Ad hoc policies on pricing and utilisation are resulting in a messy gas market where neither offtake nor equitable development is assured, warns Latha Jishnu
What can be worse for a fast-growing economy than not having its own energy resources? To have plenty of this natural resource and make a complete hash of its utilisation! Since the discovery of a rich lode of natural gas in the Krishna-Godavari (KG) Basin in 2002, gas has become synonymous with controversy, and there is no aspect — from pricing and allocation to creating infrastructure and regulation — that is free of discord and tortuous litigation.
The starting point is the central government’s inability to articulate a rational policy on how this national asset should be best used to fuel the economy. Although there have been several variations of a gas utilisation policy, set forth by the inevitable empowered group of ministers (EGOM), on which sectors should get how much and in what order, the government has not set out a clearly argued strategy on how gas should be used to fulfil certain development objectives and why.
So what we have had since a draft policy was first unveiled in December 2007, fine-tuned in June 2008 and then recalibrated twice this year in February and April, is a series of allocations on how the first tranche 40 million metric standard cubic metres per day (mmscmd) of gas from Reliance Industries’ (RIL) D6 block of the KG Basin should be distributed. So while different sectors (fertiliser, power, LPG and city gas) have been moved up and down the scale, other consumers (steel) are suddenly being included in the list while specific projects like the ill-fated Ratnagiri Gas and Power Private Ltd (RGPPL) get priority. Unfortunately, this plan is not working out because a number of users like city-gas projects have not even been put to bid by the regulator. Steel plants, on the other hand, have been aggressively demanding a share and are expected to join the preferred list.
But more than the ineffectual policy on allocations has been the government’s meddling in the price discovery process which has returned to haunt it following the verdict of the Bombay High Court on Monday (June 15). It effectively throws the price policy into disarray. Says a former petroleum secretary TNR Rao: “The gas allocation policy is a farce because it is predicated on a completely faulty price-fixation policy.” He points out that one could have arrived at a proper price for KG Basin gas through either one of these methods: An open bidding process, a cost-plus method (inclusive of gold-plating), or through indexation to oil prices. “The only real price discovery was NTPC’s international tender and no one has questioned the integrity of that tender. Yet, the government chose to subvert the market mechanism and fix its own prices in a combination of all three methods to favour the producer.” Thus, the gas price was fixed at $4.20 per million metric British thermal units (mmBtu) instead of the $2.34 tendered by RIL.
The consequence of this has been an extraordinary situation where critical sectors like power generation and fertiliser have had to be arm-twisted into signing purchase agreements with the gas producer in spite of being saddled with stranded assets. At the same time, RIL, which was all set to pump in 40 mmscmd, has been forced to scale back to 26 mmscmd and is now complaining to Ministry of Petroleum and Natural Gas (MoPNG) that it cannot find buyers. In turn, the ministry has been leaning heavily on the recalcitrant public sector power generator NTPC to sign offtake deals although it is fighting a case in the Bombay High Court against RIL for failure supply gas at the tendered price. Although it managed to force NTPC to sign a deal on supplies to its joint venture subsidiary, RGPPL, NTPC has been firm against signing agreements for its own power plants. All the while, the stranded assets (see chart) are continuing to drain the economy.
| STRANDED ASSETS Existing unmet demand for natural gas (in mmscmd) | |||||
| Andhra Pradesh | Maharashtra | Gujarat | HVJ pipeline | Total | |
| Power | 9 | 11 | 7 | 7 | 34 |
| Fertiliser | 1 | 4 | 4 | 5 | 14 |
| CGD* | 2 | 7 | 19 | 6 | 34 |
| Total | 12 | 21 | 30 | 17 | 80 |
| * City-gas distribution includes commercial and industrial consumers, apart from domestic consumers and compressed natural gas for automobiles | |||||
| THE COMING GUSH Domestic Gas Supply Outlook (2007-2012) (in mmscmd) | |||||
| Sources | 2007-08 | 2008-09 | 2009-10 | 2010-11 | 2011-12 |
| Public sector* | 57.28 | 58.42 | 55.69 | 54.67 | 51.08 |
| Private operators & joint ventures (existing operations) | 23.26 | 61.56 | 60.28 | 58.42 | 57.22 |
| Private operators & joint ventures (new operations) | — | — | 74.00 | 84.00 | 94.00# |
| Total projected supply (optimistic scenario) | 80.54 | 119.9 | 189.9 | 197.09 | 202.3 |
| *ONGC and Oil India Ltd # Includes 80 MMSCMD from RIL’s KG Basin Availability beyond 2012-13 likely to increase further from discoveries of Gujarat State Petroleum Corp and ONGC Source: Working Group of XIth Plan | |||||
The best stimulus for the economy, points out Rao, would have been a massive dose of inexpensive fuel that would have galvanised the power, fertiliser and SME sectors. Instead, “India has become an island of high-gas prices while the world is wallowing in a glut that has brought rates plunging to low levels,” says the former official who keeps close tabs on the global energy market. By setting such a high floor price for the KG-D6 gas it has locked the Indian economy into a high-cost regime, ironically, at a time the country is supposed to be moving to a free market.
With gas supplies from KG-D6 expected to double by the end of this year and production from other operators expected to swell the availability in coming years, the mess in the gas market calls for serious attention and some rational solutions. How could matters have got so convoluted? Although the EGOM appears to have consulted all the ministries involved in the offtake of gas, it does not appear to have got a grip on how best to deploy this natural resource to meet diverse challenges on the energy and environment front. The result: Ad hoc policies that are compounding the mess.
According to Prayas Energy Group of Pune — the leading energy research organisation — all this stems from a failure to analyse the trade-offs involved in arriving at a proper gas utilisation policy. “Practically all the public discourse on gas utilisation is centered on who gets how much gas and at what price. The question of how to use gas to maximise public interest has received scant attention. This is very unfortunate, considering that proper use of such a large quantity of gas can play a critical role in India’s ability to meet its developmental and environmental challenges,” points out a paper (Towards a rational, objective natural gas utilisation policy) prepared by Ashok Sreenivas and Girish Sant.
Their main contention is that the government’s policy is not merely opaque; different scenarios in gas usage have not been sufficiently analysed. For instance, some important gas uses, such as distributed heat and power production (industrial cogeneration or tri-generation) find no mention at all.
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There is a more immediate reason why the government needs to revisit its gas policy: The Bombay High Court’s verdict ordering RIL to supply 28 mmscmd to Anil Ambani’s Dadri power project at $2.34 per mmBtu. Caught short by the verdict, ministry officials are now talking of realigning priorities and petroleum minister Murli Deora has been quoted as saying the government will take steps “that are in the best interests of the nation.”
These interests are best examined in an open manner to enhance economic efficiencies and should be buttressed by detailed analysis to justify policy claims. It is well to remember Article 21.1 of the Production Sharing Contract of the petroleum ministry’s new exploration and licensing policy clearly states that “any proposal by the contractor relating to discovery and production of natural gas from the contract area shall be made in the context of the government’s policy for utilisation of natural gas and shall take into account the objectives of the government to develop its resource in the most efficient manner and to promote conservation measures”.
A critical issue that it needs to include in its deliberations is ways to tackle the emerging consolidation in the gas market. While unbundling is the norm for the electricity sector, where the principle of separating the pure wires business (transmission and distribution) from generation is being strictly enforced, such elementary rules are not being applied to the gas sector where the ownership of the natural resource along with network (infrastructure) and shipping and marketing are all set to be concentrated in one entity.