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India’s Gas Scenario
How did we miss the golden age of gas?

Dateline 2011


The International Energy Agency (IEA) suggested that the world is entering a golden age of gas. The shale revolution has just begun in the US. LNG trade was expanding, ensuring ample supplies of gas. Even in India, despite the fall in KG basin gas production, the gas scenario was looking good.

Since then, gas production and consumption have been on a downward slope. Thus, India missed the golden age of gas. In recent months, plans for five gas-fired power plants in Maharashtra, Madhya Pradesh and Gujarat, which were at different stages of getting implemented, were dropped because of lack of gas supplies.  Sad.

 

Dateline 2014


When gas prices started to decrease along with the price of crude since 2014, developed countries in the west were able to take advantage of it. But  India, where the entire gas value chain from exploration to marketing is controlled by the government, was unable to do so.  Predictably, the power sector paid a heavy price: a large number of power plants were stranded when the expected gas supplies from KG basin failed to materialise, and there was no Plan B.

The reasons for this unfortunate gas scenario are the lack of a commercial framework and poor governance. When legally earned, profit is the driving force for any business. Unfortunately, our political leaders failed to apply that basic economic principle. Gas price was regulated in an irrational manner. Some gas consumers were ready to offer a higher price through gas auctions. However, the government kept gas prices low, driven by heavily subsidised supplies to fertiliser and sections of power sectors.

If the gas market was totally liberalised, market shares shown in Table-1 for different sectors would have been very different. The fully liberalised gas market would have found its price level meeting effectively the needs of consumers and producers. Whenever a government fixes the price of gas, global experience shows that it is neither high enough for producers nor low enough for consumers.  Effectively it is a double whammy. 

 When the gas prices were as high as $ 16.33/mmbtu, the regulated price in India was about $ 4.20/mmbtu. Once NDA started to implement the new pricing formula, it went up to $ 5.61. Currently, it is $ 4.24.

Neither the pricing formula of the UPA nor the one modified by the NDA reflected the reality of the Indian gas market. Both were based on different gas markets, which had no relevance to India. To arrive at a lower gas price, NDA developed a pricing model based on markets that had low gas prices and left out higher gas prices  included in the UPA pricing formula. Do we need any other proof for greater irrationality?

Since producers were demanding higher prices of as much as $ 10/mmbtu to justify production from ultra-deep offshore gas fields, NDA allowed some producers to negotiate directly with consumers. But they set a price cap based on the lowest of the following: (a) the landed import price of fuel oil (b) landed import price of LNG (c) weighted average trailing one year landed price of imported coal (30 per cent), naphtha (30 per cent) and fuel oil (30 per cent). The rationale behind the cap is unclear when India is currently a net exporter of fuel oil and naphtha.

If the government were to promote gas exploration, it should have liberalised the gas sector entirely.

At the beginning of 2014, the plant load factor (PLF) of gas power generation capacity of  24,148 MW was minuscule, at around 13 per cent. To help increase the PLF to 30 per cent, the government adopted a new policy of subsidising LNG import.  Though this looks sound, was it the right thing to do? A liberalised market would have provided an economic rather than a political solution.

To promote a higher share of gas in overall energy demand that would help maximise GDP growth the government must be far more aggressive in liberalising the gas sector.

In developed countries, the gas industry developed over several years. Gas moved into areas where it was able to generate maximum profit, developing the needed infrastructure.  However, India does not have the luxury of time. She can learn from others’ experience and avoid their mistakes. Using the best talents available, we should develop a long-term master plan for gas production and consumption and usher a golden age of gas. For this, we should allow the industry to earn adequate returns to invest in the needed infrastructure.

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