Costly gas threatens Dabhol, Iran pipeline

The price of oil has hit a record $ 68/barrel. But even worse news for India is that the US price of natural gas skyrocketed to $ 10/mmbtu last week, double the price a year ago.

This jeopardises the revival of the Dabhol power project that Maharashtra badly needs to escape blackouts. GAIL has said it hopes to import LNG (liquefied natural gas) for Dabhol at $ 3.60/mmbtu, but that now looks a pipedream. Supplies may cost two to three times as much, and that will translate into electricity at Rs 3.50-4.20/unit, far above the Rs 2.30 that Maharashtra wants to pay. Dabhol threatens to become a crisis all over again.

Costly gas also threatens the viability of the much-publicised Iran-Pakistan-India gas pipeline. Indeed, it jeopardizes the entire strategy of importing gas on a massive scale to meet India’s growing energy needs.

The government has planned massive imports of natural gas for power generation, on the assumption that it would be competitive with coal. That is no longer the case. Domestic coal will be infinitely cheaper, and even imported coal will be cheaper although its price has doubled over the last two years. Remember that the World Bank had urged 12 years ago that Dabhol should be based on imported coal.

Even with current heavy subsidies, fertiliser plants can pay no more than $3.50/mmbtu for gas. It is better to import fertilisers than manufacture them from gas at $ 8/mmbtu.

The US price of natural gas was just $ 6/mmbtu a few months ago, but has skyrocketed in the last few weeks. Most alarming, the price has hit a record $ 10 in August, the hottest month of the year in the USA, when gas demand is usually lowest. Gas demand will shoot up in winter, when homes and offices need heating. Forecasters fear that gas will touch $ 12-15/mmbtu.

Till recently, the conventional wisdom was that the world was running short of oil but had plentiful gas, spread all over the world and not concentrated in the Middle East (as for oil). But the runaway increase in US price is a warning that the supply-demand gap may be as big for gas as for oil.

Energy prices are notoriously volatile. US gas prices may fall sharply after the coming winter. But in the futures market, gas is already quoted at $ 8/mmbtu for delivery in 2006 and 2007. A new era of super-expensive gas seems to have arrived.

Till recently, Iran and Qatar were thought to have huge gas surpluses, and the governments there were willing to sell gas cheaply. They charged than $1/mmbtu for supply to liquefaction plants that converted gas to LNG for shipment to early consumers like India’s Petronet. After conversion to LNG, transportation to India and regasification, Petronet sells the gas to Indian consumers at a bit over $ 4/mmbtu. This is far higher than the $ 1.2/mmbtu at which the ONGC traditionally supplied Indian users. But new industrial users have been willing to pay this price.

The NTPC, biggest power generator, has traditionally refused to pay more than $ 3/mmbtu.That is why Reliance has contracted to supply the NTPC huge quantities from its Krishna-Godavari offshore field at $ 3. But the recent platform fire at Bombay High has sharply cut gas supply to NTPC, which is reluctantly negotiating replacement gas at around $ 4 from the consortium operating the Tapti-Mukta-Panna fields. Even $ 4 now looks dirt cheap compared with the cost of gas in the US.

With gas futures for 2006-07 in the US crossing $ 8/mmbtu, Iran and Qatar will want to get as close to that price as possible for new contracts. Sky-high oil prices have given Iran a big dollar surplus, so it is in no hurry to sell gas unless it gets a really good price. Qatar has already decided to go slow on new gas deals in view of hardening prices.

Three multinational groups are currently investing a total of $ 20 billion in Qatar in new-technology plants to convert gas into oil. This technology is reckoned to be viable at an oil price of $ 25/barrel, and is phenomenally profitable today. Why export gas when you can convert it into oil for export? Qatar now has less reason than ever to sign new gas contracts at anything but sky-high rates.

The Planning Commission is finalising a new energy policy with an “appropriate” mix of different fuels, including imported gas. What once looked appropriate is no longer so. We need a totally new energy policy. We need to emphasise domestic coal above all, with imported coal as the second-best option. We must de-emphasise gas.

We have burned out fingers once over Dabhol. Let us not land ourselves with a dozen new Dabhols because of optimistic assumptions about the price of imported gas.

What do you think?