India Gropes its Way towards Market Prices

The Indian government’s plan to push India towards a gas based economy was earlier this month by the minister for petroleum, Dharmendra Pradhan. On May 5, in an interview with Reuters, he said that the government would boost domestic gas production and increase the purchase of liquefied natural gas to check the rise in carbon emissions.

This policy has been expressed before, first in India’s Hydrocarbon Vision 2025, published in 2000; and again in Integrated Energy Policy of 2006. Both have emphasized the role of natural gas in India’s energy future.

In the past, this drive was largely influenced by rising global crude oil prices and their growing impact on the economy: buying crude used up foreign reserves.

India’s Intended Nationally Determined Contribution (INDC), as part of the COP21 agreement, commits to 40% of the total installed capacity being based on non-fossil fuels, the other 60% comprising clean coal technologies, energy efficiency measures and the greater use of natural gas in power plants.

The push towards natural gas could significantly enhance the share of natural gas from today’s 8% of primary energy consumption and support the government’s aim to curb oil import dependency by 50% by 2030. Most imported crude oil is refined for the transport sector. A study by Nielsen (India) in 2013 observed that 70% of the diesel and 99.6% of the petrol is consumed in the transport sector alone.

Demand forecasts were too bullish

According to the report prepared in April 2013 by Industry Group for Petroleum & Natural Gas Regulatory Board (PNGRB), titled, Vision 2030 – Natural Gas Infrastructure in India, India’s “realistic natural gas demand[1]” is set to grow at a compound annual growth rate (CAGR) of 6.8% from 242.6mn m³/d in 2012-13 to 746 mn m³/d in 2029-30.

Despite these trends, India’s natural gas demand did not pick up, owing to constrained supply resulting from the fall in domestic production (Figure), which drew in more LNG imports. This was not the cheapest way owing to high LNG prices during 2012-2014.

It was only with the oil price collapse in June 2014 and the glut in the market that LNG prices also fell sharply, offering scope for many LNG importing countries to renegotiate their long term LNG contracts.

Over the last ten years, India’s LNG imports grew almost 2.8 times, from about 6.705 bn m³ in 2005-06 to 18.536 bn m³ in 2014-15.The following fiscal year, which ended last March, saw a quantum jump of LNG imports by 14.96% with an increase of 2.773.28bn m³.

This trajectory has continued, since the contract with RasGas was renegotiated in December, effective from January 1, 2016, which brought down the price to around $6-$7/mn Btu.

LNG imports since then have risen more sharply, particularly in February and March, which registered a growth of 63% and 58% respectively in comparison with the previous year.

Therefore, prevailing LNG prices will shape up India’s LNG demand from now, which has already been visible from several LNG contracts which India is looking forward to with producers in the US and Australia.

GAIL India has already booked through long-term contracts supply of 3.5mn mt/yr and 2.3mn mt/yr from Sabine Pass and Cove Point, respectively, and the shipments are expected to start from 2017-18 till 2037-38. It has further imported a spot LNG cargo from the US; Cheniere has said that one cargo went to Dahej in India. All this will give further impetus to India’s LNG dynamics.

India is also planning to set up an LNG terminal at Chabahar port in Iran. This will help India ship back natural gas from Iran.

The government has also come up with a series of measures to boost domestic natural gas production. These measures include the following:

1. Intensification of domestic production and exploration activities through the new ‘Hydrocarbon Exploration and Licensing Policy’ (HELP), which has replaced the ‘New Exploration and Licensing Policy’ introduced in 1999. HELP will have uniform license for exploration and production of all forms of hydrocarbon, through an open acreage policy, which shall be open throughout the licensing period. HELP would be based on revenue sharing model, which is easy to monitor. This will also provide marketing and pricing freedom for the crude oil and natural gas produced.
2. In order to enhance the share of natural gas in India’s primary energy basket, the government is moving towards unconventional hydrocarbons such as shale gas and gas hydrates. While shale gas policy has already been introduced for nomination blocks for Indian upstream Public Sector Undertakings, research and development work for gas hydrates has been started.
3. New gas pricing for discoveries in deep water/ultra- deep water, high pressure/high temperature areas was also introduced, keeping in mind the global low oil price regime. These discoveries are yet to start commercial production as on January 1, 2016. The producers were allowed marketing and pricing freedom subject to a ceiling price on the basis of landed price of alternatives fuels.

Thus it is expected that these reforms which offers more freedom to the producers would help in augmenting the domestic oil and gas resources in India.

Notably, given the limited availability of domestic natural gas in the country, the government of India has already formulated a gas utilization policy for allocation of domestic gas in an objective manner. This policy allocates gas to core and non-core sectors. For the core sector, the priority in which the gas is available to them is as follows:

(1)   Gas-based fertilizer plants producing subsidized fertilizers.

(2)   Gas-based LPG plants.

(3)   Gas-based power plants supplying power to distribution companies at regulated tariff

(4)   City gas distribution (CGD) entities for supply to domestic (PNG) and transport sectors (CNG).

Consumers outside that core may use re-gasified LNG (RLNG), which is imported under open general license on the terms and conditions mutually agreed upon between the buyers and sellers.

However, the demand of RLNG is price sensitive for sectors like fertilizers and power, which prompted the government to introduce the mechanism to help use of RLNG to power sector and production of urea, briefed as under.

On March 25, 2015, the Cabinet Committee on Economic Affairs (CCEA), approved a major policy intervention, wherein an effort would be made to revive and improve utilization of the stranded gas based power generation capacity, which is lying idle or under-utilized due to shortfall in the production of domestic natural gas in the country. RLNG would be made available to these stranded power plants.

Under the above mechanism, the idea was to forego of the respective taxes and levies by the central and states’ governments and a lower transportation tariff, marketing margin and re-gasification charges by gas transporters and re-gasification terminals, so as to keep the cost of power affordable.

Similarly, to supply gas by mixing domestic gas with imported RLNG at a uniform delivered price to all fertilizer plants on the gas grid for production of urea, the government on March 31, 2015, came up with policy intervention through a pooling mechanism. It was expected that the cost of production of urea at pooled price would be less than the price of imported urea, which will encourage the existing urea units to produce beyond their reassessed capacity.

While greater gas use is intended to curb coal based electricity production, coal demand, which contributes 60.8% or 167.2 GW of India’s installed capacity, will be mostly through clean coal policies. Coal will continue to play a dominant role in India’s future power generation. But now all new large coal based generating stations have been mandated to use the highly efficient supercritical technology, while about 144 old thermal stations have been instructed to improve energy efficiency.

But poor gas grid connectivity and insufficient LNG infrastructure continues to make demand for gas elusive. This calls for speeding up of planned gas grid network and LNG infrastructure to get align with the demand to make optimum use of low LNG price, which should be in addition to recent upstream reforms undertaken by the government so far.