Gas firms seek price deregulation as city distribution targets fall behind

International gas prices, typically one-sixth of oil prices, have risen since late 2021, touching $100 per barrel

Irked by the sluggish rollout of city gas distribution (CGD) networks in India, the Petroleum and Natural Gas Regulatory Board (PNGRB) has warned companies to expedite their efforts or risk having their bank guarantees seized.

In response, the companies have expressed hesitancy in committing investments without clear government guidance on the time frame during which natural gas will have free play in the economy, according to sources. Oil and gas companies have provided bank guarantees worth Rs 35,000 crore, and while PNGRB has not specified whose funds could be seized, the slow pace of progress is evident.

PNGRB officials have not commented on potential actions against companies, but Chairman Anil Jain has emphasised the need for the government to outline a road map for the transition in the transport sector, involving roles for both compressed natural gas (CNG) and electric vehicles (EVs).

“We must move assuredly towards our net-zero targets; otherwise, CNG may not attract investor or consumer interest,” he said.

Price control

International gas prices, typically one-sixth of oil prices, have risen since late 2021, touching $100 per oil barrel at times. In 2022-23, 46.3 per cent of the gas used in India was imported.

As prices cannot be controlled, it stands to reason that the gas economy should respond to the market and attract investments. However, this has not occurred in India due to stagnant petrol and diesel prices at oil bunks since May 2022, despite the government easing control.

Oil prices in Delhi (retail) have hardly moved since 2020, except for one correction. The unchanged prices provide the government relief from inflation pressures.

With stable prices of oil products, the appetite for CNG in commercial and personal vehicles is low. CGD operators, licenced to operate gas stations for vehicles and sell piped natural gas (PNG), argue that the lack of demand has made their investments risky. The envisioned business model suggested that gas stations would be profit centres for operators, with PNG to homes being slightly subsidised. Kaushik Deb, a senior research scholar at the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs, highlighted a larger problem.

“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 per cent of the market, it’s an accurate assessment that all energy prices in India are controlled,” he said. Jain echoed a similar sentiment, asking, “Since prices of competing fuels are controlled, can we expect market-priced gas to compete with them?” Companies reached out to by Business Standard did not comment on the topic.

Coal control

The issue extends to the coal sector, where 85 per cent of coal supplies are on fuel supply agreements with thermal power companies, determining prices long-term. Although the National Coal Index has begun to swing in tandem with international prices, it mainly reflects spot prices in e-auctions. For the government, this situation is favourable, as coal auction process keeps electricity prices low for household budgets. the rapid adoption of EVs, requiring recharging at reasonable prices, has been a gain.

Deb pointed out the lack of 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 the export of oil products.”

Many CGD companies are lagging behind their commitments, endangering government plans to have the gas economy serve 15 per cent of the Indian economy’s energy needs. 

According to current estimates, the government may not achieve targets for 2023-24 or even 2024-25. PNGRB has issued licences to CGD companies covering about 98 per cent of the population and 88 per cent of the total geographical area of the country. The target is to provide 125 million PNG domestic connections over the next eight to 10 years.

Jain suggested a viable option would be a Ujjwala-like scheme for PNG. The government could offer a targeted subsidy of Rs 200 per 14.2 kilogram liquefied natural gas cylinder for up to 12 refills per year for eligible households, mainly those below the poverty line and in rural areas.

A government statement after a Union Cabinet meeting in September underscored the need for the continuation of the Pradhan Mantri Ujjwala Yojana, saying, “Without the continuation of the Pradhan Mantri Ujjwala Yojana, eligible poor households may not be able to get their due benefit under the scheme.”

Deb expressed scepticism about such subsidies, saying that risks increase without a free market.

“Regulated prices could provide certainty for private investors, but don’t incentivise efficiency and cost savings. Foreign investors are unlikely to view a regulated market favourably; they tend to look to freer markets,” he said.