The gas paradox: Govt encouraging huge investment to push demand

But imposing policies that deter domestic exploration and production

Suppose you stake your life’s savings on a house. Would you, say, reduce your working hours and slash your income? That’s exactly what the Indian government appears to be doing when it comes to securing the country’s energy future.

On one hand, in a laudable initiative, Prime Minister Narendra Modi’s government encouraged investments of over Rs 2 trillion in natural gas infrastructure, and offered more than Rs 30,000 crore in subsidies under the PM Ujwala Yojana (PMUY) to expand access to cleaner burning fuels, CNG (compressed natural gas) and LPG (liquefied petroleum gas), to industries and households.

On the other, New Delhi has advocated policies that have stifled the development of domestic oil and gas, prompting foreign explorers to shun Indian acreage and resulting in lower domestic oil and gas production.

The result is that demand for natural gas and liquefied petroleum gas (LPG) consumption, typically used as cooking fuel in India and a product of refineries, is rising while domestic production of gas, extracted from land and sea beds, is declining. That increasingly leaves India and its consumers at the mercy of overseas fuel suppliers and volatile global fuel rates.

The expected compounded annual growth rate (CAGR) of domestic natural gas demand is 6-8 per cent over fiscals 2022-2027. But the CAGR of domestically available natural gas, which meets around 50 per cent of total demand currently, is expected to grow at only 5-7 per cent in the same period, according to Mumbai-based ratings agency Crisil Research.

The latest in a series of policy gaffes includes capping trading margins on resale of gas and framing convoluted conditions on prioritising sales to households and transport sectors in the case of similar bids at e-auctions. The order also adds to the reams of paperwork that gas producers must produce before officials in New Delhi. The abrupt policy change, announced without any warnings, caused Reliance Industries and BP, the only foreign oil major that has bothered to invest in India, postponing an auction to sell 6 million cubic metres (mcm) a day of gas to Indian consumers at half international liquefied natural gas (LNG) rates.

Both companies had agreed to invest $5 billion in three projects in the KG-D6 deep water area on the east coast, despite ongoing arbitration with the government over gas production from the same block. But their returns are a fraction of global gas rates — average gas price realisation in the July-September quarter was $11.3 per million British thermal units (mBtu) compared to the average Asia LNG price of $31 per mBtu, according to a Reliance presentation.

Apart from high global prices, output from Reliance-BP’s KG basin areas is the key reason India’s LNG imports have declined. The investment will add over 30 mcm a day, equivalent to a third of India’s production, this year. The two companies produced 19 mcm a day in the previous quarter, a fifth of India’s output.

Overall consumption of natural gas rose 22 per cent to 175 mcm a day between 2015-16, when the Modi government kick-started a key gas transmission project, and pre-pandemic 2019-20, when the government had given licences to extend city gas networks to 406 districts and 70 per cent of the population.

But the growth rate of LNG imports surged 58 per cent to 93 mcm a day during this period, according to oil ministry data. Imports grew because domestic production failed to catch up with demand. In the same period, gas production declined marginally to around 82 mcm a day.

That sent overall gas import dependency higher at 53 per cent in 2019-20 from 41 per cent in 2015-16. The dependency on overseas suppliers for cooking gas rose to 62 per cent from 47 per cent in 2017-18, after the government decided to offer subsidised connections to 9.3 crore households under PMUY.

“Over the medium term, we expect the growth in consumption to be driven by the city gas segment and incremental demand will likely be met from the imported sources,” said Bhanu Patni, associate director, corporates, India Ratings & Research (Fitch Group). “It will be difficult to reach the target of 15 per cent natural gas in the energy mix by 2030, which currently stands at 6 per cent.” The Modi government has set a target to more than double the share of gas in India’s energy mix by 2030.

The government’s emphasis on city gas infrastructure will enable the use of CNG, mainly used in the transport sector, to grow almost 2.5 times in the next five years, led by an increase in the number of CNG stations from around 4,200 in fiscal 2022 to 9000-10,000 by fiscal 2027, according to Crisil. Natural gas demand from the city gas distribution sector, for domestic cooking fuel and transport, is expected to grow 15-17 per cent over fiscals 2022-2027, thus supporting overall natural gas consumption, the ratings agency said.

But such rapid growth in city gas use will make India more dependent on foreign fuel. “Due to limited domestic production, India is dependent on these costlier imports to meet almost half of the domestic consumption,” said Hetal Gandhi, director, Crisil Research.

India has not seen a major gas discovery since Reliance discovered the D6 block two decades ago. That discovery was expected to herald a new phase in the upstream business. But policies such as meddling with fuel prices, arbitrarily capping margins of traders, constantly fiddling with gas pricing formulae, and pursuing pointless arbitrations only to give in at the end as in the case of UK explorer Cairn, have ended up alienating foreign explorers, industry officials said.

When the Modi government came to power in 2014, it diluted the Rangarajan Committee’s gas pricing formula by removing LNG prices as a benchmark to calculate domestic gas rates. It then capped the price of gas produced from unconventional areas, including deep waters. When that didn’t help keep prices low, it constituted a committee last year led by former Planning Commission member Kirit Parikh, which recommended a price cap on domestic supplies that is around 20 per cent lower than current levels. The new pricing formula kicks off in April.

That is unlikely to attract foreign explorers. “Exploration is a high-risk business,” said Narendra Taneja, a Delhi-based leading oil expert. It costs hundreds of millions of dollars to drill a deep water well with no guarantee of a discovery, he added. Indeed, India is not the most geologically endowed nation unlike West Asia or some African nations, where Exxon, Shell or Total can generate outsized returns with limited risks, an industry official said.

ExxonMobil recently said it wants India to offer protection against expropriation, neutral arbitration and globally competitive returns that must stay intact throughout the term of the contract before it commits to drilling in India. The fact that it is laying out conditions speaks of the widening chasm between New Delhi and international explorers.