ASSIGNMENT

Prepare a blue print of the LNG imports and supporting infrastructure required in India
by 2020.
This blue print should be broadly based on:
. !acro analysis of demand"supply for gas in India
2. !acro analysis of #orld LNG supply mar$et
%. &nalysis of e'isting and planned infrastructure for gas in India.
India is the si'th largest consumer of oil in the #orld and the ninth largest crude oil
importer. India(s oil and gas sector contributes o)er *+ to the Gross ,omestic Product
-G,P..

&ccording to !inistry of Petroleum and Natural Gas/ India has a total reser)e of 20
million metric tonnes of crude oil and0%1 billion cubic metres of natural gas as on 0
&pril 200. The total number of e'ploratory and de)elopment #ells and metreage drilled
in onshore and offshore areas during 20023200 timeframe #as 024 and 02 thousand
metres respecti)ely.

5rude oil production during 20023200 timeframe #as %%.62 million metric tonnes and
gross production of Natural Gas in the country #as 01.* billion cubic metres during
20023200. The production of petroleum products during 20023200 #as *.424 million
metric tonnes -!inistry of Petroleum 7 Natural Gas..

8o#e)er/ due to huge demand3supply gap in oil and gas in India/ it imports more than
60+ of its crude oil requirement.

9urther/ oil consumption in India is pro:ected to enhance by 03*+ per annum to 20*/
indicating a demand of 0.0 million b"d by 20*.

&s per the ;usiness !onitor International -;!I. forecast/ India #ill account for 2.0+
of &sia Pacific regional oil demand by 20*/ #hile satisfying .2+ of the supply.

,ue to increasing refining capacities/ e'ports of petroleum products are high in terms of
the foreign currency amassed and accounts for 1+ of the total e'ports. India(s e'ports of
refined products stood at 0.2* million barrels per day as of <une 20 and =>? 0.6 billion
#orth of petroleum products #ere e'ported during <uly 20. @astness of this sector is
corroborated by the fact that there #ere a total of %0/000 people employed in the
petroleum industry in 20023200.
1. Introduction
India is in transition. It is mo)ing from a planned economy #ith e'tensi)e central controls/ to
one based increasingly on the operation of mar$et forces. &lthough economic liberalisation
began in 22/ its cumulati)e impact became )isible mainly in the second half of the last
decade/ as India emerged to become the #orld(s fourth3largest economy -in PPP terms. #ith
G,P gro#th rates a)eraging 4 per cent per annum. The focus of Indian economic policy has
long been on ma$ing basic goods and ser)ices accessible to the poor. India is no# in the
process of de)eloping its o#n social mar$et economy to deli)er these more efficiently/ but
there are certain functional characteristics of the deli)ery process that are unli$ely to change
)ery quic$ly. This has led to a mi' of different systems/ and has influenced the functioning of
economic sectors in #ays that are often at )ariance #ith international e'pectations.
No#here is this more apparent than in the oil and gas sector. Ahile the oil mar$et has no#
been liberalised/ e)en at the le)el of retail prices/ the gas mar$et is still in a state of transition.
There are three main factors behind thisB -. the natural sequencing and de)elopment of
domestic indigenous supply/ -2. the more general mo)ement of the economy from socialist
planning to#ards reform and reliance on mar$et forces/ and -%. global de)elopments C
particularly the increasing a)ailability of LNG/ as #ell as changes in international energy
prices/ and ne# policy agendas such as climate change.
& relati)ely Dyoung( fuel in the energy portfolio/ gas has in the past been deli)ered to final
consumers at Dadministered( prices that are far lo#er than the costs of production/ using a
system of differential pricing. This is a strategy that has been follo#ed in most commodity
sectors of the economy in #hich the >tate has a siEeable presence. These subsidies ha)e often
been unsustainably high/ borne disproportionately by public sector companies/ and often
failed to directly benefit those at #hom they #ere targeted. This has led to considerable
economic distortions/ and the build3up of these o)er the years has led to a dilemma that is
no# faced by the Indian go)ernment in )irtually e)ery economic sectorB namely/ ho# to
encourage the mar$et3oriented pro)ision of goods and ser)ices/ #hilst ensuring their
accessibility to the poorest sections of the population.
>ignificant policy changes ha)e been carried out during 200 and the first part of 20/
#hich point to a potentially greater role for gas in the future. In !ay 200/ the price of
Dadministered( gas #as more than doubled from its pre)iously subsidised le)elB from =>? .4
per mmbtu to =>? 0.2 per mmbtu.2 This mo)e/ #hilst signalling a shift to#ards gas pricing
based on economic principles/ mirrored the core policy conflict C #hilst it appeared to signal
the reduction of distortions on one side of the policy equation -that is/ the price paid to gas
producers by mar$eting and retailing companies./ it highlighted the distortion on the other
side -that is/ the comple' subsidy regime for prices paid by some gas users to retailers.. % In
9ebruary 20/ the 9ederal go)ernment/ in its National ;udget/ announced a policy intention
to pro)ide the subsidy on fertilisers/ one of the largest e'isting and future potential consumers
of gas/ )ia a direct transfer to eligible end3users in the agricultural sector/ rather than through
the continuation of lo#3priced gas inputs to consuming sectors/ beginning from 202.
In this paper/ #e argue that the transition in the gas sector in India is part of the larger
mo)ement of the economy from a centrally planned and administered system to a mar$et
oriented system. >ections 2 and % of this paper set out the bac$ground and conte't for this
main argument/ by re)ie#ing the e)olution of India(s energy policy/ and the influence of
political economy on policy in the hydrocarbons sector. In >ection 0/ #e discuss Dofficial(
forecasts of demand and supply/ and suggest that these are sub:ect to the important limitation
of being carried out #ith a Dplanner(s outloo$(. >ection 0 also discusses the system of
Dbalance( that has been sustained bet#een the demand and supply sides in the gas sector
-although in reality they are each influenced by separate factors./ through India(s comple'
system of allocation and pricing/ #hich has led to significant economic distortions. In >ection
*/ the paper analyses the main factors that ha)e led to this system C the gas utilisation policy/
#hich has its roots in the quantitati)e planning system -#ith an emphasis on quotas./ and its
recent re)i)al under the Ne# F'ploration Licensing Policy regime. In >ection 6/ the paper
argues that the potential for gas cannot be assessed purely through forecasts/ but through an
analysis of its price competiti)eness #ith alternati)e fuels in the main consuming sectors.
There are specific areas of policy that require re)ie#/ in order to resol)e e'isting distortions
in the system/ and to mo)e for#ard from the Dhalf #ay house(C on the supply side/ these
include a re)ie# of specific terms of the fiscal regime in e'ploration and production/ and a
need for a commercially sound basis for producer prices of gas and for formal regulation in
infrastructure. Gn the demand side/ in suggesting #ays for#ard/ the paper dra#s from
e'perience in the oil sector/ #here prices #ere freed for all but the poorest category of
consumersB in addition/ a pilot scheme pro)iding subsidies on LPG and $erosene directly at
the point of distribution is being designed C effecti)ely/ potentially replacing the system of
subsidising both the input -crude oil. and outputs #ith a direct subsidy on output -mainly
LPG and $erosene./ for specific categories of consumers. The paper finds that the
distributional ob:ecti)es appear to be particularly important in the fertilisers sector/ and/
based on an assessment of the potential for gas in other sectors -including po#er and city
gas./ the paper argues that there is a case for mar$et prices to be considered in other gas3
using sectors/ e)en if direct subsidies to the fertiliser sector are continued.
India is essentially a Dcoal economy(/ as it has )ast indigenous reser)es. 9igure sho#s
trends in the production and consumption of three main sources of primary energy o)er 242
to 2002.
&fter coal/ oil forms a significant proportion of primary energy consumption. &round 10 per
cent of oil is imported and the import bill has been increasing since 220/ #hen domestic oil
production plateaued.0 India is/ ho#e)er/ a net exporter of petroleum products/ #ith an
o)erall refining capacity -though not production. of 40 !!TP& in 2002.* &ppro'imately
*00/000 barrels of oil per day or 2* mtoe of crude oil and products is thus re3e'ported
through product e'ports.
&lthough gas forms a relati)ely small proportion of primary energy production and
consumption/ its share has been increasing/ particularly #ith the liberalisation of oil and gas
e'ploration in the 220s/ and #ith the start of LNG imports in 2000.