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Special Report

Published on: May 1, 2022, 8:27 p.m.
Is the cheap gas dream going bust?
  • The ongoing war has made logistics hard to manage and hence has been one of the causes behind the steep hike in gas prices across the world and in India

By Rakesh Joshi. Executive Editor, Business India

Last month, various auto-rickshaw and taxi unions in the national capital went on a strike, demanding a subsidy on CNG (compressed natural gas) and a fare revision in the wake of rising fuel prices. Auto and cab drivers’ unions have been demanding a hike in fare and slashing of CNG prices to offset the impact of rising prices. CNG, an environment-friendly alternative to traditional fuel, is made by compressing natural gas (methane) down to less than 1 per cent of its volume. 

But like petrol, diesel and other fossil fuels, the price of CNG too has risen as a result of the increase in fuel costs by state-owned companies to offset the economic impact of the Ukraine war. Besides, Russia accounts for over 24 per cent of the natural gas supply in the world. 

The ongoing war has made logistics hard to manage and hence has been one of the causes behind the steep hike in gas prices across the world and in India. It is a problem that will haunt India for some time to come both economically and politically.

Given that taxi and auto rickshaw drivers in Delhi form an important vote bank of the ruling Aam Aadmi Party, it is a matter of time before a fare revision is announced by the Delhi government. However, the problem caused by rising demand for natural gas and the price spurt isn’t going anywhere. 

Natural gas and oil prices already were rising as the pandemic eased and demand increased, but the Russian invasion of Ukraine added to price increases. The Modi government recently more than doubled the price of domestically produced natural gas for the six months starting 1 April 2022 from $2.9 per mBtu (million British thermal unit) to $6.10 per mBtu.

India links prices of locally produced gas from old fields to a formula tied to global benchmarks, including Henry Hub, Alberta gas, NBP and Russian gas. This is gas sourced from regulated fields of state-owned Oil & Natural Gas Corp Ltd (ONGC) and Oil India Ltd (OIL). The rate paid for difficult fields like deepwater in the Krishna Godavari basin, etc, is higher.

 LNG price is linked to the prevailing crude oil price in global markets. India also has an import dependence of 45 per cent in gas. Thus, the increase in CNG prices is expected to continue as global uncertainties refuse to die down.

Global hubs abuzz

The increase is driven by the significant run-up in the prices of natural gas at global gas hubs. After last month’s spurt, European spot prices of natural gas are stabilising – but at three times the average of the past decade. Europe is scrambling to find suppliers for natural gas, because the Russian giant Gazprom has cut its supplies to two nations in the EU – Poland and Hungary, as it wanted payment in rubles. There are fears that other Russian companies will follow soon. 

Successive governments have attempted to wean away India Inc from diesel and rely on gas instead. The excitement peaked in January, when Adani Total Gas Ltd and others won keenly contested licences to add new areas to city gas networks. The drive towards making India a gas-based economy got an impetus after Prime Minister Narendra Modi’s embrace of the climate change challenge. 

Till 2019, natural gas had accounted for just 6 per cent of India’s energy basket. The government then began talking about a $118 billion ‘master plan’ to increase this share to about 15 per cent in five years. As India was the world’s third biggest emitter of carbon dioxide in the world, this ‘master plan’ was pitched as a step towards a cleaner fuel. 

And, to achieve this, the government earmarked some $60 billion to create the infrastructure – pipelines, import terminals and city gas distribution (CGD) networks – by 2024 and another $58 billion on hydrocarbon exploration and production by 2023. 

  • Mahanagar Gas: finding their costs going up

    Mahanagar Gas: finding their costs going up

Hardeep Singh Puri, minister for petroleum & natural gas, recently informed Parliament that the government has now set a target of increasing the share of natural gas in the primary energy mix from 6.7 per cent to 15 per cent by 2030. This included expanding the city gas distribution network through the establishment of CNG stations and providing piped natural gas to households, industries and commercial establishments – one of the strategies for increasing the consumption of natural gas. 

Giving an example of the success of the government’s drive, he said that the number of CNG stations established by various authorised entities has increased from 1,742 in 2019 to 3,878 by January this year.

 Gujarat’s success

Modi, according to senior government officials privy to high-level discussions which took place during his first term in office, always brought up the success of Gujarat in amping up its share of natural gas in the state’s primary energy mix to about 23 per cent – close to the global average of 24 per cent – and four times the share of gas in India’s primary energy basket. 

Indeed, Gujarat has the most extensive gas pipeline network in the country, with over 3,370 km of main lines that accounts for about 20 per cent of gas pipelines (16,324 km long) in the country. Gujarat’s per capita natural gas consumption at 191 kgoe (kilogram oil equivalent) is 400 per cent higher than the national average of 39 kgoe.

Gujarat accounts for about 40 per cent of domestic connections for piped natural gas (PNG), 67 per cent of commercial connections and 56 per cent of industrial connections. It has the second largest number of CNG vehicles, with over 27 per cent of the total at the national level -- after Delhi NCR, which has a share of 37 per cent.

But the success of Gujarat’s gas industry, say experts, can be traced to the discovery of gas in Gujarat in the 1960s. This geographic proximity to gas supplies, along with the enthusiasm of the then state government to enlist industrial consumers with favourable prices, which in turn led to investment in an extensive gas pipeline network, were critical for the success of the gas industry in Gujarat. One of the earliest consumers of natural gas produced in and around Gujarat was the Gujarat state electricity board, whose Dhuvaran Project used the gas for power generation. 

Shadow of war

But no government, least of all the one led by Modi, had reckoned with the shadow of gloom that the Ukraine war would cast on the global economy. In India, while the new hike in natural gas prices will boost the earnings of domestic producers ONGC, OIL and Reliance Industries (which is in partnership with BP plc), it will raise the prices of gas sold to households, the power sector, industries and fertiliser companies, leading to an addition in overall inflation. 

Indeed, city-gas distribution companies like Mahanagar Gas, Indraprashta Gas and Gujarat Gas, being the main buyers of domestic gas, are finding their costs going up. Since they have been passing on cost increases to the consumers in a calibrated manner over the last few weeks, the impact of costlier gas on their margins would be moderate in the short term. Already, customer discontent has begun to simmer though it is not as high as on petrol and diesel.

  • Puri: increasing the share of natural gas

Despite prices remaining high, the rating agency Crisil sees the domestic demand for natural gas rising 12-14 per cent next fiscal. But what will be the impact of such rising demand and rising prices on the political economy? 

Domestic availability will be an issue. Currently, India has an import dependence of 45 per cent of natural gas/ liquefied natural gas. Contrary to the objective of import reduction and self-sufficiency, India’s natural gas production has plummeted by 4.9 billion cubic metre to 28.7 billion cubic metre in 2020-21 compared to 2014-15. Indeed, in 2020-21, the production of natural gas declined by 8.05 per cent over the previous year.

“Production from new fields has different challenges, compared to matured fields,” says Sanjay Kumar Kar, associate professor, Rajiv Gandhi Institute of Petroleum Technology, explaining the plunge. “A sizeable chunk of domestic oil and gas production is contributed by the pre-NELP assets that are facing challenges in maintaining production rates. The matured fields are showing signs of declining production.” 

Therefore, he feels, the application of enhanced oil recovery techniques is critical for the producers. Under the high price market conditions, investment in enhanced oil recovery should not be a problem for the companies.

Complicated pricing

While the price hike in petrol and diesel is largely exogenous (as India imports 85 per cent of its crude oil) and guided by the freedom of the Centre and the states to temper the excise duty and VAT (which in some cases is 25 per cent-plus) respectively to bolster their revenue, CNG pricing is a slightly different ball game as it is linked to the prioritisation of allocations to various sectors. 

For instance, the ministry for petroleum & natural gas has not made any fresh allocation of natural gas from domestic fields to the city gas sector. The ministry insists that allocations have not been stopped and providing more for the sector would lead to cut in supplies to industries like power and fertiliser. But, despite rising demand, current supplies are at March 2021 demand level, despite a decision of the Union Cabinet to give 100 per cent gas supply under ‘no cut’ priority to the city gas distribution sector. As a result, city gas operators are buying high priced imported LNG to make up for the shortfall, leading to a spike in prices.

 New dilemma 

This is where the government’s dilemma lies. By earmarking more for city use, the fertiliser industry faces a cut, forcing it to pay a higher blended price to make the nitrogen-rich products like urea that boost the crop output. With food shortages owing to climate change and geopolitical disruptions intensifying across the world, the only hope for India is that its farmers would feed the country with decent harvests for which fertilisers are a must. 

But the cost of urea supplied to farmers is subsidised and the taxpayer ends up paying for it. Indeed the fertiliser subsidy bill this year could touch a record Rs1.9 lakh crore, according to a Crisil estimate, warranting a reworking of Centre’s fiscal math. Finance Minister Nirmala Sitharaman had budgeted for a subsidy bill of Rs1.05 lakh crore. While gas prices will inflate the cost of urea production, the war in Ukraine will impact the non-urea fertiliser segment. Russia, Ukraine and Belarus are major suppliers of non-urea fertilisers. 

Gas-based economy

In pursuit of the government’s goal, the NITI Aayog recently proposed complete marketing and pricing freedom to all natural produced in the country, including nominated gas fields. The planning body is batting for selling all natural gas through the Indian Gas Exchange (IGX), the country’s first such exchange, where the buyer and seller can decide on prices in a transparent manner. The move, once cleared by the government, will be advantageous to companies like ONGC and Oil India, sitting on a majority of nominated gas fields.

  • Gujarat has the most extensive gas pipeline network in the country

    Gujarat has the most extensive gas pipeline network in the country

NITI Aayog’s plans also recommend the creation of a special purpose vehicle, with a pool of funds to be created by state-run companies and equal share by the government to boost the exploration sector. This may also include the engagement of an international partner as an executing agency. On successful exploration, this partner may be given participating interest in the block. This pooling of funds is to reduce risk by only one company.

While the present notified gas price is $6.1 per mBtu, based on estimates, the break-even price for the ongoing and planned projects of ONGC are in the range of $5-9 per mBtu. R.S. Sharma, former CMD, ONGC, believes that the move will be helpful to not just ONGC and the nomination fields, but to the entire natural gas segment in the country. When all the natural gas produced in the country is sold on the IGX, it will boost domestic production.

There are concerns, however, within the government and outside around the free pricing, market-driven plans. Prashant Vasisht, vice-president & co-group head, ICRA, feels that they will impact the subsidy on fertilisers, already ballooning up due to the Ukraine war. The city gas segment, which is getting natural gas based on the Rangarajan formula, may also feel the squeeze. 

Apart from this, there are calls for overhauling the Rangarajan formula as it bases gas pricing at an average cost of importing LNG and rates prevailing at international hubs in the US and the UK, as well as the price of gas imported into Japan. Some experts feel that the formula is flawed, as gas prices in India cannot be fixed based on a formula that includes Japanese imports, as Japan is an importer of gas and not a gas trading hub.

 Inopportune time

However, while all these ideas are being floated and debated, India’s expansion of natural gas coverage to more than 90 per cent of its population and raising the share of natural gas in India’s energy mix to 15 per cent by 2030 from under 7 per cent now, as part of a plan to improve air quality, couldn’t have come at a more inopportune time politically.

Indeed, higher gas prices will have serious political ramifications. The Pradhan Mantri Ujjwala Yojana (PMUY), under which the poor were given 90 million free gas connections and cylinders, had yielded rich electoral dividends for the Bharatiya Janata Party in the 2019 general election, as well as the recent assembly elections. Women voters were particularly swayed as the move helped them switch from burning wood, coal, dung-cake or kerosene to using cleaner cooking gas. 

But, due to the faulty design of the scheme, it was getting unwieldy and even coming unstuck. PMUY could not enable the low-income households to use LPG as cooking fuel permanently; of the 90 million beneficiaries under PMUY, almost 35 million did not refill their subsidised LPG cylinders in the first quarter of 2021-22, as the end-price of the standard 14.2-kg cylinder rose to levels they could not afford. Since June 2020, the government too hasn’t been depositing the subsidy on cooking gas in the bank accounts of target beneficiaries, resulting in a big dip in its fuel subsidy budget from Rs23,667 crore in 2020-21 to just Rs3,400 crore in 2021-22.

Ujjwala pipedream?

Based on the experience of piped natural gas (PNG), delivered to urban homes relieving the demand pressure on LPG cylinders, the government was thinking of pushing PNG to rural areas before the 2024 general election. But now the economics of PNG – like that of CNG supplied to motorists as a cleaner alternative to gasoline and diesel – is suddenly going awry. Indeed Modi’s plan to deliver piped gas to smaller towns or even villages will remain a pipedream. 

  • Sharma: the pricing is helpful to the industry

This is because of the complex pricing formula under which natural gas is allocated to city gas and fertiliser firms, the two biggest users, as well as power stations and LPG plants. The prices are artificial. Until last month, the government kept the administered gas price at $2.9 per mBtu – hardly enough for the producers to make much money. 

The gas extracted from difficult deep-sea Indian fields was allowed to be priced at $6.1 per mBtu. In contrast, the Japan-Korea marker, an Asian benchmark, is hovering around the $25 per mBtu mark.

Supply is also an issue as the output from the KG Basin, Reliance’s gas discovery off India’s eastern coast, has not turned out to be what was originally expected. Since other local production has not responded to the government’s complicated pricing signal, industries have to pay $8-10 per mBtu for imported LNG in addition to their domestic gas quotas. 

After Putin’s invasion of Ukraine, that imported cargo costs a lot more. Besides, the local demand has grown commensurate with the growth of the city gas industry, encouraged by the Modi government.

This is putting a question mark on the financial viability of the licenses won by investors. The government is aware that the inevitable increases in retail prices won’t go down well with the public. Indian consumers don’t have the income power of their European counterparts, nor can they expect checks in the mail to help them cope with higher prices.

Even the tempering of local demand will not matter in respect of checking the raging global prices. Experts believe that China, the world’s biggest LNG importer, is a different story. If the Covid-19 lockdown of Shanghai lasts longer and spreads more widely, spare Chinese gas supply could hit the spot market. 

As for the Modi government, it has tried to build a national edifice of unviable city distribution franchises over shrinking domestic production, (now) volatile global prices and unsustainable pricing. Like rising crude oil prices, rising natural gas prices will severely impact inflation, economic progress, and market development. 

High natural gas prices will be a roadblock to greater integration of natural gas into the energy system, though it may offer incentives to producers to expand the production base. The government will have to take a call, sooner than later, instead of simply waiting for the war to end and things to somewhat settle down. 

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