Clean targets: Industry wants gas pricing freedom to become universal

Industry wants the move allowing free pricing for new fields to become universal to meet clean energy targets

In early October, the government came up with a new model offering marketing and pricing freedom to natural gas producers in India, clearing a standardised e-bidding process for price discovery from new production areas and high-pressure, high-temperature fields. This was a significant modification of the administered pricing mechanism that has prevailed in the gas market for years.
 

This liberalised platform for price discovery will apply to new production areas for which the field development plan (FDP) received approvals after February 2019. This is expected to boost gas production of companies such as Oil and Natural Gas Corporation (ONGC), Mukesh Ambani-led Reliance Industries, and Vedanta’s Cairn Oil and Gas. Moreover, the move is expected to bring in the immediate production of at least 40 million metric standard cubic meter per day (mmscmd) of natural gas from the Krishna-Godavari basin alone.
 

Many believe that this will be a huge step for India towards a gas-based economy and in increasing the share of natural gas in the overall energy basket from 6 per cent now to 15 per cent by 2030. This is also a vital step towards achieving climate change goals. But the big issue is that unless such pricing reforms are extended to gas produced from old or “nomination” (or government-allocated) fields, the share of domestic gas in achieving this target may be minuscule. This especially after the pricing for the October-to-March period was revised 25 per cent down at $1.79 per mmBtu (million metric British thermal unit).

According to the director (finance) of ONGC, Subhash Kumar, these rates are below the cost of production of the company, which is in the range of $3.5-3.7 per mmBtu. This means that ONGC alone is losing around Rs 7,000 crore annually on gas business.
 

So what is the way out? Industry experts highlight that the best thing that the government can do is to incentivise producers by freeing up pricing. “The government should either make it a free market price as it did recently for new discoveries or allow a floor pricing based on import parity. Otherwise, there will be no incremental production from these fields,” said R S Sharma, former chairman and managing director of ONGC.

 

To get a return on investments, industry estimates show that ONGC should get a price little above $5 per mmBtu. The regulated pricing mechanism remains applicable to fields that companies got on a nomination basis, while they have pricing freedom on blocks or areas it had won in auctions since 1999.
 

If there is a revision in pricing norms across the board, the question is how it will affect downstream consumers.
 

Gas distribution remains under an administered mechanism with priority accorded to fertiliser, power generation, for which output prices involve some subsidy, and city gas. “We believe that there is space to increase prices to $4-5 per mmBtu, where downstream can survive without subsidy,” said Anirban Mukherjee, partner and director, Boston Consulting Group (BCG). Until clarity is in place, he said, the implementation of enhanced oil recovery or improved oil recovery [basically, strategies to recover oil] will not be possible from such old fields.
 

There is another school of thought, too, that states that gas contributes 6 per cent to the total energy basket. Out of this, domestic sources or nomination fields account for just 2.5 per cent. “Why should there only be a price restriction for 2.5 per cent of the energy equation, when the rest is free?” said a senior industry source.
 

To achieve a 15 per cent share in the energy basket, the country’s gas consumption should increase from 153 mmscmd now to 611 mmscmd by 2030. “We want a larger share of it to come from domestic sources. Achieving this share will be through a mix of domestic gas and imported liquefied natural gas (LNG),” said Tarun Kapoor, secretary in the Ministry of Petroleum and Natural Gas, addressing the media last week.
 

Another important reform that the industry expects is the inclusion of natural gas under the goods and service tax (GST). This move will remove the various value-added taxes charged by states and reduce taxes for sectors such as power and steel. “The loss to the states’ exchequer will be around Rs 12,000 crore, if natural gas is made a part of GST. States such as Andhra Pradesh and Gujarat will lose money. But it will bring investor confidence to the table,” Sharma added. During the recently concluded CERA Week energy meet, BP Chief Executive Officer Bernard Looney, too, batted for the inclusion of natural gas under GST. Kapoor echoed his views, stating that the ministry agrees to the views of the industry regarding the inclusion.
 

In terms of creating the infrastructure for the industry, the government seems to be on the right track. Investments to the tune of around $67 billion are expected to come in gas infrastructure, which will include LNG capacity increase, pipelines and CGD networks. Global players like Total, Exxon Mobil and Shell have shown their interests in this field.
 

If natural gas touches 15 per cent of the energy basket, the country’s overall savings on the foreign exchange (given that India imports 85 per cent of its crude oil requirement) will be around $22 billion by 2030. However, experts like Sharma believe that though the country is talking about 15 per cent gas share, it is still not getting the sops that the governments have extended for renewables.