11. NATURAL GAS

2015 the GoI ran several reverse auctions to allocate subsidies to power generators for restarting their generation activity based on LNG imports.

Box 11.1 Gas demand increases in Gujarat

The GoI is focusing its efforts on developing city gas distribution to supply households and transport uses, as well as commercial and industrial customers. Successive bidding rounds have awarded development rights for the build-out of gas infrastructure in almost 200 geographical areas that collectively cover around half of the country’s population. In late 2018 Prime Minister Modi announced the intention to have the network reach 70% of India’s population in the next three years, a key commitment under the government’s vision for a “gas-based economy” (PNGRB, 2013). To this end, the government has also made pledges to expand the number of filling stations providing CNG sevenfold, to a total of 10 000 within the next decade. These national efforts to expand India’s gas market are underpinned by significant investments in gas transport; key infrastructure projects, such as the Urja Ganga pipeline, are designed to bring gas into some of India’s most populous states (West Bengal, Bihar and Uttar Pradesh).

India’s policy ambitions for gas have frequently fallen short, but the case of Gujarat shows that gas can gain significant market share under the right conditions. Natural gas accounts for up to one-quarter of the state’s energy mix, well above the national average; this is largely due to the discovery of offshore gas resources and local authorities incentivising both gasfired power plants and fertiliser plants. A densely populated region, Gujarat is geographically far from coal reserves in the eastern part of the country, putting a higher transport cost premium on coal; its coastal location has also enabled the construction of an LNG import terminal. Thanks to this favourable combination of geography, supply and supportive governance, Gujarat is set to become the first Indian state to be completely covered by a gas distribution network.

Markets and regulation

Upstream

India’s oil and gas upstream sector was opened to private and foreign companies under the NELP. Nine bidding rounds were held under the NELP between 1999 and 2010, with a total of 254 blocks awarded – of which 159 were awarded to PSU or PSU-led joint ventures, and 95 to private companies or joint ventures (DGH, 2019).

The HELP regime was introduced in 2016 and included four key market design changes compared to NELP:

A single licence for exploration and production was introduced.

The Open Acreage Licensing Policy (OALP) provides freedom to select and bid on any exploration block without waiting for a formal government bidding round.

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11. NATURAL GAS

A new form of contract, the revenue-sharing contract, was introduced as a replacement to the production-sharing contract, a move from profit sharing to revenue sharing which simplifies government monitoring of costs.

Pricing and marketing freedom was introduced subject to a ceiling price for production from discoveries in deepwater, ultra-deepwater and high pressure–high temperature fields. This ceiling price is set by the MoPNG and updated twice a year.

A series of measures target the improved functioning of DGH as a single clearance point with standardised guidelines and data accessibility. The HELP also allows bidders to access the National Data Repository to assess the prospects of any area and propose their own area (block) for bidding.

Prior to the 2014 pricing reform, different price regimes co-existed, depending on the type of supply and the class of end user. Domestic production pricing was segmented between fields with a government-fixed administrated price regime on a cost-plus basis, and individual production-sharing terms under the NELP and pre-NELP regimes. LNG import tariffs were set bilaterally based on specific contractual formulae or international spot prices. In 2014 a new pricing mechanism was adopted (PIB, 2014a) based on a consumption-weighted average basket of international natural gas prices for the United States, Canada, Europe and the Russian Federation (“Russia”), with a view to reducing links to high-price areas, notably Japan netback LNG prices. This price is reviewed every six months, based on price and volume data for the previous four quarters with a lag of one quarter. The gas price, however, does not reflect the local demand– supply structure of the gas market in India, such as gas production costs for new discoveries or consumer needs.

Onshore India has coal bed methane potential, estimated at some 2 600 bcm, in blocks spread out over 11 states. Of these blocks, 33 have been awarded at an average size of about 140 km2. Four of these blocks are currently producing, with a total output of some 700 mcm per year, or some 2% of domestic gas production. The development of shale gas within awarded blocks is allowed in principle, as there is no special regime for shale gas. The availability of land and water, however, are barriers to large-scale shale gas development.

Midstream

The PNGRB regulates gas transport access and transport rates, access to distribution and city gas networks (not gas tariffs), as well as authorisation and registration of companies active in LNG, gas storage, city gas distribution and transport.

The gas pipeline network is open to third parties. An online portal was launched by GAIL in 2018 to provide transparent open access and to apply for booking of capacity. However, GAIL is not unbundled and controls a large capacity of pipeline and gas supplies. Besides, pipeline tariffs are cumulative, which can lead to substantial costs for long-distance transport due to the addition of transit zones and tariffs (also known as “pancaking”). GAIL, which accounts for a large majority of network ownership and operations, has proposed the introduction of a uniform “postage stamp” tariff regime to reduce the end price of gas.

LNG terminals are not open to third parties. To enable open access to LNG import facilities, relevant rules have been proposed (Order no. L-12018/6/2009 GP II, dated 30.10.2012 under the PNGRB Act 2006). These rules have defined the eligibility conditions. PGNRB

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The dominant trend in Europe has been the development of virtual trading hubs (only the Belgian Zeebrugge and Austrian Central European Gas Hub are physical hubs where the network configuration allows a significant amount of physical gas sales and purchases,

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