The oil and gas sector in India is expanding at a fast pace owing to the significant increase in energy demand. The dilemma of energy poverty and energy sustainability, and the confusion generated by the energy transition are making it difficult for policymakers and regulators to provide clear direction. The Petroleum and Natural Gas Regulatory Board (PNGRB) has been instrumental in spurring expansion in the oil and gas sector. Its role will be even more critical now, given the target of increasing the share of natural gas to 15 per cent in the total energy mix by 2030 to position it as the transitional fuel. In an interview with Indian Infrastructure, Anjani Kumar Tiwari, Member, PNGRB, shared his views on recent regulatory reforms in the sector, infrastructure development in the city gas distribution (CGD) and liquified natural gas (LNG) segments, the key challenges and future focus areas. Edited excerpts…
How would you assess the growth of the country’s oil and gas sector over the past few years? What have been the key regulatory developments and their impact?
During 2022-23, the total consumption of petroleum products in India was 223.01 mmt, while production was 266.54 mmt. The capacity utilisation of the national oil refineries was 101.6 per cent. So, with respect to petroleum products, even with limited refineries and pipelines, the sector has witnessed maturity. The infrastructure, particularly for transportation of petroleum products through pipelines to replace rail and road movement, needs further strategy. PNGRB is actively working on synchronisation in order to avoid criss-cross movement of the product and add value.
The total operational natural gas pipeline in the country spans around 23,000 km and the average capacity utilisation of these pipeline is less than 50 per cent. For the growth of natural gas consumption in the country, substantial initiatives have been taken by PNGRB in the past few years in the areas of regulatory reforms, pricing reforms, fiscal reforms, and most importantly, tariff reforms. Pricing reforms include benchmarking prices for CGD companies, while regulatory reforms have resulted in the issuance of licences for over 307 Geographical Areas (GAs). Fiscal reforms are underway to include GST in the sector, with an aggressive approach being adopted to achieve this. PNGRB has been engaging with state authorities, many of whom have agreed to a reduction in the value-added tax.
Tariff reforms are crucial for incentivising infrastructure development in the sector. In 2022, inputs were solicited from pipeline operators on various regulatory incentives of their interests, including reduced ramp-up of the volume, system use gas tariff, and addressing transmission losses, towards ensuring a 12 per cent post-tax internal rate of return (IRR). Moreover, the policy of “one entity- one tariff” has been implemented to incentivise entities to create more infrastructure. PNGRB has also implemented a unified tariff to achieve the mission of “One Nation, One Grid and One Tariff” in the interest of consumers in the country. Currently, there are three tariff zones, and PNGRB is evaluating the feasibility of implementing a single tariff across the country. The recent unified tariff order outlines a vision for a uniform tariff applicable to both the nearest and farthest consumers. PNGRB is also evaluating the adequacy of existing tariff parameters, considering whether the discounted cash flow model remains suitable or if a cost-plus model would provide a more accurate tariff for companies.
Further incentives for pipeline operators such as future capex, replacement cost, cost overrun, sharing of revenue for better performance, volume risk, tariff for short-term capacity and innovation funds are being evaluated, to enable the sector to achieve self-propelling growth for the development of gas infrastructure in the country. Given the nationwide expansion of pipelines, tariff incentives for pipeline operators and CGD companies are being explored, along with the possibility of value-added services.
In July 2024, a product pipeline tariff was announced, independent of railway tariffs. The regulation allows pipelines undergoing augmentation or replacement to opt for a 12 per cent post-tax IRR to product pipeline
operators, incentivising the transport of diesel, petrol, liquid petroleum gas (LPG) and aviation turbine fuel (ATF). Currently, there are over 210 LPG bottling plants in India, with approximately 60 plants connected through pipelines. Of the remaining LPG, 8 per cent is being moved to bottling plants through rail and 54 per cent through road. PNGRB is in the process of identifying the various pipeline routes, not only for transportation of LPG but also for petroleum products such as ATF. The new tariff regulation is going to incentivise pipeline expansion and integration with oil marketing companies, ultimately reducing the criss-cross movement of products and transportation costs.
From a regulatory point of view, PNGRB serves as a facilitator, engaging in discussions with state Chief Secretaries in order to address various issues such as permissions, so that infrastructure can be developed faster. In the next four to five years, the gas sector will experience significant growth owing to infrastructure development.
How has been the progress on the implementation of CGD networks?
There are four areas under CGD – domestic pipe natural gas (PNG) connections, CNG stations, commercial connections and industrial connections. The number of CNG stations today is triple the targeted connections. In the PNG sector, 125 million PNG connections are targeted to be completed under the minimum work programme (MWP) within the next 8-10 years. Of this, around 14 million have been achieved so far. The government and PNGRB have provided CGD companies with a pricing incentive, along with priority allocation for PNG and CNG segments. Additionally, industrial and commercial connections are being prioritised, with market exclusivity initiatives as per regulations. Although there are challenges associated with ending exclusivity and declaring gas as a common carrier, PNGRB is working to end the exclusivity period of CGD companies. CGD companies are also facing challenges related to capex, capabilities and manpower. With the provision of an open market, a greater number of traders can enter, resulting in better usage of natural gas in the country.
With regard to meeting targets, there is a clear provision that if CGD players are not able to meet the MWP targets, PNGRB can impose penalties and subsequently revoke their licenses. Even if the performance falls short of expectations, licenses can be cancelled.
What are the steps being taken to improve pipeline utilisation?
Limitation in domestic production has necessitated LNG imports, demonstrating utilisation. The implementation of “one entity-one tariff” is a welcome step for further development and consumption. Pipeline underutilisation persists due to a lack of connectivity in numerous regions, with CGD companies laying pipelines with distances of 200-500 km between them. Unless a spiderweb of pipelines is created, gas consumption will not incrementally increase. A tariff incentive structure for pipeline operators, coupled with bidding criteria, is the need of the hour and requires revision, in order to stimulate infrastructure growth. To further enhance development, a second level of tariff regime is required to ensure that entities can develop pipeline infrastructure with assured returns and commitments from CGD companies. This will enable pipeline construction, where operators can lay pipelines, charge tariffs and establish mutually beneficial bilateral agreements with CGD companies.
What are your views on LNG infrastructure development and capacity utilisation?
The current operational capacity of LNG terminals stands at about 48 million metric tonnes per annum, predominantly concentrated in the western region of the country. The eastern part requires further development and integration.
At present, the LNG infrastructure is underutilised. While the average utilisation hovers at around 40-50 per cent barring one specific terminal, the Dahej terminal, which is operating at 90-100 per cent capacity. Existing pipelines have the potential for increased utilisation, but face several challenges such as lack of supply sources and connectivity to the pipeline network. Additionally, some terminals are not receiving cargoes for regasification due to long-term contract obligations and lack of open access.
PNGRB is working actively to enhance terminal utilisation, as ultimately, LNG is the future of gas. Regulatory changes are being implemented to ensure due diligence for the expansion of existing terminals and the conceptualisation of new ones. Further, regasification charges need to be regulated, given their significance in the gas value chain in the interest of the consumer.
What are the biggest challenges facing the sector?
If we talk about the challenges in the oil and gas sector, one of the major ones is import dependency. Crude oil import stands at around 85 per cent and LNG import at about 50 per cent. The current geopolitical scenario is a blessing-in-disguise for the country. The government and PNGRB are working towards self-sufficiency, and trying to determine how oil and gas could play a role in energy transition. The current petroleum product distribution system requires optimisation to reduce inefficiencies and costs. This is particularly crucial for ATF due to the increasing number of airports. Similarly, the consumption and import of crude oil and LPG need strategic reconsideration. Though the authorisation and licensing of CGD companies has been completed, much more needs to be done in the areas of infrastructure development to integrate LNG terminals, trunk pipelines and CGD authorised areas.
Despite the progress in gas licensing, fiscal reforms, such as the imposition of GST on petroleum products, may be enacted to optimise cost in the interest of consumers.
What will be your top priorities for 2024-25? What are the long-term focus areas?
The three priority objectives set by PNGRB are being led by dedicated committees. First, under Vision 2040, strategies are being developed to achieve gas utilisation targets. Second, consumer protection is aimed at safeguarding consumers’ interests while also determining necessary regulatory changes. Third, given India’s condensed areas and population density, safety is paramount. To this end, a committee has been formed to review and regulate safety. All committees are expected to submit their reports by the end of the year, after which regulatory modifications will be implemented.
PNGRB believes in dynamic regulation, keeping pace with time, in the interests of both the country and consumers.
