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Thriving through partnership

Owing to its high import dependency, the household- and transportation-driven consumption of natural gas has been on a decline but, riding on the success of Indo-American Strategic Partnership, a market is being created for LNG and CNG by replacing LPG

Thriving through partnership
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In November 2016, the Modi government proposed to create an Indian natural gas hub, similar to the US Henry Hub, which is a physical distribution hub, or the UK's National Balancing Point, which is a virtual pricing point. This was intended to make the allocation of natural gas more efficient, make the market more dependable, and decrease political influence over trade. Economic Times reported in November last year that after remaining stagnant at 70 mmscmd for the past five years, domestic gas availability for commercial consumption has risen to 80 mmscmd in the last quarter of 2021.

Growing importance

Natural gas is considered a less polluting energy source, compared to other petroleum products. Since the 1990s, when the global warming issue got linked to the production and consumption of fossil fuels, many major economies have strategically shifted their focus from carbon-intensive crude oil to less polluting alternative energy sources including natural gas. But in India, the use of natural gas has not improved much. The share of natural gas in the country's primary energy mix has declined from 8.2 per cent in 2009 to 6.7 per cent in 2020 whereas the global average has increased to 25 per cent from 22 per cent during the same period.

It may also be mentioned that as of 2017, India held 43 trillion cubic feet of proven gas reserves — ranking 22nd in the world; and to date, around 95 per cent of the gas reserve is left. India consumed 1,957,546 million cubic feet (mcf) of natural gas per year as of 2017 and the country imported around 37 per cent of its consumption that year. Import dependence is increasing even though the current government plans to reduce oil and gas import requirements. Owing to a series of major policy missteps, import dependence increased — from 83 per cent in financial year (FY) 2012-13 to 86 per cent in FY 18 for oil, and from 30 per cent to 45 per cent for gas during the same period. The dependence is expected to grow further to around 95 per cent for oil and around 60 per cent for gas by 2040, according to the most recent BP Energy Outlook for 2019.

India's natural gas consumption is projected to rise to as much as 550 million standard cubic meters per day by the end of the decade from about 174 mmscmd presently, as the user base expands with the inclusion of newer industries such as steel. The government is targeting to increase the share of natural gas in the primary energy basket to 15 per cent by 2030 from the current 6.2 per cent, reported Business Standard November last year.

Gas usage pattern

India's domestic consumption of natural gas is dominated by the fertiliser (34 per cent), electric power (23 per cent), refining (11 per cent), local distribution (11 per cent), and petrochemical (8 per cent) industries. In recent years, the GoI has undertaken initiatives to make imported LNG more attractive, especially to the power and fertiliser industries. For electricity generation, the Ministry of Power, along with the Ministry of Petroleum and Natural Gas, directed natural gas pipeline companies to reduce their tariffs to support greater natural gas use in electric power generation. In 2015, the GoI instituted a gas pooling policy to provide natural gas at a uniform price for all fertiliser plants.

Gas consumption is presently around 174 mmscmd. Of this, 49 per cent is met by domestic production and the rest through imports in the form of liquefied natural gas (LNG). Demand for city gas is likely to rise to 140 mmscmd in eight years from 35 mmscmd now while gas use in refineries is expected at 58 mmscmd from about 14 mmscmd now. As per a report by Business Standard, LNG, as a transport fuel in India, is predicted to touch 14 million tonnes by 2035. The fertiliser industry had the highest share of natural gas consumption across India during the fiscal year 2021. Along with the fertiliser industry, petrochemicals, sponge iron, and LPG shrinkage constituted the non-energy consumption of natural gas that amounted to 35 per cent of the total consumption. The IEA forecasts that India will register the third-highest growth in natural gas vehicles through 2040, after the United States and China. Indian companies are currently experimenting with ways to integrate natural gas into the transport industry. For example, Petronet and IOC are running a trial programme of long-haul buses that run on LNG.

An ORF study (December 2021) shows that between 2013-14 and 2019-20, consumption of natural gas in power generation fell marginally by over two per cent and consumption in the fertiliser segment increased only slightly by just over one per cent. These two segments that accounted for over 42 per cent of consumption in 2019-20 are showing flat or negative growth which explains the slow growth of gas consumption. However, other segments have shown phenomenal growth during the same period. CNG (compressed natural gas) consumption (including transportation) grew by over 1,700 per cent, industries by over 160 per cent, refining by over 96 per cent, petrochemicals by over 40 per cent and sponge iron by over 310 per cent. Unlike other countries where gas consumption is driven by power generation, India leans heavily on growth in household and transportation segments served by CNG.

To understand this contradiction, we have to discuss the natural gas pricing policy of the Government of India. An Expert Group was set up by the Ministry of Petroleum & Natural Gas on August 31, 2009 to suggest "a viable and sustainable system of pricing of petroleum products" for India. The Expert Group, under the Chairmanship of Kirit Parikh, submitted its report on February 2, 2010. One of the major recommendations, among others, of the Expert Group was to phase out administered pricing mechanism (APM) and allow prices of most of the oil products to be market-determined.

On the recommendation of the Expert Group, the Government of India decided, on June 25, 2010, to allow the pricing of a few major petroleum products on the basis of a free-market mechanism. After deregulation, on that very day, the price of petrol was increased by Rs 3.5 per litre, kerosene by Rs 3 per litre, diesel by Rs 2 per litre and LPG per cylinder by Rs 35. Since then, prices are moving to the north.

Gas pricing policy

Till the mid-1980s India could not formulate any gas pricing policy. A substantial amount of gas was flared. Even at the end of 1989, 30 per cent of the produced gas could not be utilised, hence flared. It was reported that flaring of gas in Northeast was as high as 50 per cent in 1987-88 due to low offtake by consumers and absence of any proper planning by the government.

It was difficult to develop a fair pricing architecture for a vital energy resource like gas. At the heart of the issue was a long-known dilemma for policymakers — whether to link gas prices to an 'assessed' price, determined by the government or private Indian participants, or link it to an international market-based price. The Administered Pricing Mechanism (APM) price set by the government for gas and used by the power and fertiliser sectors, is an example of the 'assessed' price, while the price that Indian companies pay for imported gas is an example of the market-linked price. Unfortunately, neither model accurately reflects the physical market – the actual demand and supply – for natural gas in India.

The RIL KG-D6 gas pricing is an interesting case study of how pricing has oscillated between the two models. The price of USD 2.34/mBtu proposed by Reliance Industries in 2006 to sell gas to Reliance Natural Resources Limited (RNRL) was not accepted by the government even though it was the same price as RIL. The government claimed that the price was not an 'arm's length' price for RNRL.

To make it fair, the pricing was then linked to the international price of crude oil. This resulted in the revised price of USD 4.2 per mBtu for RIL and was eventually accepted by New Delhi in 2007. Since then, India has moved to an international market-linked pricing model for gas which is linked to average gas prices in the markets of the US, the UK, among others, for our private and public sector players. This was done based on the recommendations of a 2012 committee headed by C Rangarajan. The aim was to incentivise domestic exploration.

In October 2014, the Modi government introduced a new natural gas pricing formula, which was linked to grouping of various prices on the international market. This new arrangement has kept the price in a range acceptable to domestic gas-consuming sectors, but many gas-producing companies have argued that this scheme does not offer sufficient financial incentives to expand investments in exploration and production, particularly in the offshore.

The price of natural gas in India is determined twice each year by the government through a weighted average of the Henry Hub (the United States), National Balancing Point (the UK), Russian gas, and Canadian Alberta gas prices. The distribution of domestically produced gas is set by the government through its "Gas Utilisation Policy" which rations domestically produced gas and distributes it to certain priority sectors before it is released for sale to the general public. This is intended to benefit the so-called "Tier-1" industries (city gas for households and transport, fertiliser plants and grid-connected power plants).

The government notified the Hydrocarbon Exploration and Licensing Policy (HELP) on March 30, 2016, and formally put it in operation w.e.f. July 1, 2017, with notification of the Open Acreage Licensing Programme (OALP) and operationalisation of the National Data Repository (NDR). HELP is a paradigm shift from the Production Sharing Contract (PSC) regime to the Revenue Sharing Contract (RSC) regime which completely overhauled the regulatory regime for the future Exploration and Production (E&P) activities by reducing the regulatory burden based on the principle of 'Ease of Doing Business'. It provides for a single License for exploration and production of conventional as well as non-conventional hydrocarbon resources, pricing, and marketing freedom, reduced rate of royalty for offshore blocks, etc.

In another significant step to move towards a gas-based economy, 'Natural Gas Marketing Reforms' were announced on October 15, 2020. The objective of the policy is to prescribe the standard procedure for determining the market price of gas to be sold in the market by gas producers, through a transparent and competitive process; permit affiliates to participate in the bidding process for the sale of gas; and allow marketing freedom to certain Field Development Plans (FDPs) where production sharing contracts already provide pricing freedom.

The GoI has increased the domestic natural gas price by 62 per cent from USD 1.79 per mBtu to USD 2.9 per mBtu under the domestic gas price regime, which was introduced in 2014. The new price, effective from October 1, 2021 resulted in an increase in electricity tariffs from gas-fuelled power projects and pushed up the cost of fertiliser production. Subsequently, the Union government has more than doubled the price of domestically produced natural gas for the six months beginning April 1, 2022 due to a surge in global prices. Due to this, the price of gas from regulated fields of state-owned ONGC and Oil India Ltd will also rise to a record USD 6.10 per mBtu s from the current USD 2.90, reported Mint.

The unrealistic gas pricing policy with a very high weightage on international gas prices is hindering the acceptance of natural gas as a greener alternative fuel or feedstock.

Indo-US strategic partnership

India first began importing LNG in 2004, and by 2015, it had become the world's fifth-largest importer of LNG behind Japan, South Korea, China, and Taiwan. In February 2016, India received its first LNG shipment from the United States. GAIL has signed an agreement with the Cove Point LNG facility in Maryland, which is under construction, for 50 per cent of its capacity.

In order to strengthen its energy relations with the USA, India launched Strategic Energy Partnership with the country in April 2018. In a short span of three and a half years, India's hydrocarbon trade with the US has exceeded USD nine billion and Washington has emerged among the top ten sources of crude oil for India, holding 5th position in the current Financial Year.

Indo-US ties got further strengthened when the Indian Prime Minister visited Houston — the capital of the US oil and gas industry — in September 2019. During his visit, Petronet LNG — an Indian state-private partnership — signed an MoU with Tellurian, a Houston-based oil company, to invest USD 2.5 billion in Tellurian's proposed Driftwood LNG export terminal, in exchange for the rights to five million metric tons of LNG per year over 40 years, reported Hindustan Times.

In 2020, Indian companies have together contracted 6.6 MMTPA of LNG from the US. Indian PSU, Gas Authority of India (GAIL), has signed two long-term (20 years) LNG sourcing contracts with Dominion Energy Cove Point LNG LP and Sabine Pass Liquefaction LLC for 5.8 MMT. Indian Oil Corporation Limited (IOCL) has signed an LNG Sale and Purchase Agreement with Diamond Gas International Pt. Ltd for the supply of 0.7 MMTPA of LNG from Cameron LNG Project, USA, for a period of 20 years. Cameron LNG Project started commercial operations in Aug 2019. Till May 2020, IOCL has received three LNG cargoes from the project. An MoU has been signed between the Ministry of Petroleum and Natural Gas, Government of India, and the US Department of Energy for enhanced cooperation in the Strategic Petroleum Reserves Programme on July 17, 2020.

CNG and piped gas to replace LPG

In November 2020, Adani Gas Ltd (AGL), signed a Definitive Agreement for the acquisition of three Geographical Areas (GA) namely Ludhiana, Jalandhar, and Kutch (East). With the addition of these three GAs, AGL shall now have a presence in 22 GAs as a standalone entity and additional 19 GAs as JV partner with IOCL — aggregating its tally to 41 GAs (74 districts), ensuring AGL's continued leadership in CGD Business in India.

French oil and gas company, Total SA, has partnered with Adani Group to supply and market natural gas in India. Adani Total Gas Limited (ATGL), a joint venture between Adani Group and Total Energies, is the largest private Compressed Gas Distributor (CGD) Company in India. ATGL has half a million consumers and business partners who together form the ATGL community.

Down to Earth reported that according to an ICICI Securities analysis of the gas market, prices in the gas market are expected to rise by USD 4.1/mBtu to USD 7.35/mBtu in FY23. This will imply that the main players supplying compressed natural gas (CNG) and piped natural gas (PNG) will need to raise CNG prices by 50-56 per cent between April and October 2022 to maintain their high margins.

The recent hike in gas price has provided these private players the much-needed comfort space to compete with LPG. To make CNG prices competitive for the private and joint venture piped gas distributors, LPG price has to be increased. The Government of India is killing LPG marketed by PSUs. To make it effective, LPG prices have been systematically increased so that consumers find piped gas more attractive than LPG. In May 2014, the price of a domestic cylinder was Rs 414 which has been raised to over Rs 1,000 in May 2022. The market for PNG and CNG is thus created to replace LPG.

Conclusion

India has failed to develop a comprehensive gas policy of its own. The Indo-American Strategic Partnership is a major game-changer not only in the field of petroleum and natural gas but also influences India's foreign policy. India's decision to withdraw from the China-led Regional Comprehensive Economic Partnership (RCEP) immediately after Modi's return from the USA, in September 2019 and recent objections by the USA on India's import of Russian oil are cases in point.

Views expressed are personal

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