Despite Government efforts to boost domestic production, policy constraints and pricing caps continue to stifle the energy sector’s growth

According to the Petroleum Planning and Analysis Cell under the Ministry of Petroleum and Natural Gas (MPNG), during the first six months of the current financial year (FY) September 2024, India’s consumption of natural gas (NG) increased by almost 12 per cent to 36.850 billion metric standard cubic meters (bmscm) over the corresponding period last FY. However, the import of NG (it is imported in a liquefied form commonly known as LNG) increased by 23 per cent to 18.975 bmscm during this period. Taken as a proportion of consumption, imports were 51.5 percent during April-September 2024 up from 46.8 percent during April-September 2023. 

The country’s production of NG registered a marginal increase of around 2 per cent during April-September 2024. The State-owned major Oil and Natural Gas Corporation or ONGC (it contributes about 84 per cent of total domestic output) produced 9.407 bmscm of NG during this period, which was 4 per cent less than during the same period of last FY. However, Oil India Limited (it has 8 per cent share) produced 4 per cent more NG at 1.577 bmscm during this period. The share of production in consumption was 48.5 per cent.  Delivering the 75th Independence Day address on 15th August 2021, Prime Minister Narendra Modi vowed to achieve self-reliance in energy production by boosting the gas-based economy. He had then wished the share of NG in the total energy mix to go up from subsisting around 6 per cent to 15 per cent. Pertinently, even to comply with the 6 per cent share, India had to import more than 50 per cent of its NG requirement.

The position hasn’t changed even today. Increasing the share of NG in the total energy mix to 15 per cent would require its consumption to increase from its current annual of 73.689 bmscm to 184.222 mmscm (73.689x2.5). The current consumption includes domestic production of 35.739 bmscm. If domestic production stagnates at the current level (in sync with the trend of the last few years) then, to achieve the 15 per cent target, the import of LNG will have to be 148.483 bmscm (184.222-35.739) which means India’s import dependence will have to increase to over 80 per cent. The above calculation assumes no increase in total energy consumption. But, it is increasing at a rapid pace. The country’s power demand alone is projected to grow at a compound annual rate of 7 per cent during the next five years (as per an estimate by the Central Electricity Authority or CEA).  

In that scenario, compliance with the 15 per cent target for NG would mean still higher reliance on imports. What is coming in the way of increasing production? Natural resource endowment is not a problem. India has 26 sedimentary basins (SBs) covering an area of 3.4 million sq km that could be searched for hydrocarbon resources. However, only six of the SBs are under commercial exploitation; these too are sub-optimally utilised. Hydrocarbon exploration is a highly capital-intensive and technology-intensive business involving a long gestation period. It is risky, especially when drilling in deep/ultra-deep and high-pressure/high-temperature (D/UD/HP/HT) fields in offshore areas such as the Krishna-Godavari (KG) basin.

However, these areas offer maximum promise in terms of reserves. Multinational companies (MNCs) such as ExxonMobil, Chevron, Total etc. which have the technology and resources can be enthused to take long-term bets in the Indian hydrocarbon sector provided the government offers them an opportunity to earn an attractive return on their investment in a ‘sustained’ basis.

This, in turn, requires that their efforts in the discovery and development of NG fields don’t face regulatory hurdles and that they can sell the gas ‘freely’ at a ‘remunerative’ price. Modi – The government has made a lot of efforts to remove regulatory hurdles. Until recently, of 1.73 million sq km SB area lying offshore,   0.69 million sq km was a ‘No go’ area, courtesy of security reasons.

The Centre has released almost all of this for exploration and production (E&P) activity. Now, it is granting lease rights over the entire economic life of the allotted fields (this could extend up to 30 years, even beyond depending on the available reserves) instead of the extant system of short tenure with extensions.

It has also made amendments to the Forest (Conservation) Act to enable prompt access to forest areas for exploration of hydrocarbon resources. Under the Hydrocarbon Exploration and Licensing Policy (HELP), also known as the Open Acreage Licensing Policy (OALP) launched in 2017, E&P firms are allowed to pick up a block of their choice unlike the earlier New Exploration and Licensing Policy (NELP) (launched in 1999) wherein they had to accept what the government offered. Besides, under OALP, an operator gets a composite license to search for hydrocarbon in whatever form viz NG, ‘shale gas’, CBM (coal bed methane) etc.  For long, E&P efforts were hamstrung by cumbersome procedures, multiple approvals and bureaucratic red tape. Approvals were needed at every stage.

As many as 37 procedures were required to be followed by a firm-awarded block under NELP. Team Modi has substantially liberalised and de-bureaucratised approvals by providing for self-certification of documents and pre-approved clearance of blocks. While the above helps, without freedom of marketing and the ability to secure a good price, E&P firms won’t get enthused.   Of the domestic gas, on around two-thirds of supplies (mostly from so-called ‘legacy fields’ given on nomination to ONGC and OIL and from fields given under NELP), the Centre has full control over ‘to whom’ the supplies will be made and at ‘what price’. From April 1, 2023, based on the recommendations of the Kirit Parikh committee, this price expressed on a per million British thermal units (Btu) basis is arrived at by taking 10 per cent of the monthly average of the Indian crude basket in the preceding month and notified every month. The price thus calculated is subject to a ceiling of US$ 6.50 per mBtu which makes the formula redundant.

Now, the bureaucrats have come up with a 20 per cent premium on supplies by ONGC and OIL only from the so-called ‘new wells’ or ‘well interventions’.

If their intent is to give a good price why put a cap in the first place? Moreover, which fields get the benefit of ‘new wells’ or ‘interventions’, will also be solely at their discretion.  Even the pricing of the remaining one-third of domestic NG supplied from the so-called deep/ultra-deep and high-pressure/high-temperature fields (KG-D6 operated by Reliance Industries and neighbouring KG-DWN-98/2 operated by ONGC in Krishna-Godavari basin off the Andhra Pradesh coast fall in this category) isn’t free from ‘control’ ‘discretion’ and ‘arbitrariness’. Technically though, the firms can go for competitive bidding to determine the price for such supplies (referred to as a ‘premium’ price), this too is subject to a ceiling linked to the prices of alternate fuels including fuel oil, naphtha, and LNG.  

There is an urgent need for a ‘predictable’ and ‘attractive’ policy environment to give a fillip to the exploration and production of NG. The Kirit Parikh committee was conscious of this when it recommended de-regulating difficult gas fields’ prices by January 1, 2026, and the price on supplies from legacy fields by January 1, 2027. The government should implement these recommendations. Meanwhile, it should prepare the ground for giving subsidies directly to major users such as fertilizers, power, CNG, PNG etc instead of creating distortions in the supply chain by controlling the price of basic inputs such as NG.

(The writer is a policy analyst; views are personal)