11. NATURAL GAS

Assessment

Gas supply in India started to increase in the 1980s, largely driven by increased demand in the industrial (fertiliser production) and residential sectors, reaching 60 bcm of total gas demand in 2017. Gas supply has increased almost linearly for three decades. In 2017 the share of gas in TPES was 6%, while the share of gas in the global energy mix was 23.4%. India has a target to increase the role of natural gas to reach 15% of the energy mix by 2030. Gas can play an essential role in supporting India’s sustainable development, but availability and affordability remain concerns in India.

India is expanding its gas distribution network rapidly, having already held ten bidding rounds for city gas network expansion; after completion, more than half of India’s territory will be covered and 70% of its population could be connected to a network, as natural gas is cheaper than LPG. Increased use of gas in cities would also reduce air pollution. Currently around 5 million households are connected to the grid.

In transport, piped natural gas and CNG are gaining ground. Industry is the largest consumer of natural gas in India, accounting for 62% of total consumption in 2017. Most of this is for production of fertilisers and petrochemicals. Power generation is the other main gas consumer, at around 28% of total demand. The capacity of the power sector to absorb more gas is large, as some 25 GW of gas-fired power capacity stands idle. Despite electricity shortages, the electricity distribution companies cannot afford to buy the relatively expensive gas-fired electricity (imported LNG is much more expensive than coal for firing power plants) because their electricity retail prices are kept artificially low due to government intervention. The anticipated tripling of variable renewable generation (wind and solar photovoltaic) could be supported by the greater penetration of gas-fired power to balance the variability of these renewable sources.

Gas-fired power generation capacity was built in anticipation of rising volumes of relatively cheap domestic gas production, a proportion of which had been centrally allocated by the government for use in power generation. This was originally set to a level of 75% of gas production to cover the demand in the power sector, but domestic production did not materialise at scale, leaving several power plants stranded, unable to afford higher-priced imported gas. In January 2019 the Ministry of Power’s Standing Committee on Energy concluded that frequent policy shifts on domestic gas allocations, coupled with disappointing domestic production, have made the business case for gas-based capacity untenable (Parliament of India, 2019). The GoI is considering the reintroduction of auctions of gas at subsidised prices to alleviate the supply crunch to the stranded power generators (see Chapter 7 on electricity). During 2015/16 the GoI ran an e-auction scheme for regasified LNG over two rounds, but this was discontinued amid strong demand.

Domestic gas production has been relatively stable at around 30 bcm in recent decades, down from the peak of 50 bcm. Domestic production covers just over half total gas supplies; the rest is met by LNG imports. India started importing LNG in 2003 and imports have been steadily increasing since. LNG regasification capacity in India is increasing rapidly: with the commissioning of Ennore LNG in 2019 and forthcoming start-up of Mundra LNG terminal, there will be 6 LNG terminals in the country with a total LNG import capacity of about 53 bcm.

India expects domestic production to gradually increase as a result of its policy to attract foreign investors for offshore blocks. To reduce its dependence on imported oil and gas

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and to promote domestic production in India, the GoI implemented the HELP. The first round of the HELP attracted mostly Indian companies; a second round is underway. If this second round does not attract more foreign bidders, the GoI should evaluate the conditions of the HELP and other barriers, including pricing, access to transmission and taxation in India.

One challenge is gas pricing: linking domestic gas prices to a basket of (very low) international reference prices has reduced incentives for domestic producers to increase supply. The reforms that allow marketing freedom to new supplies might help. However, there is still very low interest from new upstream companies to bid for acreage, given the competition from incumbent producers that sell gas at below its cost of production. Access to LNG facilities currently needs to be negotiated with the owner; however, the government is considering establishing an open access regime for these facilities. Whether these facilities will be fully utilised, or end up as stranded assets, very much depends on the pricing regime for gas.

The price of domestic gas is lower than that of (imported) LNG and is defined by indexation to international markets. Since India sources around 50% of its LNG imports via long-term contracts and the other half from spot markets, the price difference between oil-linked and spot gas is very important for Indian buyers. As spot gas has become noticeably cheaper, buyers of oil-indexed gas are likely to seek contractual renegotiations. GAIL and Petronet have renegotiated contracts with RasGas and others (Australia, Russia) to achieve lower prices (by lowering the “slopes” that dictate the strength of the oil–gas price link in oilindexed long-term contracts). A similar trend happened in Europe, which helped create the conditions for spot market-based pricing of gas.

For natural gas to compete in India, costs have to come down, including through rationalisation of subsidies for coal and LPG and adjustment of the GST. Since natural gas does not fall under the GST, gas consumption is taxed at several state and central government levels, in addition to the gas transport tariffs. Bringing natural gas under the GST and introducing a postage stamp gas transport tariff would reduce these costs and create a level playing field with other fuels. Overall, India’s latest 2014 gas price mechanism focuses very much on reducing the price level rather than the creation of a market-based system to reflect the domestic supply–demand structure in India.

There is no trading hub yet in India, although its creation has been suggested for 2019. The creation of a gas hub would allow transparent price discovery on the basis of buyers and sellers interacting in an open market, and has the potential to remove the multiple price regimes in India. The GoI should therefore go ahead and implement the creation of a gas hub. International experience suggests that a virtual trading hub with an entry–exit regime based on transmission capacity is highly suited for market areas with limited transmission capacity and limited domestic production but rising LNG imports. The experience in the European Union can be very instructive for India. It has taken more than a decade to create a liquid natural gas market across 28 EU states.

Another challenge is unclear regulatory oversight of midstream/downstream activities. India has a third-party access regime in place, at transport tariffs set by the PNGRB. New gas discoveries and LNG imports have to use, in most cases, the transmission networks of the incumbents, which is not guaranteed in practice. GAIL operates 68% of the transmission network and several regional gas pipeline networks. GAIL’s “Natural Gas Pipeline Open Access System” platform was launched in 2018 to provide market access

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and transparency to third parties. According to the platform, in September 2019 capacity available for third-party access did not exceed 25% in most cases. However, only in a handful of instances was this TPA capacity partially booked. Only firm capacity agreements are available, with no mention of secondary capacity or flexibility of booking, such as use-it-or-lose-it, to avoid any risk of contractual congestion. The MoPNG announced the unbundling of GAIL in 2019, which should help create an independent transmission system operator to foster liquid gas trades across India. This would help bring further flexibility and transparency to the system. Creating a single transmission system operator would also be an option (most operators being State owned companies).

At the same time, there are overlapping competencies across government, including PNGRB, the MoPNG, NITI Aayog and state-level authorities (KAPSARC and TERI, 2018). Together with frequent policy changes, these factors can deter investment. The IEA recommends that the GoI clarifies roles and responsibilities, and institutionalises lines of communication between administrative bodies, for instance by strengthening regulatory oversight and independence.

Overall, the policy of increasing the role of gas is commendable, as it results in health benefits (when substituting for traditional biomass for cooking) and decreased greenhouse gas emissions (when substituting for coal in power generation). As the share of natural gas is on the rise, it is advisable to embark on developing a gas security policy based on a well-functioning domestic gas market and robust gas infrastructure. The GoI should therefore promote the development of a functioning gas market that can allow supply to meet demand. This includes market-based price discovery, robust gas infrastructure, an independent regulator, third-party access to infrastructure, and competition among multiple buyers and sellers.

Recommendations

The Government of India should:

Foster the creation of a liquid market for natural gas in India, gradually moving from gas allocation and multiple pricing regimes to the creation of a gas hub, so that domestic gas and LNG imports can be used in the most efficient way and competition can flourish.

Strengthen and clarify the roles and responsibilities with regard to the regulatory supervision of natural gas market activities (upstream, midstream and downstream) to ensure a non-discriminatory access regime to pipeline capacity so that both LNG imports and new gas discoveries can find their way to markets and investment in gas transport and storage is encouraged.

Ensure gas is treated on a level playing field with other fuels for taxation and is included under the GST, as the country strives to increase the share of gas in total energy supply.

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