By Raymond E. Vickery, Jr —
Status: Incomplete — Acquisition price for domestically-produced gas largely set by government through a formula using prices in several developed markets. Pricing of gas from new, deepwater, and high pressure/high temperature wells liberalized but with a cap. Customer prices for city gas, electricity, and petrochemicals somewhat liberalized. However, allocation formulas, government control of distribution companies, and strict price control of gas for fertilizer still frustrate market-based pricing.
Medium Difficulty: Requiring Political Will — Simply requires a government notification. Customer expectations for gas at below market make the reform politically sensitive.
This is the fifth installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.
In inaugurating a policy of greatly expanded gas distribution infrastructure for his second term, Prime Minister Narendra Modi set the goal of increasing the share of natural gas in India’s energy mix 2.5 times by 2030. Such an increase cannot be attained without price liberalization; price controls stifle private industry’s desire to invest in production.
For its second term, the Modi government released “Reforms in Exploration and Licensing Policy for Enhancing Domestic Exploration and Production of Oil and Gas.” This policy promises pricing and marketing freedom for new gas discoveries in the 19 identified but non-producing basins. The seven producing basins are not affected. More importantly, Modi has said that India is working to establish a natural gas trading exchange, and in the 2019 budget speech the government indicated it was moving to implement an e-bid scheme for regasified liquefied natural gas.
However, given the long and tortuous history of natural gas price liberalization in India, it remains to be seen whether Prime Minister Modi’s initiatives will be successful.
Unfortunately, the price liberalization policy runs squarely into interests vested in the traditional Indian system of natural gas allocations and government price setting. This is especially true for the politically sensitive fertilizer sector where natural gas is a primary input for the production of urea. More gas is presently used in this sector than for any other purpose, and farm-connected voters, who make up almost half the electorate, demand cheap fertilizer. Some price liberalization has occurred on resale of “city gas” (Compressed natural gas for transportation and piped gas for homes). However, states and political vested interests demand that public sector companies insulate consumers from gas price increases. Central government ministries and public sector companies facilitate this price protection for political reasons.
The first Bharatiya Janata Party (BJP)-led government adopted in 1999 a New Exploration and Licensing Policy (NELP). This policy had promised market-based pricing to encourage an expanded role for the private sector in gas exploration and production. After the significant private-company discovery of gas in the Bay of Bengal in 2002, the Vajpayee government was unseated before price liberalization could be implemented.
In the waning days of their administration, the Congress-led governments of 2004-2014 tried to rectify the absurdly low price fixed for domestically-produced natural gas by announcing a change in the pricing formula. The change mandated a significant increase in the price of gas and became an issue in the 2014 campaign. BJP opposed the change, and Modi came into office promising to clean up the pricing mess.
In October 2014, the Modi government notified a pricing formula which is a weighted average of prices prevalent in the United States, United Kingdom, Canada, Russia, Europe, and Japan. Being Western market derived, the formula results in a price considerably lower than gas imported into India and prices in Asia.
In March 2016, the Hydrocarbon Exploration and Licensing Policy (HELP) was announced to switch from a production sharing (profit sharing) model to a revenue sharing model. HELP supposedly granted pricing freedom for gas from new deepwater, ultra-deepwater, and high pressure/high temperature wells. However, the government could not bring itself to allow complete pricing freedom for this gas and imposed a ceiling price for this new, hard-to-reach gas.
To encourage fracking and unconventional natural gas recovery, pricing freedom was extended to gas produced by these methods in August 2018. Thus, in its first term, the Modi government made progress toward decontrolling prices for new and difficult fields. In 2017-18, this helped secure the first production increase in six years. 2018-2019 also saw a modest increase.
The notifications and initiatives during Modi’s two governments are all steps in the right direction. However, the vast bulk of domestic natural gas still has prices set formally or informally by the government. India needs to institute a genuine market system for natural gas. Without such a system, the investment required to discover and exploit fully its natural gas reserves is unlikely to occur, and plans to vastly increase natural gas in the Indian energy mix will not be achieved.