A new policy on natural gas allocation for the next 10 years that is under discussion will benefit gas trading companies like Gail India but will make consumers pay more for not only power but also a clutch of industrial goods. It could also upset the government?s plan to reduce the subsidy on fertilisers.

This policy envisages mandatory use of imported liquefied natural gas or LNG (a minimum of 25% of the fuel/feedstock mix), which is substantially costlier than domestic natural gas that is expected to be in short supply.

A large number of products including detergents, paints, textiles and automobile parts are also likely to become costlier as petrochemical producers go for LNG that is three to four times costlier than domestic gas sold at $4.20-$5.50 per million metric British thermal units, a unit of energy.

According to official sources, the power and fertiliser ministries have agreed to the suggestion by the Saumitra Chaudhuri committee on gas price pooling that producers in these two sectors should use LNG to meet their energy and feedstock needs arising in the next five to 10 years. They cannot be supplied cheaper natural gas from companies like ONGC and Reliance Industries as the expected increase in domestic gas output in the coming years would be way below the projected demand for the clean fuel by these industries.

?We have agreed that all gas-based power plants should use LNG for a quarter of the generation tied up under long-term power purchase agreements (PPA). Unlike suggestions given earlier, we want companies to make their own arrangement of LNG, rather than government coming to their aid and supplying gas after pooling domestic and imported LNG,? said a top power ministry official, adding that a policy decision in this regard will be taken by the oil ministry and ratified by an empowered group of ministers at a meeting next month.

The mandatory sourcing of LNG for power plants is expected to increase the cost of generation by up to 25% and this could reflect in a higher electricity tariff for consumers.

“But the changes would mean that gas-based projects could run at optimum capacity rather than at 50-70% of rated capacity at present due to shortage in domestic gas,” said the official ?Do we have a choice? If everyone uses 25% of LNG for their incremental needs, it will step up LNG consumption in the country,? Gail India CMD BC Tripathi told FE. ?Our estimate is that from now to 2015, LNG consumption in India would be three to four million tonnes a year.? Gail, which in November last year opened an office in Singapore to source LNG for India?s growing requirement, last week reported a 13% jump in third quarter profit at Rs 1,091 crore, partly due to growth in gas trading volumes.

Using 25% of LNG for the incremental gas needs of fertiliser companies would mean that 22% of their total gas consumption would be the imported fuel in the next five years.

However, for producers of urea, a mass use fertiliser that is under state price control, it would not matter much as the extra cost would be set off by government subsidy. ?The cost of gas, including that of LNG, gets pass-through treatment,? said a senior government official, implying that the subsidy given to producers of the commodity will take care of this cost. Fertiliser producers are awaiting a new investment policy for the sector that will give them a 12% post-tax return on their investment and enough subsidy to cover LNG costs so that they could switch from naphtha to gas in existing plants and set up greenfield projects.

India now produces about 132 million cubic metres of gas a day and imports 46 million cubic metres of LNG a day, part of which goes to power plants and fertiliser makers. The Saumitra Chaudhuri panel said that while priority for power and fertilisers in allocating the scarce domestic gas should be continued, cheap gas for city gas distribution and transportation should be capped at their present level of 6 million metric standard cubic metres per day (mmscmd).

The panel also said that non-priority consumers like petrochemicals and steel producers should not get more than 5 mmscmd of domestic gas and that their extra requirement should be met through LNG.