The need of the hour is to create meritorious uses of natural gas, such as by building new capacities.
During its growth, the developed world did not decouple economic growth and prosperity from pollution. Sooner rather than later, the developing world will need to do that. Natural gas seems to be the immediate hope. India has fortunately reached a stage of maximum gas market growth now, thanks to some new sources of gas, and hence cannot but be opportunistic. The development of a natural gas market in the most effective manner is imperative.
Natural gas can easily compete with liquid fuels, but it will find it hard to compete with coal. The range of consumers’ willingness to pay for gas is therefore broad. Gas marketers and all others in the value chain would like to cherry pick, whereas the government would like gas to be directed to consumers, a move that would serve social, environmental, economic, national and political objectives. In such circumstances, if gas is not available to meet the demand from consumers who can afford that price, consumers would influence and try to get a share of the gas available. While this is not unique to India, the challenge is that the situation continues to be unclear as to who all will get gas, although it is already available to be commercialised and two more LNG terminals and a few other domestic sources are to be commissioned in less than three years.
The need of the hour is to create meritorious uses of gas, including by building new capacities. Clearly, investors and lenders are willing to allocate capital to such projects where market risk seems to be low in this developing economy, but not without bankable gas supply agreements. New capacities like fertiliser, large and small power, chemical, process and steel will not come up until the gas supply is contracted. Even smaller or individual consumers will take months and years to be willing and ready to change over to gas-fuelled vehicles and domestic stoves after it is known to be available. Commercial and industrial consumers need to plan for boilers, chillers, process units and generators to consume economic and environmentally friendly gas. Today, most of these consumers seem to be uncertain whether gas will be available to them.
On the infrastructure front, in building long-distance gas pipelines and LNG terminals, a strong focus should be on developing end-use markets in tandem with construction schedules and the contracted arrival of natural gas. The alignments of interests and the allocation of risks/rewards across the value chain in a stable and transparent way are critical to the long-term success of these projects. In this gas-deficit economy we would not like to see instances of the upstream source, LNG re-gasification terminals and pipelines being ready, awaiting off-take!
For the gas industry to be developed, it is necessary to have a legal framework which focuses on enabling investment, while paying appropriate attention to a possible introduction of a third-party access regime at a future date. A lot of distance has been covered in the last decade through the introduction of NELP, downstream regulations, etc. Even then, investors have witnessed instances in the recent past which lead to apprehensions about the stability of the framework. Concerns about changes in the provisions dampen their enthusiasm, although national oil companies ostensibly are prepared to weather the changes that are difficult to predict before the broad policy directions are promulgated.
The development of a modern gas industry requires a number of indispensable elements, including technical norms, standards for health, safety and environment, training of technical and commercial gas professionals and gas technology research and development ability. India should make sure that none of these indispensable elements constitutes a bottleneck. In particular, it should acquire domestic manufacturing and construction capacity of advanced end-use gas appliances and equipment. Manufacturers of burners, chillers, generators, CNG kits, etc are keenly watching developments, but are currently unwilling to throw their hats in the ring until the situation is clear on the gas destination and utilisation front.
It is in the interest of the energy sector to go beyond the project-by-project approach, by developing a coherent gas policy that reflects the importance it attaches to natural gas and addresses all issues related to the development of a gas industry. The government should consider issuing a White Paper and make a clear and formal statement of its policy objectives and long-term strategy for natural gas through to 2025. Such a paper could also identify the instruments for achieving development goals, including the role of the public and private sectors, the elements for building a modern and competitive gas industry, the economic instruments the government will use to encourage market development, and the legal and administrative processes. The process of elaboration and consultation of such a paper is critically important: it should draw on as many actors as possible, both public and private, within and outside the central administration.
Finally, the challenges of developing a gas market are never confined to the gas sector. They concern a much larger number of actors and require policies that affect the national energy economy as a whole.
India expects to grow by 30-35 BCM gas consumption in 2009-10. This is less in magnitude than the rise in domestic production and consumption in China in current times, the 150 BCM per year growth the US saw over the 1965-1975 period, the over 50 BCM per year growth Germany saw in the period 1968-1979 and the sustained growth of over 30 BCM per year for a decade that the UK, the Netherlands and Japan each had in their rapid gas market development phases. India can take a page from their book. And importantly so because, not only do we need to develop a market for the gas getting commercialised, we also need to develop or garner new sources of gas at this rate year on year, to meet the green development target. n
The author is Associate Director, PricewaterhouseCoopers. The views are personal
