The Union Cabinet is considering far reaching reforms in the gas sector. These include inter alia setting up of a local gas trading platform to facilitate price discovery, stripping power sector off its priority status in the allocation of domestic natural gas and hiving off the transportation unit of the Gas Authority of India Limited [GAIL] – a public sector undertaking [PSU] which currently holds an overwhelming share of the gas pipeline network.
The stated objective of these reforms is to enable energy companies to invest in exploration and development of gas fields in India so as to increase indigenous production and ensure that the country achieves self-sufficiency in this major source of clean energy [currently, 50% of our gas consumption is imported].
The goal is indeed laudable. But, the moot question is whether the proposed measures will help India in coming anywhere closer to it. The answer is a categorical ‘no’. The biggest stumbling block is the lack of a ‘stable’ and ‘predictable’ policy environment particularly in regard to the pricing of natural gas.
Under the guidelines in vogue since November 1, 2014, for all of domestic supplies from fields given under new exploration and licensing policy [NELP] as also blocks given on ‘nomination’ to Oil Natural Gas Corporation [ONGC] and Oil India Limited [OIL] under pre-NELP, the price is a weighted average of prices at 4 international locations in USA, UK, Canada and Russia. As per this formula, from April 1, 2019, the price is US$ 3.72 per million Btu [British thermal unit].
As per guidelines issued in March 2016, the supplies from deep/ultra-deep, high-pressure/high-temperature [HP/HT] fields get ‘premium’ price linked to the prices of alternate fuels including fuel oil, naphtha and imported liquefied natural gas [LNG]. The current price determined on this basis is almost double than the normal price.
The supplies from fields given under the Open Acreage Licensing Policy [OALP] – launched in July 2017 – are eligible for market-based price. The unconventional hydrocarbons viz. shale gas, coal bed methane [CBM] from the fields awarded under NELP also get market-based price even as conventional natural gas from these fields is eligible for normal price as per November, 2014 formula.
ONGC and OIL have 149 marginal fields in which these PSUs have not put much effort for increasing production [they account for a mere 5% of India’s total output]. The government intends to auction them to private entities. After transfer, the new owners [read: private companies] will get complete freedom of marketing and pricing of supplies from these fields.
In short, the pricing structure is highly differentiated with price varying depending on the source of supply and hydrocarbon type. Strangely, it also varies depending on who is the operator.
In 2014, when the process of formulating the new pricing policy was underway, the energy companies – in both private and public sector – lobbied hard for adopting market-based price for all supplies. But, Modi – government opted for a formula-based price applicable to all. Its logic in denying market-led price was that the gas market in India being in a nascent stage and supply far short of demand, this mechanism would lead to sharp increase in price which user industries particularly fertilizers and power [together, they consume nearly 3/4th of the available gas] may not be able to afford.
There is merit in the argument and the government ought to have continued with a ‘uniform’ policy dispensation for all supplies [seeking higher price for a difficult say, deep water, HP/HT field is untenable as such fields are expected to contain much larger reserves than a shallow or on-shore field thereby enabling them to generate extra revenue with the same price]. But, it buckled under mounting pressure from the lobbyists leading to the present messy situation.
Some entities may have got a price of their choice. But, there is no guarantee that this will translate into higher investment and more of domestic gas [this depends not just on the price but a whole gamut of factors including the regulatory environment, approval processes etc which though eased but there is still a long way to go before it becomes completely hassle free]. Besides, this leads to neglect of existing fields under NELP eligible for the lowest [albeit normal] price resulting in decline in production.
Given the muted response, now, the government is coming up with new ideas such as setting up local gas trading platform and stripping power sector of its priority status in supply of domestic gas. While, the former is intended to facilitate price discovery, it has not revealed as to how the latter will help. Both the ideas are bizarre.
At present, distribution of domestic gas [this itself is grossly inadequate vis-à-vis consumption] is totally under government control. It is decided by an inter-ministerial committee under the chairmanship of secretary, ministry of petroleum and natural gas [MPNG] which includes representatives of other crucial ministries as fertilizers and power. Of the total indigenous supply, maximum quantity 31% is given to power, 24% to fertilizers and 22% is allotted for city gas.
So, there is hardly any gas left for trading. In this backdrop, what will a trading platform do? What will be the relevance of the price discovered on such a platform? To which supplies, this reference price will apply when almost all of supplies are regulated and applicable prices pre-determined?
The officials have mooted stripping power of its priority status. This may well be intended to release substantial quantity for the proposed trading platform ostensibly to give some legitimacy to price discovery on it. This is abhorrent. First, the government encourages setting up of gas-based power plants [at 25,000 MW these plants account for about 10% of total generation capacity] by promising them supply of domestic gas on top priority and charging low price [currently, as per November 2014 guidelines]. Then, at the stroke of a pen, it seeks to withdraw the priority status. This will kill them.
Doing things in bits and pieces won’t take us anywhere. Today, we have an unholy mix of controls and market-based principles. This is more dangerous than total control on all aspects which anyway is not desirable. There is an urgent need for holistic reforms in the hydrocarbon sector.
The government should dismantle the existing regime of gas allocation and highly differentiated pricing for a variety of supply streams. Concurrently, it should deregulate import of LNG [currently, all gas imports are canalized through PSUs such as GAIL]. Together with hiving off the transportation unit from GAIL [this is a welcome idea mooted for consideration by the Union Cabinet], this will create an environment in which there will be adequate supplies to meet the demand.
This is the way forward for development of competitive markets. True, this might result in a slight increase in price over the current formula-based level yet, this will remain well below the exorbitant level promised to specified supply sources [these have the potential to strangulate user industries] at present. The users of fertilizers and power can be taken care by giving them direct subsidy.
Will Modi crack the whip on these holistic reforms?