16-03-09 India's biggest natural gas field will transform the energy landscape when production begins this month, eventually doubling the nation's supply of the cleaner-burning fuel and lessening its reliance on oil. Reliance Industries' $ 8.8 bn project will mean many things to India's 1-bn-plus people: more power supply from idled generators starved of gas; lower carbon emissions than its coal-generator sector; less need for costly naphtha or imported LNG for fertiliser firms aching for local alternatives.
But for investors, the D-6 field in the Bay of Bengal heralds a more important, but less apparent, sea change. The gas will be sold at a more than twice the price fixed by government for sales from fields of state firms, and about the same as what customers pay for gas from BG-operated Panna/Mukta and Tapti fields.

While it is only the first of many steps needed to spur investment by deregulating more of the protected energy industry, still riddled with state-owned refiners and pricing distortions caused by state control over power and fuel, it represents an acknowledgement that market mechanisms play a vital role.
"The government has implicitly accepted that the market can indicate a price level that will allow accelerated development of gas in a way bureaucracy cannot do effectively," said Al Troner, head of Asia Pacific Energy Consulting. It will also deliver cleaner feedstock to fuel-starved power stations and raise capacity by 4,000 MW or near 3 %, replace subsidised LPG with piped gas at a lower cost and cut use of naphtha, a swing fuel for fertiliser and power plants.

Higher supply will also reduce emissions as India's tax system makes it attractive for motorists to switch to compressed natural gas, which has already helped clean the air in the few cities where it has been rolled out widely over the past decade.
As the fields ramp up towards a plateau of 80 mm cmpd by 2010, gas may take up to a fifth of the current liquid fuels market in Asia's third-largest oil consumer, which imports about 70 % of the oil it consumes. They will produce enough gas to meet about a third of UK demand.

Sea change
The oil ministry has mandated which sectors will get priority in gas sales, but unlike the supply of cheap gas from state firms with rigid contracts, Reliance is negotiating supply conditions with key customers such as fertiliser plants. It is selling the gas at a base price of $ 4.2 per mm Btu.
Reliance faces controls on its gas sales, but analysts take comfort from the fact that so far the ministry has imposed these curbs only for the first 40 mm cmpd of output and for only five years, potentially allowing more freedom for the other half.

Analysts say the changes indicate the government considers it better to encourage more investment in domestic resources than keep subsidising low prices at the risk of ever-rising imports.
"That's a very big change in thinking. A lot of people don't realise how much change there has been," Troner said.

India has swept aside controls on most sectors of the economy in nearly two decades of market friendly reforms but still sets prices of petrol, diesel, cooking gas, kerosene and gas, while power and fertiliser prices are also controlled. A government official said complete pricing freedom was difficult as key customers, fertiliser and power plants themselves faced price controls on their output.
The share of market-priced gas will rise further as ageing fields of state exploration firm Oil and Natural Gas Corp are past their prime, and recent finds by Reliance and the Gujarat State Petroleum spur more offshore exploration.

Reliance's discovery in 2002, now proven to hold about 10-11 tcf of gas, put India on the exploration map for foreign companies searching desperately for accessible reserves, with ExxonMobil, Chevron and BP casting an eye on exploration rights in the once-overlooked nation.
While state firms like ONGC have sunk billions of dollars in dry wells for many years, Reliance and others such as Cairn Energy -- which made India's biggest oil discovery in over three decades in Rajasthan desert -- have flourished.

Lasting impact?
With coal still fuelling about 70 % of India's power generators, the most immediate impact of the new gas may be on India's demand for fuel oil and naphtha, typically the power fuels of last resort and less efficient than others.
The start of liquefied natural gas (LNG) imports in 2004 helped curb fast-growing domestic oil demand from the power and fertiliser sectors, but greater gas availability could squeeze another 20 % of liquid fuel out of power plants.

But analysts caution that the changes may not be lasting unless the government takes steps to attract private investment to discover and develop new fields, a more difficult task now than a year ago as collapsing global prices have cut spending.
"Reliance's natural gas field has a plateau period of seven years. Power and fertiliser plants look at a longer horizon," said T.N.R. Rao, former secretary of the oil ministry.