The war in West Asia has quickly exposed the deep vulnerabilities of India’s energy sector. The flaring up of crude prices has adverse ramifications for domestic inflation, the current account, government finances, and economic growth. However, as far as the war-induced crippling of natural gas supplies is concerned, the crisis has been prompt.
This explains why QatarEnergy’s halt in liquefied natural gas (LNG) production has forced the government to immediately consider rationing gas supplies and reprioritising allocation across sectors. Transportation, cooking, and farming already receive top priority. These sectors would now get an even larger share of the available (reduced) gas supplies, likely leaving industrial users like the petrochemical-to-plastics value chain (the cracker route) high and dry.
Vulnerability Exposed
Nearly half of 195 million standard cubic metres per day (mmscmd) of gas consumed in the country is met through capital-intensive LNG imports. As much as 60 mmscmd of gas, or around two-thirds of imports, is currently unavailable due to the closure of the Strait of Hormuz and the force majeure declared by Qatar. In fact, India’s gas consumption growth is far below potential and stunted.
The green-transition target to raise the share of this hydrocarbon to 15% of the country’s energy mix by 2030 doesn’t appear to be within reach. The dynamics of India’s gas economy remained skewed for many years. The earlier pricing systems—opaque administered caps and the one linked to global gas hubs—were far removed from domestic realities or cost structures. Uncertainties over remunerative prices made investors cautious, causing stagnant production and drying up of new discoveries.
Overall high costs have also made gas unviable for power generation. Gas-based power stations are heavily under-utilised or stranded, with an average plant load factor of just around 15% in off-summer periods. In fact, the National Electricity Plan has turned silent on the use of this fuel. As an industrial feedstock, gas has often stoked inflation, with the cost of its volatile prices borne not only by consumers at large, but also by the government. Retail prices of urea are kept unchanged, irrespective of the vagaries of the global LNG market.
Path to Resilience
However, there is reason to believe that implementation of the Kirit Parikh Committee’s recommendations since April 2023 has made gas pricing a little more investor-friendly. As for the legacy nomination fields run by the ONGC-OIL, the price band linked to Indian crude basket, along with monthly revisions and annual ceiling escalation, is seen to balance producer viability and consumer interests. With the stated purpose of attracting investment in complex offshore fields, a separate pricing policy is in place, with a far more liberal cap benchmarked to imported LNG price.
The average production from the fields run by the Reliance-BP combine in the Krishna Godavari (KG) basin, rose sharply from 20 to 27 mmscmd between 2022-23 and 2023-24 and is now around 28 mmscmd. The combine’s current production is around 30% of total domestic gas output at its peak, while ONGC has also sharpened its focus on its assets in the KG basin.
The government must not defer implementing complete pricing freedom for difficult-field gas. As per Parikh panel’s report, this was to take effect by this January, but it has yet to materialise. Along with the new, greater emphasis on coal-bed methane projects, market-determined pricing for deep and ultradeep water gas would help India prepare itself better for global energy supply shocks like the present one.