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Why India’s gas boom is running out of steam

Gas had fifteen years to establish itself in India. Seven of those years are gone – and there is little to show.

Seen from a distance, India’s gas sector seems to have everything going for it. Given how energy-starved India is – not to mention climate commitments to reduce its economy’s carbon intensity – there is abundant demand. Given the global surge in gas production even as traditional markets slow, supply is not a problem either. Helping matters further, the Indian government has ambitious targets for gas.

And yet, the mood in the sector is pessimistic. Companies across its value chain of domestic gas production, terminals for processing imported gas, the pipelines moving it, big customers like power plants and city gas distributors (CGDs) supplying gas to smaller consumers, are either making losses or exploring ways to avoid slipping into losses.

Between June and August, CarbonCopy tried to understand what ails the sector. This is an important question. If gas fails to account for 15% of India’s energy mix, India might fall back on coal. The infrastructure being created right now might turn into NPAs. The country, with its slowing economy, might find itself locked into expensive gas purchase contracts.

The First Structural Problem

The challenge before gas is one of market development. The government – and industry – have to convince users of rival fuels to switch to gas. Gas can be used for transport (where it competes with petrol/diesel); by households (LPG); and by industry (coal, furnace oil, etc). In each, how competitive is it?

It’s a hard question to answer. Natural gas occupies multiple price points in India. Domestic gas, produced from on-land fields, is cheaper than gas produced from domestic offshore and deepwater fields. India also imports gas from nearby countries (Qatar) and ones farther away (Russia and USA). With domestic gas production slowing, imports, which already account for a little over half of India’s gas consumption, continue to rise.

The outcome is a rainbow of prices. If a unit can get domestic gas at $3.5/MMBTU, gas from a deepwater field will cost as much as $8-9. If gas imported from Qatar costs it $5, gas from the USA might go as high as $8.

Now, while India has integrated some parts of its energy sector – like petrol and diesel — with global prices, it continues to control gas. It decides who gets what gas at what price. “In the existing system, if Vedanta produces gas at Barmer, the government will decide who it can sell to,” says Arvind Mayaram, a former Finance Secretary of India.

In one way, this arrangement of administered prices – where the government, not the market, sets the price of gas – could have been a good idea. It could have kept energy prices low, helping sectors like manufacturing gain competitiveness.

In practice, however, it has created conditions for political discretion. “When gas is available at multiple price points, it creates an outcome where a company’s viability depends on the price at which it gets gas,” says Mayaram. “Countries see lobbying for such gas. This creates avenues for rent extraction and patronage. At the same time, businesses not favoured by political economy struggle.” Which is what India’s gas sector has seen over the past six years.

Fertilisers, Power and CGD

The cheapest gas in India is domestic gas. Till 2014, fertiliser plants had the first right over it – while other sectors use gas as a fuel, fertiliser plants use natural gas as an input for making Urea. Then came LPG plants, power stations and then CGD networks. In its dying months, the Congress-led United Progressive Alliance government upturned that order. CGD was placed first, then came strategic sectors like space and atomic research, petrochemicals and – only then – fertilisers.

Till 2014, CGD networks had grown slowly. By 1997, they were up in Gujarat, Delhi and Mumbai. By 2007, when PNGRB was set up, India had 30. By 2014, India had added another 24.  In the six years since, the NDA has auctioned 174 geographical areas, accounting for 70% of India’s landmass and 52% of the population. “Cooking gas has huge political significance,” a former member of the PNGRB, speaking on the condition of anonymity, told CarbonCopy. “The government wanted to switch urban consumers to piped natural gas (PNG) and divert LPG cylinders to rural areas.”

This expansion, however, has come with two large costs. While fertiliser plants emerged relatively unscathed — to reduce urea imports, India began offering a blended mix of domestic and imported gas to the industry – gas-based power projects were less lucky.

The sector was already reeling due to falling output from Reliance’s KG Basin. Now, administered pricing delivered a second body blow. A 2019 report by the Parliament’s Standing Committee on Energy explains why. For gas-based power to be competitive, it has to be priced around ₹3/kwh. For such pricing, the landed cost of gas at the power plant should not be more than $5.5-6.0/MMBTU. Between 2017 and 2019, the price of domestic gas had risen from $2.48-$3.36/MMBTU. After taxes and other expenses like transport and processing, its effective price worked out to $4-$5.5/MMBTU. The equivalent number for imported gas, however, ranges between $10-12/MMBTU.

Not getting enough domestic gas and unable to compete using imported gas, these units sickened. Their capacity utilisation slipped from 55% (2007) to 23% (2015).

Between them, these two sectors used to account for as much as 70% of India’s gas consumption. Next, any hopes that CGD networks would drive gas demand in India were dashed.

What Ails CGD in India

Availability isn’t reason enough for consumers to switch from LPG to PNG (Piped Natural Gas). It had to be cheaper. And so, the government capped PNG prices. “The average household uses 0.4 cubic metre of gas in a day,” says a former manager at Unison Enviro, a subsidiary of construction major Ashoka Buildcon. “In a month, that works out to 15 cubic metres. The administered rate for natural gas by the government is ₹28/cubic metre. That works out to ₹420 a month — cheaper than an LPG cylinder.”

The cost of connecting a household to the gas grid, he adds, ranges between ₹14,000-₹15,000.

Given such economics, agrees a former energy consultant at Feedback Infra, a Gurgaon-based infrastructure consultancy, PNG is not a viable business. “It’s viable only if CGD networks can also sell to transport and industrial users.” In his previous job, he had advised companies interested in CGD bids. “We told bidders any city where they can get 75-80% of their revenues from CNG is ideal,” he said. 

There is, however, a problem there. Take Unison Enviro. It has won CGD bids for Chitradurga-Davanagere, Latur-Osmanabad and Ratnagiri. Such towns, says the ex-employee, have “little industry and not enough automobile use to make the business viable”.

The outcome, he said, is one where several CGD networks handed out under the NDA are not getting financial closure. “Banks consider CGD risky. The good locations have already been taken.”

The Second Structural Problem

If administered pricing is the first structural problem, Gas prices are the second. They are going to rise in India. Domestic gas production – from cheaper fields – is slowing. Gas from India’s newer, deepwater fields, in the East Coast Block, is expected to cost between $8-$9/MMBTU.

At the same time, several of the fundamentals that kept global gas prices low are changing as well. In the past, the sector avoided price cycles through long-term contracts. Investments in LNG were made only after demand was committed through 15- or 20-year purchasing contracts. Customer demand effectively rationed supply.

That is changing now. As global energy majors try to cash in on their fossil fuels while they can, not only is the industry seeing a massive buildup in gas Infrastructure – a recent report by Global Energy Monitor found “at least” 202 LNG terminal projects in development worldwide, including 116 export terminals and 86 import terminals” – it is also moving closer to global oil prices. “International rates benchmarked to Henry Hub and Brent are now the norm”, says the former PNGRB member. “Gas prices are now linked to oil prices – but a little cheaper.”

The outcome is a reduction in putative savings. Given that oil products are key competitors to gas in several sectors such as petrochemicals and refineries, Oxford academic Anupama Sen writes in a paper titled India’s Gas Market Post-COP21, this link “will limit the potential for gas to grow across the Indian economy, even at low LNG import prices.”

The Land Of Pending Reforms

In a nutshell, two risks loom over India’s gas sector. Firms ignored by administered pricing suffer from price risk. Those favoured by it are haunted by political risk.

Despite promising to remake India into a gas-based economy, the NDA has done little to mitigate either risk. It uses administered pricing for political gain. As for prices, it hasn’t taken the steps it could to make gas more attractive.

A 2019 Crisil report expects imported gas prices to stay range-bound between $8.5-$9.7/MBTU. In such a scenario, taxation is one way to make gas more attractive. GAIL, says gas researcher Swati DSouza, has been asking the government to slap a carbon tax on coal. Renewables, she adds, are not intrinsically cheaper. “They also get a lot of subsidies. Discoms also have renewable energy promotion targets. If you give similar incentives to gas, it would be competitive too.”

Alternatively, the government could have pushed market development. It could have encouraged trucks – the biggest users of diesel – to shift to gas. “We would have needed a hundred or so LNG stations every 600-800km from the nearest LNG terminal,” says the ex-Feedback Infra consultant. “Each would cost about Rs 7crore. For Rs700 cr, India can give a large push to gas transport.”

Or India could have rolled out mixed tenders for renewables and gas. “Gas works well with renewables,” said Santosh Khatelsal of Enerpac, a solar EPC firm. “It amps up quickly. And it is cleaner – in terms of low carbon.”

Few of these are easy decisions. A carbon tax would push up power costs – at a time the economy is already in trouble (and the government is trying to auction coal blocks). The lobby pushing coal, says a former senior official at GAIL, on the condition of anonymity, is also more powerful than the one pushing gas.

Similarly, bringing gas under GST would further weaken the finances of states such as Gujarat. Oddly, though, even relatively uncomplicated decisions have not been taken. Take the lack of movement on LNG stations. “We are willing to spend Rs100,000 crore on a high speed rail, but we won’t do gas,” complains the former gas consultant.

Or take the absence of mixed tenders for gas and renewables. “I have seen tenders for storage, for co-generation with multiple renewable energies but I have not seen a gas+renewables tender yet,” said Khatelsal. “Germany did this. They use gas turbines and renewables together.”

“If you look at the issues that plagued the sector 10 years ago all of them are still unresolved,” said a former oil secretary, on the condition of anonymity.

The outcome is one where uncertainty regarding gas remains high. Recent ideas, proposed by government ministries or its committees have not helped. Late last year, the PMO proposed waiving the existing carbon cess on coal. While boosting the viability of the coal sector, such a move would further reduce Gas’ competitiveness.

Similarly, a committee recommended to the petroleum and gas ministry that CGD be taken off the Gas Allocation Policy. Such a move, however, would result in a doubling of gas prices for the sector.

The Outlook For Gas

World over, says Dsouza, gas has grown on the backs of anchor businesses – one or two uses which accounted for most consumption. In India, that used to be power and fertilisers – they accounted for 70% of India’s gas consumption.

Things are very different now. Power plants are not likely to consume much. India has a lot of under-utilised thermal power plants running cheaply on coal. When demand rises, they and renewables will be used before gas-based power gets to sell.

Fertilisers won’t be a big driver either. India is setting up 1.2 million tons of fresh fertiliser making capacity. Once these come up, jumps in gas demand from fertilisers will end for some years.

What about CGD? Not only is PNG unviable for city gas distributors, induction heaters are coming in as well. CNG is competitive, but that could change if petrol and diesel are brought under GST. At the same time, CNG also faces competition from LPG and electric vehicles.

Moving trucks to Gas will take time. “India has very few large truck fleet owners,” said the former consultant. “Most truck owners have one or two trucks. Getting them all to shift won’t happen by 2030.”

That leaves industry. Consuming about 6-7 MMSCMD of gas, it is currently running at low capacity. It has to start running at full capacity, says the former consultant, before fresh capacity will come up. In the meantime, running low on cash, firms are waiting to see which fuel will be more competitive in the years ahead. Anything above $7/MMBTU, says the former consultant, and they will be back to coal or diesel.

What all this adds up to is slow, incremental growth. One driven by a few segments like fertilisers and petrochemicals – or industrial clusters ordered by courts to switch to gas.

This is a problem for the sector.

The Big Puzzle

As a bridging fuel, gas perhaps had about 10 years to establish itself. Of these, India has wasted five years already. “Take it in writing. If gas grows from 6.5% to 9%, you should dance,” says the former consultant. Along the way, as this bet over Gas unravels, India will be saddled with large economic and environmental costs. The third part of this series will examine those.

Part 1: Can Gas Account for 15% of India’s Energy Mix?
Part 3: The four hidden risks lurking in India’s gas expansion plans