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Natural gas: The bridge on India’s path to energy atmanirbharta

Vikram S Mehta writes: India has a long way to go before it can fully wean itself off fossil fuels. During this transitional phase, gas producers should be granted unfettered marketing and pricing freedom

One, the committee’s terms of reference suggested it was tasked to square the circle between “market-oriented pricing” and “administered” pricing. The committee was directed to develop “market-oriented, transparent and reliable pricing regimes” to facilitate “India’s long-term vision for ensuring a gas-based economy”.

My last column set out a 10-point road map for energy atmanirbharta (Building the future, IE September 5). In this article, I will elaborate on one of them: The importance of natural gas as the bridge fuel towards that goal. The trigger for this elaboration is the announcement at the end of August by the ministry of petroleum that they had constituted a committee, headed by energy expert Kirit Parikh, to review the domestic natural gas pricing regime.

My attention (rather concern) was triggered by three factors.

One, the committee’s terms of reference suggested it was tasked to square the circle between “market-oriented pricing” and “administered” pricing. The committee was directed to develop “market-oriented, transparent and reliable pricing regimes” to facilitate “India’s long-term vision for ensuring a gas-based economy”. And, examine the issues related to ensuring “a fair price to the end consumer”. I was not clear how the committee would reconcile the two.

Second, there have been several committees in the past. Their combined impact has been to create a landscape dotted with a potpourri of gas pricing regimes. This is because the recommendations made by one committee have not replaced those made earlier.  I am concerned this latest initiative might add a further layer to this already “notoriously complex” stack.

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Third, the composition of the committee suggests the government has plans to further tighten controls over natural gas pricing. Four of the six members are from the public sector.  I have high regard for public sector expertise but I do not expect them to recommend steps that will diminish their role. I wondered, therefore, about the negative impact of the move on the government’s objective to move forward “towards a gas-based economy”.

The committee was required to report back in 30 days, and it is possible their recommendations have already established that my line of thinking is exaggerated and unwarranted. Still, given its wider relevance, I elaborate below the reasons for my thought process.

India has natural gas reserves. Of that, there is no doubt. IHS CERA has estimated India has undiscovered gas resources of approximately 64 TCF.  The bulk of this is, however, in harsh topography and complex geology. These reserves are difficult to locate. Furthermore, even if located, they are difficult to bring to market on economically viable terms. This is because the cost of creating the development and production infrastructure is massive.  BP and its coventurers have, for instance, spent about 5 billion dollars over the period 2011d and 2019 to produce 3 TCF of gas. They expect to spend a further 6 billion dollars to produce an additional 3 TCF.

The reality is India is a high-risk exploration play. There are inherent geologic, technical, and economic obstacles to achieving commercial success. If on top of such obstacles there is a further constraint of administered pricing, it would most definitely kill incremental investor interest. The government must recognise and adapt to this hard truth. It should also note that petroleum companies have reduced their exploration budgets under pressure to shift away from fossil fuels.

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As regards gas pricing, the landscape is currently dotted by a mix of cost plus, replacement value and formulaic pricing principles. This is because, as indicated earlier, the recommendations of various committees have been additive. Initially, when licences were issued to PSUs on a nomination basis, the price of gas produced by them was set by the Ministry of Petroleum on a cost-plus basis. There was no controversy as exploration was the exclusive preserve of government companies. In later years, following the involvement of the private sector, prices were linked to replacement substitute fuels. Then, in 2014, a committee recommended that domestic prices be tied to the weighted average price of gas in the UK, US, Canada and Russia — a curious decision as the latter were exporters of gas whereas India was gas deficit and an importer. In 2016, another committee suggested that the gas produced from deep waters under conditions of high temperature and high temperature be capped to the minimum of the weighted average import price of fuel oil, naphtha and coal (as a collective) and the six-month lagged, landed price of LNG. This too was curious as it did not take into account the seasonality of LNG demand /supply and LNG prices. There have been several tweaks thereafter but none have allowed for the full mirroring of market dynamics. Thus, there is today a disparity between the domestic price of $ 12.47 /mmbtu (for gas from deep waters) and the price prevailing in the Asia Pacific region of $ 36/mmbtu.  This discount is a disincentive to potential international investors.

In the wake of the Ukraine crisis, the international energy market has undergone a profound transformation. It has fragmented and governments are responding to the rise in gas prices by walking back on the market. They are intervening through price controls, subsidies and the allocation of public funds for the creation of gas infrastructure.

India should adopt the opposite course. It should clear up the existing complexity and, other than for producers of gas from nomination blocks, permit all producers of gas to determine prices through arms-length, direct and transparent negotiations with different consumer segments. The concern that this will lead to price gouging or unaffordable prices is exaggerated as producers can only sell in the Indian market. There are no liquefaction facilities for the export of LNG in India. Subsidies may have to be provided but if so, they should be given directly by the government, through the exchequer. The gas producers must not be asked to bear that brunt.

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India has made impressive progress towards clean energy. It has, however, a long way to go before it can fully wean itself off fossil fuels. During this transitional phase, gas producers should be granted unfettered marketing and pricing freedom. Only then might gas provide a solid bridge.

The writer is chairman and distinguished fellow, Centre for Social and Economic Progress

First published on: 03-10-2022 at 04:04:30 am
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