By Raymond Vickery —

• Status: In Progress – In March 2016, the government did announce a new policy to bring in a revenue-sharing model in natural gas production. However, it has yet to completely deregulate natural gas pricing.
• Difficulty: Medium – Completely deregulating natural gas pricing will require a further deregulation by the government. However, taking such a decision is politically sensitive, given the government’s stakes in key state-owned enterprises that play a big role in the natural gas sector.

This is the tenth installment in a series of articles on the Modi Reforms Scorecard 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 what impact such reforms could have on specific sectors or the economy at large.

When Narendra Modi became prime minister in 2014, natural gas from domestic sources was to play a big part in his strategy for meeting the energy and environmental goals of his government. Price decontrol was to be a chief tool for increasing production. As Modi prepares for a national election to give himself another term, how much has his government accomplished in regard to natural gas pricing? Answering this question requires an appreciation for the tortuous history of natural gas and its pricing in India.

India made the world’s largest discovery of natural gas in the Krishna Godavari Basin in the Bay of Bengal in 2002. The BJP-led government led by then prime minister Atal Bihari Vajpayee was ecstatic at the prospects of using this gas to help achieve energy security, a necessity for achieving India’s ambitions to become a great power.

However, before the new gas could be brought online, Vajpayee and his government went down to electoral defeat. In 2004, the government led by former prime minister Manmohan Singh and his Congress party inherited the opportunity to exploit this new resource. However, ten years later, a chief theme of Prime Minister Modi’s successful campaign in 2014 was the mess Singh and Congress had made of natural gas and its pricing. There was justification to this charge.

The 2002 discovery had been made by a private company, Reliance Industries Ltd., with the expectation that market- based pricing would allow Reliance to make a significant profit. Indeed, this had been the promise of the New Exploration and Licensing Policy (NELP) which went into effect under Vajpayee in 1999. However, a series of court cases and governmental decisions continued a jumble of prices that were promulgated on a largely political basis and were far below those that would have obtained under a market system. By 2014, natural gas prices depended on a non-economic mixture of factors that included the identity of the seller, the date when approvals for exploration were given, the location of the well, the type of customer, and the location of the customer. These prices were far below those that would have obtained under market conditions.

Not surprisingly, natural gas production had fallen, rather than increased, year after year. The government-owned exploration and production companies, ONGC and OIL, were starved for cash. Losses, or “under recoveries,” amounted to some $300 billion in 2011 alone. Private investors, both foreign and domestic looked at the difficulties of pricing and decided not to invest. Critics charged that Reliance was withholding production because of low prices.

In 2014, the Congress-led government finally tried to rectify the absurdly low price fixed for domestically-produced natural gas by announcing a change in the pricing formula. The change would have resulted in a significant increase in the price of gas and immediately became an issue in the 2014 campaign. The BJP opposed the change and Modi came into office promising to clean up the pricing mess.

In the five years since his election, Modi and his government have made progress on natural gas pricing. However, this progress has largely been through streamlining the process and making it more transparent rather than by deregulation. In October 2014, the Modi government notified a pricing formula that is basically a weighted average of prices at Henry Hub in the U.S., the National Pricing Point for the U.K, and prices in Canada, Russia, Europe, and Japan. Since the formula is weighted toward Western markets, it results in a price considerably lower than that for gas actually imported into India and prices throughout Asia. While prices are generally uniform for buyers in India, the Northeastern states still receive a discount.

Deregulation has occurred around the edges. These deregulations have been specifically targeted at getting new gas, particularly gas that is hard to obtain.

In March 2016, a Hydrocarbon Exploration and Licensing Policy (HELP) was announced to switch from a production sharing (profit sharing) model to a revenue sharing model and supposedly granting 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 so 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.

With elections looming, the Modi government has returned to the theme of using price deregulation to encourage new production. In February 2019, the government released an “Exploration and Licensing Policy for Enhancing Exploration and Production of Oil and Natural Gas.” This policy promises pricing and marketing freedom for new gas discoveries in the 19 identified but non-producing basins. However, the seven producing basins will not be affected by the regulations.

Thus, the Modi government has 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 seems headed for a modest increase. However, the vast bulk of domestic natural gas still has prices set by the government. India still needs to “bite the bullet,” and set up 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.

Mr. Raymond E. Vickery, Jr is a former U.S. assistant secretary of Commerce and Senior Associate (non-resident) with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.