Around 7 bcm of LNG reserves likely to rein in fuel price volatility

Around 7 bcm of LNG reserves likely to rein in fuel price volatility

Estimate based on similar proportion of reserves in developed countries

The volatility in the fuel market induced by the Covid-19 pandemic has prompted India to look at strategic reserves for its liquefied natural gas (LNG) market. While the country would need around 7 to 8 billion cubic metres (bcm) of reserves to successfully mitigate price volatility, the lower share of natural gas in the country’s energy mix could put a question mark on the viability of such reserves.

The estimate of 7-8 bcm of LNG reserves is based on similar reserves in developed economies. According to the Gas Exporting Countries Forum, the global gas storage capacity is around 417 bcm, with the United States and the European Union accounting for close to 55 per cent of it.

This covers 80 days’ gas requirement in the EU and 58 days in the US. And the storage-to-consumption ratio (the correlation between effective working gas storage capacity and gas consumption) in the EU and the US is around 22 per cent 16 per cent respectively.

“Since India consumed roughly 33 bcm of natural gas in 2018-19, and 31 bcm in 2019-20, the country will require close to 7 to 8 bcm reserves to mitigate price volatility in the same manner as do developed countries,” a sector watcher explained. Supply constraints had pushed the S&P Global Platts’ Japan-Korea-Marker for LNG to record high levels of $56.326 a metric million British thermal units (MMBTU) in October 2021. This is after prices had crashed to record lows in the first half of calendar year 2020 (to well below $2 per MMBTU) and then touched record highs in the second half.

Union power secretary Alok Kumar last month emphasised the need for reserves of natural gas and coal as the country was witnessing a shortage of coal at its power plants. “Let us start thinking about keeping strategic reserves of these fuels — coal, gas, oil — so that economies are able to adjust and tide over any supply shortfall for about a month or so. That would be a small cost vis-à-vis the cost of disruption and uncertainty which countries face,” Kumar said.

According to executives at GAIL (India), the largest natural gas pipeline operator in the country, however, there was no shortage of natural gas in the domestic market and the supply to power plants tripled to around 16 million standard cubic metres per day (mmscmd) in October.

China, which was facing a similar fuel shortage, and accounts for over half the world’s natural gas storage capacity under construction, is looking to significantly increase its storage reserve capacity. This is also the reason why global gas prices are at a record high.

According to Debasish Mishra, leader, energy, resources and industrials (ER&I) for Deloitte in India, gas storage is mostly prevalent among western European countries, and is driven by regulatory and insurance requirements. These countries are dependent on Russian gas as their primary source for electricity and heating. “Given the physical composition of gas, its storage is expensive compared to coal and crude oil. Hence, it needs a regulatory system on cost sharing basis,” said Mishra.

However, whether the reserves are needed in the Indian context can be debated, since gas barely contributes 6 per cent to the country’s primary fuel basket, he added. A Shell India spokesperson suggested that India could explore using its depleting gas fields for the purpose of storage. “Depleted gas fields have been used as gas storage reserves abroad,” she said.

Shell India has a 5 million tonnes per annum (mmtpa) or roughly 6.895 bcm per year LNG terminal at Hazira, Gujarat. This is among the 39.2 mmtpa operational LNG regasification terminals in the country. Another 23.3 mmtpa of LNG regasification terminals are currently under construction.

India is projected to increase the share of natural gas in its energy mix from the existing 6-7 per cent to 15 per cent by 2030. Commenting on the utility of gas storage for the power sector, Shell India said, “Price sensitive sectors such as the power sector, where a part of the roughly 24,000 MW of gas power plants are either stranded or operating at low PLFs, can also benefit. Gas storage reserves could help in mitigating the price volatility for power plants.”

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