Natural gas: The bridge on India’s path to energy atmanirbharta

Source: The post is based on an article “Natural gas: The bridge on India’s path to energy atmanirbharta” published in The Indian Express on 3^rd October 2022.

Syllabus: GS 3 – Infrastructure – Energy

News:  The ministry of petroleum had constituted a committee recently to review the domestic natural gas pricing regime.

However, there are concerns associated with the formation of committee.

What are the concerns associated with the committee?

First, the committee was given an impossible task between “market-oriented pricing” and “administered” pricing. For that, the committee was directed:

to develop a market-oriented, transparent and reliable pricing regime.

to examine the issues related to ensuring a fair price to the end consumer.

Therefore, it is not clear how the committee will bring relations between the two.

Second, there have been several committees in the past and the recommendations made by one committee have not replaced the older ones. Therefore, it is doubtful that how will this new committee will benefit.

Third, the composition of the committee suggests the government has plans to further tighten controls over natural gas pricing as four of the six members in the committee are from the public sector.

Therefore, there might be a negative impact of the government’s objective to move forward “towards a gas-based economy”.

What are the problems associated with the India for moving towards a gas-based economy?

Harsh topography: India has natural gas reserves. IHS CERA has estimated that India has approximately 64 TCF undiscovered gas resources.

The problem is with the location of these reserves as they are located in harsh topography and complex geology.

Cost: Gas reserves are difficult to locate and even if they are located it is difficult to bring to market on economically feasible terms. This is because the cost of creating the development and production infrastructure is huge.

Administered pricing: The administered pricing is another obstacle that might end investor’s interest in exploration of gas. Petroleum companies have also reduced their exploration budgets under pressure to shift away from fossil fuels

There are geologic, technical, and economic obstacles also in achieving commercial success for gas exploration.

What are the issues associated with gas pricing in India?

Initially, licenses were issued to PSUs on a nomination basis. The price of the gas produced was set by the Ministry of Petroleum on a cost-plus basis. At that time the government had the exclusive right to set prices.

However, in later years private sectors got involved and prices were linked to replace substitute fuels.

Later in 2014, a committee recommended that domestic prices of gas to be tied to the weighted average price of gas in the UK, US, Canada and Russia.

However, the problem with the recommendation was that those countries were exporters of gas whereas India had a gas deficit and was an importer.

In 2016, another committee suggested that the gas produced from deep waters to be capped to the minimum of the weighted average import price of fuel oil, naphtha and coal.

However, this suggestion did not take into account the seasonality of LNG demand /supply and LNG prices in India.

Therefore, there is a great difference between the domestic price of gas from deep waters and the price present in the Asia Pacific region.

What can be the course of action for India?

First, it should clear up the existing complexity and permit all producers of gas except producers from nomination blocks to determine prices through direct and transparent negotiations with different consumer segments.

Second, Subsidies should be given directly by the government through the exchequer and the gas producers must not be asked to bear that brunt.

Third, gas producers should be granted marketing and pricing freedom. Only then gas might provide a solid bridge.