The problems with pipelines

Rationalise prices, or India's gas deficit will keep growing

Reliance Industries Limited (RIL) has said it has instituted arbitration proceedings with the government over profit-sharing from its premier natural gas block, KG-D6 (Krishna Godavari Dhirubhai 6). Further delays in expanding access to the KG basin’s natural gas resources are a sign of how much things have changed in the years since 2009, when production began at KG-D6. Then, it was seen as a paradigm shift; big investments were announced in pipelines and power plants; fertiliser companies were assured feedstock; city gas networks were bid out; and transport corporations bought green buses. It is now becoming clear that that was a false dawn indeed. Today, KG-D6 produces 43 mmscmd against a projected 70-80 mmscmd. Yes, the induction of British Petroleum and an initiative to develop satellite fields could boost production; but not before 2014, at the least. And meanwhile, downstream investments are slowing, and under-utilised. As India’s GDP increases, its energy needs will grow to match — and gas will play an increasing role in meeting them. It is currently 11 per cent of the primary energy mix, up from seven per cent in 2005-06; analysts project that the consumption share will rise to about 20 per cent by 2025. And the demand-supply gap will widen as inexorably: Petronet reckons Indian demand in 2011-12 is around 253 mmscmd versus domestic supply of 155 mmscmd, but, by 2014-15, demand will hit 381 mmscmd — while domestic supply will rise only to 240 mmscmd. The gap is being filled by LNG imports, shipped into terminals at Dahej, Dabhol and Hazira. (More terminals are being planned in Cochin, Mundra, Ennore, Haldia, etc.) Filling in the gas deficit will require a national gas grid, with pipelines transporting LNG to the hinterland. However, players such as Reliance, Shell, Petronet and GAIL are all somewhat hesitant.

A major sticking point is pricing policy. The “utilisation policy” assures some quota of gas at fixed prices to priority sectors like power and fertiliser. The Administered Pricing Mechanism (APM) makes gas available to various consumers at rates varying from $4.2/million British Thermal Units (mBtu) to $8/mBtu (transport may be added to the base rate). Imports, meanwhile, are sourced at global spot prices, or at mutually-agreed rates. Globally, the price of LNG varies with crude prices, and with distance. In Asia, the LNG spot price hit highs of $15 after the Fukushima disaster, when Japan’s energy sector panicked. Even otherwise, prices in the range of $10-13 are not uncommon. Import-dependent industries, which must reckon with these price fluctuations, may not always be competitive vis-a-vis those who receive APM gas. A rationalisation of domestic pricing – perhaps by some sort of pooling mechanism – to more accurately reflect global trends would help to level the field. A more coherent pricing mechanism would also encourage exploration and production. Another critical area is pipeline policy. The Petroleum and Natural Gas Regulatory Board has set open-access guidelines for pipelines and laid down transportation tariffs. In theory, this should encourage activity. But, in practice, there are only two national operators. More investment will be tough unless the price-supply conundrum is solved.

We hear a lot about energy security these days, and grandiose plans to achieve it: a Myanmar-Bangladesh-West Bengal pipeline, an Iran-Pakistan-India pipeline, etc. Such plans are hostage to the vagaries of geopolitics. If we really were to focus on ensuring a more regular energy supply, then fixing the domestic price structure and reviewing the pipeline policy should receive focused attention. The KG-D6 production-sharing contract and pricing are due for review in 2012. It would be good if the sector dynamics were re-examined before that.