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'All fuels should be sold at market price'

Last updated on: March 11, 2011 13:30 IST
At a time when India is looking at shale gas exploration, the production of another unconventional gas, coal bed methane, has not met with its target.

Yogendra Kumar Modi, Chairman and Chief Executive Officer, Great Eastern Energy Corporation Ltd, tells Jyoti Mukul that lack of pipeline infrastructure and market access are the reasons for the sector not picking up. Edited excerpts:

When you started producing CBM from the Raniganj block in 2007, you created a market for yourself. What is your assessment of gas demand now?

We are able to sell our entire production of 160,000 standard cubic metres a day. Initially, creating demand was an issue since there had been no gas in that part of the country. People who are now using gas had never seen it earlier.

There was reluctance and we had to show how it would work. Industry was used to keeping stocks of liquid fuel.

Now, gas goes from the pipe straight to their burner. Studies have assessed gas demand at 630 million cubic feet a day based on the conversion of all liquid fuels and the use of CNG.

When people get used to something, they want more of it. But gas will always be short in India. All estimates of gas demand are hugely pessimistic.

There will be demand if there is availability. In our case, there was zero demand since there was no availability. Whoever finds gas and takes it to the market will have a very good business.

Compared to the expected production of 1.11 million standard cubic metres a day (mscmd), the current CBM production stands at only 130,000 standard cubic metres a day. Even the production from your block is lower. Why has CBM production not picked up?

Although Oil and Natural Gas Corporation, Reliance, Essar and we were the first few to get licences, only we could start production.

All across the world, independent companies have been more successful in the CBM business because it requires focused attention. It is like manufacturing because every well is a small investment and you have to drill a lot of wells.

Original estimates were based on thin air. Nobody knew about the challenges since we were the first company. Unfortunately, the government is comparing CBM with conventional oil. CBM production depends on dewatering.

It is in our interest to produce more. We are not behind production targets. Currently, we have 50 producing wells. CBM production will be around 3 mscmd in the next few years. The potential is about 10 mscmd in the next five to seven years from blocks where discoveries have been made.

What is the price advantage that CBM offers over other fuels?

Once clean coal technologies arrive, gas will also be competitive. At present, coal is cheaper because you allow unabated pollution in it.

Currently, we are competitive with liquid fuel. The minimum price approved by the government is around $6.7 per million British thermal unit (mBtu).

Furnace oil sells at around $23, light diesel oil at $30 and commercial LPG at $34.62 per mBtu. CBM improves efficiency by 25-30 per cent. In the case of furnace oil, the burner has to be cleaned every few hours.

In gas, it can run forever. There is no pollution. Nor is there a need to keep any stock.

The government is planning to have uniform pricing for natural gas. Will it work?

Pooling of price is price control. Gas consumers are not special. It is not practical because foreign gas will come at market price. Cross subsidising will not serve any purpose. All gas should be allowed to sell at market price.

Only the finished product must be subsidised. If you take out crude after exploration, you get market price but if you take out gas, you subsidise.

The right course will be to allow international prices. It can work if there is one producer. Price control is a bad business.

India should move towards market-driven prices for every fuel because we are using fuel inefficiently. The poor must be given subsidies but this should be done in an efficient manner.

What is the scope for unconventional gas in the country given that the market is price-sensitive and gas infrastructure is under-developed?

Price sensitivity is not the issue. The major issue is lack of infrastructure. Alternative gas is a good source but the government has to ensure a pipeline network.

CBM is a different ball game. It is found that where there is coal, there is no pipeline infrastructure, whether in Madhya Pradesh, Andhra Pradesh, Orissa, West Bengal or Jharkhand.

For CBM, you can create a small infrastructure like we have done with an investment of Rs. 100-200 crore (Rs. 1-2 billion). In shale gas, the profile is exactly the reverse - production is at its peak in the beginning and then drops quickly. Within six months, production will drop by half so you need a big network with some other source of gas.

Otherwise, you cannot tie up customers since you cannot give them gas that day and say there will not be any gas after six months. The biggest challenge for shale gas is the lack of pipeline distribution network.

How do you deal with the problem of pipeline connectivity?

For CBM, the only way out is to invest your money in pipeline. Nobody else is willing to invest money because the investment will be lost for five to seven years. All the trunk pipelines are in the western part of the country.

These pipelines are not relevant to CBM producers because they need pipelines where gas is being produced. If coal is in Jharkhand and the pipeline is in Bihar, it serves no purpose to the person who takes out gas in Jharkhand. I do not see any CBM player being able to sell unless he has his own dedicated pipeline network.

Maybe 20 years down the line, the government will have a pipeline network like the one in the US. The producer there does not know who his customer is. Pipelines are spread all over. You simply put your gas in the pipeline and the pipeline owner gives you the money. You are not concerned about what he does with the gas.

Without such a network, it is difficult for alternative hydrocarbon producers - whether it is shale or CBM.

What kind of model do you suggest for CBM?

CBM producers should be allowed to lay pipelines. If they find somebody else, then so be it. But I have my doubts about some other company investing in the pipeline till the production is in the way of trunk pipelines. CBM producers cannot guarantee production for six or seven years.

CBM blocks are in sensitive areas. How difficult is it to operate there?

Coal is mostly in disturbed and, unfortunately, less developed areas. Law and order is a big challenge. We have approached the government for giving us Central Industrial Security Force protection.

What are your investment plans now that you also have the Mannargudi CBM block in Tamil Nadu?

We have already put in Rs. 800 crore (Rs. 8 billion) in Raniganj. This includes the pipeline. This block alone would require an investment of Rs. 2,000 crore (Rs. 20 billion) over the next five to six years.

We are in the process of signing a petroleum exploration licence with the Tamil Nadu government for Mannargudi. This will require a Rs 100-crore (Rs. 1-billion) investment in the next few years and about Rs 2,000 crore (Rs. 20 billion) in seven or eight years.

Do you plan to diversify?

We will look at shale gas depending on the policy that will be introduced, whether there is an opportunity, how you can market it and the areas offered.

We will expand as and when the opportunity arises. If the government comes with new blocks, we will participate. If there is no opportunity in India, then we will look overseas. We will continue to focus on this business. The focus is our advantage.

There are environmental concerns over CBM and shale production. Do you still see an opportunity there?

Environmental concerns are only over shale. Many shale reserves in the US are beneath cities and they are facing a problem. In shale, you need double the land required for CBM and it is spread over a larger area.

CBM, on the other hand, is environment-friendly because mining is done after exploration, and so it is safer. Also, we are replacing dirty fuels like furnace oil. The US, Canada and Australia are big players in CBM. In India, we have started it.

One company has started production in China. Some countries in Europe and Africa are also looking at it. Indonesia is also doing it. We feel India is the best bet.

Jyoti Mukul in New Delhi