IEC 2013 Securing tomorrow’s energy today: Policy & Regulations Resource Allocation and Pricing February 2013 www.deloitte.com/in “Pricing and Resource Allocation to Take Place Under Market Forces Under an Effective and Credible Regulatory Oversight, as Far as Possible” - Integrated Energy Policy , Government of India 2 Contents Introduction 4 Policy and regulatory framework 8 Pricing of energy in india 14 Discussion points 17 Resource Allocation and Pricing | 3 Introduction India is home to one-sixth of the world population Figure 1: Primary Energy Mix of India (2011) however its per capita energy consumption of 585 kilograms of oil equivalent (kgoe) in 2009 is much below the global average of 1,839 kgoe. The stage however, is set for change; with continued economic growth and better living standards the per capita energy 52.9% consumption in India is expected to be more than double by 2031-32 to around 1,124 kgoe, though this will still be lower than the 2009 world average of 1,839 kgoe. 1.3% Increasing population, economic activity and rising 5.3% income levels with further push the demand for energy in India. The Integrated Energy Policy has estimated that 1.6% India’s primary energy supply will need to increase by 4 to 5 times and its electricity generation capacity by 6 9.8% to 7 times over its 2003-04 levels to deliver a sustained growth rate of 9 percent through 2031-32 with primary 29.0% energy supply growth of around 5.8 percent per year. On the other hand, commercial energy supply would need to grow faster at about 6.8 percent per annum as Oil Nuclear Energy it will incrementally replace non-commercial energy over this period. Natural Gas Hydro electricity The primary energy consumption in India is dominated Coal Renew- ables by coal and hydrocarbons, with less than 10 percent Source: BP Statistical Review 2012 of energy accounted by other sources like hydro, renewables and nuclear. In 2011, oil and gas accounted for around ~40 percent of India's total primary energy consumption, next only to coal, which accounts for ~53 percent (Figure 1). In the last five years, India has averaged a growth rate of 8% and the demand for energy has been putting pressure on its supply sources. It is an established fact that if India continues to grow at 8% or so in the coming years a higher than average demand for energy will persist. In such a scenario, it is expected that there will be continued pressure on supply sources in the next decade largely driven by increasing urbanization and increasing demand for consumption. 4 Oil & Gas Demand Supply Scenario Figure 2: Production and consumption of Crude Oil India has 0.5% of world’s proven oil reserves; however it houses more than 15 percent of the world’s population. 78 4,000 The current reserve to production ration is ~18 years. 76.50 75.11 75.30 3,500 In terms of Natural Gas, India has 1,241 billion cubic 76 ) 74.97 3,000 74 meters (bcm) of proven and indicated reserves, which is 2,500 72.89 0.6 percent of the world's total proven gas reserves. At 72 2,000 71.25 & Cosnumption the existing production levels of 50.9 bcm per year, the ('000 BPD) (Percentage 1,500 70 70.37 country has a Gas R/P ratio of ~ 26.9 years. 1,000 68 500 Production India's existing domestic production of about 858,000 Oil Imports 66 0 barrels of oil per day (bopd) is less than 25 percent of 2005 2006 2007 2008 2009 2010 its current consumption of 3,473,000 bopd, creating a Oil Production Oil Consumption Oil Imports Percentage wide gap to be met through imports. As a result, the Source: BP Statistical Review 2012 volume of crude oil imports has been increasing steadily in India reaching more than 75 percent of its total crude requirement in 2011. Figure 3: Production and consumption of Natural Gas According to the draft approach paper on the 12th five year plan (2012-17), the gap between crude oil 30 70,000 requirement and domestic production is expected to 60,000 25 ) widen further over the next five years; this is observed as ) 50,000 a result of India's projected increasing GDP growth rate.. 20 40,000 As per forecast made by the Working group on energy 15 sector for the 12th Plan, the country requires energy 30,000 10 supply to grow at CAGR of 6.5 percent to maintain 20,000 the growth rate of 9 percent over the next five years. Import percentage (% 5 10,000 It is projected that the oil and gas requirement by the terminal year of the 12th Plan would reach 204.80 mtoe 0 0 2005 2006 2007 2008 2009 2010 2011 Production & Cosnumption (Mcm and 87.22 mtoe respectively. This demand for oil and gas would be fulfilled by import of 164.8 mtoe (or 80.5 Gas Production Gas Import Gas Import (Percentage) percent) crude oil and 24.8 mtoe (28.4 percent) natural Source: BP Statistical Review 2012 gas in 2016-17. Natural gas constitutes around 10 percent of India's total primary energy basket, which is well below the world average of 23.7 percent in 2011. As per estimates from Ministry of Petroleum and Natural Gas, by 2025, the share of natural gas in India’s energy basket is likely to reach 20 percent. The increased consumption of natural gas is expected to be fed both by increased domestic production and import of natural gas Resource Allocation and Pricing | 5 The natural gas consumption, in India was about 180 Figure 4: Demand Supply Scenario of Natural mmscmd in FY11 as against an estimated demand of Gas for Power Sector (mmscmd) approximately 279 mmscmd in 2011 (as per 11th Five 450 Year Plan). Domestic supplies are not matching with the demand of oil and natural gas in India. Mature gas 391 400 fields like that of ONGC (Panna Mukta Tapti and Bassein) and Niko in Surat have declining production and mature Bombay High oil fields are also past their peak 350 313 production levels. 300 1.3% In 2002, Reliance Industries Ltd made a large discovery 5.3% in the Krishna Godavari Basin (KG Basin) with an 250 231 estimated 337 bcm of gas reserves. Hence, there was 1.6% a sudden jump in domestic supply in 2010 (45 percent 200 175 increase over 2009). The field started production in 151 started in 2009. The initial production estimates were 150 125 28, 53 and 62 mmscmd respectively for FY10, FY11 and 110 FY12. RIL was able to meet the FY10 target by achieving 100 100 a total production of 40 mmscmd, but after peaking at 65 70 61.5 mmscmd in March 2010, the production started declining alarmingly to the extent that the current 50 production levels hover around less than 30 mmscmd. Geological complexity of the basin and high water and 0 sand ingress are the indicated causes of the decline in 1999-00 2001-02 2006-07 2011-12 2024-25 output volumes. Supply Demand Power and Fertilizer sectors are two major consumers Source: CEA of gas in India. Other consumers include CGD, LPG, refineries, etc. Availability of domestic natural gas is an increasing concern for all the consuming sectors. There has been limited capacity addition in the past for fertilizer plants based on domestic natural gas. Similarly, there has been limited focus on developing natural gas based thermal projects which could have been better in terms of their capital cost, project construction time and also environmental concerns vis-à-vis the coal based projects. The price of imported re-gasified LNG is more than thrice as expensive and is thus considered prohibitive for development of plants which need to enter into PPA’s on a competitive bidding basis India is highly dependent on imports for both for crude oil as well as natural gas and with increasing demand and reducing domestic supplies, this dependence is expected to increase further. Currently, ~76% of the crude oil and ~21% of the natural gas is imported. Import dependence to increase to 80% by FY17 for crude oil and 35% by FY17 for Natural gas. 6 Demand Supply Scenario of Coal in India Figure 5: Demand Supply Scenario of Coal (MMT) India has fifth largest coal reserves in the world and it is XI FYP XII FYP (MT XIII FYP third largest producer after China and USA. Power, steel (MT) Projected) (MT and cement are the major consuming sectors in India Projected) with power sector consuming ~70% of domestic coal Demand 696.03 980.50 1373 produced in the country. Coal accounts for 69% of total power generated in the country. Supply 554 715 950 Gap 142.03 265.5 423 However, coal production has observed slow growth Source: CEA rate. There has been limited commissioning of captive coal blocks allotted to private and public sector supporting infrastructure. Also, different characteristics companies having presence in end user industries. The of coal typically permit existing power plants to blend Demand Supply scenario after taking Business as usual imported coal with domestic coal only up to 10% scenario for coal production augmentation is shown to 15%. In addition, there is a huge price difference below: between domestic and imported coal. In addition the dynamism in the regulations of the countries from According to a press release by Ministry of Coal, India’s where coal is being imported pose further hurdles by coal demand increased at CAGR of 8.5% in the 11th way of political risks.