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:- 9187BATCH: 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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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 ofinformation

 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.

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.

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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.

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Series 1

N A T U R A L G A S P R O D U C T I O n

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.

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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.3These reforms have yielded fruit. In 2002, Reliance Industries Limited (hereafter “Reliance”) announced a 14 trillion cubic foot (Tcf) gas field off 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.

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

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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.

Present Scenario

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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.

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

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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.

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.

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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.

Demand and supply scenario1

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

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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 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

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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 & 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

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

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46%

30%

19%

5%

Natural Gas Consumption in India3

Electric Power Fertilizer Industry Other

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 ScenariosElectricity Sector

Demand Driver Current Condition Plausible Future Scenarios

Natural Gas PricingSome plant have access to

cheap government-regulated gas

Gas supply curve allows plants to exhaust available low-cost supplies and forces them to purchase market-

priced gas.

Environmental controlsPiecemeal regulation of regional air pollutants in

some cities

Tighter limits of sulfur emissions

Coal pricing and reform

Coal is state-controlled industry with low prices and infrastructure imposed cap

on available supplies

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

2005 2010 2015 2020 20250

200

400

600

800

1000

1200

1400

1600

1800

Nuclear

Hydro

Natural Gas

Coal

Renewablesbilli

on k

Wh

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

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Demand Driver Current Condition Plausible Future Scenarios

Import controlsIndia is nearly 100% self-sufficient in nitrogenous

fertilizer

Allowance of 5% or 30% dependence on imported

fertilizer

Price and availability of gasMost plants have access to

cheap government-regulated gas

Cheap gas supplies decline and gas prices move to

market levels

Farm gate urea pricesPrices to farmers have increased slowly but remain below international levels

Farm gate prices increase more rapidly towards international levels

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Natural Gas 14.7 MTNaptha 7.3 MT

FO\LSHS 1.1 MT

Mixed Fuel 2.6 MT

Fertilizer Production Capacity by Feedstock (2005)1

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.

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

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Industrial Sector

Demand Driver Current Condition Plausible Future Scenarios

Availability of gas

Many industrial consumers lack political access to gas

supplies, and consume other fuels

Significant gas supplies are available to consumers

willing to pay international prices

Economic growthEconomic growth is strong

in India

Economic growth could accelerate, decelerate, or

remain the same

Refining and Petrochem-icals33%

Iron and Steel19%Heavy Engineering

12%

Ceramic and Glass10%

Chemical9%

Metals & Minerals3%

Textiles2%

Cement1%

Paper1%

Others10%

Distribution of Industrial Gas Demand, 20061

1For 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.

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Total Indian Gas Demand

Projected Natural Gas Demand (2005-2025)

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

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Indian Gas Supply and Demand Projections

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

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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

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

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.

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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 governmentand its approval in supply of 28 mmscd gas for 17 years at 2.34 dollarsper 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 Ambani — the mother of the estranged industrialists Anil and Mukesh Ambani to reach an arrangement.

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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.

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

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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.

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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.

MOU between RIL and RNRL:

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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. 

Legal Complications involved in the case:

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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.

Sales of Goods Act

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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”.

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.

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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.

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.

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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.)

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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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