Request you to kindly drop in all your mails/queries to or call us at
+91-120-6799125 (D); +91-120-6799100 (B)

Gas Utilisation Policy: A Step in the Right Direction, Shri R V Shahi, Former Secretary, Ministry of Power

In view of the developments in the petroleum sector in last few years, but more particularly in last two years, which have seen the crude price crossing $ 135 a barrel, the focus on possible usages of gas has further intensified. In India the natural gas has been used, over the years, for various sectors and the existing utilization indicates the highest proportion to power sector. The relative percentages of gas consumption for various sectors are: Power (40%), Fertilizer (30%), LPG (7%), Petro chemical and Refinery (5%), City gas/CNG (5%), Steel (3%) and others (10%). For the APM (Administered Price Mechanism) Gas, as per the direction of the Supreme Court, power sector has been provided priority after the City Gas Distribution projects.

It is known that during the entire period of the Xth Plan (2002-07), the net production of gas under ONGC declined. While there were some new gas fields where new production did happen, because of declining production in the older ones, on an overall basis, there was a net reduction. Though some other gas producing companies did provide additionalities but they were not significant enough to make any meaningful impact on mitigating the shortages. As a matter of fact, power sector holds, within the gas based installed capacities, a significant amount of stranded capacity. If we exclude the additionality of generation in these plants through naphtha, the overall utilization of gas based plants is hardly 50% for the country as a whole, and even in respect of NTPC it is only about 60%. Some of the plants, which were commissioned about a year and a half back, hardly get any gas for operation. As a result, out of about 13,000 MW of gas based power plants, almost 4,000 MW of capacities (whose capital cost, as per present estimates, could be more than Rs. 15,000 crores) have remained unutilized.

The situation of gas shortage is not only relevant for the power sector but also for fertilizer. In case of power while the present requirement is of the order of about 80 million cubic meters per day, the availability is about 40 million cubic meters per day (only 50%). In the case of fertilizer sector also the shortage is about 25%. While the requirement is of the order of 40 million cubic meters per day, the availability is about 30 million cubic meters per day (approximately 75%). However, if we consider the requirement for conversion of naphtha/fuel oil based fertilizer plants the requirement will further increase by about 10 million cubic meters per day, in which case the shortage would be about 40%.

The gas supply position has remained more or less stagnant during the entire Xth Plan and the situation continues to be almost same for the first two years of even XIth Plan. It is now expected that from the year 2009-2010, and partially even during 2008-09 in the later half, there could be visible improvement. This is primarily because of additional gas that would be available from KG Basin and a few other gas fields. The expected production of domestic gas in 2009-2010 is likely to be of the order of 140 million cubic meters per day which may rise to over 170 million cubic meters per day in the terminal year of the 11th Plan i.e. 2011-12. In addition, the Liquefied Natural Gas supply is also likely to increase from about 30 million cubic meters per day in 2007-08 to over 80 million cubic meters per day from 2011-12. This would come from LNG Terminals at Dahej (12 mtpa), Hazira (2.5 mtpa), Dhabol (5 mtpa), Kochi (2.5 mtpa), Mangalore (1.25 mtpa) - Total 23.25 mtpa equivalent to 81.4 mcmd. Thus, if we aggregate the availability on account of domestic natural gas and imported LNG, the overall availability improves from 110 as at present to over 250 million cubic meters per day from 2011-12. Even if we consider some slippages, about 225 million cubic meters per day can be safely assumed to be available by 2011-12.

Obviously, in view of the likely scenario of substantial amount of additional gas being available in next two years, there are claims of different sectors and various organizations to secure reliable gas supply arrangements. No doubt, a good amount of the additional availability will be able to mitigate only the present shortages, it is important that a long term approach is available to all concerned so that any future investments in power, fertilizer, other industries and in City Gas Distribution are appropriately aligned to the likely availability of gas and LNG. How should this subject be approached has been a matter of concern for all the stakeholders. One view could be that this entire process is left to the market mechanism. However, in the context of severe mismatches between the demand and supply and total lack of maturity in the market, such an approach could obviously create difficulties. In the entire energy chain - petroleum, coal, power - there has been a consensus that the present situation of shortages is likely to continue, it would take time to develop matured markets in each of these segments and therefore regulatory interventions during such transition periods would be essential. Therefore it is in fitness of things that Ministry of Petroleum and Natural Gas has come out with a draft policy paper on utilization of gas and has asked for comments of all the stakeholders. Salient features of the draft policy are as follows:

  • The draft provides for establishing relative priorities to different sectors in the following manner:

  1. The existing fertilizer plants have been proposed to be accorded the first priority. At present 22 fertilizer plants in the country can use natural gas and their aggregate capacity of fertilizer production is about 17 million tonnes per year. Due to shortage of gas they use naphtha and fuel oil whose cost works out to 22 $ and 12 $ per million BTU respectively. The shortfall is of the order of about 10 million cubic meters per day (requirement - 40, availability - 30).

  2. In addition to these 22 plants, there are seven more fertilizer plants which use either naphtha or fuel oil and in their present position they cannot use gas. There is a merit in their conversion to gas based operation. In such a situation about 10 million cubic meters per day of additional gas would be needed for these plants.

  3. Seven fertilizer plants are shut down. Their revival will require 14 mcmd and they could produce seven million tonnes of urea per year.

  4. Starting from about 50 mcmd in 2009-10 and going upto 80 mcmd in 2011-12 would be expected by the fertilizer sector.

  5. The next priority accorded in the proposed approach paper is for LPG and petro chemical plants. For meeting the requirement of LPG, almost 25% of the need is met through imports. Presently LPG production from natural gas is about 2.3. million tonnes per year and the gas supply to these plants is about 10 million cubic meters per day.

  6. The present requirement of natural gas for petro chemicals is estimated to be of the order of 15 million cubic meters per day and the supply is about 5 million cubic meters per day leaving a shortfall of about 10 million cubic meters per day.

  7. The next priority proposed is for existing gas based power plants. As already mentioned, the existing gas based capacity of the order of about 13,000 MW is under utilized and almost 4,000 MW capacity remains unused. As it is, the gas based capacity is less than 9% of the total installed capacity.

  8. Next to existing power plants the proposed priority is for City Gas Distribution. At present, City Gas Distribution is rather low - only about 8 lakh domestic households and about 1300 commercial customers. 12 cities having more than 25 lakh population are to be covered in next 3 years, and later other cities (between 10-25 lakh population) are proposed to be covered. For City Gas Distribution and CNG for transportation the proposal is to expand the coverage to larger number of towns and cities.

  9. The subsequent priority is for Refineries. While the estimated requirement of natural gas is of the order of 24 million cubic meters per day the supply is hardly 2 million cubic meters per day.

  10. The last priority among the existing consumers is for the other industries. They are able to use to the extent of 50% of their requirements.

  11. The above priorities, as briefly mentioned, relate to the existing plants and factories in different sectors. All the green field projects have been accorded priorities after meeting the requirements of the existing facilities. In respect of green field projects following order of priorities have been proposed - (i) Fertilizer plants, (ii) Petro chemical plants, (iii) City Gas Distribution, (iv) Refineries and (v) Power plants. The expected demands are - (i) Fertilizer (16 mcmd), (ii) LPG and Petro chemicals (15 mcmd), (iii) City Gas Distribution (21 mcmd), (iv) Power (62 mcmd).

The approach of the Ministry of Petroleum and Natural Gas to formulate a policy so that it brings about greater degree of predictability and transparency is really a step in the right direction. The fact that before finally adopting this policy they have invited comments and suggestions also needs to be appreciated. It is in this context that Infraline Energy and IDFC organized a Round Table discussion on June 4, 2008 at Delhi. About 60 senior functionaries of various organizations covering power, fertilizer, other industry sectors, consultants and academics participated. While I coordinated and moderated the discussions, three comprehensive presentations were made by Shri Rakesh Nath, Chairman, Central Electricity Authority, Shri B.S. Negi, Member, Petroleum and Natural Gas Regulatory Board and Shri Chandan Rai, Director (Operations), NTPC. We also had a Senior Executive of the Chambal Fertilizer apart from other participants from fertilizer sector who presented their view points. These presentations and further discussions provided a good frame work for preparing a balanced set of comments and suggestions on this subject.

The points of view of the power sector could be briefly outlined as below:

  1. In the overall profile of installed capacity in India, the capacity based on gas is less than 9%. As per the World Electricity Generation Statistics by International Energy Organisation, the percentage based on gas, for the world as a whole, is 19% at present and is projected to be 25% by 2030. Indian power sector must therefore be allowed to enhance its gas based generation capacity.

  2. No doubt, the existing installed capacities which are under-utilized should get the top most priority because of the huge capital investments already having been made and also because of the increasing shortages of power across the country, but also the capacities under execution which are of the order of 6,000 MW must get priority next to the top.

  3. While preparing the paper on power for XIth Plan, the Working Group had suggested that once the picture about likely availability of natural gas became clearer, the shelf of projects based on gas, aggregating to about 13,000 MW, should be taken up for implementation because in view of the shorter gestation these capacities could be made available within the XIth Plan period. These projects should also get higher priority.

  4. The multiplier effect of power on economy was presented by the Power Group to indicate that if about 40 million cubic meters per day of gas could be made available it would lead to a generation of approximately 56 billion units per year, leading to an additional revenue of more than Rs. 140 billion per year. Though normally people believe that the multiplier effect of power on economy is 20 times, even if we assume that it is 10 times the additional revenue generated would be more than 1400 billion per year. The revenue that will be available to the Government by way of taxes and duties, considering this to be 13% as per budget estimate 2008-09, the tax revenue to the Government on account of additional electricity generated will be of the order of more than Rs. 18,000 crores.

  5. Power sector has been receiving highest priority next only to City Gas Distribution (for which the requirement is marginal). No doubt, fertilizer sector must get the desired consideration - in fact, fertilizer sector has been the largest consumer next only to power. The situation should continue. However, the fact is that fertilizer can be produced in Middle East and other countries by using gas produced in these countries and can be brought to India whereas similar dispensation may not be practical for production and transmission of power. A few examples of fertilizer plants being set up by Indian companies abroad have proved to be very effective and successful arrangement.

The points of view of Fertilizer Sector could be outlined as below:

  1. The imputed economic value of fertilizer produced using gas is significantly higher and this must receive proper consideration while allocating gas to various sectors.

  2. Fertilizer produced by using naphtha entails a very heavy financial burden on the Government because the Government subsidises the supply of fertilizer to agriculture. Higher cost of naphtha means excessively high cost of fertilizer production which in turn means excessive subsidy burden on the Government. Even as at present this is very high and will increase further with expansion of fertilizer capacity in the country.

  3. Issue of food security has assumed global dimension. Shortages are being experienced in many parts of the world. Its impact is likely to be substantial on India. Agricultural productivity therefore must increase and this will require proper use of fertilizer. As it is, Indian agriculture, per acre of land uses minimum amount of fertilizer.

Points in favour of City Gas Distribution could be outlined as below:

  1. In India the City Gas Distribution coverage at present is very low, even as compared to countries like Pakistan.

  2. In whichever cities and towns City Gas Distribution system has been started the experience is highly satisfying.

  3. LPG supplied in cylinders requires heavy subsidy to be supported by the Government. Its extensive coverage in last 5 to 6 years has led to substantial increase in the subsidy burden on the Government. Besides, being a more convenient way of supplying gas to the domestic consumers, the City Gas Distribution is self sustaining and it altogether frees the Government from any subsidy requirement.

  4. Similarly, transport system using CNG wherever introduced, has proved to be a successful initiative because it has led to visible improvement in pollution levels in these places.

The demands (in MCMD) for various sectors may be summarized as given in the following Table:



City Gas


Petro Chem / Refineries

Sponge / Steel


















Percentage of Total







As against the above, the present availability is about 80 mcmd (about 45% of the demand) and projected availability in 2011-12 is 252 mcmd (about 90% of the demand). Therefore, the exercise of allocation can definitely be handled with greater degree of ease.

Some of the issues which were discussed in detail and which have a bearing on the approach to be followed relate to (a) possibility of increased prices of domestic gas leading to subsidy expectation from consumers, (b) environmental ramification of larger amount of coal based power capacity in the context of global debates on Climate Change, (c) market behaviour on price of crude, its impact on gas prices and corresponding implications on cost of power etc. A point was made that even though LPG requires subsidy from Government what is the guarantee that consumers would not expect similar subsidy if the price of natural gas were to increase and most likely that will happen? The issue after deliberations that got focused was that gas price increase would have a linkage to the increase in crude price and that in any case would have a direct linkage on the price of LPG. Therefore at any time the LPG subsidy burden is bound to be significantly higher than any such subsidy, if at all expected in the case of natural gas. Therefore, there is considerable merit in according appropriate priority for gas allocation to City Gas Distribution system and CNG for transport.

Fertilizer sector, no doubt, must receive appropriate priority as it had in the past. However, any reduction in the inter-se allocation in respect of power will be construed contrary to the position that India has taken on climate change. We have been saying that though we do not accept any quantified targets on CO2 emissions, we do consider it necessary to adopt environment friendly technologies for power generation and for other manufacturing processes. Any dilution in the proportion of gas to be allocated to power sector would negate this position of the Government of India. It would therefore be necessary that if it is not possible to increase the proportion, the least that we could do is to continue with the existing proportion. Another point made was about the peak hour full load and off peak part load operation of gas based plants. We could still take up 13,000 MW more in addition to 6,000 MW under execution if we assume overall 70% PLF and provide about 120 mcmd of gas. About 110 mcmd will mean 60% PLF. Obviously, peak hour power should be allowed to be priced higher to maintain the overall economics of such investments and operations.

In any case, formulation as provided in the draft document may not lend itself to a smooth implementation unless proportion of available gas is earmarked for various sectors. Keeping one sector below the other or above the other would not mean much when it comes to making allocations. Placement like this would only mean that after the need of first priority is fully met, the question of allocation to the second priority, and then to the third priority and so on, will arise. Perhaps this is not the intention. The meaning of priority here can only be inferred to mean higher allocation to higher priority and lower allocation to lower priority sectors. Then within the proportion of allocations earmarked for different sectors there could be criteria for relative priorities. If we follow this approach, the Gas Distribution Policy could first earmark proportionate allocations to different sectors, for example: Power (42%), Fertilizer (33%), City Gas Distribution (6%), Refineries and Petro chemicals (10%) and others 10. With the total availability of 252 mcmd by 2011-12 as highlighted with Draft document, the allocations could tentatively look like as given in the following Table:


43% 108 mcmd

Over 80% of demand


31% 78 mcmd

Almost equal to demand

City Gas Distribution

6% 15 mcmd

Petro chemical & Refineries

10% 25 mcmd


10% 25 mcmd

These figures are only indicative and could be fine tuned. Then within the sectoral allocations relative priorities could be identified. For example, (i) existing power capacity, (ii) capacity under construction, (iii) capacity where EPC has been finalized and so on in that order. Similar relative priorities could be laid down for other sectors within their sectoral allocations.