Gas pipeline from Kochi to Mangaluru: hurdles crossed, and why it matters
On Tuesday, Prime Minister Narendra Modi dedicated to the nation the Kochi-Mangaluru natural gas pipeline of the Gail Authority of India Limited (GAIL). The key infrastructure project has come about after overcoming protests in Kerala, misconceptions about safety, and a long delay. The terminal, since 2013 The pipeline will deliver liquefied natural gas (LNG) sourced from a terminal in Kochi built by Petronet LNG in 2013 at a cost of Rs 4,500. However, for want of pipeline connectivity, it could not be utilised until now. The terminal’s objective is to supply natural gas for domestic and industrial use in Kerala and South India. It is South India’s first LNG-receiving, regasification and re-loading terminal with a capacity of five million metric tonnes per annum. Phases and sections The project, conceived in 2007, envisages pipelines from Kochi to Mangaluru and to Bengaluru. In the first phase, a 44-km line was laid in Kochi, linking the terminal with local industrial users, including Bharat Petroleum Corporation Limited. To take natural gas to domestic consumers, Indian Oil Corporation (IOC) entered into a pact with Adani Gas Ltd. The second phase of the pipeline passes through seven districts of Kerala to carry natural gas from Kochi to Bengaluru via Palakkad, with another leg taking it to Mangaluru. The Kochi-Mangaluru line (444 km) has been opened while the Bengaluru leg is nearing completion, officials said. Already 2,750 domestic gas connections have been given in Kochi and work for supply of natural gas in other towns is going on. The pipeline supplies 3.8 million cubic metres of gas a day to industrial and residential customers in Kochi and is set to cross 4 million cubic metres in the city itself. Menagaluru has a potential of 2.5 million cubic metres per day, The capacity utilisation of the LNG terminal will go up to 25-30%. Delays since 2007 In 2009, the then CPM-led government headed by V S Achuthanandan gave single-window clearance to the project, which should have been completed in 2013. However, protests took place as local people wanted the alignment along a sea route rather than through inhabited areas; they felt the pipeline was a ticking gas bomb. After the Congress-led government headed by Oommen Chandy came to power in 2011, the CPM, then in opposition, chose to stand with the protesters. When even local leaders of the ruling UDF joined the agitation, the government suspended the survey. GAIL too suspended all contracts. The government even pulled up then Chief Secretary Jiji Thomson for having said the pipeline would be laid at any cost and the protestors would be arrested. During the UDF regime, only 48 km of the 444-km pipeline could be laid. The pipeline was planned at an estimated cost of Rs 29.15 billion in 2009. Due to the delays, its cost went up to Rs 57.50 billion. Expedited by Vijayan While in opposition, the CPM had stood with the agitators. But, after assuming office in 2016, Chief Minister Pinarayi Vijayan placed the GAIL pipeline in his 100-days projects. As Vijayan had the party under his firm control, no one in the CPM or Left Democratic Front questioned his decision, and local leaders stepped back from their protest. The Centre too wanted Kerala to give top priority to the project as the LNG terminal in Kochi was incurring huge losses. To win over landowners, Vijayan increased the compensation amount for the acquired land, and reduced the width of the land to be acquired was reduced. After laying the pipeline, farmers were allowed to cultivate, except deep-rooted crops. Although right wing Muslim outfits Social Democratic Party of India (SDPI) and Welfare Party of India (of Jamaat-e-Islami) led protests in many places, and the protests turned violent in Kozhikode district in 2017, the government ensured that work proceeded under police protection.
LNG’s unprecedented surge to apply brakes on India’s imports, consumption
The unprecedented surge in spot LNG prices has taken Indian buyers by surprise and forced importers to stay away from spot purchases, which would potentially lead to lower throughput at some terminals, reduce gas-based power generation as well as slow consumption in other industrial sectors. With spot LNG prices hitting record highs, analysts and industry officials said throughput at some terminals could fall by about 10%-12% in the first quarter of 2021 due to a slowdown in spot arrivals, although LNG cargoes based on term contracts were expected to flow in as per schedule. “The quick change in the market dynamics has taken Indian LNG buyers by surprise. A lot of Indian buyers can’t afford to pay these prices. We will see demand destruction across various sectors,” said a senior official at a leading Indian LNG firm. “Whatever little availability is there in the global spot market, China is taking those cargoes.” JKM, the benchmark for Asian spot LNG prices, surged to an all-time high at $21.453/MMBtu on Jan. 8 amid record low temperatures in North Asia, high freight rates, congestion in the Panama Canal and supply disruptions. The West India Marker (WIM), the benchmark for spot LNG prices delivered to India, hit an all-time high at $17.925/MMBtu on Jan. 8, S&P Global Platts data showed. A leading Indian LNG importer said that the country could see LNG imports dropping to 5.5-5.7 million mt in Q1 2021, compared with 6.5 million mt in Q4 2020. Gas-based power generation Indian re-gasified LNG based power generation is likely to drop in India in Q1 due to record high LNG prices, sources said. With WIM surging close to $18/MMBtu for February-delivery cargo, the spark spread for the power sector is expected to remain in the negative territory. Even after accounting for the maximum traded electricity price on Indian Energy Exchange in February 2020 at Indian Rupee 5/KWh, the spark spread would be at about negative Indian Rupee 6.50/KWh for February with the current spot LNG prices in India. “Gas based power generation is economical for us if WIM is at $4.00/MMBtu or the delivered price of gas at the burner tip is no more than $5.50/MMBtu,” a major Indian utility said. LNG demand in India is also expected to take hit from other sectors such as city gas distribution and industrial customers, with end-users switching to other alternative fuels such as fuel oil, LPG and naphtha. “Refineries in India which have dual fuel power generation capabilities have already started switching from LNG January onwards. Reliance did not buy any LNG cargoes for January and is probably consuming a third of the gas volumes which they did earlier in 2020,” an Indian end-user said. Most of the recent tenders issued by Indian LNG importers seeking December-February cargoes, such as GSPC, Petronet LNG, IOC and Reliance, have been not awarded due to lack of spot cargo availability or higher offers. IOC was last heard to have procured a Feb. 21 DES West India cargo at high $13.00/MMBtu level on Jan. 4 2021. “LNG importers are curtailing supply for RLNG now since they haven’t been able to secure supply due to high prices and the tight market. Most of the supply is coming from the existing inventory at the LNG terminals,” an Indian end-user said. Changing dynamics Jeff Moore, manager for LNG analytics at Platts said that given the unprecedented spot prices the market is seeing right now, it’s no surprise that Indian end-users would turn down their spot supplies, especially compared to Q1 last year. “We are basically in the exact opposite situation now with essentially zero spot supply available which is leading to historic LNG prices compared to contract prices based on oil, landed LNG prices from the US or European reloaded prices,” Moore said. The steep rise in spot prices have ensured lower offtake of LNG in India and many prompt cargo tenders have not been awarded, while shipping slots have gone unutilized, traders said. “What we saw in January and February of 2020 where coal-to-gas switching contributed to incremental demand will definitely not happen and there is a possibility for negative growth in LNG volumes for January and February 2021,” said a senior official at an international trading firm based in India. “Some sort of rationing of RLNG has also happened since early-December 2020 and that continues into January 2021 as well. Fertilizer and other industrial players who depend on LNG will have an impact on their production as it’s not easy to switch to an alternative fuel,” the official added. Platts Analytics expects the rise in gas prices could see increased coal import demand and potential gas-to-coal switching from the non-power sector, especially the ceramics and industrial sectors in the southern regions that are reliant on gas consumption. “We have also seen a recovery in thermal coal railed to the non-power sector. It has returned to 2019 levels,” said Matthew Boyle, senior coal analyst at Platts Analytics.
Strong recovery in oil and gas volumes likely in 2021-22: ICRA
The domestic demand for petroleum products is expected to increase at a healthy rate of 8 to 10 per cent in FY22 on a year-on-year basis, ratings agency ICRA said in a report. Accordingly, the report said a growth in economy and pick-up in industrial activity. The report explained that growth in Motor Spirit (MS) consumption is expected due to preference for personal mobility while higher off-take of High Speed Diesel (HSD) and industrial fuel would likely be driven by a pick-up in economic activity. As per the report, Aviation Turbine Fuel (ATF) demand is expected to lag due to the discretionary nature and the perceived risk of air travel. According to Prashant Vasisht, Vice President and Co-Head, Corporate Ratings, ICRA, “Though, refinery capacity utilisation levels are recovering and were 89 per cent in October 2020, refining margins remained weak due to the global supply overhang.” “Going forward in FY2022, the refinery margins are expected to remain low owing to significantly lower ATF demand vis-a-vis pre-Covid levels. Even though, there have been announcements of the closure of a number of refineries in CY2020 in the US, Europe and Asia, weak refinery economics are expected to be protracted.” Besides, Vasisht cited that gross under-recoveries are expected to be moderate at Rs 15 billion in FY2022. “Low gross under-recovery levels and moderate crude oil prices should lead to lower working capital borrowings and interest costs. Additionally, the Government of India’s divestment of Bharat Petroleum Corporation Limited (BPCL) would be a key monitorable to determine the future competitive dynamics in the refining and marketing sector,” he said. Furthermore, the report pointed out capex and investments are expected to be healthy in FY22, as companies make up for the time lost due to restrictions and lockdowns in FY21. It said a clearer outlook on demand and prices, and a greater impetus for local manufacturing under ‘Aatmanirbhar Bharat’ are expected to spur demand over the long term. “The debt levels are expected to decline owing to lower capex undertaken in FY2021 and higher cash accruals in FY2022, even though several companies have raised bonds or Non- Convertible Debentures (NCDs) to capture low interest rates. The debt levels would moderate to nearly Rs 4.9 lakh crore by FY2022 end from Rs 5.8 lakh crore at FY2021 end.” “The credit metrics are likely to improve in FY2022 due to a decline in debt levels and improvement in profitability.” Additionally, the credit profile of the entities in the oil and gas sector should remain stable, given the increase in crude oil realisations, stable returns from pipelines, healthy demand growth, dominant market position, strong financial flexibility and headroom in key credit metrics.
Include natural gas under GST to push for gas-based economy: Industry
The government should bring natural gas under the Goods and Services Tax (GST) regime to realise Prime Minister Narendra Modi’s vision for a gas-based economy and raising the share of the environment-friendly fuel in India’s energy basket, the industry has said. Natural gas is currently outside the ambit of GST, and existing legacy taxes — central excise duty, state VAT, central sales tax — continue to be applicable on the fuel. “Non-inclusion of natural gas under GST regime is having an adverse impact on its prices due to stranding of taxes in the hands of gas producers/suppliers and is also impacting natural gas-based industries due to stranding of legacy taxes paid on it,” the Federation of Indian Petroleum Industry (FIPI) said. In a pre-Budget memorandum to the Finance Ministry, FIPI, which boasts of members from across the oil and gas spectrum, said the value-added tax (VAT) rate on natural gas is very high in different states — 14.5 percent in Uttar Pradesh and Andhra Pradesh, 15 percent in Gujarat, 14 percent in Madhya Pradesh. “Since gas-based industries do not get the benefit of a tax credit of VAT paid on purchases of natural gas, it is resulting in an increase in the cost of production of such industrial consumers and would have an inflationary effect on the economy,” it said. Inclusion of natural gas under the GST ambit will have a positive impact on gas-based industries, promote usage of the fuel and avoid stranding of taxes, it said. The prime minister has set a target of raising the share of natural gas in the country’s primary energy basket to 15 percent by 2030 from 6.2 percent currently. Greater use of natural gas will cut fuel costs as well as bring down carbon emissions, helping the nation meet its COP-21 commitments. FIPI also sought rationalization of GST rate on service of transportation of natural gas through the pipeline. Presently, GST on the service of ‘transportation of natural gas through the pipeline’ is applicable at the rate of 12 percent (with ITC benefit) and at the rate of 5 percent (without ITC benefit). Further, as per GST laws, two different registered units of an entity are considered distinct persons and inter-unit billing for the supply of goods/services between such units is required to be carried out with applicable GST. Considering such provisions under GST laws, the lower GST rate of 5 percent (without ITC benefit) could not practically be implemented so far, FIPI said. “Input Tax Credit (ITC) of GST payable on the inter-unit billing, for services of transportation of natural gas, will not be available to the recipient unit of GAIL,” it added. Natural gas is a much cleaner source of energy than other alternatives available and is primarily used in priority sectors like power, CNG and fertilizer. “The high rate of GST on the services of transportation of goods by pipeline will make natural gas costlier for power and CNG sector where ITC of GST paid on transportation of natural gas is not available as the output product is not covered/exempted under GST,” it said. It suggested GST of 5 percent on services of transportation of goods by pipeline be provided with ITC benefit. “This will lead to lower cost of transportation of natural gas and will help in the promotion of cleaner sources of energy for power and CNG sector,” it said. “This will also enable natural gas to compete with other alternative polluting fuels like furnace oil, naphtha, etc.” FIPI also sought rationalization of GST on the service of regasification of LNG. Since domestic production of natural gas is not enough to cater to the increasing demand, import of liquefied natural gas (LNG) at a large scale is required to augment the supply for use in priority sectors such as fertilizer and CNG. The imported LNG has to be re-gasified and converted into natural gas (known as R-LNG – Regasified Liquefied Natural Gas) for transportation and consumption in India. The activity of regasification of LNG presently attracts a GST of 18 percent. “The levy of GST at a higher rate of 18 percent on the regasification of LNG increases the landed cost of imported LNG for domestic industrial consumers,” it said, adding that regasification of LNG is under GST ambit, resulting in the stranding of taxes and a higher rate of tax. It suggested that regasification may be considered as manufacturing and GST of 12 percent levied on a job work basis.
20% ethanol blending in petrol can create economic activity of Rs 1 lakh crore: Petroleum Secretary
Blending 20 per cent ethanol with petrol can help create economic activity of over Rs 1 lakh crore every year in the country and save precious foreign exchange, Union Petroleum Secretary Tarun Kapoor said on Monday. Currently, the petrol sold in the country has above 5 per cent of ethanol, a bio-fuel extracted from various locally available sources. “We have done a calculation and we see that with the current programmes we have, which means that 20 per cent ethanol blending in petrol and the 5,000 compressed biogas plants which we want to set up, we could have an economic activity worth Rs 1 lakh crore every year,” Kapoor said. He was speaking at an event organized by Repos Energy and Tata Motors. Just as the world is switching to newer sources of energy as part of a shift away from fossil fuels, a transition is also underway in India, he said. However, the country needs more energy, and the movement is from coal to oil or gas in India. If India has to move to renewable energy and gas, it will have to be seen what can be produced within the country, Kapoor said, adding that this is where bio-fuels and solar power become very important. Adoption of bio-fuels as part of the transition can save a lot of forex, create large number of entrepreneurs, deliver jobs and also help create an economy based on bio-fuels, he said, asking start-ups to make the most of this opportunity. Opportunities exist for start-ups even from a manufacturing perspective, Kapoor said, adding that the state-run enterprises in oil and gas sector alone spend over Rs 1.5 lakh crore per year on capex, and a bulk of the equipment is imported. If one adds the private sector’s capex, it becomes a capex of nearly Rs 2 lakh crore per annum which offers a slew of opportunities, he said, stressing that the government wants to focus on ‘Make in India’ programme.
India’s annual oil usage falls for the first time in 21 years
India’s overall petroleum demand in 2020 fell for the first time in more than two decades as the Covid-19 pandemic shuttered businesses and factories, crimping the appetite of one of the world’s biggest consumers. Demand for total petroleum products — including diesel, gasoline and jet fuel — slid 10.8 per cent from a year earlier, the first annual contraction in data going back to 1999, according to Bloomberg calculations of provisional figures published by the oil ministry’s Petroleum Planning & Analysis Cell. Consumption was also at a five-year low of 193.4 million tons. Fuel demand from Asia’s second-biggest oil importer collapsed by as much as 70 per cent after it embarked on one of the world’s most stringent lockdowns in March. The drop resulted in a sharp cutback in crude processing and operations at petrochemical plants. The strict restrictions ravaged the Indian economy, which is set for its biggest contraction in annual gross domestic product in records going back to 1952. Prime Minister Narendra Modi’s government has relaxed most of the virus curbs to pull Asia’s third-biggest economy out of the slump. Demand is picking up as restrictions are eased. While monthly consumption of petroleum fuels in December was about 1.8 per cent lower than a year earlier, it was still at an 11-month high, according to the government data. Gasoline consumption last month rose 9.3 per cent year-on-year, the highest since May 2019, on increased use of personal vehicles. Diesel demand was 2.8 per cent lower than a year earlier.