Russia-Ukraine crisis: A lack of gas storage infra may come to haunt India

The lack of storage infrastructure will weaken India's energy security and delay the transition to clean fuel

Stocking grain for a rainy day is an ancient Indian tradition. My grandparents’ living room had a huge, black wooden cupboard to store rice, an emergency stockpile adequate to cover the family’s needs for a year, in case of a drought.

Strange, then, that the Narendra Modi government, wedded to ancient Indian wisdom, failed to create storage for a colourless, odourless bunch of methane molecules, especially after it embarked in 2015 on a challenging mission to more than double the share of natural gas, a relatively cleaner burning fuel, in India’s energy mix to 15 per cent by 2030.

After committing trillions of rupees on gas infrastructure, one would have expected the government to earmark funds for underground storage along with pipelines, liquefied natural gas (LNG) import terminals, compressed natural gas (CNG) outlets and gas transmission networks. That never happened.

A lack of gas storage infrastructure may come to haunt In­dia as the conflict between Russia, Europe’s biggest gas su­pplier, and Ukraine has set pri­ces on the boil. The Inter­nat­ional Energy Agency des­cr­ibes Indian buyers as price sens­itive, underlining the impo­r­t­ance of cheap gas to the country’s demand for the fuel. A surge in LNG rates late last year to over $25 per metric million British thermal units (MMBtu) sent LNG imports down by 9 per cent in 2021. That makes storage a critical component of India’s budding gas infrastructure, both to ride price volatility and cushion consumers against supply disruptions.

“As Europe is discovering, natural gas storage is a crucial way to prevent price spikes,” said Mathew Carr, head of CarrZee, a London-based clean energy intelligence provider. “Had Europe had more storage and had that storage been full­er, prices would not have sur­ged so high during the Russia-Ukraine crisis.” Europe uses storage to meet peak demand for the fuel in winter.

The International Gas Union (IGU) advises countries with more than 30 per cent external dependence on gas that the working gas volume of storage facilities should account for more than 12 per cent of annual consumption. Working gas is the volume of gas in a reservoir above the level of base gas and available to the marketplace. China, whose working gas capacity accounts for around 6.3 per cent of demand, also gets fuel via pipelines from Russia and Central Asia in addition to LNG. India is more precariously poised because it has recourse only to LNG, negligible overhead storage, and nil underground storage.

Germany, which is overly dependent on Russia for energy, has storage capacity equivalent to about one-quarter of annual consumption. It plans to introduce a law mandating minimum working gas inventories from May, said Laura Page, a senior LNG analyst in London at Kpler, a commodity intelligence provider. “This is going to be a big stretch, especially given tightness in the market,” Page said. European stock levels are at only around 27 per cent of annual consumption.

The EU, which depends on Russia for 40 per cent of its gas supplies, just announced plans to cut reliance on Russian gas by two-thirds by leaning on LNG. Replacing 100 billion cubic metres of Russian gas by the end of this year is EU’s objective, according to Frans Timmermans, EU climate policy chief. That’s equivalent to 70 million tonnes of LNG or 18 per cent of global LNG trade. To do this, the EU will need to outbid consumers in emerging markets (such as India and China), which could trigger energy crises there too, said Nikos Tsafos, energy expert at US Johns Hopkins University. In 2021, nearly 70 per cent of Europe’s supply of LNG originated in the United States, Qatar and Russia, according to data by CEDIGAZ, countries that also supply India under term contracts.

Analysts see crude climbing to $200 a barrel while Russia warns of $300 a barrel, inflating rates of crude-linked term LNG for India. Term LNG accounts for over 80 per cent of India’s supplies with the rest sourced from the spot market. The ANEA price, the Argus assessment for spot LNG deliveries to northeast Asia, stood at $54 per MMBtu for first-half of April, equivalent to $310 a barrel oil, and may rise further if Europe starts competing with Asia for cargoes. Such expensive spot supplies will be out of the reach of most Indian users, with factories suspending operations or burning dirty furnace oil. That risks leaving much of India’s gas infrastructure, such as LNG import terminals, already operating at 63 per cent, and pipeline capacity underutilised in the absence of storage.

India imports around half of its gas needs, and given the constraints in domestic production that dependence can only inc­rease. The higher the degree of external dependence, the greater the importance of gas storage. India has no underground gas storage, a senior official involved with India’s crude storage said, nor has state-run Indian Strategic Petroleum Reserves been asked to evaluate options. Overhead storage at LNG import terminals such as Petronet LNG’s Dahej facility is negligible relative to consumption.

Natural gas is most commonly held underground under pressure in depleted oil and gas reservoirs, aquifers and salt caverns. LNG is stored in liquid form in overhead tanks, which are expensive and consume space. Most natural gas storage in the US is in depleted fields, which takes advantage of existing wells, gathering systems and pipeline connections.

India turned its focus on gas after Modi, who had a successful stint building Gujarat’s gas infrastructure as chief minister, decided to boost the country’s dependence on a cleaner fuel that would provide infrastructure, jobs and contribute to growth. Back then, in 2015, crude averaged $45 a barrel, falling to as low as $9 a barrel in April 2020, keeping term LNG costs low. Spot LNG rates plunged to less than $2 per MMBtu in May 2020 compared to over $50 per MMBtu now. 

It was inexpensive to store gas in the 2015-20 period, provided we had created storage — but the government should have anticipated black swan events threatening India’s energy security.

China has played the gas game much better. Demand this year is expected to average 407 billion cubic metres, over six times that of India. China became the world’s biggest LNG importer last year at 79 million tonnes, thrice that of India, despite being a late entrant to LNG. But Beijing embarked on building underground gas storage in parallel. 

The China National Petroleum Corporation (CNPC) has 11 gas storage facilities groups in service, accounting for 82 per cent of China’s gas storage. Working gas capacities at 19.3 billion cubic metres are equivalent to nearly a third of India’s annual gas use. The working gas volume in storage has been growing at an average annual 22 per cent in the past seven years.

New Delhi recently annou­nced vague plans to build strategic gas storage. Given that we need the fuel to fire our growth en route to a $10-trillion economy, it’s critical for the Modi government to step on the pedal.