped gas import may be feasible, subject to overall techno-economic considerations and also subject to satisfactory resolution of other complex aspects of cross border gas trade and transit issues. Hence import of LNG is the viable option to meet the immediate demand. Question is at what price? Let us look at the prevailing natural gas price in India.

YearGeneral PriceConcessional Price for North Eastern States %30% %40% %45% Natural Gas Price in India Historically, Natural Gas pricing in India was based on Government Awards, opportunity costs by the National Oil Companies and cost of alternative fuel to consumers. Gas pricing came under the administrative control of the Government of India in 1986 and this was predominantly based on a cost plus approach for providing adequate returns to the producer and transmitter of Gas. The consumer prices were constant over a period of time and also uniform irrespective of the End Use. From January 1992, a variable consumer-pricing concept was introduced with an annual escalation to take the consumer price close to price parity with fuel oils. With effect from India’s consumer price of natural gas has been linked to the price of basket of LS/HS fuel oils are as follows: However, these prices are due for revision w.e.f so as to achieve 100% fuel oil parity. Gas Pricing from JV Exploration – JV Gas With the economic liberalization policy of Government of India, private participation was allowed in the petroleum exploration. Exploration contracts were awarded under Petroleum Exploration Licence & Mining Lease. Pricing formula were based on Low Sulphur Fuel Oil (LSFO) and in some cases based on High Sulphur Fuel Oil (HSFO) prices with floor and ceiling. During Government of India formulated New Exploration Licensing Policy (NELP) to provide level playing field in which all parties can compete on equal terms for the award of exploration acreage. In three rounds of bidding, NELP-1 (1999), NELP-II (2000) & NELP-III (2002), PSCs have been signed for 70 blocks. Under NELP-IV, 24 blocks have been offered for exploration. The floor and ceiling price at which the gas was sourced, from JV under pre-NELP is higher than the price of gas under APM. Therefore, pooling the gas price from the indigenously available gas sources and selling the same at the uniform price to all the consumers met the differential cost. However, from March 2003, Government of India started withdrawing pooling support and pre- NELP JV Gas is expected to be sold at Market Determined Price (MDP). Arrival of LNG in India From April, 2004, commercial supply of re-gasified LNG started from 5 MMTPA capacities Dahej LNG Terminal of M/s Petronet LNG Limited (PLL). Promoters of PLL are Bharat Petroleum Corporation Ltd. (BPCL), Indian Oil Corporation Ltd. (IOCL), Oil & Natural Gas Corporation Ltd. (ONGC) and GAIL (India) Ltd. Gaz de France (GDF) has taken 10% equity. PLL has signed SPA with RasGas for importing 5 MMTPA LNG at Dahej and 2.5 MMTPA at Kochi. Commercial operation will begin from last quarter of 2004 from Shell’s Hazira LNG terminal. Upon commissioning the terminal will have a capacity of 2.5 MMTPA, rising to 5 MMTPA.

WEST COAST LocationCompanyCapacity (MMTPA)Commissioning by DahejPetronet5.0April 2004 PipavavBG2.5- JamnagarReliance10.0Proposed HaziraShell MaroliUnocal2.5- MumbaiTata/Total2.5- DhabolEnron5.0Major work comp. MangaloreFinolex2.5- KochiPetronet2.5Proposed EAST COAST LocationCompanyCapacity (MMTPA)Project Status EnnoreTIDCO5.0- TuticorinIndian Gas2.5- KakinadaIOC2.5Proposed VizagTotal/HPC2.5- Proposed LNG Projects in India Concurrently, many private parties also prepared plan to import LNG at various port locations in the country. Details are: CHINA PAKISTAN MYANMAR NEPAL B’DESH BAY OF BENGAL DELHI Ennore Vizag Kakinada Mangalore Dahe j ARABIAN SEA Kochi Tuticorin Jamnaga r Pipavav Hazira Maroli Trombay Dabhol

Strong promoters profile. Location advantages Agreed supply & off take contracts in place Head start advantage Project implementation is on schedule Consumption of gas as a proportion of total energy consumption at very low levels Large unmet demand Cross country trunk pipeline in place and work in progress for further augmentation. CNG and PNG demand. Price comparison of Re-gasified LNG and domestic gas No. of LNG projects in the pipeline at various stages of implementation Possible increase in domestic gas production with award of new E&P contracts under NELP Petronet LNG Limited  Commercial supply started from April, 2004 from Dahej LNG terminal Head start over competition will result in first mover advantage. SWOT Analysis Strengths Weakness Opportunities Threats UPSTREAM Production Gas Reserves Separation Gas treatme nt Gas transport pipeline Gas liquids storage Liquefaction plant LNG storage End User Re-gasification plant Gas transmission and distribution SUBSURFACE DEVELOPMENT SURFACE DEVELOPMENT LIQUEFACTION, STORAGE AND LOADING SHIPPINGREGASIFICATION Condensate Project financing with LNG SPA as primary security For export or local use Project financing with Time Charter Agreement as primary security DISTRIBUTION Project financing with Gas Transportation Agreement as primary security LNG storage Project financing based on GSPA as primary security LNG Supplier DOWNSTREAM LNG Buyer Creating value in the entire chain Overview of the financing packages for each element of the LNG chain: CASH FLOWS OFF TAKERS

LNG price and contractual terms in Indian market Globally utility markets are open to competition. It will no longer be possible to sell LNG to monopolies. The old compact, whereby the Seller effectively took most of the price risk and the Buyer took the volume risk is breaking down. Importers are facing uncertain market conditions and possible loss of market share. This situation will force importers to seek more flexible volume terms and/or more market responsive pricing. Under this context the following developments are taking place in the LNG chain:  Capital cost intensity is declining. Gas resource base is not constrained Oil price linkage is falling away – Different geographical markets will continue to develop their own tailored solutions whether these be benchmark gas spot prices, power netbacks, or just a redefinition of the oil price linkage with, for example, Floors and Ceilings or a new Oil/Gas Btu price relationship. Long term and rigid trading conditions are being reviewed. Spot trading of LNG, which is one of the yardsticks of flexibility, is increasing at a rapid rate. Indian market is looking for LNG from suppliers with softer terms and conditions some of which are mentioned below:  Shorter duration contracts Pricing formula Fixed price Quasi fixed Price by setting a formula Price with Floor and Ceiling Negotiated ratio of fixed elements while lowering the ratio of the crude oil-linked portion. Flexible Terms and conditions Making the contract two-tired, with a flexible delivery portion (to meet seasonal demand) and a fixed delivery portion based on base load. Varying TOP coverage Price linked to net Calorific Value Conclusion India is a rapidly growing energy market. This market may evolve New Risk Distribution Model. The importers not only will demand that the suppliers bear some of the risks they have taken, but also that they may seek new profits in return for the additional risks they are going to assume by enrolling themselves into entire LNG chain. New LNG re-gasification terminals along with pipeline infrastructure are expected to be commissioned for providing terminalling, storage, re-gasification and transportation services nearer the demand centers. Thereby utility owners shall have direct access towards ownership of the gas under long, medium, short-term contracts and access of gas under spot purchase. The major utility owners are negotiating new generation contracts as “Terminalling, Re-gasification and Transportation Agreements (TRTA)”. Indian importers shall endeavor to create an optimal portfolio of LNG contracts by negotiating different pricing formula with different contractual terms. This will enable them to match demand patterns, customer needs and lower generating costs.