The Hindu Business Line : Natural gas: The way forward

The natural gas industry is on the verge of change and we should not lose this momentum. A level-playing field for both public and private sectors, supported by appropriate regulatory legislation, will serve to attract the much-needed investment the sector requires, says Nigel Shaw.

Open access to transmission pipelines is essential as this will allow producers and consumers of natural gas to share the benefits of significant economies of scale.

THIS is a fascinating time to be in the natural gas industry in India. Not only is the industry in a state of structural transition, but it is also on the threshold of rapid growth over at least the next two decades. So, what is the current structure of the industry and how is it likely to change? How will government policy affect it and what will be the impact of change?

These are fundamental questions this article discusses. The gas industry, to date, has been dominated by a state-owned producer (ONGC) and a state-owned transmission and marketing company (GAIL). Gas has been sold at a fixed, heavily subsidised price under an Administered Price Mechanism (APM).

Potential demand has been significantly in excess of available supply, which has meant that gas has been allocated/rationed to individual customers by the Gas Linkage Committee. The subsidy associated with this mechanism distorts the market.

In the last year or so, the industry has begun to change with relatively small amounts of domestically-produced gas being sold to non-GAIL customers at market prices. In addition to Petronet LNG, gas is now being sold by various PSUs at a market-related price.

What has been established is two gas markets — one controlled and subsidised by the public sector, and a small, but growing, one that operates under free market principles.

The direction of the recent Government policy has been to ensure that the free market grows and flourishes while the controlled and subsidised market declines in volume, as it depends on existing fields where production will fall over time.

The size of the subsidy should also decline as the price of APM gas is brought in line with the market — a stated Government policy for the last four years.

It is very encouraging that the Government is taking steps to change the balance between the controlled and free market by allowing the producers of gas from Panna, Mukta and Tapti fields to market directly to consumers rather than being required to sell to the Government nominee.

On April 1, 2005, 10.5 million standard cubic metres of gas per day, which is now being supplied to the controlled market, will be transferred to the free market.

The UK Government used a similar policy mechanism in the early 1990s as part of the process to liberalise the UK gas market.

On the other hand, it is somewhat disappointing that, at the same time, the Government has indicated an intention to take `profit' gas (that is, Government's share of the gas produced) in `kind' rather than in `cash', as has been the case to date.

The gas in kind will be given to GAIL which will have the effect of prolonging the life of the controlled market and jeopardising the growth of the free market. BG India and other gas producers feel that this stated intention could stifle exploration and development of gas fields in India.

An essential feature of all liberalised regimes is open access to transmission pipelines. There are significant economies of scale associated with transmission pipelines and it is important that the benefits of these economies are shared by producers and consumers of natural gas. The Government has prepared a draft Bill which, among other things, will provide open access to transmission infrastructure.

The Bill is currently being reviewed by a Group of Ministers and, while some modifications are required to the current draft, it is very important that the Bill proceeds to Parliament and becomes law before too much time has elapsed.

The industry needs legislative and regulatory clarity now, given the very significant investment that it is likely to make over the next few years, whether this is in gas production, LNG facilities, transmission pipelines or in City Gas Distribution (CGD).

Investment is generally a matter of confidence in the market and the environment. While one can be confident of the gas market potential, uncertain regulatory regimes and those prone to change will cause investors, particularly those in the private sector, to delay their investment decisions.

Another key principle which needs to be established by legislation is the unequivocal separation of transmission activities from the buying and marketing of gas in integrated companies.

This was, perhaps, the most contentious issue in the liberalisation of the UK gas industry throughout the 1990s and which led to the eventual full de-merger of BG's supply and marketing business from its transmission business. A competitive level-playing field can only be established if all users of pipelines, including the pipelines' affiliate companies, have exactly the same terms and conditions for use of the pipelines.

More important, the market potential in India means that there is a requirement for both public and private sector companies to participate to meet the needs of the gas consumers. It is vital that the same rules and regulations apply to private and public sector companies.

For example, if a public and a private sector company want to build a pipeline, the authorisation process for the two must be the same. If it is automatic only for the public sector, it will have an unfair competitive advantage which will distort the development of the industry and discourage private participation.

Another key area for development is City Gas Distribution. As in Delhi and Mumbai, CGD has the potential to transform the environment through the use of Compressed Natural Gas (CNG) and bring the benefits of piped gas to lakhs of domestic and commercial consumers.

BG India is already participating in CGD in Mumbai and Gujarat and sees the potential for significant further investment in this sector. There has to be, however, a clear policy framework for the development of this sector, which ensures a level-playing field for the award of licences and a clearly defined rule for the regulation of CGD franchises.

BG India has been proposing a phased competition model designed to give a degree of certainty to the investor in the early stages of a project and to allow consumers to benefit from competition after the network is established.

The natural gas industry is on the verge of change and we should not lose this momentum. A level-playing field for both the public and private sectors, supported by appropriate regulatory legislation, will serve to attract the much-needed investment the sector requires.

(The author is CEO, BG India.)

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