By Manish Vaid and Tushar Shah
Having indicated his intention to increase gas pipeline network infrastructure by 15,000 kilometers, making it almost double existing capacity, India’s Finance Minister Arun Jaitley has certainly raised an intellectual argument among oil and gas stalwarts: What should be India’s priority – gas or gas grid?
The government’s goal remains addressing carbon emission concerns and reinforcing low carbon growth by hooking the entire country into the gas grid, while meeting growing demand for electricity. These goals look unrealistic in light of India’s current gas situation.
The KG-D6 gas basin, once regarded as India’s largest gas field, is only producing at 16 percent of estimated peak output, pulling down the country’s total gas production.
Consequently, industry experts are pessimistic at the proposition of doubling current gas pipeline infrastructure. Developers will not invest in additional pipeline when existing pipeline is operating at only 50 percent to 55 percent capacity.
A strong gas pipeline infrastructure is a prerequisite for a mature gas market. The inability to find the necessary investment funds raises serious concerns around India’s gas production.
According to British Petroleum’s Statistical Review of World Energy 2014, India’s gas production dropped by 16.3 percent in 2013 and has fallen by 33.8 percent since 2010, due to ambiguity in gas pricing policy and Indian companies’ inability to boost gas production.
This has dampened the enthusiasm of both domestic and foreign investors, and has proven a serious blow to the government’s plans to foster low carbon growth by using natural gas as a bridge fuel.
The result has been an increasing number of Indian companies looking to import liquefied natural gas (LNG), mostly from the US, as a potential long-term solution.
All these constraints justify the government’s decision to speed up the development of India’s natural gas pipeline network. A parliamentary committee recently recommended to the Ministry of Petroleum and Natural Gas that overtures to prospective buyers should progress in tandem with a build out of India’s natural gas infrastructure.
The path to prosperity for India’s gas distribution network runs through making gas available to consumers in the hinterlands. This will allow India to better safeguard its natural environment, while providing cheaper and easier options to domestic gas users.
According to Indian government projections, demand for natural gas will increase from 242.66 million metric standard cubic meters per day in 2012-13 to 378.06 million in 2016-17, the last year of the current Five-Year Plan.
However, staggering projected increases in natural gas demand of almost 40 percent and 76 percent during the next five and 10 years necessitate the construction of a far-reaching gas pipeline network, so that gas can be made available to consumers in remote areas.
These projections have provided ample reason for the government to cope with growing demand by speeding up its development of natural gas infrastructure, including LNG terminals and natural gas pipelines.
The government also needs to take serious measures to address the drop in domestic gas production with lasting efforts to encourage investment in domestic exploration and production activities through improved profit sharing regimes.
Although market-linked pricing mechanisms are not the ideal choice for India’s evolving natural gas markets, a sincere effort should be made to create a pricing formula that is realistic in balancing the public interest against the profitability of gas producers.
An attractive policy regime could help restore investor and affect a sustainable turnaround of India’s hydrocarbon sector, particularly the natural gas sector.
Neither increased gas production nor a larger gas grid will solve the problems facing India’s gas sector. Rather, a consolidated, holistic, amicable approach will help India deploy an enhanced gas pipeline network and facilitate last-mile connectivity, benefiting the public at large.
(Manish Vaid is a Junior Fellow with Observer Research Foundation, New Delhi. Tushar Shah isa consultant of risk advisory services in oil and gas, Ernst & Young LLP, Mumbai)
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