Political Economy Of Natural Gas Market In India
Natural gas has the potential to be the transition fuel to a low carbon development path for India. Recently, large gas reserves were discovered off the eastern shore of the country. India imports about 80% of its hydrocarbon requirements; therefore, natural gas is an important fuel for India’s energy security. Although the current share of natural gas in India’s primary energy basket is only 8.5% against the world average of 24%, it is expected to grow significantly in the near future. Over the last fifteen years, the Indian gas sector has been in a state of flux. It has gradually shifted from a centrally-managed sector to one with greater control by market forces. Despite comprehensive structural reforms in the late 1990s, the sector is plagued with shortages and significant uncertainties over pricing and production in the future.
India, too, is making the switch from oil to natural gas.
Commercial use of natural gas in India didn’t start until the 1970s. Until the mid-1990s, the gas sector was still dominated by government-owned companies in every aspect of the supply chain – production, transportation, and distribution. Gas was produced almost entirely by the national oil companies, namely, Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL). It was transported and marketed by GAIL Ltd, another federally owned company. Gas prices were regulated by the government, and were often lower than the production costs. Low prices on one hand created large demand for gas, but on the other,left no incentives for new investments in gas exploration and production. This led to chronic gas shortages, thereby requiring the government to allocate the cheap domestic gas by prioritizing gas consumers; the fertilizer and power sectors, being important for food and energy security of the country, got the highest priority.
Following the severe balance of payments crisis in 1991, the Indian government invited private and foreign investors to bid on contracts for exploration, production, and retailing of India’s oil and gas. Only a handful of corporations responded and signed production contracts for extracting gas from the fields already discovered by ONGC and OIL. Despite this mediocre response, this paved the way for comprehensive reforms such as the New Exploration and Licensing Policy (NELP) in 1999. Designed to attract foreign investment and technology, NELP auctioned oil and gas exploration and production rights. It also laid the foundation for developing gas markets by committing to market-determined prices and allocations – with the market deciding, rather than government, which consumers would acquire gas at what price and quantity. Nevertheless, NELP failed to attract any major international oil companies, and has resulted in only a handful of major gas discoveries so far.
Until 2002, the proven gas reserves of India were only 751 billion cubic meters. Although these discoveries increased the total gas reserves of the country, only Reliance Industries Limited (RIL), a major gas producer in India, has been able to begin production from its gas fields discovered in 2002. Meanwhile, there are no signs of gas production from other fields discovered under NELP.
India’s natural gas sector is also characterized by significant vertical integration. For example, one of the most crucial cross-country pipelines, and several planned pipelines, are owned by RIL. Similarly, GAIL, who owns most of the current pipeline infrastructure, also has a 12.5 percent equity stake in the largest liquefied natural gas (LNG) importer in the country, Petronet LNG Limited.
The Indian gas sector is characterized by dual pricing of gas. Gas prices for domestically produced gas are regulated by the federal government, while LNG importers are free to set their own prices. Pricing for all gas discovered after implementation of NELP in 1999 was expected to be fundamentally different. The producers would be free to sell their gas at the prices determined by a transparent bidding process. The only gas producer that found gas under NELP and started production is RIL. Interestingly, RIL’s gas was not competitively priced, but it was fixed at $4.20 per million British thermal units (up to 2014) by the government after a long-fought legal battle. This whole process of arriving at RIL’s gas price was ad hoc and non-transparent. It is expected that the price will be set through competitive bidding after 2014, but it is still largely uncertain. Due to such lack of consistency in the gas pricing policy, investors would have little confidence in the Indian gas market. If the government wishes to expand the private participation in the gas market and augment the gas production, adopting a consistent and transparent gas pricing policy is key.
Natural gas sector reform outcomes in India have been quite contrary to the government’s vision of creating competitive gas markets and enhancing energy security. India’s gas market will continue to be characterized by an oligopoly in supply, heavy imports of LNG, vertical integration, and most importantly, significant uncertainty over gas pricing policy. The keys to strengthening the reforms and developing an efficient gas market lie in developing a transparent and competitive price-setting mechanism along with independent and stringent regulation of the gas pipelines sector.