Liberalise gas sector, allow market forces to shape its destiny

Finally, India’s energy security is slowly coming to the national agenda six months after the NDA came to power. However, the recently announced energy security policy dealt only with the power sector.

Even the measures announced to improve power supply at affordable prices by pooling of gas prices will have minimal impact on energy security as discussed below. 

In India, because of irrational pricing policy, gas consumption has declined to 51.4 bcm (billion cubic metre) after reaching a high of 63 bcm in 2010.  Indian gas consumption has been limited more by supplies rather than by demand. In most parts of the world, gas consumption has been increasing to reduce dependence on coal and also to reduce carbon foot print. But, not in India.
India’s gas production has been declining from a high of 50.8 bcm in 2010 mostly because of the rapid decline of Krishna Godavari basin production operated by Reliance Industries. As a result, gas import has been increasing and currently, it is 34 per cent of total consumption. Still, gas-powered plants with about 25,000 MW are starved of gas and many are idled. Those which operate have low load factor. This is because India’s capacity to import LNG is limited.

India’s gas imports are all in the form of high priced LNG. Unfortunately, India has failed to import gas through pipeline from potential gas exporting countries like Myanmar, Bangladesh, Turkmenistan, Iran and Qatar even after holding several high level meetings for the last 25 years.  This was mostly because of irrational domestic gas pricing which will not justify high market related prices for imports and lack of strategic vision to diversify sources of energy.
The LNG prices in Asian gas markets are mostly based on international crude oil prices. They have ranged between the current low prices of around $10 per million British unit (mmbtu) and $18 per mmbtu. But the domestic gas prices have been kept low at $5.61 per unit, driven mostly by political considerations rather than the practical realities of supply and demand in the Indian gas market.   
High LNG prices will be a huge burden to power producers. Cost to produce power will be more than double and consumers may not be able to afford them. To soften the price shock, the bureaucratic strategy suggested by the ministers in the name of enhancing energy security is to pool the gas pricing by averaging the lower priced domestic gas with higher priced LNG.
Idea of gas pooling seems fine on paper. But it is unlikely to increase gas availability to gas power plants. Even after pooling average gas prices, cost to power plants will be around $ 7.65 per unit. This will result in electricity price increase of about one rupee per kwh. Will the energy regulatory commission allow such an increase?
It is not easy to administer the price regime based on pooling of gas prices. It looks simple on paper. It will create an accounting nightmare giving rise to potential rent collection on part of LNG importers. Computing the amount of subsidies to be paid to LNG importers is not likely to be easy. Those who had access to cheaper gas will be unhappy since they will be cross subsidising high priced LNG imports. Pooling of gas prices will give wrong pricing signals creating some more long term problems.
We are in this predicament because of irrational gas pricing policy of the government.  It was a huge disappointment when the Modi government decided to lower to $5.61 per unit the UPA recommendation of increasing the gas price to $8.20 per mmbtu. There was not much interest on the part of the public, political leaders, or energy experts to question the rationale behind regulating the gas price, unjustifiable formula to fix the price, potential impact on future gas exploration, increasing gas imports, falling gas demand etc.
Irrational formulae
Some were happy that NDA government did not accept the pricing formula of UPA. Both formulae were irrational. In the case of UPA it based its price on the gas prices prevailing in the US at Henry Hub, National Balancing Point in the UK and LNG import price of Japan and India. Most of these gas markets, with the exception of LNG prices, were not relevant to India. Thus, the UPA, instead of liberalising the gas market, came up with a model to use some irrational bench marks to base their price. The NDA worsened the situation by dropping the more relevant benchmarks and based it on markets not at all connected with Indian market realities.
Still, why did the committee, consisting of secretaries of power, fertiliser, petroleum and finance came up with a more irrational model? It is clear that they wanted a political price which would be less than the one recommended by UPA. Also all these secretaries with the exception of petroleum have an in-built goal to reduce subsidies by lowering gas prices.
According to the New Exploration Licensing Policy (NELP), gas prices are supposed to be determined by the market to attract foreign investment.  If the government is really serious in increasing gas production and reducing gas dependency, they should have allowed the gas prices to be determined by free market as they have done in the case of oil. 

If we are serious about energy security, there is an urgent need to liberalise gas
sector and allow the market forces to shape its destiny.

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