Higher gas prices raise difficult questions for Reliance, Adani Group

The 153% jump in prices of natural gas this year has raised the stakes for the government of India to get its policy right in the sector

Amazingly, India’s two largest industrial groups stand on the two ends of the natural gas equation. The Adani group is largely a buyer of gas for use in its city gas distribution licenses stretching over 52 geographical areas that cover 15 per cent of the country, according to its own published data. Reliance Industries Limited is also a seller of gas from its largely off-shore projects, accounting for a third of the country's domestic production. 

It would not have mattered had the price of natural gas not flared up worldwide by 153 per cent in eight months since January this year globally. The rise has raised the stakes for the government of India to get its policy right in the sector.

A large segment of the gas economy is still state-controlled. Once India was seen as a laggard in removing price controls for gas, but it will be emboldened now as the Russia-Ukraine war means that even the shortage-hit Europe is also pulling back to the same shore. Volumes have plummeted in the European gas markets. The European Commission has asked the European Securities and Markets Authority to devise ways to dampen tearaway prices. Suggestions include temporary trading halt mechanisms. 

Also Read: After Russian flows dry up, India pays up to double price for gas

While the absurd global price rise has halted the timeline for deregulation of prices in the sector, it will extract costs. A committee has again been appointed under Kirit Parikh, energy sector veteran and former Planning Commission member to revise the pricing formula for the sector. All stakeholders are eagerly waiting to read what the report will say.

Based on Parikh’s advice, whatever decision Hardeep Singh Puri, minister of petroleum and natural gas takes, could hurt either of the two industrial groups. However, there are larger stakes. In response to the global spike, the price of India’s cheapest domestic gas (India has three sets of prices for gas, depending on the type of fields) might also spike by a third from the current $6 mmBtu to $9, steeply raising the cost of fertiliser and city gas distribution (CGD) networks that it feeds. This could potentially add Rs 1.4 trillion to the government subsidy bill this financial year and the next. Already, gas pipeline operator Gail has raised prices by 18 per cent in August for all CGD operators, in its latest monthly revision.

Rising prices have cut into the demand for gas. Consumption was 10 per cent lower in August, year-on-year. Some of it is because the higher prices of natural gas (PNG) supplied to homes is now costlier than alternatives like LPG cylinders. Poorvi Jain, writing for Institute for Energy Economics and Financial Analysis, shows the monthly average cost at the ongoing rates makes PNG seven per cent costlier. The current government’s policy to wean urban customers out of LPG in favour of PNG was supposed to create space to provide these bottles to rural areas, as a great piece of social engineering. Those benefits are fast eroding.

Choice for Parikh committee

But not doing so also has costs, possibly crippling investments into exploration for new gas fields. India has had a long fallow period for nearly two decades since the discovery of KG-D6 in 2002 with no major finds since then. Neighbour China has galloped ahead, as the chart shows. ONGC has had a puny exploration budget of less than Rs 30,000 crore per year, which made no impact on the ground. Some changes could happen now as Exxon has this year tied up with the company for fresh forays in Indian waters.

A flat price could, however, dampen those plans. If India hopes to produce 290 mmscmd of gas to reach the target of meeting 15 per cent of its energy basket from this source by 2030, from about 6.7 per cent as of end-December 2021, then at current prices of equipment and services globally, it would mean finding the money to finance up to Rs 3 trillion of investment.

While the risks may seem evenly tilted, they are not. In the case of CGD bids, the bidders knew there was a possibility of gas prices shooting up. For instance, in March this year, the government raised domestic gas prices by about 110 per cent. "The margins of CGD entities will be impacted significantly, contracting by about 300 bps in fiscal 2023, said Hetal Gandhi, Director, CRISIL Research", in response. But the companies still felt the larger risk was instead not getting the required quantity of gas, for which the government had promised allocation, “as a top priority under no cut category”.

Yet, it is also true that despite the commitment, the current supplies are at the level of demand assessed a year ago as on March 2021. While city gas operators have claimed they had to buy high-priced imported LNG to make up for the shortfall, data shows that consumption fell as prices spiked. None of the two groups, RIL and Adani, were willing to share any comments for this story.

The companies other than Adani and Total Gas, including the three state-owned oil marketing companies, Torrent Gas, Gujarat Gas and Indraprastha Gas, would obviously want the supplies ramped up and the domestic prices ringfenced.

None of these problems can be satisfactorily solved unless the pricing system for domestic gas exploration is streamlined. The reason why India has three prices for domestic gas is that policy changes were done piecemeal.

In the first iteration in 2014, a committee of secretaries linked not only the price of domestically extracted gas to those of major exporting countries like Russia and Canada but also directed whom to sell to. It did so without factoring in the higher extraction costs in India because of challenging topography. This policy, also known as administered price regime, which accounts for nearly two-thirds of the gas sold largely from ONGC fields, feeds the fertiliser plants and most of the CGD networks.

The next offer, made in 2016 and 2017, gave marketing freedom with a higher price cap. This category accounts for about a fifth of India’s total production from consortiums like those RIL and BP. The sales are mostly to refineries, petrochemical plants and other traders. The last is the regime of total marketing freedom without any ceiling price which producers like Vedanta and joint ventures between the Adani Group and Welspun Enterprises, through the Adani Welspun Exploration Ltd have tapped. “There is a below the ground risk of production and above the ground risk of policy change” in this environment as one of the company heads put it.

The problem for the Parikh committee is how to draw the line connecting the APM regime to the demand from fertiliser and CGD operators. These units account for almost half of the 60 mmscmd of production from these fields. Yet, they are not the only ones. Establishing any large-scale gas economy, say, by making more power units switch to gas from coal, can only happen with an assured supply. It will help the climate agenda, which means India needs more gas from under its feet.

In this environment, since global prices are highly elevated, the committee could be well advised to take the risk of dismantling the entire domestic price control regime. It would be short-term pain but will give the government more policy space to ask the companies to share some of the cost burdens. Just as petrol and diesel prices have been kept capped the largesse might be extended to some of the 7.4 million consumers of piped gas. The higher exploration dividends could pay for the current higher subsidies to shield these consumers.