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Issues in Management of Gas Sector, Shri R V Shahi, Former Secretary, Ministry of Power

The India Energy Forum organised "Seventh Petro India 2008" at Delhi on 25th and 26th September, 2008. The theme of the Conference was "Gas in India - Issues, Opportunities and Challenges". The Conference covered all the relevant issues including demand and supply gap in domestic natural gas, regulatory issues, imported natural gas and LNG, pricing and utilisation policy, gas infrastructure and city gas distribution. I had the opportunity to chair one of the sessions on imported natural gas and LNG.

We all know that the gas is a much more convenient and environment friendly fuel to propel different economic and industrial activities. At present the two important industrial sectors which consume almost 80% of gas are power and fertiliser - power a little more than fertiliser. The balance 20% goes to all other sectors. To meet the demand supply gap in last seven to eight years efforts have been made to set up LNG regasification facilities so that gas from abroad could be liquefied, transported in specially built ships and regasified at these terminals and the gas could be supplied to the consumers through pipelines. In spite of imports of LNG, it has not been possible for the gas sector to meet the requirement, and as a result, both fertiliser as well as power sector have been facing the biggest amount of difficulties, in fact, the shortages are causing problems to other sectors as well. In the case of power sector almost one third of its gas based combined cycle power plant capacity, which is more than 13,000 MW, remains unutilised. As per the Working Group (XIth Plan), of the Government of India, as in 2007-08, the demand for the gas was of the order of 180 MMSCMD while the supply was about 90 MMSCMD (72 Domestic gas and 18 LNG). In the last year of XIth Plan, the demand is projected to rise to about 280 MMSCMD while the supply is expected to be of the order of 243 (Gas 170, LNG 73).

The problem has been accentuated over the years because the leading gas producer of the country, viz. Oil and Natural Gas Commission has more or less remained stagnant in gas production in last seven to eight years. While they did add, during this period, marginal increase here and there, but the decline in production in the existing gas fields more or less neutralised these increases. Additionalities from the joint venture of ONGC have not been significant enough to show any visible increase in overall gas availability from domestic production in as long a period as seven to eight years. Efforts to set up a number of regasification facilities with a view to making significant contribution from import of LNG have also been rather slow because of the highly volatile behaviour of global gas prices.

Discoveries in KG Basin in Bay of Bengal, first by Reliance Industries and subsequently by the Gujarat Gas Company have, no doubt, raised the hopes all around of substantial increase in availability of gas. This process has also been unfortunately slow. It was expected earlier that RIL Gas from KG Basin would be available by mid 2007 if not early 2007. As a matter of fact, in the Power Ministry, during the middle of the Tenth Plan, we became hopeful that if gas could be available even by March 2007 for about 5,000 to 7,000 MW additional capacity, a few power plants based on gas could be so planned in advance that within the Tenth Plan we could add about 7,000 MW to make up the shortfalls, particularly on account of some of the hydro projects and also some of the coal based projects whose commissioning in the Tenth Plan was somewhat uncertain. A review by Secretary, Petroleum and Natural Gas, sometime in middle of 2005, however, revealed that production of gas from KG Basin could be expected only by July 2007. Unfortunately, even this has not happened. The best expectation now is that we could get gas from this basin only in January 2009. The gas field of KG Basin was allocated much later to the Gujarat Gas Company and therefore output from these fields would be expected much later.

Inadequacy of gas production so far, a highly volatile global gas market, uncertainties about gas pipelines from Iran to India via Pakistan are not the only issues which have been causing serious concerns and, therefore, insurmountable difficulties in making any medium term or long term programmes by the consuming sectors such as power and fertiliser. We do recognise that these are not within our control. The subject of getting gas from Iran through pipeline passing via Pakistan is a very old issue - it was conceived more than ten years back. Subsequently to avoid taking the pipeline through Pakistan, because of strategic and security reasons, another proposal was to use submarine pipeline through sea route and import gas. Keeping in view the techno economic feasibility and cost implications, this option was not pursued and again the pipeline via Pakistan got into the fore-front of discussion. As mentioned, this is a very serious matter and in any case, besides price, it involves a number of political, diplomatic and strategic issues not many of them within India's control. Everybody recognises that it has taken a long time and it may take even longer. Similarly, the global gas market established a high degree of correlation, in respect of pricing for gas, with crude price levels. As a result, as the crude prices have gone on moving up, rather highly erratically, they had similar impacts on prices of gas. This has obviously slowed down our efforts on expanding substantially the LNG regasifying facilities. Here again, there is hardly anything that we can do about global trends in gas prices.

What then are the issues where we can do something if we do not have control, as mentioned above, on import of gas through pipelines and on the price regime for LNG abroad? It is in this context that we need to have a critical look at the strategy and actions on domestic front. Have we done enough to see that the exploration and development process by ONGC, JV of ONGC, KG Basin Gas by RIL fructify into gas production at a pace which can, in reasonable time frame, mitigate even partly the problem that gas consuming sectors are faced with? Secondly, has our approach on the Gas Utilisation Policy taken into account the fact that any delayed decision in this regard would not only create uncertainties among the likely users of gas but would also inevitably deprive the economy from certain projects particularly projects in power sector from getting planned and executed? Thirdly, have we been able to resolve the issue concerning price of domestic natural gas and have succeeded in bringing about a desired degree of predictability and clarity on the issue? Fourthly, is our Policy on pipeline infrastructure sensitive to the need to provide Open Access for convenience of not only the gas producers and suppliers but also the consumers so that the competition to provide transportation infrastructure leads to efficiency as well as better services for consumers. And finally, in any case has our Policy on development of pipeline infrastructure been timely and has it enthused a number of agencies to come into the field to create such an infrastructure for larger interest of developing a gas transportation market in the interest of consumers?

Let us analyse the first issue whether the pace of exploration and production process been adequate or, keeping in view particularly our urgent needs and also the severe gaps between demand and supply, the process has been rather usual or lethargic. We may recall the background under which the NELP Policy was conceived - its rationale and expectation of outcomes from this Policy. It was often brought out, in fact as a matter of criticism, that the Oil and Natural Gas Commission was not doing enough by way of putting required amount of resources in exploring new fields, that its investigation was not as deep as it should have been thereby depriving Indian economy from the benefit of huge reservoirs that existed deep into the sea. The underlying principle behind the Policy of NELP has been that multiple players of national and international repute will enter the sector, will supplement the efforts of ONGC, will invest resources and more importantly will deploy most modern globally available technologies which can facilitate discovery of these reservoirs wherever they are available. It is more than ten years that several rounds of NELP exercises have been undertaken but unfortunately the outcomes have been extremely slow. In the field of gas, the country has been confronted with near stagnation for almost eight to ten years. With private sector entry obviously the progress was expected to be faster. Though it has not happened, and we can give some allowance for the learning curve phenomenon, atleast for the future the experiences of last several years, in relation to the working of NELP, should definitely be used, not only to set right this Policy but also to ensure that committed delivery schedules are met.

As regards the second issue i.e. the approach towards gas utilisation policy, the process has been totally unimaginative and far from being satisfactory. May be, we were perhaps too optimistic that a large quantity of gas would start becoming available by mid 2007, but even a realistic estimate could definitely have revealed that the gas would be available by mid 2008 or late 2008. Linked to the quantity of additional gas, did we interact with the agencies in the major consuming sectors viz. power and fertiliser with some degree of certainty about the likely quantities and time schedule of availability? Unfortunately answers to these relevant questions are in the negative. Let us take power sector for example. Power plants, as we all know, are highly capital intensive. Neither the investors or developers nor the lenders can finance these projects unless there is certainty about gas supply. In case of coal, they have already been taking some degree of risk. In case of gas based plants, a few developers in Andhra and a number of their lenders burned their fingers by relying upon gas producers and gas supplier. Atleast 2,000 MW of installed capacity (capital cost investment of the order of Rs. 8,000 Crores) have remained stranded for more than two years for want of gas supply. Another dimension which is important to understand, in relation to gas based power plants, is the fact of relatively shorter gestation of about one and half years for open cycle operation and not more than two and half years for their combined cycle operation. The short gestation periods of these plants is a very important positive factor in favour of these plants and it could have been used to mitigate, in the short and medium terms, the shortages that exist in the power sector. Unfortunately, because of total confusion and complete lack of clarity about the gas utilisation policy this great opportunity of creating additional capacities in the short term has almost been lost. There is no justification whatsoever for the concerned authorities not to have resolved this issue with transparency and clarity well in advance. Even if it had been done by, say, January 2007, a number of plants could have been planned and they would have been due for commissioning in the last quarter of 2008 or the first quarter of 2009. The whole sector and also the financiers and lenders have only been waiting and guessing, and no serious proposals, on new power projects, have moved forward.

The third issue relates to pricing of domestic natural gas. No other issue has remained as confused and unresolved for long as the Government approach to pricing of domestic gas. There are so many issues moving parallel and creating avoidable complications not at all desirable from the point of view of investors and lenders. We may briefly look at these issues - (a) The gas produced earlier by ONGC and marketed by Gas Authority of India Ltd. (GAIL) is regulated through Administered Price Mechanism (APM). The total price of this gas including the transportation and marketing margin by GAIL works out to approximately $ 3 per million btu, (b) The price of gas produced by Panna Mukta Tapti (PMT) joint venture of ONGC is fixed as per the decision of the Government of India at around $ 4.30 per million btu, (c) The price of gas yet to be produced by RIL in the KG Basin is totally uncertain, (d) In the year 2003-04, with reference to an international tender by NTPC for its two projects at Kawas and Gandhar in the State of Gujarat, both of 1,400 MW each, Reliance Industries had won the Bid to supply gas at these plants, inclusive of transportation, at around $ 2.95 per million btu. The NTPC had accepted the offer. This issue is in a legal battle pending consideration in the Bombay High Court. In the year 2005, Energy Coordination Committee had decided that Government should intervene for an out of Court settlement between NTPC and RIL, but not much progress could be made, (e) RIL is reported to have entered into MOU's with a number of power project developers to supply gas for their new power projects which are yet to be started. In all these cases, these developers could not make any headway in terms of concrete progress on projects because of uncertainty both on the time line of delivery as well as on price. They could not approach any lenders in a serious manner in view of these major loose ends, (f) There is also a Court case between the RIL and ADAG Controlled Company questioning the MOU's by RIL for supplying gas to any company without first ensuring that a specified quantity of gas is supplied to ADAG Controlled Power Projects. This obviously has enhanced the uncertainties in respect of other agencies who have entered into MOU's with RIL.

There is also a school of thought which believes that price of domestic natural gas should be left to the market. In the inaugural Session of the 7th Petro India Conference, referred to above, atleast three eminent speakers who spoke, prior to the inaugural address by the Secretary, Petroleum and Natural Gas, argued strongly in favour of removing confusions on the issue of price of domestic gas and allowing the market to determine the price. This line of approach was articulated by former Petroleum Secretary, Mr. S.C. Tripathi, former Cabinet Secretary, Mr. Surender Singh, who is now the President of Observer Research Foundation and Dr. David Victor of Stanford University, U.S.A. I was present in the inaugural Session and was somewhat surprised at the way these arguments were advanced. I have always believed that, no doubt, ultimately when the market matures it does take care of, in a balanced way, interests of all the stakeholders, particularly of investors and consumers. But, that has to be the goal of any regulatory process. Obviously, we need to reach that goal, but the skill lies in drawing the road map and evolving the modality to reach the destination. In the Indian context, I have been emphasising - and fortunately that is also the consensus reached while formulating the Integrated Energy Policy (2006) - that during the transition period till the market matures with multiple players providing options to consumers, it will be important that regulatory mechanism, through appropriate interventions, balances the interests of both consumers and investors. I articulated this line of argument during the subsequent Session in the same conference that I chaired. But even during the inaugural Session itself it was gratifying to hear, loud and clear, the assertions made by Shri R.S. Pandey, Petroleum Secretary, when he said, "Where is the Market? It is the Supplier's Market. Consumers hardly have any option. Fixing of price cannot, therefore be left to the Market." Thus, the issue has got derailed on account of indecisions and inactions on the part of the concerned Ministry. The concerned authorities have failed to give due cognizance not only to the conclusion and recommendation of the Integrated Energy Policy but even to follow the letter and spirit of the contractual stipulations of the NELP Contract in which it says that pricing formula would be approved by the Government or by an agency including a Regulatory Body appointed by the Government. In spite of suggestions to bring the upstream segment also under regulation by enlarging the jurisdiction of the Petroleum and Natural Gas Regulatory Board, there seems to be no action to make any progress in this regard.

The fourth issue relates to the Policy which may facilitate Open Access to the gas transportation pipeline networks for all those who want, be they the gas producers who may enter into short or long term contract with their consumers or the consumers who also arrange such contracts with gas producers. This will obviously require that the transportation network providers do not also become the gas trader. This will also require that the transportation pipeline networks do not continue to be a monopoly system. The petroleum sector will have to think of provisions in its Policy which could be similar to those in the power sector as provided in the Electricity Act 2003 both in respect of Open Access on transmission systems and Open Access in distribution infrastructure. As we know, in the case of electricity industry we have the national grid owner and operator, viz. Power Grid, we have State transmission companies and we also have a few private transmission system owners and operators, whose number is likely to increase in coming years. Under the Act it has been specifically provided that the grid operators shall not engage in power trading, that they shall be obliged to provide non discriminatory Open Access to distribution utilities and also to consumers. In spite of all these provisions, and also in spite of the fact that Open Access in transmission is in practice (though Open Access in distribution is yet to happen, and perhaps will happen from the mandated date of January, 2009), electricity market in real sense is yet to evolve. It is for these reasons, and also for the very overriding factor that it is the suppliers in the petroleum sector who control the market, that it appears somewhat amusing when people talk of leaving the price determination to market forces as if the market existed to anywhere near perfection.

Lastly, the Policy towards development of gas transportation pipeline infrastructure itself. Even though the gas exploration and production was being liberalised, for a number of years, GAIL succeeded in getting the opening up of the pipeline sector stalled. It appeared as if the system was sympathetic to the view point of GAIL that it is this organisation which, as a monopoly, would have the soul jurisdiction on creating pipelines and therefore transporting gas. Though this approach did change but rather belatedly and even now adequacy of pipeline infrastructure being developed by a few agencies is doubtful. Proactive steps would be necessary if the full benefit of this approach to the satisfaction of all concerned is to be realised.

The process of development of LNG infrastructure which started ten years back lost its momentum primarily on account of a confused approach on pricing of LNG. While in the previous paragraphs it has been articulated that the regulation of price for domestic gas can ensure balancing of interests of all the concerned stakeholders and that this cannot be left to the market forces because of totally imperfect market conditions in the gas sector, there is not much that we can do to control the prices of LNG which we import from outside. In the interest of better energy security, no doubt, acquisition of gas fields abroad could, to a great extent, insulate Indian gas sector from highly aggressive and volatile market situation, yet this exercise has its own limitation in being able to even partly mitigate the problem. Thus, we need to agree and recognise that Indian gas sector will have to accept fluctuations in global LNG markets. The next best option, therefore, appears to be to evolve a well conceived approach on pricing of LNG. We need to avoid a situation that some consumers are getting LNG at a rate of, say, $ 3 a million btu while others may have to pay as high as $ 10 a million btu. What may be considered is an approach to work out, on an annual basis, pooled price on weighted average basis for all the LNG that is procured and processed by various agencies. No doubt, it is easier said than done, and precisely for this reason this approach will need to be properly structured and fine tuned. This will obviously require full involvement of a Regulatory Body.