India's clean air target at risk as gas plan caught in regulatory minefield

New Delhi's ambitious targets to clean its air by decarbonising energy sector will be underpinned by its success in building nascent natural gas segment

If India is serious about more than doubling the share of natural gas in the country’s energy mix by 2030, justifying the billions of dollars of investments being made by the state in a national gas grid, and charting a path towards less polluting fuels, then it needs to review recent actions that threaten to shackle the gas industry and impact energy security.

New Delhi’s ambitious targets to clean its air by decarbonising its energy sector will be underpinned by its success in building its nascent natural gas segment — rarely has any large nation directly made the leap from coal to renewables. The road to net zero passes through the gas grids.

However, less than 6 per cent of India’s energy mix comes from gas, and a majority from coal — in contrast to over 35 per cent for gas in the US energy mix and 10 per cent in China.

Given the long road ahead, one would expect the government to expand reforms to bring transparency to the gas market. But, on the contrary, since the pandemic, New Delhi has increased its oversight of the gas business, either directly or via regulation.

The pushback against market reforms began in early 2023 after global gas rates rose, prompting New Delhi to cap domestic prices, hurting investor interest in upstream — the closing date for bids for India’s ninth petroleum bidding round has been postponed repeatedly, the latest to August, due to lack of interest, industry officials said. Regulatory actions this year have  transmitted conflicting signals to investors in city gas pipelines and LNG import terminals.

Taken together, it is a red flag for investments in new LNG facilities and other gas downstream businesses — less than $100 million in overseas investments was made into the entire oil and gas sector last fiscal. India imports around 45 per cent of its daily gas needs — around 190 million cubic meters per day — as LNG.

The latest bout of interference emerged from the Petroleum & Natural Gas Regulatory Board (PNGRB), a regulator of pipelines. PNGRB has sought comments from stakeholders on plans to register new LNG terminals and grant permissions for additions to LNG capacity.

“Regulation is required where you give out a monopoly, say like product pipelines,” said Prashant Vasisht, vice president & co-head corporate ratings at Icra, a US Moody’s affiliate. 
 

“There’s open competition in LNG terminals,” he added.
 

PNGRB’s contention is that by regulating expansion, it will ensure utilisation of existing LNG import capacity, which is currently underutilised. After excluding Petronet LNG’s Dahej terminal, the country’s biggest import facility, throughput in fiscal 2023-24 

at India's six LNG import facilities was below 30 per cent. The 17.5 million-tons-a-year Dahej operates at full capacity.

The regulator may have a point as far as utilisation numbers go: Usage in fiscal 2023-24 ranged from 17 per cent to 95 per cent despite a 17 per cent surge in LNG imports.
 

But the question remains if PNGRB’s interference is warranted or can the market take care of itself. It is unclear if PNGRB has the right to regulate LNG import terminals, two Mumbai-based senior industry officials said. PNGRB did not reply to a mail seeking comments.

Moreover, the draft rules impose onerous regulations on new facilities by introducing layers of bureaucratic oversight. The draft regulations state that the PNGRB must approve new facilities or capacity additions. Promoters must submit a feasibility report and a gas evacuation plan.
 

The project must have a certification of registration from PNGRB before starting development and developers would need to publicly disclose their regasification tariffs and other levies. Any commissioning delays would invite penalties. The draft regulations impose fresh costs in the form of a "performance bank guarantee" that amounts to the lower of either 1 per cent of the project cost or Rs 250 million ($3 million).
 

The attempt to regulate LNG import activity is the second in as many years, a Delhi-based analyst said.
 

The proposed regulations reflect that investments in the gas business will be subject to greater scrutiny — at a time when an impending glut in LNG production by 2026 may send prices of the fuel lower and affordable for Indian buyers.

India plans to add at least 25 million tons per year of LNG import capacity in the next few years to increase the role of the fuel in the country's energy mix.
 

Moves to rein in LNG terminal construction come little over a year after New Delhi reintroduced price controls on a majority of domestic gas supplies, ostensibly to prevent CNG rates from rising. The peg for the formula to calculate domestic gas prices was changed to oil from a cocktail of global gas benchmarks, accompanied by a $6.5 per million British thermal units cap.

Explorers get paid less, hurting investments in upstream and by consequence the country’s energy security.

In addition, last month, PNGRB withdrew notices — issued to city gas utilities to open up access to distribution networks to third parties after the expiry of several city gas licences, including lucrative ones in Delhi, Mumbai and parts of Gujarat — closing the doors on competition.

When these areas were awarded, the rules on common carrier were not clearly defined and that led to protracted litigation, said Swarnendu Bhushan, co-head institutional equities of Mumbai-based brokerage Prabhudas Lilladher.

Some say that issues with regulation may have to do with an understaffed regulator. In the last few years, PNGRB has functioned with a diminished board strength, complicating matters for the industry. Introduction of contracts for small scale LNG on the Indian Gas Exchange (IGX) was delayed by several months because of delays in approvals, industry officials said. 

Plans to introduce longer-duration regasified LNG contracts are also pending with PNGRB.

The regulator is typically short of senior staff, delaying approvals, two Mumbai-based market participants said. The board is still short of a member with legal expertise, and the chairman’s post was vacant for over a year, government data showed.