Prime Minister Narendra Modi has repeatedly called upon fellow Indians to make the nation energyindependent while providing sustainable, affordable energy access to all. India’s climate commitments are aligned to this goal with a steer towards increasing the share of renewable energy (RE) as the country moves towards net zero by 2070. The energy transition that is underway has a key role for natural gas, where GoI has set a target to increase its share in our energy needs to 15% by 2030.
Oil and gas producers have stepped up exploration and production activities and have been working together with the petroleum and natural gas ministry and the directorate general of hydrocarbons to increase domestic production. Given the dramatic changes in the global energy landscape, attaining energy security has gained urgency. India is poised to see an exponential increase in its energy demand and there is a crucial need to accelerate exploration and development of hydrocarbon resources while expeditiously increasing investments in the oil and gas sector.
This increased need to work towards energy independence, particularly in the high-risk hydrocarbons sector, can be enabled by a stable policy regime that promises a reasonable and steady rate of return for investors. Marketing and pricing freedom to all exploration and production (E&P) investors is one such policy tenet.
Ahigh-powered committee headed by Vijay Kelkar submitted its report in 2014 with comprehensive recommendations on reforms for the upstream petroleum sector. Many of these recommendations have been implemented. In 2016, with the objective of attracting risk capital in the upstream and to increase domestic gas production, GoI decided to differentiate gas produced from administered price mechanism (APM) nomination blocks from gas produced and sold from production-sharing contracts (PSC) of deep-water, ultra-deep water andhigh-pressure high-temperature (HPHT) blocks.
It restored marketing freedom for the latter. However, price realisation was still subject to a ceiling price. Given the pricing frame, gas producers under the 2016 pricing guidelines (more than 30% of India’s production) always get lower than the ceiling or market price. The importance of market forces can be gauged from the fact that even though the pricing reforms were suboptimal, gas price reforms of 2016, 2017 and 2019 have impacted positively. Natural gas production under the PSC regime, too, has risen to about 25 million metric standard cubic metres per day (mmscmd).
The recent announcement formalising an expert committee to examine and review the 2014 New Domestic Natural Gas Pricing Guidelines, and 2016 marketing guidelines, including pricing freedom for the gas to be produced from the discoveries in deep-water, ultradeep water and HPHT areas, could turn out to be a case of policy stability being threatened. E&P companies that have invested high-risk capital in exploration blocks could interpret this as goalposts being shifted midway with apprehensions on contractual sanctity.
Akey aspect of being able to take risks in the E&P business is the assurance of a free-market regime (pricing and marketing freedom) and afiscally stable policy framework. Not allowing market forces to operate deters investment. This is also one of the reasons why Indian basins remain under-explored despite significantuntapped opportunities.
Recently, the Oil and Natural Gas Corporation (ONGC) reiterated that abalanced risk-reward framework is imperative to attract investments and enhance domestic gas production. Contract and policy stability should be at front and centre for investors to commit large-scale investments given the project life of 25-35 years.
The vision of India as a gas-based economy can be achieved only through increasing domestic gas production for which marketing and pricing freedom is crucial. More importantly, a majority of potential hydrocarbon resources are estimated to be in frontier basins and areas requiring a huge risk capital and state-of-art technologies to bring them to production. This is possible only when market-based prices and a stable regime are assured by GoI.
GoI should consider direct benefit transfer for city gas distribution (CGD) and fertiliser companies to address affordability, subsidies and welfare economics for targeted consumers. Any policy change that takes away pricing and marketing freedom would shift the risk-reward balance and severely impact the risk and investment appetite. It will put India back on increased import dependency.
Crucial reforms like including gas under the goods and services tax (GST) is also long overdue and must be implemented at the earliest. The writer is former chairman, Oil and Natural Gas Corporation