The past few years have been quite eventful for the gas sector. They were marked by the government’s decision to grant marketing and pricing freedom to all new gas discoveries, the field development plans of which are yet to be approved. On the exploration and production (E&P) front, five new bidding rounds were launched under the Open Acreage Licensing Policy (OALP) and two rounds of bidding were conducted under the Discovered Small Fields [DSF] Policy, 2015. The city gas distribution (CGD) segment has received a lot of attention in the past couple of years. There has been a surge in activity in terms of new authorisations and network expansion. The Petroleum and Natural Gas Regulatory Board is also formulating new regulations to bring competition into the CGD segment after the expiry of the marketing exclusivity period. Also, plans are afoot to launch India’s first gas trading hub by March 2020.
Further, liquefied natural gas (LNG) infrastructure is being expanded to meet the growing demand for gas from the CGD, power and fertiliser sectors. Gas transmission pipeline infrastructure is being created in areas that are still uncovered. Besides, new and innovative technologies and digital solutions are being increasingly deployed to automate operations and better manage assets.
A snapshot of the emerging trends and recent developments over the past few years and outlook for the gas sector…
Trends and outlook
Widening gap between gas consumption and production
Natural gas continues to be a small part of the country’s energy mix, accounting for only 5-6 per cent. The consumption of natural gas, however, has been rising consistently since 2014-15. In 2018-19, natural gas consumption was 60,747 million metric standard cubic metres (mmscm), as compared to 59,170 mmscm in 2017-18. From 2014-15 to 2018-19, gas consumption grew at a compound annual growth rate (CAGR) of 7.42 per cent. The gap between demand and supply of natural gas increased at a CAGR of around 10 per cent over the same period. This widening gap indicates the need for increasing LNG imports in at least the near term to cater to the growing requirements.
The trend of falling production from domestic gas fields continues to be an area of concern for India’s energy security. Domestic natural gas production has remained stagnant over the past few years, falling during 2014-15 and 2015-16 but making a modest recovery in 2017-18. During 2014-16, gas output declined from 35 billion cubic metres (bcm) to about 32 bcm. In 2018-19, natural gas production was 32.8 bcm, roughly the same as the previous fiscal year’s production. This trend persists, with about 8 bcm of gas production registered in the April-June quarter of 2019-20, the same as in the corresponding quarter of 2018-19.
Increasing dependence on LNG imports
Reliance on LNG imports has been growing considerably in the past few years. During the period 2014-15 to 2017-18, annual LNG imports grew from about 50 mmscm per day (mmscmd) to 75.17 mmscmd. In 2018-19, LNG imports stood at 78 mmscmd, an increase of about 4.5 per cent over 2017-18. During April-September 2019, the figure stood at 45 mmscmd, as against 41 mmscmd during the corresponding quarter of 2018-19. The share of LNG in the country’s total gas consumption increased from 36 per cent in 2014-15 to nearly 50 per cent in 2018-19.
LNG import and regasification capacity is expected to increase to 56.5 million tonnes per annum (mtpa) by 2025. The capacity of regasified LNG terminals is expected to increase from 17.3 mtpa in 2012-13 to 83 mtpa in 2029-30 assuming that all the planned terminals come on stream. Several new LNG terminals are already at the construction or planning stage
Increasing activity and investments in E&P
The E&P segment received a major fillip with new bidding rounds launched under the OALP. The submission window for expressions of interest for the OALP fifth bidding round was open till November 30, 2019. In the first three rounds, 87 blocks were awarded and the government has committed an investment of about Rs 15 trillion over the next four to five years for the development of these blocks. Another 53 blocks have been awarded under the two DSF bidding rounds. There are also plans for developing discoveries in the North-East Coast-25 block in the Mahanadi basin.
New reforms in the exploration and licensing policy
In February 2019, the government introduced reforms to enhance domestic production of oil and gas. The reforms focus on increasing E&P activities in Category II and Category III basins where no production exists, increasing production in Category I basins where potential has been established and production is taking place, enhancing gas production through incentives, and promoting ease of doing business. Under the new reforms, contractors bidding for blocks in Category II and Category III basins where there is no commercial production at present will not have to share any revenue with the government unless there are windfall gains. For unallocated and unexplored areas in Category I basins, bidding will continue to be on a revenue sharing basis but with more weightage given to the work programme (70 per cent weightage to the work programme and 30 per cent to the revenue share). Further, to incentivise early production, concessions in royalty – 10 per cent in Category I basins, 20 per cent in Category II basins and 30 per cent in Category III basins – will be provided if production commences within four years for onland and shallow water blocks and five years for deep water blocks, from the effective date of the contract.
At present, most of the gas produced locally is priced at a figure derived from a four-year-old government-set formula that takes the average rates from global trading hubs to determine domestic prices twice a year, in April and October. In October 2019, the government had cut domestic natural gas prices for the first time in two and a half years. The price of most of the natural gas produced by state-owned Oil and Natural Gas Corporation and Oil India Limited that account for the bulk of the existing gas output, was cut to $3.23 per million metric British thermal units (mmBtu) for the six-month period beginning October 1, 2019, from $3.69 per mmBtu during April-September 2019. This is the first reduction in rate since April 1, 2017. At the same time, the government cut the price of gas produced from difficult fields to $8.43 per mmBtu from $9.32 per mmBtu.
Initiatives to increase pipeline connectivity in unserved regions
Gas supply infrastructure is currently concentrated in the northern and north-western regions of the country. The operational natural gas pipeline network spans 16,981 km, as of November 1, 2019, and another 8,423 km of pipelines are under construction. In terms of length, the 2,539 km Jagdishpur-Haldia-Bokaro-Dhamra pipeline (excluding the Guwahati-Barauni extension project) is the biggest pipeline project, and is being implemented by GAIL (India) Limited. In addition, the government is developing the 1,600 km Indradhanush Gas Grid connecting the north-eastern states to the existing natural gas pipeline network.
Expanding CGD infrastructure
The prospects for the CGD segment have improved markedly in the past couple of years. More than Rs 1.2 trillion is expected to be invested in the development of CGD infrastructure in 130 new geographical areas awarded under the ninth and tenth bidding rounds. In terms of infrastructure development, 40 million piped natural gas (PNG) connections, 8,000 compressed natural gas (CNG) stations and 170,000 inch-km of steel pipelines are planned to be added in the next 8 to 10 years.
In the past 18-24 months, the sector has made rapid progress in terms of new infrastructure creation. About 1.5 million PNG connections and 497 CNG stations have been added to the existing network. Operations have commenced in Patna, Daman & Diu, Bhubaneswar, Dadra & Nagar Haveli, Kutch (West), Amreli, Dahod, Dahej-Vagra and Jalandhar.
Outlook and the way forward
Gas demand in the country is set to increase to 290 mmscmd by 2024-25. It is hoped that increasing domestic E&P activity will correct the declining gas production to some extent, as production from the newly awarded blocks under the OALP and the DSF bidding rounds comes online in the next couple of years. The use of new and innovative technologies and digital solutions is expected to increase as well.
That said, issues such as high execution risks, huge capital expenditures, the slow pace of pipeline development, increasing import bills and long-term pricing policies need urgent attention. While the recent policy initiatives mark a departure from the past and bode well for the sector, effective and timely implementation will hold the key to overall success. The presence of an enabling regulatory regime will also be extremely important for better functioning of the gas sector.