Analysis: India's gas policy reforms need to gain speed to lift output, consumption

Singapore — India's ambitions to move towards a gas-based economy will need much broader policy reforms, with analysts saying that removal of price ceilings, introducing a unified pipeline tariff structure and bringing the fuel under a nationwide tax could sharply boost both output and consumption.

Analysts see some of recent policy announcements -- such as an e-bidding mechanism for natural gas sales from newly discovered fields announced earlier in October -- as steps in the right direction but not big enough to make help the country see a substantial rise in domestic gas output.

"It is important to note that a large portion of the domestic gas output does not benefit from this reform," said Poorna Rajendran, consultant at FACTS Global Energy, adding that the bulk of the domestic gas is from legacy fields. Only output from newly discovered fields and coal-bed methane will benefit most from this reform in the near term.

"Additional reforms to India's current domestic gas price and ceiling price are needed to drive the increase in output. The "difficult gas" fields already enjoy marketing freedom but their prices are capped at fuel import prices -- basket of LNG, coal, fuel oil, and naphtha -- that were seen a year ago," he added.

The domestic gas price selling price from the conventional gas fields in India for October 2020 – March 2021 was set at $1.79/MMBtu, one of the lowest on record, which would discourage domestic gas producers from producing gas as it is well below their breakeven level of around $3.00-$4.00/MMBtu.

Price ceiling

James Waddell, senior global gas analyst at Energy Aspects said India needs to find a way of making domestic pricing attractive to encourage its own production.

"We have seen large falls in output from India's western offshore blocks on a year-on-year basis this year, providing scope for LNG to increase its share of domestic supply," he said.

ONGC, BP and Reliance have targeted major increases in Indian output from the Krishna Godavari basin in the eastern part of the country but much of that remains under threat as long as the price ceiling by PPAC remains in place, he added.

"The October 2020-March 2021 ceiling price is $4.06/MMBtu which is likely below the breakevens for production which we see around $5/MMBtu. ONGC has quoted at least one minimum reserve price at $5.60/MMBtu for output from the Krishna Godavari basin," Waddell said.

"A move towards full marketing freedom would allow Indian domestic production to cover full costs instead of the status quo where the reference prices are based on international benchmarks in the UK, US, Canada and Russia," he added.

Unified pipeline tariff

The Petroleum and Natural Gas Regulatory Board has published a draft amendment proposing unified tariff for the national gas grid system in India, which, if approved, would move away from the current distance-based zonal tariffs to a unified tariff rate applied across major pipelines in India.

The new tariff structure would be beneficial for buyers further away from the gas source as they would be paying lesser tariffs compared to that previously. The buyers further away from the gas source would be cross subsidized by end-users closer to the gas sources since the tariff paid by them would increase, PNGRB notice showed.

"Demand from price sensitive buyers, especially where substitutes are available for gas, is likely to be affected with the change in pipeline tariffs. The impact will likely be felt by those closer to the gas source who might end up paying higher than their current tariffs under the unified tariff plan," said Chinmayee Atre, LNG analyst at S&P Global Platts Analytics.

Based on the data for the Indian financial year 2019-20 (April-March), the unified pipeline tariff would be Rupees 56.84/MMBtu, or 77 cents/MMBtu, PNGRB calculations showed.

Buyers in key gas consuming states of Gujarat, Maharashtra and New Delhi would end-up paying higher transportation costs than before. The highest transportation tariff currently on major pipelines such as GSPL High pressure grid, integrated HVJ pipeline and Dahej-Uran-Dabhol pipeline is Rupees 34.86/MMBtu, Rupees 49.64/MMBtu and Rupees 39.85/MMBtu, respectively.

However, the unified pipeline tariff would benefit producers of domestic gas on the east coast of the country as it would be more economical to transport gas from the Krishna Godavari basin to the West coast of the country through the PIL East-West pipeline. The Zone 5 tariff rate to transport gas from Kakinada on the east coast to buyers in Hazira on the west coast is Rupees 80.15/MMBtu.

The tariff would be calculated and published by PNGRB on a fortnightly basis and would be based on the approved zonal tariffs for each natural gas pipeline and multiplied with the actual zone wise quantity of natural gas transported through the pipeline on a ship or pay basis during the fortnight.

India has embraced a unified tax structure – called the Goods and Services Tax -- across a wide range of goods and services while it has kept crude, natural gas and some oil products out of GST's purview.

Oil and gas companies have highlighted that the move to keep the five products out of the GST list could affect investments in infrastructure, as their input costs would rise but they won't be able to pass on the tax burden to consumers.