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Indian gas sector: Running out of options - Views on News from Equitymaster
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  • Apr 1, 2011

    Indian gas sector: Running out of options

    The last few months have been quite eventful for Indian Gas energy sector. So how have these impacted the sector and what lies ahead for it. Before we explain this, let us understand the basics of this sector. As of now, the natural gas is priced under two regimes. The first one is APM (Administered pricing regime). In this, the gas prices are fixed by the Government. The second is non APM/free market gas. It could be either domestically produced or imported LNG. The domestically produced gas is priced as per terms in production sharing contracts /PSCs (between Government and gas extraction companies). On the other hand, the imported LNG is priced under long term contracts or Special purchase agreements (SPAs) between buyer and purchaser.

    Recent developments...

    In the ninth NELP licensing round, India witnessed a cold response from the foreign players. That too at a time when crude prices are boiling. The message is loud and clear. Foreign players are wary of entering Indian energy landscape due to lack of clarity around interpretations of policies and contracts. The dismal track record of commercial gas discoveries deters them further. The policies hardly provide an incentive for upstream investments. Infact, these have reduced the status of oil and gas companies to contractors with no pricing freedom. To make things worse, the Budget has scraped away the 7 year tax holiday on profits from oil and gas produced from NELP blocks in future. This will further harm our prospects compared to other countries that offer much better terms when they auction their blocks.

    The APM gas supplies which cater to priority (and subsidized) sectors - Power and Fertilizer have been declining. In contrast, the demand from these sectors will only go up. This means that the gap has to be met by other sources under non APM regime. As domestic gas production prospects receive a serious blow due to decline in supply from the biggest domestic gas source, KG D6 basin (operated by RIL), the solution to India's energy demands is left to imported gas supplies.

    Their implications...

    Energy has a pivotal role in India's growth story. While imports can bridge the demand supply gap for some time, we cannot rely on them in the long term. They are not only priced much higher, but also linked to global oil prices which are notorious for their vagaries. To make things worse, earthquake in Japan has sent ripples in the global gas markets. Natural gas has become substitute to regular energy sources (destroyed in earthquake) in Japan. This sudden demand rush has led an overall increase in gas prices. The spot LNG prices are already up 8-10%. Expecting too much from international gas pipeline (TAPI) will hardly be sensible post the fate of Iran Pakistan India pipeline. Even if possible, it is too far in future.

    Need of the hour....

    We need to have transparent policies in gas sector to attract foreign /private investments. It is a shame that there is no conclusion yet on royalty and cess issues in the deal involving players like ONGC, Cairn and Vedanta. Due to this flip flop approach, the reputation of India as an investment destination has received a serious blow.

    Also, we need to bridge the huge price gaps due to different pricing regimes. The gas prices need to be raised to cover production costs, recover capital and reduce PSUs under recoveries to grab foreign capital. There will be an obvious resistance from the sectors using cheaper prices. However, this will be crucial to attract upstream investments and new LNG supplies. Our approach to pricing will determine the success of shale block auction by MoPNG expected in the near future. (During the decade, the breakeven cost of shale gas production that ranged from US$8 to US$ 12/mmbtu is now reported to be in the range of US$4-8 /mmbtu (depending upon the basin) and its share has leaped from 2% to 20% and will go only up) . The access to foreign investment and technology will unlock the potential of Indian gas reserves. Once the supply is in place, the pricing issue will automatically be taken care of.

    While NELP IX is already a lost opportunity for us, we and can't delay the much required overhaul in policies regulating gas sector. Is the Government listening?



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    1 Responses to "Indian gas sector: Running out of options"


    Apr 14, 2011

    The only reason for foreign players are away from the NELP is because of very poor commercial discoveries. Otherwise regulations etc are part of any other country's sovergnity. Cairn Vedanta deal is a business decision on royalty payment for which government wants more clarity from respective parties

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