OBJECTIVES OF STUDY

Indian Oil & Gas Industry

• The Indian Oil & Gas Sector traces the trends that are most likely to emerge in this

industry in the beginning of this new decade.

• With the Government gradually giving up control on the oil & gas sector in favor of

market forces, Indian oil companies both upstream and downstream players are getting

exposed to international price fluctuations.

• This is changing the ground realities for this vital sector of the Indian economy.

• Hence in order to realize the importance of Indian oil sector this project can be very

useful as it highlights the most successive challenges faced by the Indian oil sector.
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 INTRODUCTION TO INDIAN OIL SECTOR

The Global Scenario:-

Globally, the oil & gas sector is dominated by certain large private companies who have a
presence in almost all segments of the oil & gas value chain. Historically, oil price has been the
single most important challenge facing the global oil industry. The problem is all the more acute
as the large private companies account for only a small share of world oil production even as oil
prices remain unpredictable and prone to wide fluctuations. Given this backdrop, global oil
majors are now increasingly benchmarking their production costs against the oil production costs
of the OPEC (Organization of Petroleum Exporting Countries), and increasingly relying on
technological innovations and other cost cutting measures to lower their own production costs.
The other factors influencing their decisions are the likely fall in oil prices after March 2000,
rising demand for gas and lighter petroleum products, and the volatile and unpredictable nature
of refining margins.
The Indian Scenario: -
Unlike their global counterparts, Indian oil & gas companies have so far been operating in
specific segments of the value chain. Oil & gas exploration, crude oil refining, distribution and
marketing of petroleum products, and natural gas distribution are the key sub-sectors of the
Indian oil & gas sector. The total sales turnover of this sector as a whole was around Rs. 1,500
billion as on March 31, 1999. The Indian oil & gas sector has historically been a regulated sector,
dominated by Government undertakings. The regulation took the form of the Administered
Pricing Mechanism (APM) under which the returns on investment were guaranteed. But now,
with the APM being dismantled in phases and private players gaining a presence in the Indian oil
& gas sector, the existing public sector oil companies are getting exposed to market forces and
competition.

The Indian Upstream Sector: -

For the upstream players (the crude oil producers), the linkage to international crude oil prices
implies volatility in earnings. While a rise in international crude oil prices would translate into a
positive contribution to the bottom-line, a decline in the international prices, on the other hand,
would exert pressure on the margins of all upstream companies. The national oil companies
would, however, is protected from the downside risk by the floor price fixed by the government.
But if the floor price is removed and the international oil prices drop to levels lower than the cost
of production, even the national oil companies would require government intervention to protect
their bottom-line. What aggravates the risk further is the fact that declining oil production and
stagnating reserves dictate that the upstream companies venture into exploration areas that have a
high-risk-high-return profile (like deep water blocks). And this has implications for future
exploration & production (E&P) costs. Given the emerging scenario, expects the strategies of the
upstream players to focus on: use of better recovery techniques; employment of cost cutting
measures; entry into high-risk-high-return areas (with the assumption that oil prices will not fall
below the cost of production); integration into downstream areas; partnering; venturing into other
geographical regions; and, undertaking organizational restructuring.
The Indian Downstream Sector: -
The phased dismantling of the APM has exposed the Indian downstream players (refiners and
marketers of petroleum products) to market forces. The refining margins of the Indian refineries
are now linked to the international refining margins. A fluctuation in the international prices of
crude oil/ product translates into a variation in the domestic margins (although they are, to a large
extent, protected by the positive net duty protection). In the first 18 months of decontrol (fiscal
year 1999 and first half of fiscal year 2000), the profitability of Indian refineries has increased
(and is expected to increase further) as their margins have increased following higher duty
protection and linkage of crude and product prices with international prices. However, on the flip
side, the expected surplus in the domestic market may limit this margin expansion. The other
factors influencing the profitability of Indian refineries in the deregulated scenario would be
refinery configuration, operating costs, and refinery location. The ownership of marketing and
distribution infrastructure would be of strategic importance and would enhance profitability as
the marketing sector is decontrolled. While the profitability of the integrated players would be
higher and more resilient to economic troughs, the pure refining companies would find it difficult
to sustain profitability in a decontrolled scenario. Accordingly, the pure refining and marketing
companies are expected to be merged with the oil majors. A full decontrol of the marketing
sector is likely to lead to severe competition among the various players in the industry, and a
greater focus on branding and product differentiation. Given the changes taking place, expects
the strategies of downstream players to focus on: strengthening import infrastructure; enhancing
scale of operations; upgrading processing facilities; implementing environmental projects;
strengthening marketing and distribution infrastructure and promoting brands; entering into
strategic alliances; venturing into other areas of the energy value chain for optimizing the risk-
return profile; and restructuring the organization.
The Indian Gas Sub-Sector: -
The share of natural gas in India's energy mix has increased more than three times since the early
1980s. Energy efficiency, multiplicity of applications, and environment neutrality are the key
factors that are likely to propel further rise in demand for gas in India. The increase in demand
could come both from the existing uses of natural gas and from newer applications. A rising
demand for gas has implications on the supply level. An increased thrust on liquefied natural gas
imports would signal positive developments on the supply front. Also expects the decontrol of
the oil sector to enable the existing oil companies to pursue gas E&P activities more actively.
The Gas Authority of India Limited, with a monopoly in natural gas distribution, is likely to
benefit from the expected rise in natural gas supplies. Besides, its exposure to price risks would
be minimal because of the fixed nature of natural gas transportation tariffs.
Likely Strategic Initiatives: - Response to the phased deregulation, the strategic initiatives of
the various players in the energy value chain would focus on the following factors. Product mix.
This will have to be in line with market demand. Technology would play a major role in
influencing the product mix. Strategic initiatives would also impact product mix. Cost
competitiveness. Technological advancements and scale of operations would have an impact on
operating costs. Infrastructure/Logistics. The ownership of infrastructure for sourcing crude oil
and the logistics for distributing finished products would have a considerable impact on
operating costs. Integration into different elements of the value chain would be imperative for
bringing synergetic benefits, reducing volatility in earnings, and enhancing value addition. Brand
building, pricing, and packaging. These would be used as tools to deliver greater value to
customers.
WHAT DOES PETROLEUM MEAN?

Petroleum is a liquid that is found underground. Sometimes we call it oil. Oil can be as thick and
black as tar or as thin as water. Petroleum has a lot of energy. We can turn it into different fuels-
like gasoline, kerosene, and heating oil. Most plastics and inks are made from petroleum, too.
People have burn oil for a long time. Long ago, they didn’t dig for it. They gathered that seeped
from under the ground into ponds. It floated on the water.

Petroleum is a fossil fuel:

Long before the dinosaurs, oceans covered most of the earth. They were filled with tiny sea
animals and plants. As the plants and animals died they sank to the ocean floor. Sand and
sediment covered them and turn into sedimentary rock. Millions of years passed. The weight of
the rock and heat from the earth turned them into petroleum.
Petroleum is called a fossil fuel because it was made from the remains of plants and animals. The
energy in petroleum came from the energy in the plants and animals. That energy came from the
sun.

Petroleum is non-renewable:

The petroleum we use today was made millions of years ago. It took millions of years to form.
We can’t make more in a short time. That’s why we call petroleum non-renewable. We import
more than half the oil we use from other countries.
We drill oil wells.

Petroleum is buried underground in tiny pockets in rocks. We drill oil wells in to the rocks to
pump out the oil. A few wells are more than two miles deep. A lot of oil is under the oceans
along our shores. Oil rigs that can float are used to reach this oil. After the oil is pumped to the
surface, it is send to refineries. At the refineries, it is separated into different types of oil and
made into fuels. Most of the oil is made into gasoline. The oil is moved from one place to
another through pipelines and by ships and trucks.
We use petroleum everyday.

What would we do without petroleum? Our country would come to a stop! Most of our cars,
trucks, planes are powered by fuel made from oil.
Our factories use oil to make plastics and paints, medicines and soaps. We even burn oil to make
electricity. We use more petroleum than any other energy source.

Petroleum can pollute.

Petroleum keeps us going, but it can damage our environment. Burning fuels made from oil can
pollute the air. Pollution from cars is a big problem in many parts of the country. oil companies
are making cleaner gasoline and other fuels every year.
Oil can pollute soil and water injuring the animals that live in the area. Oil companies work hard
to drill and ship oil as safely as possible. They try to clean up any oil that spills.
ORIGIN OF PETROLEUM

During the past 600 million years incompletely decayed plant and animal remains have become
buried under thick layers of rock. It is believed that petroleum consists of the remains of these
organisms but it is the small microscopic plankton organism remains that are largely responsible
for the relatively high organic carbon content of fine-grained sediments like the Chattanooga
shale which are the principle source rocks for petroleum. Among the leading producers of
petroleum are Saudi Arabia, Russia, the United States (chiefly Texas, California, Louisiana,
Alaska, Oklahoma, and Kansas), Iran, India, China, Norway, Mexico, Venezuela, Iraq, Great
Britain, the United Arab Emirates, Nigeria, and Kuwait. The largest known reserves are in the
Middle East

PHYSICAL PROPERTIES OF PETROLEUM BASED OIL

Petroleum-based oil describes a broad range of natural hydrocarbon-based substances and
refined petroleum products, each having a different chemical composition. As a result, each type
of crude oil and refined product has distinct physical properties that affect the way oil spreads
and breaks down, the hazard it may pose to marine and human life, and the likelihood that it will
pose a threat to natural and man-made resources. For example, light refined products, such as
gasoline and kerosene, spread on water surfaces and penetrate porous soils quickly. Fire and
toxic hazards are high, but the products evaporate quickly and leave little residue. Alternatively,
heavier refined oil products may pose a lesser fire and toxic hazard and do not spread on water as
readily. Heavier oils are more persistent, however, and may present a greater remediation
challenge.
The rate at which an oil spill spreads will determine its effect on the environment. Most oils tend
to spread horizontally into a smooth and slippery surface, called a slick, on top of the water.
Factors which affect the ability of an oil spill to spread include surface tension, specific gravity,
and viscosity.

• Surface tension is the measure of attraction between the surface molecules of a liquid.
The higher the oil's surface tension, the more likely a spill will remain in place. If the
 surface tension of the oil is low, the oil will spread even without help from wind and
water currents. Because increased temperatures can reduce a liquid's surface tension, oil
is more likely to spread in warmer waters than in very cold waters.
• Specific gravity is the density of a substance compared to the density of water. Since
most oils are lighter than water, they lie flat on top of it. However, the specific gravity of
an oil spill can increase if the lighter substances within the oil evaporate.
• Viscosity is the measure of a liquid's resistance to flow. The higher the viscosity of the oil,
the greater the tendency for it to stay in one place.
 The Importance of Oil and Natural Gas

When they hear of the decline of oil and natural gas, the first inclination of many people is to
say, “Oh well. So I won’t be able to drive as much. I’ll just have to buy a hybrid car and a wood
stove.” It is difficult to appreciate the true importance of hydrocarbons to modern civilization. It
is doubtful that there is any facet of our technological civilization which will not be affected by
the diminishing production of oil and natural gas.

If you are reading this article in the morning paper, then the paper it is printed on was
manufactured using the energy of oil or natural gas, while the ink itself is an oil product. The
printing press which printed this newspaper was built using the power of oil and natural gas, and
runs on energy provided by oil and gas. Unless the paper was delivered by a paperboy riding a
bicycle (built using the energy of oil and gas, and riding on tires made of oil), then it was
delivered by a motor vehicle which consumed oil, was built with the energy of oil and gas,
incorporating plastic parts made from oil, and driven on roads made from oil.

The light you are reading by was probably produced from electricity generated by natural gas. If
not, then it was generated by coal or nuclear fuels both of which are mined and transported using
oil. The chair you are sitting on was built using the energy of oil and natural gas, and if it is built
with any materials other than wood (cut and transported using oil and gas) or metal (mined,
smelted and transported using oil and gas), then they are probably artificial materials made from
oil. The same goes for the clothes you are wearing.

The coffee you are sipping as you read this column was transported and processed using the
energy of oil. Likewise the bacon and eggs you had for breakfast. And the grain which went into
the toast you are eating (harvested, ground, baked and transported using the energy of oil and
gas), was grown using fertilizers produced from natural gas and pesticides produced from oil.
The plate you are eating on was either made from oil, or baked in a kiln using natural gas. And
your breakfast was cooked on a stove which used either natural gas, or electricity generated from
natural gas.
Beyond that, the materials used to build the house you are sitting in were transported using oil, as
was every item in your house. Oil powered vehicles transport all raw materials to the factory, all
finished products from the factory to the marketplace, and all purchases from the marketplace to
your home. It is mainly due to the availability of cheap and plentiful oil that the average
consumer in INDIA today can live like a king or queen.

The average Indian citizen today is benefiting from the energy equivalent of 60 slaves working
around the clock. We take our energy slaves totally for granted. A large portion of them are used
on frivolous consumption. And, if we are denied our energy slaves for even a few hours, then
most of us will kick up a big fuss until they are restored to us.

Our civilization is built on oil, and an ever expanding supply of energy is vital to continued
economic growth. To quote the Energy Information Administration, Department of Commerce
and Bureau of Economic Analysis, “The availability of oil, natural gas, and coal is what made
the United States’ rise to a global economic superpower possible. As energy consumption
escalated, so did the nation’s economic output as measured by annual gross domestic product.”

The converse of this last sentence is also true. As energy consumption declines, so will the
annual gross domestic product. It is suspected that this decline will be precipitous rather than
gradual. Once investors understand that diminishing energy production cannot be reversed, the
market will collapse. The result could be a depression worse than the Great Depression of the
1930s; a depression with no end in sight.

To see where we may be heading, it is only necessary to look back at the 1970s. In the year 1970,
U.S. domestic oil production peaked and began to decline. This country has never again
produced so much oil as we did in 1970. The result was spiraling inflation and gasoline
rationing. Due to inflation, mortgage rates jumped 21%. There were trucker strikes, the Arab oil
embargo, and a host of other difficulties. But we were able to overcome the peak of domestic oil
production because the world as a whole had not peaked. We had someplace else where we could
turn. By the early 1980s, Alaska’s North Slope oil was brought on line, as was Gulf of Mexico
oil production and, more importantly, the North Sea deposits. Although the North Slope and Gulf
of Mexico deposits were not big enough to change the peak of U.S. oil production, along with
the North Sea oil they gave us enough leverage to break the back of OPEC for the time being.

But today the North Slope and North Sea fields are all past peak, as are most of the major oil
fields in the world. The vast majority of the remaining oil deposits are found in the Middle East,
in the countries of Saudi Arabia, Iraq and Iran. Outside of this area, there are important deposits
in Russia, West Africa and Venezuela, but these deposits are an order of magnitude smaller than
the Middle East. And there are indications that Saudi Arabia’s Ghawar oil field—the largest
single field in the world—has been overproduced and abused to the point of collapse.

This is why many experts speculate that the end of cheap oil could bring about the end of
civilization as we know it. After this will come an era of diminishing energy supplies,
diminishing economies, and the faltering ability to even feed the number of people who live in
the U.S. today, much less the entire planet.
INDUSTRY STRUCTURE

The structure of the oil industry had been established in the early 1920’s and had been
remarkably stable up until the 1990’s. In the last decade a range of competitive forces influenced
two key structural changes – the consolidation of some of the historic majors, hand in hand with
widening liberalization of gas and power markets.
Today for the first time there was truly an energy market spread across firms competing against
one another in oil, gas and power, compared with the segmentation of relatively static market
structures maintained by barriers to entry or government control.
Energy businesses which drove their operations to achieve cost reductions, to achieve growth in
their markets and which were abreast of the electronic communications revolution in how they
conducted their business were likely to succeed today, not simply those who had physical and
resource assets.
Oil markets had over the last 2 years broken out of the band of crude oil prices which had been
the main trading range in the decade to 1998. Prices had halved and then tripled in two years, and
the forward outlook for the next 2 years as reflected in oil futures would be relatively tight
market conditions. The outlook was for price expectations of above Rs.840 per barrel for some
time yet.
The volatility of price was a sign that markets were working and often politicians were in favour
of markets when prices were falling but wanted to intervene if prices rose. The main driver was
essentially that the world was increasing its demand for oil (by about a million b/d each of the
next 3 years) and asking OPEC to supply about 2/3rds of that growth.
Despite the present revitalized cohesion of OPEC, calls for government intervention on the
grounds of energy security were misplaced. The basic fact was that oil producers were mostly
tied into a single commodity for their entire economic future, and they had no persistent
incentive to stop or reduce supply. They were much more dependent and vulnerable to physical
oil supply shocks than consumer economies were.
 NATURAL GAS AND TECHNOLOGY

Over the past thirty years, the oil and natural gas industry has transformed into one of the most
technologically advanced industries in the United States. New innovations have reshaped the
industry into a technology leader, in all segments of the industry. This section will discuss the
role of technology in the evolution of the natural gas industry, focusing on technologies in the
exploration and production sector, as well as a few select innovations that have had a profound

effect on the potential for natural gas.

In recent years, demand for natural gas has grown substantially. However, as the natural gas
industry in INDIA becomes more mature, domestically available resources become harder to find
and produce. As large, conventional natural gas deposits are extracted, the natural gas left in the
ground is commonly found in less conventional deposits, which are harder to discover and
produce than has historically been the case. However, the natural gas industry has been able to
keep pace with demand, and produce greater amounts of natural gas despite the increasingly
unconventional and elusive nature. The ability of the industry to increase production in this
manner has been a direct result of technological innovations. Below is a brief list of some of the
major technological advancements that have been made recently:

ADVANCES IN THE EXPLORATION AND PRODUCTION SECTOR

Technological innovation in the exploration and production (E&P) sector has equipped the
industry with the equipment and practices necessary to continually increase the production of
natural gas to meet rising demand. These technologies serve to make the exploration and
production of natural gas more efficient, safe, and environmentally friendly. Despite the fact that
natural gas deposits are continually being found deeper in the ground, in remote, inhospitable
areas that provide a challenging environment in which to produce natural gas, the exploration
and production industry has not only kept up its production pace, but in fact has improved the
general nature of its operations. Some highlights of technological development in the exploration
and production sector include:
• 22,000 fewer wells are needed on an annual basis to develop the same amount of oil and
gas reserves as were developed in 1985.
• Had technology remained constant since 1985, it would take two wells to produce the
same amount of oil and natural gas as one 1985 well. However, advances in technology
mean that one well today can produce two times as much as a single 1985 well.
• Drilling wastes have decreased by as much as 148 million barrels due to increased well
productivity and fewer wells.
• The drilling footprint of well pads has decreased by as much as 70 percent due to
advanced drilling technology, which is extremely useful for drilling in sensitive areas.
• By using modular drilling rigs and slim hole drilling, the size and weight of drilling rigs
can be reduced by up to 75 percent over traditional drilling rigs, reducing their surface
impact.
• Had technology, and thus drilling footprints, remained at 1985 levels, today's drilling
footprints would take up an additional 17,000 acres of land.
• New exploration techniques and vibration sources mean less reliance on explosives,
reducing the impact of exploration on the environment.
Some of the major recent technological innovations in the exploration and production
sector include:
 Advanced 3-D Seismic Imaging

• 3-D and 4-D Seismic Imaging - The development of seismic imaging in three
dimensions greatly changed the nature of natural gas exploration. This technology uses
traditional seismic imaging techniques, combined with powerful computers and
processors, to create a three-dimensional model of the subsurface layers. 4-D seismology
expands on this, by adding time as a dimension, allowing exploration teams to observe
how subsurface characteristics change over time. Exploration teams can now identify
natural gas prospects more easily; place wells more effectively, reduce the number of dry
holes drilled, reduce drilling costs, and cut exploration time. This leads to both economic
and environmental benefits.

• CO2-Sand Fracturing - Fracturing techniques have been used since the 1970s to help
increase the flow rate of natural gas and oil from underground formations. CO2-Sand
fracturing involves using a mixture of sand propants and liquid CO 2 to fracture
formations, creating and enlarging cracks through which oil and natural gas may flow
more freely. The CO2 then vaporizes, leaving only sand in the formation, holding the
newly enlarged cracks open. Because there are no other substances used in this type of
fracturing, there are no 'leftovers' from the fracturing process that must be removed. This
means that, while this type of fracturing effectively opens the formation and allows for
increased recovery of oil and natural gas, it does not damage the deposit, generates no
below ground wastes, and protects groundwater resources.

• Coiled Tubing - Coiled tubing technologies replace the traditional rigid, jointed drill pipe
with a long, flexible coiled pipe string. This greatly reduces the cost of drilling, as well as
providing a smaller drilling footprint, requiring less drilling mud, faster rig set up, and
reducing the time normally needed to make drill pipe connections. Coiled tubing can also
 be used in combination with slim hole drilling to provide very economic drilling
conditions, and less impact on the environment.

• Measurement While Drilling - Measurement-While-Drilling (MWD) systems allow for

the collection of data from the bottom of a well as it is being drilled. This allows
engineers and drilling team’s access to up to the second information on the exact nature
of the rock formations being encountered by the drill bit. This improves drilling
efficiency and accuracy in the drilling process, allows better formation evaluation as the
drill bit encounters the underground formation, and reduces the chance of formation
damage and blowouts.

• Slim hole Drilling - Slim hole drilling is exactly as it sounds; drilling a slimmer hole in
the ground to get to natural gas and oil deposits. In order to be considered slim hole
drilling, at least 90 percent of a well must be drilled with a drill bit less than six inches in
diameter (whereas conventional wells typically use drill bits as large as 12.25 inches in
diameter). Slim hole drilling can significantly improve the efficiency of drilling
operations, as well as decrease its environmental impact. In fact, shorter drilling times
and smaller drilling crews can translate into a 50 percent reduction in drilling costs, while
reducing the drilling footprint by as much as 75 percent. Because of its low cost profile
and reduced environmental impact, slim hole drilling provides a method of economically
drilling exploratory wells in new areas, drilling deeper wells in existing fields, and
providing an efficient means for extracting more natural gas and oil from undeleted
fields.

• Offshore Drilling Technology - The offshore oil and gas production sector is sometimes
referred to as 'NASA of the Sea', due to the monumental achievements in deepwater
drilling that have been facilitated by state of the art technology. Natural gas and oil
deposits are being found at locations that are deeper and deeper underwater. Whereas
offshore drilling operations used to be some of the most risky and dangerous
undertakings, new technology, including improved offshore drilling rigs, dynamic
positioning devices and sophisticated navigation systems are allowing safe, efficient
offshore drilling in waters more than 10,000 feet deep.
 Offshore Production - NASA of the Sea

• Offshore Drilling Technology - The offshore oil and gas production sector is sometimes
referred to as 'NASA of the Sea', due to the monumental achievements in deepwater
drilling that have been facilitated by state of the art technology. Natural gas and oil
deposits are being found at locations that are deeper and deeper underwater. Whereas
offshore drilling operations used to be some of the most risky and dangerous
undertakings, new technology, including improved offshore drilling rigs, dynamic
positioning devices and sophisticated navigation systems are allowing safe, efficient
offshore drilling in waters more than 10,000 feet deep.
The above technological advancements provide only a snapshot of the increasingly sophisticated
technology being developed and put into practice in the exploration and production of natural gas
and oil. New technologies and applications are being developed constantly, and serve to improve
the economics of producing natural gas, allow for the production of deposits formerly considered
too unconventional or uneconomic to develop, and ensure that the supply of natural gas keeps up
with steadily increasing demand. Sufficient domestic natural gas resources exist to help fuel the
U.S. for a significant period of time, and technology is playing a huge role in providing low-cost,
environmentally sound methods of extracting these resources.
Two other technologies that are revolutionizing the natural gas industry include the increased use
of liquefied natural gas, and natural gas fuel cells. These technologies are discussed below.
LIQUIFIED NATURAL GAS
Cooling natural gas to about -260°F at normal pressure results in the condensation of the gas into
liquid form, known as Liquefied Natural Gas (LNG). LNG can be very useful, particularly for
the transportation of natural gas, since LNG takes up about one six hundredth the volume of
gaseous natural gas. While LNG is reasonably costly to produce, advances in technology are
reducing the costs associated with the liquification and regasification of LNG. Because it is easy
to transport, LNG can serve to make economical those stranded natural gas deposits for which
the construction of pipelines is uneconomical.

LNG Delivery Facility with

Tanker

LNG, when vaporized to gaseous form, will only burn in concentrations of between 5 and 15
percent mixed with air. In addition, LNG, or any vapor associated with LNG, will not explode in
an unconfined environment. Thus, in the unlikely event of an LNG spill, the natural gas has little
chance of igniting an explosion. Liquification also has the advantage of removing oxygen,
carbon dioxide, sulfur, and water from the natural gas, resulting in LNG that is almost pure
methane.
LNG is typically transported by specialized tanker with insulated walls, and is kept in liquid
form by auto refrigeration, a process in which the LNG is kept at its boiling point, so that any
heat additions are countered by the energy lost from LNG vapor that is vented out of storage and
used to power the vessel.
The increased use of LNG is allowing for the production and marketing of natural gas deposits
that were previously economically unrecoverable. Although it currently accounts for only about
1 percent of natural gas used in the United States, it is expected that LNG imports will provide a
steady, dependable source of natural gas for U.S. consumption.
NATURAL GAS FUEL CELLS
Fuel cells powered by natural gas are an extremely exciting and promising new technology for
the clean and efficient generation of electricity. Fuel cells have the ability to generate electricity
using electrochemical reactions as opposed to combustion of fossil fuels to generate electricity.
Essentially, a fuel cell works by passing streams of fuel (usually hydrogen) and oxidants over
electrodes that are separated by an electrolyte. This produces a chemical reaction that generates
electricity without requiring the combustion of fuel, or the addition of heat as is common in the
traditional generation of electricity. When pure hydrogen is used as fuel, and pure oxygen is used
as the oxidant, the reaction that takes place within a fuel cell produces only water, heat, and
electricity. In practice, fuel cells result in very low emission of harmful pollutants, and the
generation of high-quality, reliable electricity. The use of natural gas powered fuel cells has a
number of benefits, including:
 Clean Electricity - Fuel cells provide the cleanest method of producing electricity from
fossil fuels. While a pure hydrogen, pure oxygen fuel cell produces only water,
electricity, and heat, fuel cells in practice emit only trace amounts of sulfur compounds,
and very low levels of carbon dioxide. However, the carbon dioxide produced by fuel cell
use is concentrated and can be readily recaptured, as opposed to being emitted into the
atmosphere.

 Distributed Generation - Fuel cells can come in extremely compact sizes, allowing for
their placement wherever electricity is needed. This includes residential, commercial,
industrial, and even transportation settings.

 Dependability - Fuel cells are completely enclosed units, with no moving parts or
complicated machinery. This translates into a dependable source of electricity, capable of
 operating for thousands of hours. In addition, they are very quiet and safe sources of
electricity. Fuel cells also do not have electricity surges, meaning they can be used where
a constant, dependably source of electricity is needed.

 Efficiency - Fuel cells convert the energy stored within fossil fuels into electricity much
more efficiently than traditional generation of electricity using combustion. This means
that less fuel is required to produce the same amount of electricity. The National Energy
Technology Laboratory estimates that, used in combination with natural gas turbines, fuel
cell generation facilities can be produced that will operate in the 1 to 20 Megawatt range
at 70 percent efficiency, which is much higher than the efficiencies that can be reached by
traditional generation methods within that output range.
The generation of electricity has traditionally been a very polluting, inefficient process.
However, with new fuel cell technology, the future of electricity generation is expected to change
dramatically in the next ten to twenty years. Research and development into fuel cell technology
is ongoing, to ensure that the technology is refined to a level where it is cost effective for all
varieties of electric generation requirements.

Types of extracted natural gas

Based on its composition, extracted (biological) natural gas belongs to one of four basic groups:
1. Dry (weak) natural gas contains a high percentage of methane (95-98%) and a very small
amount higher hydrocarbons,
2. Wet (rich) natural gas contains more higher hydrocarbons in addition to methane,
3. Acidic natural gas has a high content of sulfane (H2S), which must be removed in
processing plants before natural gas is supplied to the distribution system,
4. Natural gas with a high content of inert gases, i.e. mainly carbon dioxide and nitrogen.
As to higher hydrocarbons, natural gas contains mainly saturated hydrocarbons, which under
normal conditions exist in gaseous form – ethane, propane, and butane. Natural gas from some
deposits also contains hydrocarbons that are in a liquid state under normal conditions (pentane
and higher) and are separated as a gaseous condensate during processing. Their mixture is called
gasoline or biological petrol.
At present, the most widely used natural gas is the so-called oil-based natural gas, which formed
together with crude oil. In most cases, oil-based natural gas extracted together with crude oil is
wet natural gas. Some deposits contain no crude oil, but only dry natural gas.
Besides oil-based gas, carbon-based natural gas is used, which is removed from coal during the
mining process for safety reasons. This natural gas is always dry. Carbon-based natural gas is
used in areas with anthracite mining.
Although the deposits of oil-based natural gas are sufficient, research is underway into ways of
producing energy when all gas deposits will have been exhausted. One possibility is producing
substitute natural gas through coal gasification.

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