PROJECT REPORT ON

“Study of Natural Gas Demand in India”

IN PARTIAL FULFILLMENT OF THE REQUIREMENT

FOR THE COURSE

MASTER OF MANAGEMENT STUDIES (MMS)

UNIVERSITY OF MUMBAI

SUBMITTED BY

NINAD RAJENDRA JOSHI

ROLL NO:- 9187

BATCH: 2009-2011
SPECIALISATION:- MARKETING

UNDER THE GUIDANCE OF

PROF. Madhusnata Saha

Oriental Education Society’s

Oriental Institute of Management

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Certificate

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 Acknowledgement

I express my profound sense of gratitude and sincere thanks to the

management of L&T ENC having offered me an opportunity to work on this
project in their esteemed organization.

I extend my special thanks to Mr. Mrinal Pal and Mr. , who gave me a
wonderful opportunity to select and work on this topic and understand the
challenges which we face in our career path while dealing with people and
the complexities of the job.

I would also express my sincere thanks to our Director, DR. M.G.

Shirahatti for enabling me to undertake such an excellent project, which
made me to acquire tremendous knowledge and self- confidence.

I would also like to place on record my sincere thanks to Prof.

Madhusnata saha my guide, for her valuable guidance and inputs which
helped me to select and focus my work on this project.

NINAD RAJENDRA JOSHI

MMS: Marketing

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 INDEX
Sr. No Topic Page No.

1 What is Natural Gas? 3

2 Natural Gas Production Table 4

3 Natural Gas in India 6

4 Availability & utilization 8

5 Present Scenario 10

6 Demand and supply scenario 11

7 Demand Driver 14

8 Total Indian Gas Demand 20

9 Reliance Natural Resources Ltd. 22

10 Bibliography 24

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Page | 6
 Overview of the Study

1.1 Introduction to the Project:

The last thirty years have seen a shift in the global energy
fuel mix towards an increased role for natural gas. Attractive
for its cleaner and more efficient combustion relative to other
fossil fuels, gas has assumed a significant role in power
generation, industrial applications, residential heating and in
some cases as a transport fuel as well.

This study focuses in particular on the evolution of natural

gas demand in India over the next 20 years. It considers the
major gas-consuming industries in India – electricity
generation, fertilizer production, and industrial use – and
explores how fuel choices in these sectors may respond to a
range of market and policy conditions.

Along with this project I also done comparative study of

dispute between RIL -RNRL

The 2 projects were:

1st Project:
Study of Demand of Natural gas in India

2nd Project:
RIL vs. RNRL dispute on Natural Gas

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1.2 Importance of the Study:
The study was important to understand that “Demand
for gas in India would surge by 9-10% annually to about 115
to 135 billion cubic meter (BCM) by 2020”
Indian petroleum demand depends highly on import of
oil and natural gas.
The area of interest for the Indian Oil and Natural Gas
Industry is to search for petroleum in both offshore and
onshore blocks.

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Company Profile
Larsen & Toubro Limited (L&T) is a technology, engineering, construction
and manufacturing company. It is one of the largest and most respected
companies in India's private sector.

Seven decades of a strong, customer-focused approach and the continuous

quest for world-class quality have enabled it to attain and sustain leadership
in all its major lines of business.

L&T has an international presence, with a global spread of offices. A thrust

on international business has seen overseas earnings grow significantly. It
continues to grow its overseas manufacturing footprint, with facilities in
China and the Gulf region.

The company's businesses are supported by a wide marketing and

distribution network, and have established a reputation for strong customer
support.

L&T believes that progress must be achieved in harmony with the

environment. A commitment to community welfare and environmental
protection are an integral part of the corporate vision.

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History
Larsen & Toubro Limited is the biggest legacy of two Danish Engineers, who
built a world-class organization that is professionally managed and a leader
in India's engineering and construction industry. It was the business of
cement that brought the young Mr.Henning Holck-Larsen and Mr.S.K.
Toubro into India. They arrived on Indian shores as representatives of the
Danish engineering firm F L Smidth & Co in connection with the merger of
cement companies that later grouped into the Associated Cement
Companies.

Together, Mr. Holck-Larsen and Mr. Toubro, founded the partnership firm of
L&T in 1938, which was converted into a limited company on February 7,
1946. Today, this has metamorphosed into one of India's biggest success
stories. The company has grown from humble origins to a large
conglomerate spanning engineering and construction. ECC was conceived as
Engineering Construction Corporation Limited in April 1944 and was
incorporated as wholly owned subsidiary of Larsen & Toubro Limited. L&T's
founders Mr. Holck - Larsen and Mr. Toubro laid the foundation for ECC. It
has today emerged as India's leading construction organization.

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L&T Operational Divisions

➢ Engineering & Construction Projects (E&C)

➢ Heavy Engineering (HED)

➢ Construction

➢ Power

➢ Electrical & Electronics (EBG)

➢ Machinery & Industrial Products (MIPD)

➢ IT & Technology Services

➢ Financial Services

➢ Railway Projects

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Engineering & Construction Projects
(E&C)
The Engineering & Construction (E&C) Division forms the biggest segment in
Larsen & Toubro Limited’s business portfolio. This division is capable of
carrying out turnkey projects in core industry sectors on EPC basis.

The Engineering and Construction Division has integrated its strengths in

process technology, basic and detailed Engineering, modular fabrication,
procurement, project management, construction and commissioning. It
offers single-point-responsibility under stringent delivery schedules.

The Division has offices at various locations in India - Powai Campus-

Mumbai, Vadodara and Faridabad.

L&T's Modular Fabrication Facility (MFF) at Hazira, one of the largest of its
kind in South Asia, is capable of manufacturing several large modules
simultaneously. This has been further strengthened by the new JV company,
Modular Fabrication Yard LLC at Sultanate of Oman.

The Engineering & Construction Division is focusing on increasing its global

presence. The Division has secured orders from international clients in
Malaysia, USA, UK, Brazil, Saudi Arabia, UAE, Qatar, Bangladesh, Sri Lanka,
etc.

The export earnings of the Division have been increasing steadily. The
customer profile includes leading names such as Samsung, Chevron,
Bechtel, Kvaerner, Pirelli, Siam Michelin, Goodyear, etc.

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ECC
ECC – the Engineering Construction and Contracts Division of L&T is India’s
largest construction organisation with over 60 years of experience and
expertise in the field. ECC figures among the World’s Top Contractors and
ranks 35th among top global contractors and 60th among international
contractors as per the survey conducted by Engineering News Record
magazine, USA (August 2008).

Many of the country’s prized landmarks – its exquisite buildings, tallest

structures, largest airports/ industrial projects, longest flyovers, highest
viaducts, longest pipelines including many other benchmark projects have
been built by ECC. ECC’s leading edge capabilities cover every discipline of
construction: civil, mechanical, electrical and instrumentation engineering
and services extend to all core sector industries and infrastructure projects.

ECC is equipped with the requisite expertise and wide-ranging experience to

undertake Engineering Procurement and Construction (EPC) projects with
single source responsibility. Contracts are executed using state of the art
design tools and project management techniques from concept to
commissioning.

ECC today is organised in to four Operating Companies to allow for more in-
depth technology and business development as well as to focus attention on
domestic and international project execution. Each Operating Company is
further split into different Business Units (BUs) to take care of the specific
needs of various customers. The Operating Companies (OC) includes:

➢ Buildings & Factories Operating Company (B&F OC)

➢ Infrastructure (Infra OC)

➢ Metallurgical, Material Handling & Water (MMH &W OC)

➢ Electrical & Gulf Projects (E&GP OC)

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Hydrocarbon Construction and Pipelines
Hydrocarbon Construction & Pipelines undertakes turnkey construction of
Refinery & Petro-chemical, Chemical, Fertilizer, Cross-country pipelines and
Oil & Gas projects covering civil, structural, piping, equipment, heavy lifts,
electrical and instrumentation works. In association with L&T’s other
divisions, ECC offers Engineering, procurement, construction and
commissioning services. ECC has In-house design engineering capabilities
for cross-country pipelines, terminals, offsite facilities, floating / fixed roof
tanks, cooling towers / cooling water system, electrical & instrumentation
system, fire protection system, etc.
ECC’s special projects team takes up heavy lift jobs with crane / strand jack
systems and fast track shut-down jobs.

➢ Refineries and Petrochemicals

➢ Oil & Gas Terminals and Cross-country Pipelines
➢ Fertilisers and Chemicals

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Ongoing Project
➢ IOC Panipath
➢ MSQ Upgartion Project for IOCL
➢ Methanol Reformer plant for RCF
➢ Methanol Reformer plant of Saudi Chemicals

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Oil and natural gas sector – Introduction
The oil industry can be divided into three major components:

Upstream,
Midstream and
Downstream.

The upstream industry includes exploration and production activities, hence

is also referred as the exploration and production (E&P) sector. The
midstream industry processes, stores, markets and transports commodities
including crude oil, natural gas, natural gas liquids (NGLs) like ethane
propane and butane and sulphur. The downstream industry includes oil
refineries, petrochemical plants, petroleum products distributors, retail
outlets and natural gas distribution companies. The downstream industry
provides consumers thousands of products such as gasoline, diesel, jet fuel,
heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers,
antifreeze, pesticides, pharmaceuticals, natural gas and propane. Both
internationally and within India the oil and gas sector is characterized by
existence of "integrated" companies, which are present in all these three
sectors.

The flow chart below shows oil value chain depicting the entire process
under which both upstream and downstream segments are covered . To
start with, crude oil is explored and produced (Upstream) and then
transformed into various petroleum products with different end uses (see
table for end uses) in refineries and finally marketed to retail customers
(Downstream). Except Aviation Turbine Fuel (ATF) and Liquefied Petroleum
gas (LPG), all the end products are sent to intermediate storage plants
through terminal/depots and finally to retail customers. As regards ATF it is
distributed directly to the Airfields or Air stations and refined LPG is
dispatched to LPG storage/bottling plants for liquefaction and marketing to
retail customers. Pipelines are mostly used to transfer the petroleum
products and by products. For onshore fields, coastal tankers are used.

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What is Natural Gas?
Natural gas is a gas consisting primarily of methane. It is found associated
with other fossil fuels, in coal beds, as methane clathrates, and is created by
methanogenic organisms in marshes, bogs, and landfills. It is an important
fuel source, a major feedstock for fertilizers, and a potent greenhouse gas.

Before natural gas can be used as a fuel, it must undergo extensive

processing to remove almost all materials other than methane. The by-
products of that processing include ethane, propane, butanes, pentanes and
higher molecular weight hydrocarbons, elemental sulfur, carbon dioxide,
water vapor and sometimes helium and nitrogen.

Natural gas is often informally referred to as simply gas, especially when

compared to other energy sources such as oil or coal.

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 Natural gas production world

List of countries by natural gas production

Rank Country/Region Natural gas production (m³) Date of

information
World 3,021,000,000,000 2007 est.
1 Russia 654,000,000,000 2007 est.
2 United States 545,900,000,000 2007 est.
— Arab League 405,510,000,000 2007 est.
— European Union 197,800,000,000 2007 est.
3 Canada 187,000,000,000 2007 est.
4 Iran 111,900,000,000 2007 est.
5 Norway 99,300,000,000 2008 est.
6 Algeria 85,700,000,000 2007 est.

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7 Netherlands 76,330,000,000 2007 est.
8 Saudi Arabia 75,900,000,000 2007 est.
9 Indonesia 72,300,000,000 2007 est.
10 China 69,270,000,000 2007 est.
11 Turkmenistan 68,880,000,000 2007 est.
12 Uzbekistan 65,190,000,000 2007 est.
13 Malaysia 64,500,000,000 2007 est.
14 Qatar 59,800,000,000 2007 est.
15 India 56,000,000,000 2007 est.

Natural Gas Production (2007)

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Natural Gas in India
The Indian natural gas market is in the midst of a major shift from a
centrally managed system to one with a greater role for market forces.
Since the first major gas supplies began flowing in the mid-1980s, gas has
been produced entirely by the national oil company, Oil and Natural Gas
Corporation (ONGC), and transported and marketed by the state-owned Gas
Authority India Limited (GAIL).1 This gas was sold at low prices set by the
central government that, at the time, had a large surplus of gas and sought
to stimulate consumption. Along the major pipeline that GAIL constructed to
link the gas fields in the west with the interior of the country up to Delhi, the
government urged construction of large fertilizer plants, gas-fired power
plants, and other gas-consuming industries to ensure that the full volumes
of gas were consumed.

In this state-controlled system, gas was allocated through a political process

to priority users in the fertilizer and electric power sectors. Low prices
encouraged excessive consumption, however, and soon demand for gas
outstripped supply. Other potential gas consumers, especially those in
industry (such as steel, glass making, and petrochemicals), received the
remaining gas after the priority consumers had used their allocation.
Although cheap, these gas supplies were unreliable and frequently cut off
without compensation, causing many consumers to build plants capable of
running on multiple fuels.

Retail price caps hindered investment in new gas production and

infrastructure. ONGC was, first and foremost, an oil company that had little
interest in gas, and private oil and gas companies had little access to the
Indian market. A gas shortage quickly emerged and, by the end of the
1990s, by some estimates, nearly half of India’s gas demand was unmet.2
In response to this supply shortfall, the Indian government passed a series
of broad reforms designed to increase the production and availability of gas.
Most prominent among these was the enactment of the New Exploration
Licensing Policy (NELP), which allowed private companies to bid for oil and
gas exploration blocks, and to construct liquefied natural gas (LNG) import
terminals. These private investors were guaranteed attractive tax rules and
the freedom to sell their gas at whatever price the market would bear.3
These reforms have yielded fruit. In 2002, Reliance Industries Limited
(hereafter “Reliance”) announced a 14 trillion cubic foot (Tcf) gas field off

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the east coast of India, increasing India’s available gas reserves by nearly
50%. Other large fields have since been announced by the Gujarat State
Petroleum Corporation (GSPC)4 and ONGC respectively.5 In 2004, India’s
firstLNG facility (Petronet – Dahej LNG) began operations, with a second
(Shell – Hazira LNG) opening in 2005. Figure 1 stacks the expected supplies
from these projects, in addition to the existing (declining) fields currently in
production. The assured supplies are shown at the bottom; more speculative
supplies (e.g., a much discussed, but heretofore unbuilt international
pipeline, such as from Iran) are at the top of the stack. The figure assumes
no major new domestic gas finds in the coming years, but given the
significant exploration underway within India, it seems likely that other
domestic supplies will materialize.

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Hydrocarbon Vision 2025

In India, Natural Gas got attention as a fuel of importance in the last 2

decades when the Government setup Gas Authority of India Limited to
handle the gas distribution business. Till that time, ONGC and OIL were
looking after production and distribution of natural gas. Since the last one
and a half decade, natural gas started finding a number of usages as an
environment friendly high efficiency fuel. With the turn of Century, the
following key developments marked a key milestone in the growth of natural
gas sector as an industry:

1. Hydrocarbon Vision 2025 predicted huge demand supply gap and

emphasized the need of bridging the gap.
2. Besides ever growing need of Power and Fertilizer sectors, natural gas
started finding its usage also in other industries such as
petrochemicals, transportation, sponge iron, glass and ceramics.
3. A number of LNG Terminals were planned, some of which have are
now already in their construction phase.
4. New gas pipeline infrastructure started coming up.
5. E&P activities in NELP blocks started giving very encouraging results.
6. Gas Prices were taken up for revision.
7. More number of domestic and international players started taking
interest in the sector.

All these activities put the Indian Natural Gas market firmly on the World
Energy Map and the sector started drawing attention from Infrastructure
Developers, Financial Institutions, Equipment Manufacturers, EPC
Contractors, Consultants, Management and Legal Advisors, from world over
etc."

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Availability & utilization of natural gas

Natural gas has emerged as the most preferred fuel due to its inherent
environmentally benign nature, greater efficiency and cost effectiveness.
The demand of natural gas has sharply increased in the last two decades at
the global level. In India too, the natural gas sector has gained importance,
particularly over the last decade, and is being termed as the Fuel of the 21st
Century.

1. Production of natural gas, which was almost negligible at the time of

independence, is at present at the level of around 87 million standard
cubic meters per day (MMSCMD). The main producers of natural gas
are Oil & Natural Gas Corporation Ltd. (ONGC), Oil India Limited (OIL)
and JVs of Tapti, Panna-Mukta and Ravva. Under the Production
Sharing Contracts, private parties from some of the fields are also
producing gas. Government have also offered blocks under New
Exploration Licensing Policy (NELP) to private and public sector
companies with the right to market gas at market determined prices.

2. Out of the total production of around 87 MMSCMD, after internal

consumption, extraction of LPG and unavoidable flaring, around 74
MMSCMD is available for sale to various consumers.

3. Most of the production of gas comes from the Western offshore area.
The on-shore fields in Assam, Andhra Pradesh and Gujarat States are
other major producers of gas. Smaller quantities of gas are also
produced in Tripura, Tamil Nadu and Rajasthan States. OIL is
operating in Assam and Rajasthan States, whereas ONGC is operating
in the Western offshore fields and in other states. The gas produced
by ONGC and a part of gas produced by the JV consortiums is
marketed by the GAIL (India) Ltd. The gas produced by OIL is
marketed by OIL itself except in Rajasthan where GAIL is marketing
its gas. Gas produced by Cairn Energy from Lakshmi fields and Gujarat
State Petroleum Corporation Ltd. (GSPCL) from Hazira fields is being
sold directly by them at market determined prices.

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 4. Natural gas has been utilised in Assam and Gujarat since the sixties.
There was a major increase in the production & utilisation of natural
gas in the late seventies with the development of the Bombay High
fields and again in the late eighties when the South Bassein field in the
Western Offshore was brought to production.

Utilization of natural gas

The gas produced in the western offshore fields is brought to Uran in
Maharashtra and partly in Gujarat. The gas brought to Uran is utilised in and
around Mumbai. The gas brought to Hazira is sour gas which has to be
sweetened by removing the sulphur present in the gas. After sweetening,
the gas is partly utilised at Hazira and the rest is fed into the Hazira-
Bijaipur-Jagdhishpur(HBJ) pipeline which passes through Gujarat,
MadhyaPradesh, Rajasthan, U.P., Delhi and Haryana. The gas produced in
Gujarat, Assam, etc; is utilised within the respective states.

Natural Gas is currently the source of half of the LPG produced in the
country. LPG is now being extracted from gas at Duliajan in Assam, Bijaipur
in M.P., Hazira and Vaghodia in Gujarat, Uran in Maharashtra, Pata in UP
and Nagapattinam in Tamil Nadu. Two new plants have also been set up at
Lakwa in Assam and at Ussar in Maharastra in 1998-99. One more plant is
being set up at Gandhar in Gujarat. Natural gas containing C2/C3, which is a
feedstock for the Petrochemical industry, is currently being used at Uran for
Maharashtra Gas Cracker Complex at Nagothane. GAIL has also set up a 3
lakh TPA of Ethylene gas based petrochemical complex at Auraiya in 1998-
99.

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Present Scenario
The Gas Industry

The distribution of natural gas reserves in the country is not uniform.

Around 75% of the gas is produced in the Western Offshore fields, with the
balance coming mostly from Gujrat and the North-Eastern States. The
production of crude oil and natural gas is currently the responsibility of two
public sector undertakings (PSUs), ONGC and OIL. The Gas authority of
India Ltd. (GAIL), a PSU, and OIL are engaged in transportation, distribution
and marketing of natural gas. The Government of India is keen to attract
private investment in the production, transportation, etc. of natural gas.
Contracts have been awarded for the development of some medium/smalll
sized fields and it is expected that in 1997-98 about 6 MMSCMD of gas
would be produced from the private/joint venture fields. Two private sector
companies and the Municipal Corporation of Baroda are at present engaged
in the distribution of the natural gas in the domestic/commercial sector in
Gujrat and Mumbai. Two State Government undertakings are doing the
same work in the North-Eastern states in a number of small towns. City gas
for Delhi and a project for supply of gas to reduce pollution in and around
Taj Trapezium area are being implemented.

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Pricing of Gas
The price of gas is under revision for which the Government of India has set
up a committee and it's recommendations are expected soon. Pending
finalisation of the report, the price of gas as applicable on 31.12.95 is
continuing and the current consumer price of gas is Rs. 1850 per thousand
cu.m.. (US$ 1.50/MMBTU) exclusive of royalty, taxes and transportation
charges. This price is lower than the CIF price of imported high sulpher fuel
oil. However, the Government of India has signed production sharing
contracts with multinational companies for development and production of
various fields. The price of gas to be paid for gas purchased by the Gas
Authority of India Ltd. From such joint ventures is linked to a basket of fuel
oil. The balance gas may be marketed by the developers at negotiated
prices.

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Demand
Registered demand with Gas Authority of India Ltd. For natural gas in the
country is around 260 MMSCMD. The Government of India has also
constituted an Expert Group to assess the realistic demand for natural gas.
This Expert Group has assessed the demand for gas at 146 MMSCMD by the
year 2000 and 188 MMSCMD by the year 2004-5. In view of the large
difference between availability and demand, natural gas supply is allocated
by the Government generally based upon the Imputed Economic Values
(IEVs) of natural gas use. Further, in order to utilise natural gas optimally, it
is fractionated to derive the value added products and heavier fraction,
C2/C3, is being used for petrochemicals industry and LPG as a domestic
fuel. An allocation of 92.92 MMSCMD has been made so far. Power and
fertiliser sectors get preference; allocation to power sector amounts to
42.41% and for fertiliser sector 32.05%. Natural gas to the extent of 11% is
also being used as a fuel source in industries and balance for production of
LPG and C2/C3.

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Demand and supply scenario 1

In the recent years, India’s energy consumption has been increasing at one
of the fastest rates in the world due to population growth and economic
development. Primary commercial energy demand grew at the rate of six
per cent between 1981 and 2001 (Planning Commission 2002). India ranks
fifth in the world in terms of primary energy consumption, accounting for
about 3.5% of the world commercial energy demand in the year 2003.
Despite the overall increase in energy demand, per capita energy
consumption in India is still very low compared to other developing
countries.

India is well-endowed with both exhaustible and renewable energy

resources. Coal, oil, and natural gas are the three primary commercial
energy sources. India’s energy policy, till the end of the 1980s, was mainly
based on availability of indigenous resources. Coal was by far the largest
source of energy. However, India’s primary energy mix has been changing
over a period of time.

Despite increasing dependency on commercial fuels, a sizeable quantum of

energy requirements (40% of total energy requirement), especially in the
rural household sector, is met by non-commercial energy sources, which
include fuelwood, crop residue, and animal waste, including human and

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draught animal power. However, other forms of commercial energy of a
much higher quality and efficiency are steadily replacing the traditional
energy resources being consumed in the rural sector.

Resource augmentation and growth in energy supply has not kept pace with
increasing demand and, therefore, India continues to face serious energy
shortages. This has led to increased reliance on imports to meet the energy
demand.

1
http://www.indiaenergyportal.org/overview_detail.php

In 2009-10, the demand for natural gas is expected to be 225 million metric
standard cubic meters per day (mmscmd) while supply would be around 168
mmscmd, implying a demand-supply gap of 57 mmscmd.

According to a recent Mckinsey report, Gas in 2020: A Perspective,

“Demand for gas in India would surge by 9-10% annually to about
115 to 135 billion cubic meter (BCM) by 2020.” To meet its peak power
deficit of about 140 gigawatts (gw) in 2017, India will need to build 55 gw of
additional peaking capacity. Hydro electricity can satisfy 20-30 gw of peak
power demand by 2017 with alternatives like natural gas filling this gap.
However, current projects indicate that indigenous production would
increase to 55 BCM by 2012. But in the longer term, indigenous natural gas
alone may not be able to fulfill the country’s consumption needs and
pipelines would play an important role.

Experts opine that poor gas transportation infrastructure has been a

major hurdle in the development of a full natural gas market in India. The
finance minister’s proposal to develop a blueprint for long-distance gas
highway leading to a National Gas Grid is quite important, especially when
the country can expect more gas from exploratory fields of RIL, ONGC,
Cairns, and GSPC. According to Akhil Sambar, senior manager, Ernst &

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Young, “The government could look at public private partnership model for
putting together the proposed gas grid. This is all the more important when
there is a liquidity crunch. IIFCL can also play a major role in financing the
gas grid project.

1 http://www.financialexpress.com/news/natural-gas-could-keep-indias-growth-
engines-running/488199/

Review of Indian Natural Gas Demand Projections for 2020

Sources: HV 2025 – Government of India (2000). “Hydrocarbon Vision – 2025.”

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IRADe-PwC – Integrated Research and Action for Development and PriceWaterhouse Coopers (2005). “Fueling India’s Growth –
Vision 2030.”
IEP – Government of India (2006). “Integrated Energy Policy – Report of the Expert Committee.”
IEA – International Energy Agency (2006). “World Energy Outlook, 2006.”
EIA – Energy Information Administration (2006). “Annual Energy Outlook, 2006.”

Indian gas market study aims to understand the major drivers of natural gas
demand, and explain how the Indian gas market might develop under
different political and economic scenarios. In this way, it hopes to explain
the variation in projections and explain how Indian gas demand could vary
by wide margins under a range of plausible policy and development
scenarios.

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Demand Driver
Indian study examines three key consuming sectors for the country as a
whole: electricity generators, nitrogenous fertilizer producers, and industrial
consumers1.

As shown in Following Figure, these three consumers account for

approximately 95% of current demand. Our study excludes attention to
users such as CNG for transportation and domestic consumption because
they play a minor current (and likely future) role in the total market. The
widely publicized Supreme Court mandated shift of the Delhi bus fleet to
compressed natural gas (CNG) for example, consumes about 1% of India’s
gas.2

1
Industrial consumers in this figure includes natural gas used both as a chemical
feedstock and as a fuel for process heat. More details will be discussed later in the
paper.
2
Ministry of Petroleum and Natural Gas, Government of India (2007). “Petroleum
Statistics.” Available at: http://petroleum.nic.in/petstat.pdf.
3
Ministry of Petroleum and Natural Gas, Government of India (2007). “Petroleum
Statistics.” Available at: http://petroleum.nic.in/petstat.pdf.

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Summary of Natural Gas Study Sector
Scenarios
Electricity Sector
Demand Driver Current Condition
Some plant have access to
Natural Gas Pricing cheap government-
regulated gas
Piecemeal regulation of
Environmental controls regional air pollutants in
some cities
Coal is state-controlled
industry with low prices and
Coal pricing and reform
infrastructure imposed cap
on available supplies
Plausible Future Scenarios
Gas supply curve allows
plants to exhaust available
low-cost supplies and forces
them to purchase market-
priced gas.
Tighter limits of sulfur
emissions
Reforms allow much greater
use of pit-head coal plants
("coal by wire") and
imported coal, and raise
coal prices towards
international levels
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Projected Electricity Generation Mix, 2005-2025

As the projections indicate, coal is expected to maintain its dominant

position in the Indian electricity mix (69% in 2005 vs. 58% in 2025). Cheap
domestic coal, as well as the increased availability of imports, makes it very
difficult for alternatives like natural gas to compete with coal in this market.
The share of natural gas does increase from 11% to 18% of the electricity
market – much of this fueled by the new gas supplies projected to come
online by 2010 from Reliance and other private suppliers. Natural gas
assumes a large role in generating peaking power, as the model expects
that the Indian load curve will shift from baseload-dominated power of today
to a load curve with greater daily variability.

Fertilizer Sector

Demand Driver Current Condition Plausible Future Scenarios

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 India is nearly 100% self- Allowance of 5% or 30%
Import controls sufficient in nitrogenous dependence on imported
fertilizer fertilizer

Most plants have access to Cheap gas supplies decline

Price and availability of gas cheap government- and gas prices move to
regulated gas market levels

Prices to farmers have Farm gate prices increase

Farm gate urea prices increased slowly but remain more rapidly towards
below international levels international levels

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Nitrogenous fertilizers are no exception.16 Since the 1970s, India has maintained a
cost-plus pricing regime for domestic fertilizer producers, guaranteeing them an
attractive rate-of-return over their production costs. Through the 1980s and early
1990s, Indian policymakers encouraged construction of fertilizer plants along the
HVJ pipeline that connects gas fields in the west with the major consuming centers
in the interior to Delhi, and provided these plants with inexpensive natural gas. As
a result, India has been able to achieve 100% self-sufficiency in nitrogenous
fertilizer production. However, due to frequent shortages of gas in the pipeline,
much of India’s fertilizer production was built with the flexibility to utilize gas (when
available) or oil-derived naphtha (which, as a liquid, is easier to transport and store
on site). Following Figure summarizes Indian fertilizer production capacity by
feedstock.

1
See Integrated Research and Action for Development (2007). “Demand for Natural
Gas in the Indian Fertilizer Sector.”

Industrial Sector

Demand Driver Current Condition Plausible Future Scenarios

Many industrial consumers Significant gas supplies are

lack political access to gas available to consumers
Availability of gas
supplies, and consume willing to pay international
other fuels prices

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 Economic growth could
Economic growth is strong
Economic growth accelerate, decelerate, or
in India
remain the same

1
For a more detailed discussion of the modeling framework and results, see A.T. Kearney
(2007). “Demand for Natural Gas in the Indian Industrial Sector.” Program on Energy and
Sustainable Development, Working Paper #68.

Total Indian Gas Demand

Projected Natural Gas Demand (2005-2025)

Page | 38
*L, M, and H are Low, Medium and High gas demand scenarios respectively.

Page | 39
 Indian Gas Supply and Demand Projections

“IEA Ref.” from International Energy Agency (2007). World Energy Outlook.

Page | 40
Conclusions

• Natural gas consumption has risen faster than any other type of
energy source, but India’s limited domestic gas reserves spell a need
for foreign dependency in this sector as well.

• The government has slowly been switching from highly polluting coal-
fired power plants to plants using natural gas.

• India's natural gas needs have resulted in negotiations with nations of

concern in terms of reliability, including Iran, Bangladesh, and Burma.

• Demand size and uncertainty could influence supply infrastructure

decisions.

• Gas demand is highly dependent on policies outside the gas sector.

• The electricity mix in India is unlikely to change dramatically

• Coal sector reform may undercut climate change objectives

• Non-climate policies could have a large impact on carbon emissions

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Reliance Natural Resources Limited (RNRL) is engaged in the business of
sourcing, supply and transportation of gas, coal and liquid fuels. The
company is concentrating on building a strong foundation for the business of
fuel management and has already established itself as a contending player
in the Indian market.

RNRL has been awarded four CBM blocks, with an acreage of about 3,251
sq. kms, for the exploration and production of coal bed methane (CBM),
making it the second largest CBM player in India in terms of acreage. The
Company has applied for Petroleum Exploration License ( PEL ) for all four
blocks to the Governments of the concerned States. The company has
received the PEL for two blocks(Barmer 4&5) located in Rajasthan for
which operations have commenced.

RNRL has also been awarded an oil and gas block with acreage of about
3,619 Sq. Kms. in the state of Mizoram under the sixth round of the New
Exploration Licensing Policy (NELP–VI) for the exploration and production of
oil and gas. The Company has received PEL for this block and has
commenced exploration activities.

RNRL is actively pursuing business opportunities in the supply management

of coal and natural gas.

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Reliance Industries Limited (BSE: 500325, NSE: RELIANCE, LSE: RIGD) is
India's largest private sector conglomerate company by market value, with
an annual turnover of US$ 44.6 billion and profit of US$ 3.6 billion for the
fiscal year ending in March 2010 making it one of the largest India's private
sector companies, being ranked at 264th position in the Fortune Global 500
(2009[3]) and at the 126th position in the Forbes Global 2000 list (2010).

Reliance was founded by the Indian industrialist Dhirubhai Ambani in 1966.

Ambani has been a pioneer in introducing financial instruments like fully
convertible debentures to the Indian stock markets. Ambani was one of the
first entrepreneurs to draw retail investors to the stock markets. Critics
allege that the rise of Reliance Industries to the top slot in terms of market
capitalization is largely due to Dhirubhai's ability to manipulate the levers of
a controlled economy to his advantage.

Though the company's oil-related operations form the core of its business, it
has diversified its operations in recent years. After severe differences
between the founder's two sons, Mukesh Ambani and Anil Ambani, the
group was divided between them in 2006. In September 2008, Reliance
Industries was the only Indian firm featured in the Forbes's list of "world's
100 most respected companies.

Page | 43
Stock
According to the company website "1 out of every 4 investors in India is a
Reliance shareholder.". Reliance has more than 3 million shareholders,
making it one of the world's most widely held stock. Reliance Industries Ltd,
subsequent to its split in January 2006 has continued to grow. Reliance
companies have been among the best performing in the Indian stock
market.

Products
Reliance Industries Limited has a wide range of products from petroleum
products, petrochemicals, to garments (under the brand name of Vimal),
Reliance Retail has entered into the fresh foods market as Reliance Fresh
and launched a non-veg chain called Delight Reliance Retail and NOVA
Chemicals have signed a letter of intent to make energy-efficient structures.

The primary business of the company is petroleum refining and

petrochemicals. It operates a 33 million tonne refinery at Jamnagar in the
Indian state of Gujarat. Reliance has also completed a second refinery of 29
million tons at the same site which started operations in December 2008.
The company is also involved in oil & gas exploration and production. In
2002, it struck a major find on India's eastern coast in the Krishna Godavari
basin. Gas production from this find was started on 2 April 2009. As of the
end of 3rd quarter of 2009-2010, gas production from the KG D6 ramped up
to 60 MMSCMD.

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RIL vs. RNRL dispute
The gas dispute between Mukesh Ambani-led Reliance Industries Ltd (RIL)
and Anil Ambani-led Reliance Natural Resources Ltd (RNRL) began about
three and a half years ago.

Anil Ambani began, what became the biggest battle between industrial
giants that the country has ever seen, in 2006 when he filed a case against
RIL over Krishna Godavari (KG) basin gas supply.

He accused that his elder brother was violating the family agreement signed
by the brothers in 2005 in the presence of their mother Kokilaben, when the
Reliance group split.

Mukesh Ambani, on the other hand, argued the intrinsic role of government
and its approval in supply of 28 mmscd gas for 17 years at 2.34 dollars
per unit to RNRL.

The years-long battle ended on Friday, May 7, when the Supreme Court
ruled in favour of Mukesh Ambani saying the price was subject to
government approval. The apex court also noted that the family MoU was
not technically binding as the shareholders had no idea on the contents of
the agreement.

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Brief Summary
Power shortage, in India, is not unheard of. Such grim is the
outlook that India is expected to miss its 2012 power generation target by
nothing less than 60%. Hence India, once again, started to look at Natural
Gas to cater for this deficiency. Successful exploration of gas from KG basin
was widely anticipated as a solution to all lacunas persisting today. As a
result, India or Reliance Power planned a under construction, gas fired
power plant, one of the single largest gas fired power plant (5500 MW) in
the world, in Dadri, UP. However complications started immediately after the
death of Mr. Dhirubhai Ambani. Family feud between Ambani sons – Mr.
Mukesh and Mr. Anil unveiled for public interpretation. Considering the
mammoth size of Reliance conglomerate – then Rs 100,000 Crore, about
2% of India‘s economy a lot was at stake, it was imperative to reach an
amicable and agreeable solution to the dispute. Mother Kokilaben played an
important part to reach at amicable solution. The agreement contained a
clause named Gas Supply Master Agreement (GSMA). According to GSMA,
RIL (part of Mukesh Ambani group) was to supply gas at subsidized rate of
$2.34 per million British thermal units (mmbtu) for a period of 17 years. The
amount of gas would be equivalent to 28 Million Metric Standard Cubic Meter
Per Day (mmscmd) from the KG basin.

Reliance Natural Resource Ltd. (RNRL) Of Anil Ambani in 2006

claimed that Reliance Industries Ltd. (RIL) Of Mukesh Ambani had reneged
on part of a promise under the demerger agreement to supply gas from
Krishna-Godavari basin to the RNRL’s planned power stations. RIL then
argued the agreement was subject to government approval and that in
2007, a ministerial committee set a price of $4.29/mmBtu. The feud was
never settled for good. It was painfully visible by the fact that RIL was never
intending to supply gas at a contractual price when it will be making a loss.
In November 2008, RNRL filed company application, over gas supply, taking
dispute with RIL to court. The Bombay High Court upheld the maintainability
of RNRL’s plea and asked RIL to supply gas to the latter. The court asked
the two parties to enter into an agreement within a month along the
stipulated ruling. The HC also said the parties can approach Kokilaben

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Ambani — the mother of the estranged industrialists Anil and Mukesh
Ambani to reach an arrangement.

Following this, both the companies – RIL and RNRL moved to

Supreme Court. It admitted the petitions. Such a dramatic turn of events
forced the GOI to take a stand. The government has filed the affidavit as an
intervener which means that it gets to assist the court in coming to a
conclusion. Oil and petroleum ministry filed a petition in court claiming that
KG basin and its natural assets are public property, and hence, no MOU
regarding the same is legally valid unless the GOI has consented to the
MOU. On this ground, it requested the Apex court to declare the MOU null
and void. Supreme court hearing will be on the 20th October regarding this
case.

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TimeLine
July 2002 - Dhirubhai Ambani, a school teacher's son and founder of the
Reliance business empire, dies. Mukesh Ambani becomes chairman and
managing director of Reliance Industries Ltd, and Anil Ambani is made vice-
chairman.

Nov 2004 - Feud between the brothers becomes public.

June 2005 - Family reaches a settlement to split the Reliance group in a deal
brokered by their homemaker mother, Kokilaben. Memorandum of
Understanding was signed between the brothers, which included provision of
providing natural gas from RIL to RNRL at lower prices.

2006 - Formal split takes place, with Mukesh taking control of flagship
Reliance Industries, with interests in petrochemicals, oil and gas exploration,
refining and textiles. He has since launched a retail venture. Anil gets
telecoms, power, entertainment and financial services. The Anil Dhirubhai
Ambani Group includes Reliance Communications Ltd, Reliance
Infrastructure Ltd, Reliance Capital Ltd, Reliance Natural Resources Ltd
(RNRL), and Reliance Power Ltd.

December, 2006 – RNRL goes to Bombay High court against RIL on

Krishna- Godavari Natural gas issue.

June 15, 2009 - Mumbai's High Court directs Reliance Industries and RNRL
to enter a gas supply agreement within a month. Notwithstanding
Government policies and the provisions of the PSC, the order observes that
the provisions of the MOU are binding on the parties. The MOU, as per the
judgment, provides that 12 mmscmd will be given to NTPC, 28 mmscmd will
be given to RNRL and the remaining, at the option of ADAG, will be shared
between RIL and RNRL in the ratio of 60:40. The MOU also stipulates that
this share of gas will be applicable to gas not only from reserves of KG D-6
field, but also from other fields to be explored and operated by RIL, even
consequent to future bidding by RIL.

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July 18, 2009 - The government filed a petition before the Supreme Court,
made a case for scrapping the gas supply agreement between RIL & RNRL.

July 23, 2009 - The Petroleum Ministry filed a special leave petition, seeking
direction for declaring as 'null and void' a memorandum of understanding
between RIL and RNRL that provides for gas supply.

October 20, 2009 - The Supreme Court will hear the government's petition
for admissibility, as also the cross-appeals by RIL and RNRL.

October 27, 2009: Arguments by the government and RIL against the HC
ruling begin in the SC.

November 5, 2009: Justice Raveendran withdraws from the case as his

daughter works for RIL.

December 16, 2009: Arguments end in the Supreme Court (SC).

May 7, 2010: Supreme Court rules in favor of Mukesh Ambani and observes
that the family MoU was not legally binding.

Page | 49
Agreements or Contracts present in
Reliance Gas Row

Production Sharing Contract (PSC) between RIL and Government:

Under the government's New Exploration and Licensing Policy (NELP)

there is a production sharing contract (PSC) between RIL and Government
signed in April 2006, which sets out the terms and conditions under which
RIL operates its lease of Gas fields in KG-D6, including the share of
revenues that would accrue to the Government.

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MOU between RIL and RNRL:

In 2005, RNRL and RIL signed a memorandum of understanding (MOU) on

the terms under which gas would be supplied for the RNRL’s Dadri power
project in UP. This MOU specified that the price at which the gas would be
supplied would be the same as the price at which RIL would supply gas to
an NTPC project. In 2004, RIL made successful bid for NTPC to supply gas at
a price of $2.34 per mmbtu.

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Legal Complications involved in the case:

Contract Act: Contract & MOU

A contract is an agreement, enforceable by law. Every promise and

every set of promises forming the consideration for each other is an
agreement. All agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful consideration and with
a lawful object, and are not hereby expressly declared to be void.
A memorandum of understanding (MOU) is a legal document
describing a bilateral agreement between parties. It expresses a
convergence of will between the parties, indicating an intended common line
of action, rather than a legal commitment. It is a more formal alternative to
a gentlemen’s agreement, but generally lacks the bind power of a contract.
However in some cases, depending on the exact wording, MOUs
can have the binding power of a contract; as a matter of law, contracts do
not need to be labeled as such to be legally binding. Whether or not a
document constitutes a binding contract depends only on the presence or
absence of well-defined legal elements in the text proper of the document.

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Sales of Goods Act

Oil and petroleum ministry filed a petition in court claiming that

KG basin and its natural assets are public property. On this ground, we
cannot treat Natural gas under the sales of goods act. Hence price
determination of Natural gas between Family business agreements might
not be considered as valid.

Model production sharing contract

The government’s stance in the Reliance Industries Ltd (RIL) case against
Anil Ambani’s Reliance Natural Resources Ltd (RNRL) is that the agreement
between RIL-RNRL to supply gas has no legal sanctity since RIL had to get
the contract approved of by the government first. The Production Sharing
Contract (PSC) which governs the rights and obligations of both the
government and winning bidders like RIL is quite clear on this. The model
PSC issued for the current round of the New Exploration and Licensing Policy
(NELP-VIII). Clause 21.3 says the contractor has the freedom to market the
gas “as per Government Policy for utilization of gas among different sectors”
and 21.3.1 elaborates on this, saying “the Government may from time to
time frame policy for utilization of gas among different sectors”.

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The problem, however, is that this is not the PSC that RIL signed with the
government in 2000. That contract, under the NELP-I, gave unrestricted
freedom to the contractor (RIL) to sell and the government’s role was
restricted to ensuring it got its proper share of the profits. In other words, it
would appear that the government changed the model PSC (the changes
first came about in NELP-VII in 2007) terms around the same time that the
RIL-RNRL fight was heating up — this is when the petroleum ministry said it
had the right to reject the RIL-RNRL contract under the PSC. If the ministry
has this right, the RIL-RNRL case goes for a toss — while RIL maintains it
cannot sell any gas from the KG Basin without the ministry’s explicit
approval, RNRL contends the ministry has no such rights under the PSC.

Future Course

With RNRL challenging RIL’s decision on reneging the

agreement and latter’s equally ferocious rejoinder; with NTPC filing a court
case against RIL; with government allegedly favouring RIL and yet not taken
a firm stand and putting a leg down on either parties; with other
stakeholders (customers) of KG basin gas – Gautami group, a power plant
owner in AP moving to apex court for continuance of gas supply to other
non-disputing parties the situation couldn’t get more murkier. Until the
government, or the apex court, decides in favour of either parties, it’s not
just a national loss in form of worsening power situation but a loss to both
RIL and RNRL – loss of revenue, increased time and other costs associated
with litigation; a loss to the stakeholders associated with the business of
extraction and supply of gas, of power generation business and of other
consumers of KG basin gas.

Page | 54
 It is absolutely necessary for both the companies to reach on
common ground to save all the losses. But it looks a distinct possibility now
with the Anil Ambani’s attack on RIL through aggressive newspaper
advertisements. Government needs to take fair & firm stand on this case to
save huge losses. However, the most important is—it is the shareholders
who would benefit with a solution and consumers who will benefit with an
uninterrupted supply of gas.

CONCLUSIONS

Supreme Court verdict will entirely depend on the answer of the

following questions.
1. Is there any consideration involved in the MOU to consider it as a valid
contract? (Supreme Court might ask to produce complete MOU to conclude
on this part as both brothers have produced only certain part of MOU in
front of the court.)
2. Can we consider Natural Gas which is a public property under sales of
goods act? (Stand of petroleum ministry will play important part in deciding
on this issue.)
3. Can Government force laws of new act on this contract which was based
on the old act? (Firm stand from government & Supreme Court is required
to assure that there are no extraordinary losses or supernormal profit to
either party.)

Page | 55
Bibliography

• http://en.wikipedia.org/wiki/Main_Page
• http://petroleum.nic.in/
• http://www.indiaenergyportal.org/overview_detail.php
• http://www.financialexpress.com/news/natural-gas-could-keep-
indias-growth-engines-running/488199/
• http://pesd.stanford.edu
• http://business.mapsofindia.com/india-gdp/industries/oil-
natural-gas.html
• http://economictimes.indiatimes.com/news/economy/indicators/
Manufacturing-helps-GDP-grow-74-in-
FY10/articleshow/5996613.cms

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