Gas firms seek price deregulation as city distribution targets fall behind

Regulator warns them of losing bank guarantees as investors show little interest in gas economy

Irked by the slow rollout of city gas distribution (CGD) networks in India, the Petroleum and Natural Gas Board (PNGRB) has told companies to get going or risk having their bank guarantees seized. In turn, the companies have told the regulator they are wary of committing investments without the government saying the time period in which natural gas will be offered a free play in the economy, sources said.

Oil and gas companies have made bank guarantees worth Rs 35,000 crore, and PNGRB has not said whose money could be seized but slow pace is rife. (See table at the bottom)

PNGRB officials have not commented on possible action against companies, but chairman Anil Jain said the government should offer a road map for transition in the transport sector with a role both for compressed natural gas (CNG) and electric vehicles (EV). “It is necessary for us to move assuredly towards our net-zero targets otherwise CNG may not receive investor or consumer interest”, he said.

Price control

International gas prices — usually one sixth that of oil — have increased since late 2021 to touch $100 an oil barrel sometimes. Of the gas India used in Financial Year 2022-23 (FY23), 46.3 per cent was imported. As prices cannot be controlled, it stands to reason that the gas economy should respond to the market and find investments. That has not happened in India because petrol and diesel prices at oil bunks have not budged since May 2022 despite the government easing control. Going back further, oil prices (Delhi retail) except for one correction have hardly moved since 2020. The unchanged prices give the government relief from inflation pressures.

As oil products' prices are stable, appetite is low for CNG commercial and personal vehicles. CGD operators are licensed to run gas stations for vehicles and sell piped natural gas, but they say lack of demand has made their investments risky. The business model envisaged that the gas stations will be the profit centres for these operators and the piped natural gas to homes will be a tad subsidised.

Kaushik Deb, senior research scholar at the Center on Global Energy Policy at Columbia University's School of International and Public Affairs, said the problem is larger. “Retail prices for oil products are ostensibly deregulated. But given that public sector oil companies under the administrative control of the ministry of petroleum and natural gas account for about 85 percent of the market, it’s an accurate assessment that all energy prices in India are controlled.”

On the same note, Jain said: “Since prices of competing fuels are controlled, can we really expect market-priced gas to compete with them?"

Companies that 'Business Standard' reached out to did not comment on the topic.

Coal control

The problem affects the coal sector too. As much as 85 per cent of coal supplies are on Fuel Supply Agreements with thermal power companies where prices are decided long term. Even though the National Coal Index has begun to swing in tandem with international prices, it is more a reflection of the spot prices in e-auctions.

For the government this is a happy situation, as the coal auction process keeps the price of electricity low for household budgets. Another gain has been the rapid adoption of electric vehicles that need recharging at reasonable prices.

Essentially, as Deb points out, there is no price discovery in the retail energy market. “The only price discovery elements in these sectors are (1) the award of drilling rights via auctions and (2) in export of oil products.

Many CGD companies are behind their commitments, endangering government plans to bring the gas economy to serve 15 percent of the Indian economy’s energy needs (see table). By current reckoning, the government shall not reach the targets of FY24 or even FY25. PNGRB has given out licences to CGD companies covering about 98 per cent of the population and 88 percent of the total geographical area of the country. The target is to provide 12.5 crore PNG domestic connections over the next 8-10 years.

Jain said a viable option to consider will be an Ujjwala-like scheme for piped natural gas. Under the scheme, the government offers a targeted subsidy of Rs 200 per 14.2 kg LPG cylinder for up to 12 refills per year for eligible households, basically those under the poverty line and in rural areas. “Without continuation of Pradhan Mantri Ujjwala Yojana, eligible poor households may not be able to get their due benefit under the scheme,” said a government statement after a union cabinet meeting in September.

Deb said such subsidies may not work. The risks are obviously more without a free market. “Regulated prices could provide certainty for private investors, but don’t incentivize efficiency and cost savings. And foreign investors are unlikely to look at a regulated market favourably. They tend to look to freer markets”.