NATURAL gas is increasingly playing a major role in driving economic growth in India. The dependence on natural gas is also growing rapidly, but there are fears of a widening demand-supply gap for this commodity.

An estimated 280 million metric standard cubic metres per day (mmscmd) of gas will be needed by the end of the current Five Year plan (the 11th Plan), which ends in 2011. Experts predict that by then the existing domestic gas sources are likely to dry up. New discoveries along the Krishna-Godavari (KG) basin and others under the New Exploration Licensing Policy (NELP) will sustain domestic supplies, which will add up to nearly 110 mmscmd.

According to government estimates, there is currently a potential demand of 170 mmscmd of gas, though supplies (both domestic and imported) add up to only 85 mmscmd. Almost 80 per cent of the domestic supplies are from ONGC. Gas consumption is expected to soar to 400 mmscmd by 2025.

India expects to tie-up supplies of imported LNG (liquefied natural gas) of another 80 mmscmd, but still leaving a huge gap of 90 mmscmd. Not surprising then that the country is desperately looking around for natural gas supplies.

If the 2,300-km-long, $7.5 billion, Iran-Pakistsan-India (IPI) gas pipeline finally materialises, the first deliveries from Iran could start flowing in from 2011. All three countries are close to the terms of an agreement, which would ensure that the project takes-off. India has signed a $20 billion deal with Iran for the supply of LNG (the gas is likely to be sold at under $5 per million British thermal units) and despite American opposition, the ambitious project may finally kick-off.

Earlier this month, ONGC Videsh Ltd (OVL), the overseas arm of state-owned hydrocarbon explorer ONGC, announced that it had found natural gas in Iran’s Farsi block, with reserves estimated at 10 trillion cubic feet. OVL had won the bid for the Farsi block about five years ago.

India is also seeking LNG from other sources, including Qatar, Oman and Yemen in the Gulf, Algeria in North Africa and Malaysia and Indonesia in South East Asia, and even Australia. Besides firm agreements with Qatar, India is seeking a long-term agreement with Algeria for the supply of LNG. According to M.S. Srinivasan, the petroleum secretary, India will shortly sign a 25-year agreement with Algeria’s Sonatrach, for the supply of 1.25 million tonnes of LNG annually.

India is looking for long term agreements for the supply of LNG, as spot prices are flaring; it is currently priced at between $8 and $10 – depending on the geographical location of the buyer – as against less than $5 that India is expected to contract from Iran. Last week, Petronet LNG, a company promoted by India’s state-owned energy giants, signed an agreement with Qatar’s RasGas for the supply of 1.25 million tonnes of LNG in 20 cargoes.

The country’s largest LNG importer will be taking delivery of the gas at its Dahej terminal in Gujarat, and supply the fuel to the controversial Dabhol power project in Maharashtra. Petronet had signed an agreement with RasGas in 1999 for the supply of five million tonnes of LNG per annum. Last year, it sought to enhance this by another 50 per cent to 7.5 million tonnes.

The imported LNG is shipped in vessels and unloaded at regassification terminals that have come up along the western coast. Petronet LNG has a five million tonne terminal at Dahej, while Royal Dutch Shell has a terminal at Hazira, also in Gujarat. The third terminal is at Dabhol, where the mega power plant is located.

Petronet plans to double the capacity of Dahej terminal to 10 million tonnes in about two years, and is also building another terminal in Kochi in Kerala. The 2.5 million tonne terminal would be ready by 2011. Petronet, which has also been buying LNG from the spot market to meet the growing demand for gas, plans to import another five million tonnes from Australia.

The LNG that it acquired from Qatar last week is being sent through the new, 570-km-long pipeline to Dabhol. Gas Authority of India Ltd (GAIL), another state-controlled energy giant, built the pipeline linking the two coastal places. The Dabhol plant, which has been snared in a controversy ever since the now defunct American energy giant, Enron, promoted it, has been depending on more expensive naphtha for the generation of power.

This was the first time that the Dabhol plant, which began operations in 1999, received gas for generating power. The plant will generate 1,400 MW of power, which is expected to be raised to 2,184 MW by the end of the year.

The new pipeline will also ensure reliable supply of R-LNG (regassified LNG) to dozens of industrial towns in both Gujarat and Maharsahtra. It has a capacity of 12 mmscmd.

Natural gas accounts for just eight per cent of India’s primary energy needs at present. Its share is higher in power generation (12 per cent) as a fuel, fertiliser (60 per cent as feedstock) and petrochemicals (40 per cent). Its use in the transport sector is growing, though the sector accounts for less than one per cent of natural gas consumption.

With oil prices soaring, demand for natural gas is high, as many motorists and transporters have switched over to it.

Last week, Reliance Industries, the largest private sector company, announced a gas discovery in the Cauvery basin off the east coast. The find could result in Reliance ultimately overtaking ONGC as the country’s largest producer of natural gas.

Reliance claimed that the well produced over 30 million cubic feet of gas and 1,200 barrels of oil a day. This was the second major success for the company, which has been catapulted to the top-20 oil and gas companies in the world (in terms of market capitalisation).

The Reliance scrip rose by nearly three per cent following the announcement, and its market capitalisation topped the Rs2.5 trillion-mark.

Reliance’s biggest ever discovery was in the near-by Krishna-Godavari (KG) basin about five years ago; it plans to produce about 80 mmscmd of gas from KG by next year. The company is investing over $5 billion to produce gas in the area. For Reliance, this was the fourth deepwater block where it has struck gas.

Besides the KG basin, it has struck hydrocarbon in the Saurashtra basin and the Mahanadi basin. All these basins were offered by the Indian government to international and domestic companies under various rounds of the NELP.

Another private energy exploration firm that struck oil in Rajasthan sometime back, Cairn Energy of the UK, declared last week that it would continue to stay invested in India for a long while.

Delays in the government firming up the funding of a $600 million pipeline, that would transport the oil from Rajasthan to refiners in Gujarat, had brought a great deal of uncertainty to the project.

Cairn had struck oil in Rajasthan and planned to produce 40,000 barrels a day by February 2009, and 150,000 by the end of the year. Under the production-sharing agreement, the government had to buy all the oil and transport it to refiners in Gujarat.

However, the government had second thoughts and wanted to build a refinery in Rajasthan itself, which could upset Cairn’s plays, and delay production of oil. ONGC has now stepped in to share part of the cost of building the pipeline. The onshore block in Rajasthan is expected to remain productive for the next quarter century.