India sets out multi-faceted reform to support gas

India sets out multi-faceted reform to support gas

New Delhi is set to implement a new pipeline tariff policy to complement its first trading exchange and under-construction distribution network, to further boost the use of gas

The Indian government announced further measures during June to raise the share of gas in the country’s energy mix. The target is to increase the contribution of gas from c.6pc to 15pc by 2030.

In mid-June, oil minister Dharmendra Pradhan and the Petroleum and Natural Gas Regulatory Board (PNGRB) announced that a new pipeline tariff policy would soon be unveiled to rationalise gas prices across the country. India also launched its first gas trading exchange, which will enable entities such as Shell and Dutch and Singaporean commodities trading houses Vitol and Trafigura to sell LNG directly to domestic customers at spot and forward market rates.

PNGRB recently permitted the setting up of LNG filling stations to provide a more energy dense alternative to compressed natural gas (CNG). The support for gas is based on the twin objective of containing air pollution and diversifying away from India’s overwhelming dependence on crude oil imports. 

Due to stagnant domestic gas output, India’s consumption push is being driven by growing volumes of imported LNG procured via long-term contracts from suppliers such as Qatar and from the international spot market. LNG accounted for half of India’s 60.8bn m³ of gas consumption for fiscal year ending 31 March 2019 and imports rose to 33.7bn m³ for the 2020 fiscal year.

Pradhan said that in the next few years India will expand its gas pipeline infrastructure from 17,000km to c.32,000km and raise annual LNG import capacity from 39.2mn t to c.50mn t.

Backed by sound government initiatives, India is progressing well in its installation of the requisite downstream and midstream infrastructure to distribute gas—just as it has done for oil in the form of pipelines, refineries and retail stations. In addition to LNG regasification facilities, a massive exercise is underway to build city gas distribution networks to supply the fuel to households in the form of piped natural gas (PNG).  

The way forward

There are, however, areas that need reworking to facilitate a quicker push towards a gas-based economy. New Delhi has been reluctant to bring petroleum products—whether diesel, petrol, CNG, PNG or natural gas—under the rationalised goods and services tax (GST) as it prefers to retain flexibility to meet its fiscal goals.

In the past few weeks, for instance, India steeply increased diesel and petrol retail tax rates while global crude oil prices slumped. New Delhi has been quick to ramp up tax collection as receipts have dipped due to the coronavirus pandemic. 

A relatively lower GST rate for gas would incentivise consumers to increase demand. But it must be noted that substituting one fuel for another—as it heavily imports both—will still leave India vulnerable to the volatilities of global market. In this regard, India’s efforts in the upstream space have been lacking; oil and gas exploration efforts have suffered due to inefficient pricing and opaque policies. 

An example of skewed policy is the pricing of domestically produced gas in India. The local gas price is linked to a basket of low global reference rates in countries such as Canada, the UK and the US. Domestic producers say this low price level does not reflect the high cost of production or market realities in India. 

The gas price in India has been fixed at a multi-year low of $2.39/mn Btu. However, the Covid-19 crisis has narrowed the gap between spot LNG rates and the fixed local gas price, prompting New Delhi to re-examine the pricing formula. 

India will gradually end federal controls on gas pricing as it seeks to attract foreign investment to lift local output, Pradhan said in late June. By backing gas, India wants to be counted as a nation sensitive to the environment. There is, however, work to be done to make the transition a success.

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