A Natural Choice

Feature | 3 May 2010

India is doubling production of natural gas in Gujarat to provide a cleaner and cheaper fuel to more households, transport services, and industrial enterprises.

Vadodara, India - The streets of downtown Vadodara pulsate with buses and auto-rickshaws - yet the air is less polluted with traffic fumes than in many other Asian cities. The reason: most of the inner city's public transport runs on compressed natural gas (CNG), which is cleaner than gasoline or diesel.

In an ammonia plant on the city's outskirts, a state-run enterprise has substituted natural gas for naphtha for the past 4 years - and would use more gas to increase production if it were available. Among ordinary citizens, tens of thousands of households have switched to cooking with natural gas rather than more expensive kerosene.

A Public-Private Partnership for Clean Power

Driven by government policy to use cleaner fuels, India is switching from oil and coal to natural gas to meet energy needs that grew at a yearly average of 4.5% over the past decade. Natural gas contributes only 8% to the country's energy requirement - compared with nearly 90% by oil and coal. The government wants to lift the share of natural gas to 15% by 2012 and 20% by 2025.

To support the government's goals of reducing greenhouse gas emissions and strengthening energy security by diversifying to domestically processed cleaner fuels, India's first liquefied natural gas (LNG) import and regasification terminal at Dahej started operations in April 2004.

The project, owned by Petronet LNG and supported by equity and debt financing by ADB, imports LNG, mostly from Qatar, converts it back to gas, and sells the gas to off takers for distribution to industry, transport services, and household consumers.

Starting with a capacity of 5 million metric tons per annum, Petronet doubled its capacity to 10 million metric tons in 2009 after adding two storage tanks and a jetty at Dahej. Petronet is building a second terminal at Kochi, Kerala, with an initial capacity of 2.5 million metric tons per annum, expandable to 5 million metric tons.

Already, the project is playing a sizeable role in helping India switch to LNG. In 2008, Petronet supplied customers with 9,274 million cubic meters of natural gas, equivalent to 20% of India's natural gas consumption and 78% of total gas imports.

The contribution toward climate change mitigation is significant, notes Pradeep Perera, an ADB senior evaluation specialist. The LNG displaced fuels, including naphtha, coal, heavy furnace oil, or diesel equal to around 6,983 kilo tons, which would have emitted 21.7 million tons of greenhouse gas emissions. LNG, which emits lower amounts of greenhouse gases, produced 16.3 million tons of greenhouse gas emissions, resulting in greenhouse gas savings of 5.3 million tons a year.

After financing a feasibility study for the venture, ADB has taken a 5.2% equity stake (equivalent to an initial investment of about $10 million) in Petronet and has provided financing to its Dahej expansion program with a loan of 6.75 billion rupees (Rs) (US$144 million).

Half of Petronet's shares are held by four Indian state oil companies, with Gaz de France, which provides technical expertise, holding 10% of the equity. The remaining 40% is held by ADB and other private interests following an initial public offering.

"Petronet represents a classic example of a public-private partnership that operates as commercially as a private sector entity with an independent board," says Ada Li, an investment specialist for ADB.

Meeting Gas Needs

Although the economic slowdown has seen LNG prices fall in tandem with crude oil prices, Petronet buys most of its LNG under 25-year contracts with Qatar - it purchases 15% of its LNG shipments on the spot market - and sells to off takers under long-term agreements. Petronet has been operationally profitable from the first year. For the 9 months ended 31 December 2009, Petronet had a net profit of Rs3.07 billion (US$66 million).

The government is seeking other ways to expand the role of natural gas. It allowed Shell to build the country's second LNG terminal - with an annual capacity of 2.5 million metric tons - at Hazira, Gujarat.

India is also negotiating with several countries to procure LNG and is exploring with others to import gas by pipeline.

Domestic gas production is on rise, following the discovery of major offshore gas fields. Even so, domestic supply - current natural gas production is 87 million standard cubic meters per day - is unlikely to prevent the gap between supply and demand from widening.

For this reason, Petronet is not overly concerned with growing competition. "Per capita energy consumption in India is very low compared to more advanced economies and we expect energy consumption to continue going up as living standards rise," notes Rajender Singh, head of Petronet's Dahej and Kochi operations. "Also, the share of gas is still low and we expect gas demand to rise exponentially over next 10 to 20 years."

To increase earnings, Petronet also plans to build a 1,000-megawatt power plant at Dahej to use some of the energy currently being vented during the regasification process.

Fueling Development

To be sure, Petronet's output not only contributes to India's energy diversification but also helps to meet many development needs.

Vadodara is using more gas than most other cities in India because it is close to gas pipelines and to Petronet's terminal at Dahej, 150 kilometers away on the coast.

While waiting for customers near Vadodara's central bus station, Vishinath Jagtap, an auto-rickshaw driver for 20 years, says he switched to a CNG-powered three-wheeler from a petrol-run model 5 years ago. He says he has doubled earnings as a result, since CNG is cheaper than petrol and because many passengers prefer to use a less polluting vehicle. The downside, he says, is that CNG tricycles cost more than a petrol tricycle and that he has to queue up longer to refuel because there are still too few CNG-dispensing stations.

At the central bus station, Narendra Rana is manager for a privately owned fleet of nearly 100 CNG-powered buses that ferry passengers to and from downtown. The buses cost 15% more than those that run on diesel, he says, but they are cheaper to fuel, need less maintenance, and cause less air and noise pollution.

Since Vadodara was chosen, along with Delhi and Mumbai, to pilot-test CNG vehicles, the number of gas-fuelled vehicles has gone up rapidly. In 2008, an estimated 70% of the city's three-wheelers and all its inner-city buses run on CNG.

Among the general public, apart from commuters, tens of thousands of households are opting to use natural gas for cooking over kerosene.

Powering Industry

Some 80% of natural gas is consumed by power and fertilizer plants and demand is growing from other industrial clients in the glass, ceramics, automotives, and sponge iron industries.

At the ammonia plant of Gujarat State Fertilizers and Chemicals in Vadodara, R.K. Shah, deputy general manager (projects), says they have substituted natural gas for naphtha in making fertilizer and petrochemicals, mainly because of the much lower price of gas.

The government subsidizes the price of natural gas to produce 650 tons of fertilizer a day—about half the ammonia plant's capacity - to farmers at affordable prices, he adds. Even so, analysts note that India has to import most of its fertilizer at premium prices, underscoring unmet demand.

As other urban centers and industries increasingly follow Vadodara's example, natural gas will continue to displace oil-based liquids to the benefit of the general public as well as industry, agriculture and transport.