India?s choice of fuel is shifting toward natural gas as the government plans a national grid to facilitate transportation of gas across the length and breadth of the country. However, the government?s policy to intervene in gas pricing poses a major hindrance to the emergence of an integrated gas market.
The gas market in India is highly fragmented, with different sets of consumers paying different prices. The government says it wants to keep input costs for key sectors like fertiliser and power low and hence the price intervention. However, this has created serious distortions in the domestic market.
Globally, natural gas accounts for about 23% of primary energy consumption. However, it is just around 8% in India. The growth of the Indian gas market has not been that explosive despite huge discoveries in the domestic sedimentary basins in recent years.
Public sector companies like ONGC and Oil India Ltd (OIL) are selling gas to administered price mechanism (APM) consumers in the power, fertiliser sector at $2 per million British thermal unit (mmBtu) even as other players are meeting their fuel requirements with re-gasified LNG bought at $5-6 per mmBtu from the spot market. Users of costly re-gasified LNG cannot compete with APM gas users and so the former hardly ever run plants at full capacity. That means a loss in indigenous production and resultant shortages in the market.
Meanwhile, production from APM gas fields of ONGC and OIL is declining fast. The pace of decline can be slowed down with additional investments.
In contrast, ONGC and OIL get international price for their crude oil. And that is why they have made huge investments in implementing projects to restore production from even their ageing oil fields.
APM gas blocks aside, the government has started intervening in pricing of gas from blocks allocated through bidding under the National Exploration Licensing Policy (Nelp) regime, where commitment to allow contractors freedom in gas marketing is enshrined in the production-sharing contract (PSC). The ministerial panel for fixing price for gas from Reliance Industries Limited?s (RIL) D6 block in the KG basin is the most conspicuous case.
The gas from the Panna-Mukta-Tapti was already being sold at $5.73 per mmBtu when the ministerial panel arrived at the price of $4.2 for KG basin gas. Although there is no gainsaying that Reliance is able to make profits from KG basin gas even at the price fixed by the government, the right policy would be to allow the market to discover the gas price on its own. The present policy can hurt investor sentiments .
Meanwhile, there is also the fear that contractors who have already made gas discoveries in various fields awarded to them under Nelp might prefer to go slow on development work to start production. This is because the spectre of having to accept government-determined prices looms large.
The government is struggling to pay under-recoveries incurred by public sector oil marketing companies on retail sale of key petroleum products. It?s incomprehensible why it wants to subsidise sale of natural gas, which is an industrial input rather than an item of mass consumption.
Fuel cost for power generators is already a pass-through under the tariff-determinations guidelines set out by the Central Electricity Regulatory Commission So, there should not be any problem for generators if APM gas price is raised in line with the market-determined price. In any case, many generators are already using R-LNG procured from the free market to fire their plants. If anything, price realignment will level the playing field for all gas-based generators.
So fertiliser is the only sector where an increase in APM gas price will have serious implications for the government?s finances. Despite facing a huge fiscal deficit, the government is unable to act decisively to reduce its fertiliser subsidy burden. But the question is whether the gas market should remain hostage to the government?s dilemma over fertiliser subsidy.