Gas Trouble

Arundhati Prasad, 36, who lives in the outskirts of Patna, has to queue up in front of a liquefied petroleum gas (LPG) agency’s office to get a cylinder of gas. Now compare Prasad to Mohammad Ali Bhatti of Dera Baba Bhuman Shah village in Pakistan’s Okara district: in addition to the gas used for cooking in his kitchen, everything from the refrigerator to lamps in the Bhatti home run on natural gas. Pakistan supplies piped gas to 1,050 towns and villages through 31,000 km of pipelines. In the future, piped gas will be available to any Pakistani habitation with a population of more than 20,000.

In contrast, only 20 Indian cities have been connected with gas pipeline — 11,000 km. “India is nowhere near Pakistan as far as availability of gas infrastructure is concerned,” says Labyendu Mansingh, chairman of the Petroleum and Natural Gas Regulatory Board (PNGRB). Worldwide, gas discoveries and production are taking centre-stage even while oil production is slowing down somewhat. For most of the world, gas is turning out to be a great source of energy because it is relatively clean, can be substituted for oil in many cases (not all), and is also cheaper than oil as an energy source.

Not only Pakistan, in the past 25 years, natural gas has grown to account for 24 per cent of total energy consumption globally. Even Brazil (20.1 per cent) and China (25.8 per cent) are far ahead of India, which only meets 9 per cent of its energy needs from gas.

Need For Network
The only issue with gas is that it is not as easy to transport as oil is. “The situation is just like the chicken and egg story,” says B.S. Negi, member of the PNGRB. “Which comes first? Gas or infrastructure? My answer in this case would be the chicken, which is the infrastructure — that is, pipelines.” Talking to BW, Negi says that in the past two decades, the country’s largest gas transmission company, GAIL, had failed to capitalise on opportunities and slowed down the process. “If we see what they have added in terms of gas exploration and pipelines, it is minuscule.”

In India too, there seems to be a huge amount of gas waiting to be discovered. India’s gas inventory will be doubled by the end of fiscal 2010-11 as Reliance Industries’ D6 block reaches production of 90 million metric standard cubic metres per day (MMSCMD) — more than twice its present 44 MMSCMD.

Yet, even while the world is embracing gas wholeheartedly, India is in danger of missing the bus because it doesn’t have a proper gas pipeline network and new pipeline projects are being built too slowly. India has also failed to work out a proper policy for gas carriage, which is why not too many players want to get into building pipelines. Other than GAIL , RGTIL (Reliance Gas Transportation India) and GSPL (Gujarat State Petronet) are the only major players in transporting gas through pipelines. Indian Oil Corporation (IOCL) and Oil India (OIL) have also entered the segment but in a small way.

This is a pity because, given India’s huge dependence on imported oil, a quick move to adopt gas as a fuel could help the country actually reduce its energy costs somewhat.

In fact, the actual demand for gas in the country is estimated to be higher at 196 MMSCMD. Consumption stands at 119 MMSCMD, reflecting a deficit of about 77 MMSCMD. In the future, latent demand will increase; there may be more court directives to switch to public transport in the most polluted cities to CNG; and city-based gas distribution will be extended to more cities. However, without the necessary pipelines, gas supply and its demand will never match.

Pricing, The Pandora’s Box
Of the 119 MMSCMD of gas currently consumed in India, 64 per cent goes to the power and fertiliser sectors, and only 9.5 per cent reaches the nation’s transport and city-based gas distribution systems. Further, there is another policy shortcoming that is making the switch-over to gas difficult.

9% Energy needs met by gas in India, while 24% is the world average

“The current regime of gas allocation across various sectors is decided by the EGoM (empowered group of ministers), and is vague,” says Ajay Arora, partner and national leader for oil and gas at advisory firm Ernst & Young. “Industry players need clarity so that they can plan their supply portfolios better. More complications will come up when future deficits lead to competing end users, with each user capable of absorbing different levels of gas prices,” he says.

The ongoing multiple gas pricing regime is messy: the administered pricing mechanism (APM) is applicable to government-nominated fields; companies in production sharing contracts (PSCs), a common contract signed between a government and a company that extracts resources, follow a different system.

There is another price for imported re-gasified liquefied natural gas or RLNG; and the spot LNG price is variable. Other than the government’s claim that it is examining the idea of a unified gas pricing regime, there has been no progress on this front.

Pricing of gas supply from different sources is even more uncertain in the long term. Of course, there is room for multiple interpretations, but PSC terms need to be spelt out clearly, which will assure their enforceability for future investors in the oil and gas sector.

At present, the domestic tax law provides a 10-year tax holiday for laying and operating cross-country natural gas distribution networks, including pipelines and storage facilities. Tax holidays were introduced with the aim to promote and set up gas infrastructure, and simultaneously reduce the existing subsidy on LPG.