The four hidden risks lurking in India’s gas expansion plans

India’s plans to remake itself into a gas-based economy are floundering. As the previous story in this series described, not only is the fuel controlled so tightly by the government that players struggle for viability, India is also running out of cheap domestic gas. The country’s new gas finds – in deepwater fields – and imported gas is too expensive to be viable unless the government steps in with subsidies or taxes rival fuels.

India’s Bharatiya Janata Party-led National Democratic Alliance (NDA) government, however, is moving in contradictory directions. On the one hand, it moots the creation of a gas exchange to boost gas trading in India. At the same time, however, it is also wondering if the existing carbon cess on coal should be waived.

Along the way, as the government delays structural reforms – while taking more expedient decisions – India’s gas sector is creating a new set of poorly understood risks for the country.

1. The burden of keeping gas attractive for users is falling on companies

To push gas, the NDA has to make it cheaper than rival fuels like coal and oil. If taxing rival fuels heavily is one way to meet that end, subsidising gas is another. India should have moved to market pricing for gas, says former finance secretary Arvind Mayaram, and given direct benefit transfers (DBT) to its users. Such an arrangement, he says, would have made gas exploration more remunerative.

DBTs to all gas users, however, would be prohibitively expensive. And so, the NDA is making companies subsidise users. We see that in gas exploration where domestic gas is now so cheap, ONGC expects to post a loss of ₹6,000 crore in 2020-2021. And we see that again in City Gas Distribution (CGD). There, rates for piped natural gas are so low the business is viable only in the biggest cities.

One outcome? Most CGD networks are not investing much. “That is what bankers tell them: invest only if you will see results,” said the former Feedback Infra consultant. “And, after some years, exit.

2. Too risky for banks

Companies working under administered pricing know their viability is in the hands of the government. “They will try and transfer this political risk to banks,” says Santosh Khatelsal of Enerpac, a solar EPC firm, “They won’t put their own money into the business.” That is not working this time. Banks are wary of lending to CGD networks.

“After ten rounds of bidding, while a few firms like IGL and MGL are doing well, in all other areas, banks’ money is stuck,” says a former manager at Unison Enviro – a subsidiary of Ashoka Buildon, which has won three CGD bids spanning Karnataka and Maharashtra.“They now consider CGD risky.”

Banks will not lend, agrees Hemant Manuj, a professor teaching risk management at Mumbai’s SP Jain Institute of Management and Research. “Bankers look for sectors where, without any miracles or government interference, businesses are sustainable.” Given the economics of gas in India, he says, only a few firms with lower unpredictability – like stable contracts for supply or sales – will get funding. For this reason, India’s abortive gas boom will not result in an NPA crisis. Players here are spending cautiously.

3. State oil companies will be hit in the short term

As private sector interest in gas falls, pressure is growing on state oil companies to step up. In CGD, as private firms start to stay away, no less than 60-70% of bids have been won by state-owned oil companies. This, says a former GAIL manager, is due to government dictat.

State oil companies are also being used to bail out companies. Take LNG terminals. As capacity stays low in most terminals, India is seeing transactions where state oil companies like Indian Oil and GAIL rent capacity from Adani at a higher rate than what they would have paid elsewhere.

4. The Centre must bear the losses

At some point, however, these losses will reach the Centre. The reasons could be impending privatisation of oil companies, losses rising beyond what these firms’ balance sheets can absorb or because cheap domestic gas will run out.

At this time, the costs of subsidising consumption of a dwindling reserve instead of incentivising domestic gas exploration will come home to roost. By then, a large part of the country will be accustomed to PNG. Asking them to pay more – for imported gas – will be unpopular.

As former petroleum secretary Vivek Rae wrote: “As cheap domestic gas sources dry up… bidders will be faced with serious problems of cost recovery, thereby affecting viability and sustainability of the CGD system. This will open up a Pandora’s box of legal disputes, contract re-negotiations, non-performing assets and supply disruptions. The government surely cannot afford such outcomes.”

At such a time, imports will increase. This is tricky. India’s economy is slowing. Its remittances and exports are both falling, creating a forex problem. Rising imports, therefore, will land India in one of two messes. We could go, says Mayaram, the Pakistan way. The country allowed users to freely convert their vehicles to gas. The result? While its domestic reserves fall, gas consumption continues to boom. “People got used to this cheap fuel. Pakistan’s power projects are starved for gas,” says Mayaram. “There are deep blackouts, but people continue to move around in cars.” India, too, could find a rising chunk of its cash going into servicing not just oil, but also long-term gas purchase contracts.

Alternatively, as gas prices soar, the country will be forced to intensify searches for domestic gas – or to fall back on coal and renewables. The first will result in exploration closer to places like Baghjan. The second will result in more air pollution (both gas and coal release GHG gases. Gas’ advantage lies in lower local pollution).

Little here adds up. India has some oil and coal – and very little gas. And yet, over the past 10 years, successive Indian governments – run by the Congress and the BJP – have taken gas away from a critical, productive sector like fertiliser and used it to subsidise household cooking.

Such a move, apart from hamstringing fertilisers, also creates a new dependency for the country. “When you do not have a resource in your country, why bring it in? Why create a market around it?” asks Khatelsal. At one level, this sclerosis is an indictment of energy planning in the government. “There is no comprehensive thinking in this government,” says Mayaram. “No one thinks 20 years ahead. Every ministry is pretty much working on its own.”

Part 1: Can Gas Account for 15% of India’s Energy Mix?
Part 2: Why India’s gas boom is running out of steam

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M Rajshekhar

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