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Is natural gas the fuel of the 21st century?

By Sudha Mahalingam

Natural gas is an efficient fuel, emits 60% less carbon dioxide than coal and 42% less than oil, and is available in abundance. But there are geopolitical, economic and infrastructural challenges in India's transition to a gas-fuelled economy

The one glimmer of hope on the energy horizon comes from a relatively new energy source -- natural gas -- hailed as the fuel of the 21st century. Natural gas emits 60% less carbon dioxide than coal and 42% less than oil for a comparable unit of consumption, although it does emit other non-carbon greenhouse gases. Gas is an efficient fuel and saves up to 30% of energy in most applications. Unlike nuclear energy, natural gas does not pose waste-disposal or safety problems. And it is available in abundance. If any single factor can substantially lower carbon intensity in the global economy, it is inter-fuel substitution or replacement of conventional fuels such as coal and oil by natural gas.

Yet, inter-fuel substitution is fraught with obstacles. Foremost among them is the location of global gas reserves. More than two-thirds of proven gas reserves in the world are clustered around the two oil-rich regions of Russia and the Persian Gulf, notably Iran and Saudi Arabia. Significant gas reserves are also found in Algeria, Indonesia, Trinidad and Tobago and Turkmenistan. China and India, which together account for a third of global incremental energy demand, have only modest gas deposits. Other major energy importers such as the United States, Europe, Japan and South Korea have either modest gas deposits or none at all.

The single most important factor that constrains more widespread use of gas is its lack of fungibility. Gas deposits occur independent of oil fields as well as part of them. The latter is called associated gas and it used to be flared until it was discovered to be useful as an independent fuel. Unlike oil, which can be stored and shipped to any destination in any part of the world, gas used to be treated as a stranded resource unless it had a use nearby and could be piped. Gradually, non-associated gas deposits acquired value, provided there was a ready regional market for them. With the advent of liquefaction, gas has acquired a degree of fungibility, though the high costs of liquefaction and regasification detract from its widespread acceptance. Even today, liquefied natural gas (LNG) accounts for no more than 6% of global gas trade. Gas is thus regarded as a regional resource.

For developing countries in pursuit of rapid electrification, gas presents an alluring prospect. Technological breakthroughs in combined cycle gas turbines have rendered gas-fuelled generation very efficient. Plants with such turbines can be set up in a short time and require much less initial capital investment than hydroelectricity or coal-fired power generation plants. Throughout the world, gas is fast replacing coal as the preferred power generation fuel. Gas also has applications in the manufacture of fertiliser. India, with its focus on food security, consumes 40% of its gas in the fertiliser sector. The Paris-based International Energy Agency predicts that by 2020 developing countries in Asia will increase their gas consumption by a factor of six. The United Nations Framework Convention on Climate Change (UNFCC) and the Kyoto Protocol are perceived to have key roles in facilitating the switch to cleaner gases.

Prospects for natural gas use in India

With 15% of the world's population, India has less than 1% of global gas reserves and depends on imports. Natural gas accounts for 8% of the country's energy basket. Apart from domestic production, gas is imported from Qatar in the form of LNG. About 40% of gas consumed in India goes to fuel gas-turbine plants generating power.

The challenges that confront India in its endeavour to transit to a gas-fuelled economy are three-pronged: availability, affordability and infrastructure.

The geopolitical challenge

India's gas deposits are found in Assam and Gujarat and offshore in south Bassein. At an annual production rate of around 1.024 trillion cubic feet (tcf), productive fields are expected to last 28 years. Until recently, it was believed that all the gas deposits in the country had been mapped and this belief shaped India's gas policies. However, recent offshore finds by both public and private sector investors in exploration have raised hopes that perhaps a significant portion of domestic demand could be met by indigenous production. But the deposits are deep and extraction could be both challenging and costly.

In any case, the growing demand for gas will necessitate continued reliance on imports. India is surrounded by gas-rich neighbours -- Iran to the west, Turkmenistan to the north and Bangladesh and Myanmar to the east. Gas could be piped in from these countries and LNG imported from elsewhere. As of now, India does not import piped gas from anywhere, although it began importing LNG from Qatar in 2004. With the recent inauguration of the second LNG terminal at Hazira, India's LNG capacity has gone up. But either through pipelines or in the form of LNG, imports will have to satisfy the growing need for gas. Throughout the world, pipelines are the more convenient and economical mode of gas conveyance. Yet, geography and geopolitics seem to frustrate India's efforts to access neighbourhood gas through pipelines.

Iran is home to the second largest gas reserves in the world, next only to Russia. The logical markets for Iranian gas would be India and China, since Europe is well supplied by Russia and Algeria. India's Ministry of Petroleum and Natural Gas has initiated measures to bring Iranian gas through a pipeline that will traverse 2,775 km, of which 760 km are in Pakistani territory -- in the troubled Baluchistan province. The total investment in the pipeline project is estimated to be US$ 4.16 billion at current prices.

Yet, the Iran-Pakistan-India pipeline may remain a pipedream, not only because political differences with Pakistan defy resolution, but also because the new political dispensation in Iran seems to be heading towards a confrontation with Western powers that might eventually provoke UN sanctions against Iran, leading to an economic blockade. An undersea pipeline that might avoid the political pitfalls and carry the gas directly from Iran to India's western shores appears to be a tantalising, if expensive, prospect, but no feasibility study has been done so far. Whether under sea or over land, it is doubtful whether international investors would finance the construction of a pipeline originating from Iran.

Gas-rich Turkmenistan sits across the mighty mountain ranges that separate the Indian peninsula from its Central Asian neighbours. The 1,680 km pipeline will run through Herat and Kandahar in Afghanistan, the Pakistani cities of Quetta and Multan and on to the Indian border town of Fazilka. If it is to be extended to Delhi, it will have to run another 600 km. Construction costs are estimated at US$ 3.5 billion. In view of the costs, the challenges posed by the terrain, and the vulnerability of any pipeline on this route to potential terrorist attacks, there is little hope that it will be built in the near future.

Myanmar's offshore gas field Shwe 1 is estimated to have in place reserves of 4 to 6 tcf. Two Indian companies have a total of 40% equity stake in this field. This gas will have to cross either Bangladesh -- which is reluctant to provide transit rights to India -- or India's northeastern states of Manipur, Mizoram, Tripura and Assam before it reaches India's gas markets in West Bengal. The latter option is considered unattractive since the pipeline will have to cross ecologically sensitive areas and the distance is too long to make it economically viable.

As for Bangladesh, which may have up to 32 tcf of gas, political and public opinion seems to be overwhelmingly against exports to India. In the circumstances, India's prospects for accessing neighbourhood gas supplies through pipelines seem to be frustrated as much by geopolitics as by geography.

The affordability challenge

One way to overcome geopolitical challenges is to opt for LNG, but affordability could be a key challenge. LNG is an expensive option. Liquefaction requires gas to be cooled to 264F. Liquefied gas has to be transported in cryogenic ships to markets where it has to be regasified. The process of cooling, transportation and regasification adds considerably to the cost of delivering gas to markets. This, in addition to crude price linkage, renders the burner tip price of gas rather steep. Although improvements in technology in the past decade have brought down the cost of liquefaction by a third, soaring crude prices have taken the sheen off LNG.

Affordability is as vital a criterion for India as are availability and accessibility of adequate energy supplies. India's domestic gas production by state-owned companies is supplied to power and fertiliser plants at a subsidised rate. India's National Thermal Power Corporation, which ranks among the top 10 power generators in the world in performance as well as size, has set up seven gas-turbine power stations in the last decade. But, owing to non-availability of sufficient quantities of gas at an economical price, many of these stations are operating at sub-optimal capacity. In fact, the corporation has decided not to set up any more gas-based power stations and is now deviating from its core competence to build hydropower plants. Other gas-fuelled power developers in the country that do not get subsidised gas under the gas allocation mechanism have been forced to shut down their plants. Inter-fuel substitution away from polluting coal and towards clean gas is seriously constrained by the prevailing price of gas.

Gas is also unviable for the transportation sector in India. A few thousand public transport vehicles in the national capital were converted from diesel to compressed natural gas (CNG) some years ago, following an order from the apex court. However, large-scale transition to gas-fuelled automobiles will not occur unless gas is available at stable and affordable prices, and the necessary infrastructure is in place.

If the architects of the Kyoto Protocol are serious about combating climate change by promoting fuel-switching and appropriate technologies, it is imperative that Kyoto members collectively lobby to de-link gas prices from crude. Since gas replaces coal in most uses, it can be indexed to coal prices. Otherwise, developing countries will have no option but to turn to affordable energy supplies. Coal fits the bill nicely. It is abundantly available, especially in China and India, never mind if it emits carbon and contributes to global warming. The quest for growth will drive these countries to dip into their domestic coal reserves. For countries hamstrung by Kyoto commitments to reduce carbon, nuclear energy will provide an attractive alternative to gas. Global initiatives for combating climate change cannot ignore gas.

(Sudha Mahalingam is a Senior Fellow at the Nehru Memorial Museum and Library, New Delhi. An economist and lawyer by training, she specialises in reforms and energy security. Her focus areas are energy regulation, tariff setting and the geopolitics of energy security. She has also served as Senior Fellow at the Institute for Defence Studies and Analyses, New Delhi, where she headed a Cluster on Energy, Environment and Economy)

InfoChange News & Features, June 2006