India's gas target of 15% was only aspirational. Time to give it up?

At which point did India decide natural gas would provide 15 per cent of the country’s energy mix? Also, what was the basis for arriving at this number which is now routinely used by the ministry of petroleum and natural gas?

The target has become hard-wired in the policy documents. For instance, in July this year, the ministry of petroleum and natural gas told Parliament in reply to a question that “the government has set a target to raise the share of natural gas in the energy mix to 15 per cent by 2030 from about 6.3 per cent now”. 

Current and former petroleum and natural gas ministers Hardeep Puri and Dharmendra Pradhan have repeated these numbers at several forums over the years. 

“I suspect this number was an aspirational target”, says Anil Jain, recently retired secretary of the ministry of coal. 

In his recently published book “Natural Gas in India: Challenges and Opportunities”, Jain has taken a dim view of gas making a big dent in the Indian energy mix. He said that he was not aware of any modelling exercise done before making the target public. The ministry of petroleum and natural gas did not respond to a query from Business Standard on how the 15 per cent target was arrived at. 

The government’s Invest India portal, which puts out key country data and holds meetings with prospective investors, notes, “India aspires to be a gas-based economy by increasing the share of natural gas in India’s energy mix from 6.3 to 15 per cent, by 2030”. It broadly means the current demand at about 64 billion cubic meters per year (BCM) shall touch 133 by the year 2030. 

Companies in sectors like fertilisers, city gas distribution and even power are building up or evaluating capital expenditures based on these estimates. In turn, banks have given out loans. While several bankers and analysts have projected the difficulty of reaching this number, it is important to figure out where the target of 15 per cent came from. 

Urja Sangam model:

The petroleum and natural gas ministry began quoting the 15 per cent number soon after the Urja Sangam of 2015. Addressing the event, which was flagged as India’s biggest global hydrocarbon meet, aimed at shaping India’s energy security, Prime Minister Narendra Modi made an important statement. He said policymakers should aim to reduce India’s import dependency on oil and gas imports by 10 per cent by 2022. The ministry read out the 15 per cent target soon after. The initial announcement for growing gas from 6.5 per cent to 15 per cent made by Petroleum Minister Dharmendra Pradhan, even in 2016, lacked a timeline which was added later.  

Current gas usage in the energy mix has meanwhile dropped in this decade, reaching 6.3 per cent from above 10 per cent it had reached in 2010. 

In any case, his team seemed to be essentially banking on a report issued two years earlier. In May 2013, the sector regulator, Petroleum and Natural Gas Regulatory Board (PNGRB), adopted a report written by a group of oil and gas companies. The report titled “Vision 2030: Natural Gas Infrastructure in India” was highly optimistic about the future of natural gas in India. The authors from RIL (Reliance Industries Limited), Shell, ONGC (Oil and Natural Gas Corporation), IOC (Indian Oil Corporation Ltd.), GSPL (Gujarat State Petronet Ltd) and other companies estimated the share of natural gas in the energy mix of India would reach a massive 20 per cent as early as in 2025.

However, since these would need the development of infrastructure like additional regasified LNG terminals, the establishment of a nationwide transmission pipeline network and the coming of age of transnational pipelines, the industry leaders “envisaged that the share of natural gas in the primary energy mix would reach 20 per cent till 2030 if not more”.

This was a remarkably gung-ho estimate. The authors assumed natural gas demand will grow at a compounded annual average growth rate of 6.8 per cent, pushing the demand from 242.6 mmscmd (million metric standard cubic meters per day) in 2012-13 to 746 mmscmd in 2029-30. The target for the natural gas economy also assumes that there shall be a trans-border flow of gas, the yet-to-be-constructed Turkmenistan to India gas pipeline—Tapi. The authors assumed the flow would begin by 2017.

Other than Tapi, their ground for optimism rely on two assumptions- first, they assumed that supply from the largely RIL-operated Krishna Godavari basin shall keep on rising, despite the sudden dip from 2010; second, the demand for natural gas from the power sector shall expand rapidly, substituting for coal. Both these assumptions have come asunder. 

But, the report did not conduct any modelling exercise to check the counterfactuals. So while they accurately estimated that power, fertiliser, industrial and city gas distribution would derive the demand for natural gas, there was no evidence demonstrated in the report to show what would happen if prices rose, RE became more competitive or domestic supplies were constricted. 

The Vision 2030 document admitted it had no data to go beyond the 12th Five-Year plan document beyond the year FY17. For years beyond, “no constraints were considered in terms of natural gas price, supply (or) infrastructure”. The demand projections were “refined” to project the most realistic possible demand scenario, but ultimately they were “based on inputs from industry players and the government of India”, the assessment report noted.

Surprisingly even international bodies swallowed the target. The International Energy Agency (IEA), the pre-eminent body that brings together all the oil producer countries on a single policy platform, had put gas usage in India Energy Outlook, 2015 at between 6-8 per cent for a future as far away as 2040. In their next edition of 2021, IEA blithely raised it upwards but with a hugely wide range of 11 to 16 per cent. 

As the table shows, it was not alone. The PNGRB estimate of the 2013 forecast for 2022 is about four times more than an independent study by Oxford Institute for Energy Studies. The annual BP Statistics of 2019 by BP p.l.c. (BP) put the number at 8 per cent share only in 2040. The subsequent estimates by the ministry of petroleum and natural gas in its various bids for city gas distribution, nevertheless, continue this error. 

How significant is the scale of the error? A paper from the New Delhi-based energy sector think tank, Council on Energy, Environment and Water (CEEW), notes that if the current high prices of natural gas persist globally, the share of natural gas in the primary energy mix will reach only 6.4 per cent by 2030. India will miss its target by a considerable margin of 9 per cent, the paper notes (Malyan, Ankur, Poonam Nagar Koti, Nitin Maurya, Diptiranjan Mahapatra, and Vaibhav Chaturvedi. 2021. India’s Natural Gas Future Amid Changing Global Energy Dynamics)

Room for policy mistakes:

This has implications. Rahul Tongia, a Senior Fellow at the Centre for Social and Economic Progress, noted that the divergence had created another problem. “The relevant question that arises is whether there is value in gas plants within a regime of high uncertainty of utilisation”, he said. According to him, the value of natural gas is squeezed between cheap coal and clean, renewable energy (RE). “How much gas ultimately gets used depends on what the alternatives are,” he said.

Instead of recognising these uncertainties, the expectation of a high share in primary energy usage has allowed policy mistakes to seep in. Since the gas economy is expected to expand, the government has worked with the assumption that it has a vast policy space. It has kept prices under control for producers with the assurance that higher demand for their product will make up for the difference. For consumers, it has offered the carrot at a low price to entice them to switch from other fuels to natural gas. This gas allocation policy has not worked. 

“The Indian hydrocarbon basins have not responded very well to the discovery and supply of domestic gas. As regards to imported gas, those will come at market-determined prices. But in India, the consumer price of the final products, namely urea and power, is controlled by the government”.

In the circumstances, he said, to incentivise domestic production or to incentivise greater import of natural gas and set up Liquefied natural gas (LNG) product supply chains, one has to allow market price to be given to both the importers and the producers of domestic gas.

Investors have also said the same thing. Banks have not been keen to lend to gas-based projects, especially power, where about Rs 18,500 crore worth of projects are stranded.

For other sectors like fertilisers and city gas, the CEEW paper notes that withdrawing from the gas allocation policy “is not beneficial to gas penetration in the country”. But it adds the government has multiple options available for withdrawing the policy without hurting the segments. The authors cite the role of direct benefit transfers for farmers and the promotion of electric vehicles (EVs) as primary transportation as examples. 

Climate concerns: 

One of the reasons why the government may be persisting with the impossible target is to burnish India’s climate change leadership. Jain thinks this could be one reason but says in the case of power, when there is ready access to cheap coal, “there is no reason why only driven by the climate change phenomena, India will jettison a cheap source of power for a highly speculative source like gas”.

Tongia is more optimistic. “For a variety of reasons, India is unlikely to need natural gas to comply with its climate commitments, made at COP21 in Paris. This doesn’t mean natural gas has no role or future, but simply that carbon alone won’t be its driver”.