Time to act on building gas storage in India

Vital step for Energy Security

India is one of the three most energy consuming nations. Yet, while several nations such as United States, Russia, Ukraine, Canada, China, and Germany have built underground gas storage (UGS) capacity to ensure energy security, India has lacked behind. Its high time India puts its act together to invest in gas storage.

Ashiq Muhammed, Senior Associate, Energy Research (Gas and LNG), Genesis Ray Energy explores what’s happening on the global gas storage front and why is it important for India to move ahead urgently.

Introduction

Gas is increasingly becoming a fuel of choice as there is a global shift towards cleaner fuels. It is now being seen as a vital bridge to a carbon-free world. India too has shown an appetite for consuming more and more gas, especially imported gas as the country’s production of gas is quite limited. However, gas demand is prone to seasonable fluctuations. What comes handy in such a scenario is “stored gas” which can be used to reduce peak loads and ensure flexibility and reliability of gas supplies. Underground gas storage (UGS) facilities are created in depleted hydrocarbon fields, aquifers, or salt caverns. Most existing natural gas storage in the United States for instance are depleted natural gas or oil fields that are close to consumption centers as well as pipeline connections.

These facilities are used in balancing demand, maintaining the pressure and flow in gas pipelines and in adjusting regional gas supplies. In most cases, the principal owners/operators of underground storage facilities are interstate pipeline companies, intrastate pipeline companies, local distribution companies and/or independent storage service providers. An important characteristics of an underground storage reservoir are its working gascapacity (i.e., total gas storage capacity minus the base gas that is the volume of natural gas intended as permanent inventory in a storage reservoir was) and its deliverability rate (i.e., the rate at which gas inventory can be withdrawn daily).

Global Scenario

It was as early as 1915, when natural gas was first stored underground successfully in Well and gas field in Canada. Since 2010, the increase in global working gas capacity has picked up pace with even Argentina building up UGS capacities. Currently, the number of UGS facilities in operation around the world is 661 with a working gas capacity of 422 billion cubic meters. Two-third of the UGS capacities globally are in developed countries of North America amounting to 441 facilities with a global deliverability of 3,726 million cubic meters per day (mcm/d) and a working capacity of 163 billion cubic metres (bcm). Besides, there are 141 facilities (108.6 bcm, 2,082 mcm/d) in Europe, 47 facilities (121 bcm, 1,242 mcm/d) in CIS, 28 facilities (22.4 bcm, 200 mcm/d) in Asia-Oceania, and 3 facilities (6.9 bcm, 34 mcm/d) in Middle East.

Source: Genesis Ray Energy Research 

Let us take the example of two countries in Asia that have presence in the UGS sector. UGS development started in China way back in 1990s. Currently UGS accounts only 3 per cent of China’s gas consumption, but the plans are to grow this capacity. Toward the end 2017, 14 UGS facilities were active in China.  Meanwhile, Japan depends heavily on imported LNG as the domestic gas production in the country is very insignificant. It imports almost 96 per cent of the natural gas it consumes. Japan is therefore among the largest importers of LNG in the world. There are five existing UGS in Japan.

Building UGS infrastructure

To build a UGS system, the structures must be reconditioned before injecting natural gas. As more natural gas is injected, formation pressure increases. Gas can be readily extracted if the pressure inside the storage facility is higher. If the pressure lowers to the wellhead pressure, gas will not be able to come up as there is no pressure differential across the wellhead and storage.

To ensure stability and minimum pressure there must be base gas as already discussed. This is a certain volume of gas inside any underground storage facility which can’t be extracted. The volume of gas which can be withdrawn or stored at any time during normal operation is called as working gas. The injection and withdrawal capacity are largely dependent on the storage pressure. If the storage pressure is high due to enough working gas inside, injection rates will be low, but the withdrawal rates will be high. Conversely, if the storage pressure is low, gas can be injected at high rates but withdrawn at low rates.

Why gas markets needs UGS?

Seasonal variation
Due to seasonal variation in gas demand, natural gas is often stored during low consumption seasons and withdrawn during high-demand seasons. Countries where natural gas is used as the primary source of heating use large-scale UGS to manage seasonal demand-supply mismatch. For the consumption in winter, in cold countries such as Russia and Canada, natural gas produced in summer is stored in UGS. Injection season usually starts in the month of April by the help of consistent natural gas production during summer and the gas  is typically sent out around the month of November. The storage levels go up by almost 80-90 per cent of the working capacity at the end of injection period and go down by 20-30 per cent at the end of withdrawal season.

Chart 2Source: Genesis Ray Energy Research Team

Peak shaving
When there is a sudden heating demand or demand for gas-fired peak load power plants, the price of natural gas can shoot up due to scarcity. This happens when there is an active competitive power or gas market. Here UGS operators can make huge profit by following the simple principle of buy low and sell high. Natural gas is bought when the prices are low and injected into UGS and is sold when demand increases. Both US and Europe are good example of such markets.

Strategic reserves
If a country or a particular sector in a country is highly dependent on imported gas, UGS can act as strategic reserves to ensure uninterrupted supply of natural gas. Japan for instance has minimal domestic gas production and is the one among the top natural gas consumer in the world. The country relies on imports to meet its natural gas requirement. Western European countries also have strategic reserves in place as they are heavily dependent on pipeline imports from Russia. There is always a risk for supplies to suffer due to political uncertainties.

How will India stand to gain with UGS capacities?

India does not suffer from much seasonal variations. Besides, India lacks a competitive gas or power market. The limited level of competitive market for power does not incentivise the gas operators to buy gas at high prices during peak periods because there are no distribution companies willing to buy high-cost gas fired power even when there are power shortages; they would rather have blackouts than pay through their nose for the gas. So, it is for building strategic reserves that India should invest in UGS capacities so that it ensures uninterrupted gas supply.

Compelling reason for having UGS in India

Natural gas accounts for 6 per cent of the total energy consumption in India. There is an expressed aspiration to increase the share of natural gas to 15 per cent by 2030. Indian gas market is predominantly used by the three major sectors: fertilizer sector (29 per cent), followed by CGD sector (20 per cent) and power sector (19 per cent . A detailed study was done by Genesis Ray’s energy research team on the fertilizer sector, a sector that uses natural gas as the primary feedstock and consumes highest amount of natural gas.

India plans to be self-reliant in the production of fertilizers by 2023. Under the programme ‘Aatmanirbhar Bharat’, new fertilizer manufacturing units are being set up with an investment of INR 400 billion to reduce the dependency on import. Former Fertilizers Minister D V Sadananda Gowda had said last year that the plan is to convert all fertiliser companies into a gas-based technology to promote indigenous industries. The only means by which fertiliser production can be increased is by ensuring uninterrupted and steady supply of natural gas. As it is, the fertilizer sector receives priority access to domestically produced gas. But it is to be noted that over the last couple of years, fertiliser sector in India is depending more on the imported gas than the domestic gas (see chart below). Currently, nitrogen-phosphate-potash (NPK) fertilizer manufacturing is largely dependent on imported gas, while urea manufacturing relies both on imported as well as domestic gas.

Chart 3Source: Genesis Ray Energy Research

LNG price in the Asia Pacific basin is heavily linked to crude oil price. This results in substantial volatility in gas prices. It is extremely difficult to plan operations purely based on LNG from future sources and it is important to consider UGS to avoid gas disruptions for a sector like fertilizer which is heavily dependent on imported gas. For instance, Matrix Fertilisers and Chemicals Durgapur was facing problems in its urea production in the starting of 2021 due to lack of natural gas as feedstock.. In such cases, UGS can act as a strategic reserve, helping country prepare itself for any type of planned or unplanned supply disruptions.

What has India done so far?

To achieve the ambitious gas usage goal, India is planning to build underground gas storage to ensure supply security. Towards this, an expert panel of Ministry of Petroleum and Natural Gas (MoPNG) has studied various suggestions for building the gas reserve. The Ministry is also planning to hire consultants to evaluate the options. Some experts feel that the government may depend on the private sector to construct gas storage capacity. Depleted oil and gas fields of national oil companies will be offered on competitive basis to interested gas marketeers, both for strategic and commercial storages. NITI Aayog, the government’s planning arm is finalising a National Energy Policy that incorporates a case for a gas storage requirement for the consumers to be guaranteed uninterrupted gas supplies. India is also exploring the option of salt caverns and aquifers to be built as an underground storage. Bids would be invited once these storage sites are identified. Overseas gas producing companies would also be offered a stake in these facilities.

Interestingly, Indian Strategic Petroleum Reserve Limited has set up Strategic Petroleum Reserves facilities with a capacity of 5.33 million metric tonnes at Vishakhapatnam, Mangalore, and Padur in Chennai. According to the consumption pattern of 2019-20, the total national capacity considering strategic petroleum reserves and the storage facilities of oil marketing companies is 74 days. Taking advantage of low crude oil prices in April/May 2020, the strategic petroleum reserves have been filled, leading to notional savings of roughly Rs 50 billion. This same approach can be followed for gas as well.

How can GRE tool help?

It’s important to strategically place underground storage facilities so that effective gas dispatch is possible using pipelines or nearest processing plants. Identification of demand centres, knowledge of potential consumers and connectivity to the national grid are some of the major concerns investors face in monetizing the stored gas. GenRay EXPLORER™ with its powerful GIS driven data visualizations provides a comprehensive view of natural gas infrastructure in and around the prospective project locations. It gives detailed information of nearby pipeline infrastructure, gas processing plant, its processing capacity, existing/potential gas consumers, industrial park locations, etc.

GenRay Explorer helps in screening sites for Underground Gas Storage

 A visualisation from GIS tool GenRay EXPLORER™ giving comprehensive details on gas infrastructure

Challenges Ahead

The complicated geological conditions make the cost, maintenance, and operations of UGS structure quite high. The other challenge is getting a suitable location in the vicinity of urban or industrial area which is also close to an existing gas pipeline. There are therefore not quality structures at the right places available for developing UGS facilities. Besides, UGS facilities have shown a history of gas migration problems.

If the storage pressure exceeds the original field reservoir pressure, there can be high chances of gas leakage to the surface which can in turn create a serious risk of explosion. Besides, faults can get more permeable mainly during an event of earthquake and there is a high chance of gas coming to the surface. Therefore, factors such as presence of faults and fractured zones, lithology and structure of overlaying formation, breakdown of cement and the seals that block the vertical migration of fluids and gases in the wellbores and their annular space must be taken into consideration while building an underground storage. There is also a need for discovering new technologies to extract gas from UGS facility in an efficient and cost-effective manner. 

Conclusion

The challenges notwithstanding, there is a strong case for building gas storage infrastructure in India. India is ramping up its gas consumption, through increased gas imports and better gas infrastructure. It must invest or encourage investment in gas storage. There will be initial hurdles, but India must join the club of countries that are using these structures to build gas reserves and through its energy security. As they say, better late than never.

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