INDIA STEPS UP PUSH TO HIKE NATURAL GAS USE, END FLARING

India is pressing efforts to step up utilization of natural gas, a resource it continues to waste to a significant degree through flaring.

Its push to end flaring will coincide with plans to boost oil production.

Those efforts come as the country grapples with a lagging economy dragged down further by a sharply higher oil import bill in the wake of the Persian Gulf crisis and set against a backdrop of continuing political turmoil.

Although India's state oil companies have pressed strong oil and gas E&D programs in recent years, development and/or utilization of much of the hydrocarbon resource discovered has been stymied by political or economic problems.

The country's vulnerability to rising oil imports was marked vividly by the spike in oil prices and supply disruption following Iraq's blitz of Kuwait a year ago. While the growth rate in India's crude oil production has sagged in recent years, consumption has been on the rise. In fiscal 1990-91, India's oil demand is estimated at 1.16 million b/d, up from 1.074 million b/d in fiscal 1989-90 and 995,200 b/d in 1988-89.

COST OF IMPORTS

In fiscal 1990-91, the cost of India's imports of crude alone is estimated at $5.5 billion, accounting for 25% of its total imports and equal to its total trade deficit.

India's tab for imported crude and products is expected to average $9 billion/year through the end of the decade as a result of increased import volumes, the World Bank reported. The World Bank projects oil will account for 25% of India's energy mix through 2010, with demand rising to 2 million b/d in the period. Coal will hold a 65% share of the energy mix with natural gas, hydropower, and nuclear splitting the remaining 10% share.

That situation will be aggravated by India's continuing fiscal crisis. The devaluation of the rupee last month by 18% against the U.S. dollar will jump India's oil import bill by more than $1.135 billion/year, according to industry estimates. That would put its tab for imported oil at as much as $9.335 billion in fiscal 1991-92 if oil prices stay at about $20/bbl.

At the crux of India's energy woes is a continuing massive waste of associated gas flared in the country's key oil fields. Concerns over gas flaring have risen to the point that the Indian government has proposed an interim measure to halt flaring March 1992 by cutting crude oil production and shutting in dry gas production. But that effort has run into political snafus.

In addition to complaints of waste, critics have charged the government with establishing the wrong priorities in oil and gas policy, thereby diverting scarce cash to developing resources for which there is insufficient demand away from projects that could eliminate the waste and boost domestic oil output.

END OF FLARING?

India has been flaring gas since 1957. During 1989-90 about 182 bcf of gas went up in flames.

Bombay High oil field is India's biggest source of oil and gas. In fiscal 1989-90 it produced 400,000 b/d of oil and almost 1.06 bcfd of gas, accounting for more than 60% of domestic oil production and 70% of domestic gas production. Currently, ONGC flares more than one third of Bombay High's associated gas production, and there are high levels of flaring in India's other key producing regions (see table). Officials estimate as much as $730 million/year of gas is wasted in the process.

State owned Oil & Natural Gas Commission has drawn up plans for a broad program to boost oil and gas production and at the same time end gas flaring in the Bombay High area. To be complete by 1995, the program would cost about $2.8 billion.

The foreign exchange component of financing the projects is about $1.6 billion. The World Bank has sanctioned a loan of $450 million. India's Petroleum Ministry estimates the projects could be complete within 3 years of construction start. Utilizing surplus gas in Assam and Gujarat will be amenable to quicker solutions because of much lower transportation costs in those regions.

FURTHER DEVELOPMENT

ONGC first plans to develop the L-III reservoir in the southern portion of Bombay High field.

That calls for drilling 78 production and water injection wells from eight platforms. In addition, plans call for installation of more processing platforms in the field as well as more infield and trunk pipelines.

ONGC estimates additional reserves recovered from the L-III program at 438 million bbl of oil and 635.6 bcf of gas.

ONGC also plans to develop the L-II reservoir in the northern portion of Bombay High field. This program calls for drilling 42 producers and water injectors from five platforms, installation of a processing platform and infield gathering lines, and laying a gas feeder line to the Bombay High-Uran trunk system. ONGC pegs added recovery from L-II at 120 million bbl of crude and 282.5 bcf of natural gas.

GAS FLARING REDUCTION

In addition, ONGC plans to implement a gas flaring reduction project for existing Bombay High facilities as well as the two new development projects.

The project is based on results of an optimization study for Bombay High field that Engineers India Ltd. (EIL) conducted in 1989.

The EIL study found the least cost option for eliminating gas flaring, taking all gas currently flared to the Bombay area market, could not be implemented because of the limited capacity at the 565 MMcfd Uran gas terminal.

That led to another study to construct an oil and gas processing plant and terminal at Usar. However, that proposal has run into stiff opposition from environmental groups. Further, ONGC and state owned Gas Authority of India Ltd. (GAIL) expect problems with acquiring land for such a facility would delay completion of the terminal so long as to render the project uneconomic.

Instead, ONGC opted for a pipeline system that would bring increased volumes of surplus Bombay High gas to the other available landfall point, Hazira.

GAIL in 1988 completed the $1.7 billion, 1,094 mile, Hazira-Bijaipur-Jagdishpur (HBJ) gas pipeline linking Bombay High oil field and Bassein gas field with fertilizer and gas processing plants in northern India (OGJ, Feb. 13, 1989, p. 58).

SHUT-INS, DEBOTTLENECKING

Slow progress of industrial development in western India last year forced ONGC to shut in big volumes of gas from Bassein field, developed largely to underpin that infrastructure (OGJ, June 4, 1990, p. 21).

It shut in more Bassein gas as Bombay High associated gas output rose.

Under the program to end flaring, ONGC would make as much as 869 MMcfd of transportation capacity available from Bombay High to Uran and Hazira.

That would in theory eliminate Bombay High flaring and help meet expected growth in demand for natural gas in the Bombay area and along the HBJ system.

Proposed construction of a second trunk line and expansion of gas processing and terminal facilities at Hazira would enable ONGC to segregate sweet and sour gas streams as well as boost transportation capacity.

In addition to the trunk line, ONGC plans to lay a 124 MMcfd pipeline from the southern portion of Bombay High oil field to link with the Heera-Uran trunk line in Heera oil field.

The projects would give ONGC flexibility to use Bassein dry gas once the supplies of Bombay High associated gas decline. In addition, it would allow a sizable increase in Bombay High oil production.

In recent years ONGC has been forced to curtail some Bombay High oil production in an effort to curb gas flaring when demand for gas fell short of expectations.

The Bombay High area gas supplies will back out naphtha in fertilizer production, middle distillates burned to generate peak load electrical power, and coal burned to generate baseload electric power. ONGC will be responsible overall for the project.

EIL will be main contractor on all phases of project design and implementation, with help from multinational engineering/construction firms.

PROJECT SCOPE

Here's the scope of the Bombay High area program:

Installation of Platform SHG in the southern portion of Bombay High field with a capacity of 1 00,000 b/d of oil, 530 MMcfd of gas, and 140,000 b/d of water, along with a 78 km, 28 in. pipeline to Platform BPB in Bassein field.
Installation of process Platform NQP in the northern portion of Bombay High field with a capacity of 60,000 b/d of oil, 240 MMcfd of gas, and 30,000 b/d of water, plus a 30 km, 18 in. line to link it with the Bombay High-Uran trunk line.
Modifications to existing platforms in the Bombay High area.
Construction of a 142 km gas pipeline from the existing process Platform ICP in the southern portion of Bombay High field to the Heera-Uran trunk line.
Construction of a 255 km gas trunk line from Bassein to Hazira.
Expansion of the gas terminal at Hazira.
Implementation of a package of measures to reduce environmental risks and improve safety of offshore operations.

FINANCING, GAS PRICES

In addition to the World Bank loan for the project, ONGC has secured $750 million in suppliers' credits, a $300 million loan from Japan Exim Bank Ltd., and $250300 million from the Asian Development Bank. It also seeks about $600 million from other sources.

The World Bank laid down several conditions for securing its loan, including increases in domestic gas prices and a tender to foreign oil companies for a fourth round of bidding for oil exploration concessions.

Prior to Jan. 30, 1987, the price of gas in India was based on equivalent oil replacement cost. Initially, ONGC's price was 9.3/Mcf in 1964. ONGC obtained phased price increases during the years, but the price remained well below replacement costs because of political opposition to price hikes. ONGC sued to obtain a higher price, winning a Supreme Court verdict calling for a market based price system.

The government on Jan. 30, 1987, established a two tier pricing regime it considered fair, calling for a delivered price of $2.64/Mcf in Gujarat and Maharashtra and a delivered price of 94/Mcf in the eastern portion of the country, taking into consideration the latter's underdeveloped condition.

The former Chandrashekhar caretaker government in June approved recommendations on gas prices by a committee led by Vijay Kelkar.

Under those terms, the base of gas will jump, using current rupee-dollar exchange rates, from the present $1.98/Mcf to $2.27/Mcf in fiscal 1991-92, $2.55/Mcf in 1992-93, and $2.83/Mcf in 1993-94. With a 10% royalty, 4.8% central sales tax and 5% state sales tax that works out to a landed price of $2.75/Mcf in 1991-92, $3.09/Mcf in 1992-93, and $3.43/Mcf in 1993-94. That compares with a current landed price of $2.40/Mcf.

GAIL's tariff on the HBJ line under the new system will be $1.60/Mcf.

Industrial plants fed by the HBJ system currently pay a delivered price of $3.72/Mcf for offshore gas, including taxes, royalty, and a $1.20/Mcf tariff. Their costs will jump to $4.06/Mcf in 199192, $4.41/Mcf in 1992-93, and $4.76/Mcf in 1993-94.

Producers will receive half the price increase, with the balance credited to a gas pool account to be set up for development of India's gas infrastructure.

POLITICAL PROBLEMS

Although the Chandrashekhar government approved the price increases, the World Bank wants the successor P.Y. Narasinha Rao government, which took over in June, to formally endorse them.

That approval is critical because of the fierce opposition to the price increases on grounds the hikes defeat the purpose of the HBJ system and Bassein development, intended mainly to provide a lower cost feedstock for fertilizer production in northern India.

Critics claim central government approval of the Kelkar committee recommendations jeopardizes economic viability of many natural gas based fertilizer plans, especially with talk of moving away from price subsidies for fertilizer.

If there is a cloud over future economic feasibility of the northern India fertilizer industry, India will have continue heavy imports of fertilizer for the foreseeable future, critics contend.

In turn, the current viability of new gas based petrochemical projects may come into question, forcing those plants to switch to lower priced naphtha.

However, India also must import naphtha, while huge volumes of domestic gas supplies are wasted.

In the near term, only an attractive price will boost demand for gas from current levels.

Under the new pricing scheme, critics say, there is little incentive for the market to expand.

That leaves the new government with a ticklish task: reviewing the price mechanism to ensure the gas is effectively utilized without causing an onerous economic hardship for Indian gas users.

Earlier government efforts to establish priorities in the oil and gas sector have stumbled amid a deteriorating economy and rising oil imports.

INTERIM FLARING MEASURE

New Delhi's proposal to stop flaring by cutting crude oil production by 60,000-80,000 b/d by March 1992 has run into problems.

Critics have questioned the wisdom of cutting oil production when India faces a foreign exchange crisis. Gasoline rationing has largely been ruled out, but some officials are promoting ideas such as freezing states' gasoline supply quotas at last year's levels and/or closure of gasoline service stations once a week.

The Petroleum Ministry has drawn up a revised proposal to stop flaring by February 1993. This would require an outlay of $1.265 billion, about 70% of which will be in foreign exchange. The investment would be for additional compression and downstream utilization infrastructure.

Pipelines would be required to develop flexibility in halting purchases of production from dry gas fields and confining purchases to fields producing associated natural gas.

Under the original proposal, the government estimated the plan would save 390 bcf of gas ultimately valued at a total $2 billion during a 3 year period. However, the ministry noted flaws in the original proposal, which led to the revised plan.

It said it would be better to selectively shut in wells in the northern portion of Bombay High field that had the highest gas:oil ratio. This action would cut flaring by 247-282 MMcfd with a minimal crude oil production cut of 40,000 b/d.

PRIORITIES

India's oil and gas sector problems were dramatically underscored at the height of the Persian Gulf crisis last year. In September 1990, ONGC was forced to cut its production target for fiscal 1990-91 by 10,000 b/d.

That occurred when the government faced an unprecedented foreign exchange crisis, forcing it to slash imports of higher priced crude and refined products.

Critics charge the government sank a huge amount of cash in developing Bassein gas field, which has endured shut-in of sizable volumes for lack of market, and in laying the HBJ line, which remains underutilized.

Those critics contend the government instead should have spent a few hundred million dollars in India's Northeast and in Gujarat state to expand refinery and crude pipeline capacity so ONGC could produce more crude from those areas.

ONGC in fiscal 1989-90 set a crude oil production target of 82,000 b/d from Assam state but later cut that target to 62,000 b/d because of refinery constraints. The same situation has held true in Gujarat, where ONGC also has been forced to shut in crude for lack of refining and transportation capacity.

Indian Oil Corp.'s Koyali refinery is limited to processing 94,000 b/d of northern Gujarat crude. There is no transportation available for southern Gujarat crude. In all, that accounts for surplus deliverability of Gujarat crude of 21 000 b/d, rising to 72,000 b/d by 1994-95.

Much of the problem stems from a glut of low sulfur heavy resid at Koyali. IOC's utilization has dropped to 43,800 b/d from 54,750 b/d, forcing it to cut its take of northern Gujarat crude, which has a high cut of low sulfur heavy resid.

As a result, ONGC shut in almost 10,000 b/d in northern Gujarat during the first quarter of the current fiscal year, a level expected to persist through the fiscal year.