In its Performance Audit Report on Supply and Infrastructure Development for Natural Gas (tabled in the Parliament on May 5, 2015), the comptroller and auditor general (CAG) has pulled up the government for failing to create infrastructure for domestic gas production and supply. CAG said that India lost subsidy savings of Rs 11,800 crores between 2010 and 2013 on this account.
Infrastructure for domestic gas – CAG revelations
It noted that non-availability of long-term gas supply and inadequate pipeline connectivity were the main constraints in increasing of urea production capacity. During 2011-12 and 2012-13, urea production was only 44.6 million tons against the requirement of 60.4 million tons. The shortfall of 15.8 million tons was imported at much higher cost leading to extra subsidy outgo of Rs 4202 crores.
Due to absence of adequate pipeline connectivity and resultant non-availability of re-gasified liquefied natural gas (RLNG), there was substantial delay in conversion of existing naphtha and fuel oil-based plants to natural-gas based urea units. As a result, the government lost an opportunity to reduce urea subsidy by Rs 7674 crores between 2010-11 and 2012-13.
The auditor has recommended that the petroleum ministry set up an inter-ministerial committee, in coordination with its power and fertilizer counterparts. It should suggest a time bound plan for synchronizing implementation of gas pipeline projects and revival of fertilizer units, so that the benefit of gas as feedstock is derived, besides reducing import of urea. The committee would also suggest measures to create the required infrastructure to provide gas for the power sector at an affordable price.
Being a constitutional body entrusted with the responsibility of putting all state expenditure to rigorous scrutiny and fertilizer subsidy being a major item of budgetary expenses, it was only apt that CAG identified areas where substantial savings in subsidy could have been achieved with timely action by government. But, the problem is much too complex to be solved merely by setting up of an inter-ministerial committee. Already, there exists a Gas Linkage Committee (GLC) chaired by Secretary, petroleum ministry which is fully aware of supply-demand issues and despite it problems persist.
What we need urgently is fast-track action on the ground as the bottlenecks and action areas are already known. The three crucial segments of gas supply chain requiring focused attention are (i) production/supply of required gas; (ii) its transmission and distribution to all plant locations/customers to fully meet their requirements and (iii) plants should be ready to take gas and ensure timely payments.
Abundant gas supplies – initial exuberance
In regard to (i), major discoveries from 2002 onward, led to a wave of exuberance and projection of abundant supplies of domestic gas. Supplies aggregating to more than 150 million standard cubic meter (mmscmd) were to come mainly from Reliance Industries Limited (RIL) operated KG-DWN-98/3 field off Andhra coast (better known as KG-D6); ONGC operated KG-DWN-98/2 (located next to KG-D6) and others such as Gujarat State Petroleum Corporation (GSPC), Deendayal; Oil India Limited (OIL) fields in north-east etc.
Amongst the aforementioned fields, development work on KG-D6 started at a momentous pace and in an initial development plan (IDP) submitted in 2004, RIL promised production of 40 mmscmd. However, in an ‘addendum’ to IDP submitted in 2006, supply commitment was doubled to 80 mmscmd. It was primarily on the strength of this, there was surge in gas-based power generation capacity and existing naphtha and fuel oil based fertilizer plants were switched over to gas – under a government directive.
There was clearly a semblance of synchronization between promised supply and setting up of additional capacity in power and extra demand generation from fertilizers. But, for the former, the latter would not have come up. Production from KG-D6 commenced in 2009 and scaled up to reach 60 mmscmd in 2010. Thereafter, forget reaching to committed level of 80 mmscmd, it declined progressively to touch a low of around 10 mmscmd currently.
It was a complete disaster leading to an unprecedented loss of 70 mmscmd and casually explained away by the operator in terms of ‘un-anticipated geological and technical factors’. This loss combined with ONGC doing no development work at KG-DWN-98/2 – an equally promising field – for more than a decade and other operators too making little progress on their respective discoveries led to a monumental shortfall in gas availability and debilitating effect on fertilizers and power plants.
Hopes belied – impact on fertilizers and power
At present, India faces a deficit of over 100 mmscmd in domestic gas supply. In fertilizers, against requirement of about 47 mmscmd, actual availability is only 26 mmscmd forcing plants to use costly re-gasified LNG besides several plants continuing on more expensive naphtha and fuel oil (being inferior feed stock, these plants were also afflicted by lower energy efficiency). The gas supply crunch also came in the way of setting up new urea projects or even revamp of existing plants in turn leading to high imports. All this has led to ballooning subsidy – as pointed out by CAG.
In power, out of 24,000 mw of gas-based generation capacity, projects with 14,000 mw have no fuel linkage and other plants with 10,000 mw get measly supplies resulting in operating rate of less than 30%. All these plants are on a ventilator fighting a battle for their survival. Recently, government came out with a bail-out package having to even use money in Power Systems Development Fund (PSDF) [which is meant for maintaining safety and stability of the grid] to subsidize cost of re-gasified LNG.
The pains of shortfall in availability of domestic gas have been aggravated by poor planning and execution of projects for laying pipelines i.e. second critical link in supply. If, only this had been addressed, today when price of imported LNG has plunged – in tandem with declining oil price – and its availability is plenty, both fertilizers and power plants would have benefited by increasing production/generation at lower cost/tariff.
Blatant neglect of pipeline infrastructure
Yet, blatant neglect of aforementioned is pretty evident. The 2,050-km Jagdishpur – Phulpur – Haldia gas pipeline project – passing through 4 states viz., Uttar Pradesh, Jharkhand, West Bengal and Bihar and intended to serve as ‘energy hub’ of east India [it will supply gas to 12 districts in Bihar and 15 in other 3 states] and meet gas needs of fertilizer plants in Sindri, Gorakhpur, Barauni and Durgapur – has been languishing for close to a decade.
A major reason for delay cited by Gas Authority of India (GAIL) – public sector behemoth and implementing agency for project – is that fertilizer plants which were expected to be anchor customers did not give firm off-take commitment of gas (the pipeline will carry 16 mmscmd in the first phase and 32 mmscmd in second phase). On the other hand, the latter did not commit because their viability was predicated on un-interrupted supply of gas and they were not sure when former would be ready to deliver.
Pertinently, both GAIL and Fertilizer Corporation of India (FCIL) & Brahmaputra Valley Fertilizer Corporation Limited (BVFCL) owners of above mentioned plants are owned by Government of India. One is waiting for the other to make a forward move but none makes any move. Meanwhile, the project gets inordinately delayed leading to unconscionable cost escalation [current estimate is Rs 10,000 crores or US$ 1.67 billion] besides causing huge loss to the country by way of higher subsidy on imported urea.
It is a classical case of governance failure – the left hand does not know what the right hand does – and has afflicted several projects involving investment in hundreds and thousands of crores cutting across all sectors. It required intervention by Prime Minister who resurrected the project last year and directed GAIL to commence work on October 1, 2014 and complete within 2 years. Modi also directed that the issue be sorted out expeditiously between the fertilizer and oil ministry.
User industries ‘ill-equipped’ to receive gas
This brings us to the third critical link on demand side. Herein, fertilizer and power plants too have been laggards. Even as Modi – government has brought to the center stage revival projects of several fertilizer plants under FCIL and BVFCL [on March 31, 2015, the cabinet committee on economic affairs (CCEA) cleared a proposal for reviving Barauni (Bihar) unit lying closed since 2004 and others such as revamp of Talcher (Odisha), Sindri (Jharkhand) and Namrup – IV (Assam) are being pursued], there are too many imponderables and hurdles to be crossed.
The major hurdles include (i) massive funds required for investment and roping in partners for implementation under joint venture arrangements; (ii) delay in acquisition of land; for instance, revival of Sindri – approved in 2011- is hamstrung primarily because of un-availability of land [the situation will become more grim if amendments to Land Acquisition Act (2013) mooted by Modi – government do not get through] and (iii) doubt about continued viability of revived plants – post reforms in the urea sector. For details on the imponderables, pl read:-
Even under optimistic scenario of all hurdles smoothly crossed, it won’t take less than 3-5 years for revival projects to be commissioned. If, Jagdishpur–Phulpur–Haldia pipeline is ready within 2 years as per the deadline given by Modiji, there could be mis-match putting GAIL in to serious financial difficulties as there won’t be any takers for gas. Going by past records, if completion of revival projects takes longer than 5 years, it could mean disaster for GAIL.
Urgent need for coordinated action plan
The government should put in place a ‘coordinated’ and ‘coherent’ action plan to remove impediments and synchronize progress in all the three critical areas of gas production, transmission and use. For boosting production, three things are needed viz., (a) a ‘conducive’ and ‘stable’ policy environment; (b) an effective and transparent regulatory architecture and (c) clear-cut and legally enforceable production sharing contract (PSC).
Boosting domestic gas supply
By announcing a formula-based new structure of gas pricing w.e.f November 1, 2014, government has already taken care of (a) while (b) and (c) are currently works in progress. In the model PSC, effort is being made to remove the ambiguities – present in extant PSC – which will bridge the trust deficit and enthuse investors. It is now the turn of exploration and production companies to respond by undertaking required investment and contribute to the over arching goal of achieving energy security.
In this regard, in a meeting held at the Prime Minister’s Office (PMO) with petroleum ministry, all the gas fields whose Field Development Plans (FDPs) have been approved by the ministry (in plain terms, which are ready to start production) were reviewed. Major operators viz., ONGC, OIL, RIL/BP also made presentations on the current status of fields and how they can contribute to enhancing output. It is estimated that domestic gas output will increase from current 92 mmscmd to 160 mmscmd by 2020-21. It may even improve further if in the meantime some more gas fields are discovered and their FDPs given approval by the ministry.
Indeed, this is a very encouraging news. However, to actually see this happening 5 years from now will require a lot of tight planning and execution supported by a regulatory environment that imparts momentum to the process of field development and their commercialization. The decision of Modi – dispensation to standardize approval procedures and grant greater autonomy and flexibility to director general of hydrocarbon (DGH) will give a fillip to this process.
The issue of precipitous fall in output from KG-D6 will require deft handling. This is not just because of bountiful contribution of 80 mmscmd from this alone but it is also a test case for assessing the authenticity of estimates of recoverable reserves. From an initial estimate of 3.3 trillion cubic ft (tcf) in 2004, to over 12 tcf put up by RIL in 2006, to 10 tcf approved by ministry and eventually changed to 2.9 tcf in 2013 has left every one gasping!
This requires a comprehensive review to ascertain and establish if it was a case of manoeuvring with numbers to benefit from extant ‘cost recovery’ model that placed a premium on ‘gold plating’ of capital expenses [in view of revelations by the CAG, prima facie it would appear so]. Alternatively, if it turns out that recoverable reserves were actually high – as initially projected – and RIL ‘deliberately’ suppressed production then, credible efforts can be made to retrieve the committed production of 80 mmscmd. For details, pl read:-
Augmenting pipeline network
Concomitant with efforts to increase gas output, the government should goad GAIL, Reliance Gas Transportation Infrastructure Limited (RGTIL) and others to complete commissioning of their respective pipeline networks. It should also put in place arrangements for laying an additional 15,000 km network of pipeline – as announced by Arun Jaitely in the union budget. Both these tasks must be completed in the next 5 years to deliver all gas – domestic plus imported LNG – to all places where needed.
Energizing fertilizers and power sectors
At the users end, government must ensure that all revival projects under FCIL and BVFCL as also new grass root urea projects needed to fully plug the deficit of about 9 million tons are commissioned by 2020-21. Even though for now, it has left existing urea pricing policy [read new pricing scheme (NPS) that allows unit-specific subsidy to all manufacturers] untouched, over the next 5 year time horizon it is only fair to expect urea reforms to be in place. Consequently, it must take unit-specific measures to ensure their continued viability under market-based environment.
In power sector, the health of generators has to be robust. This in turn will require that that health of power distribution companies (PDCs)/state electricity boards (SEBs) is restored so that they make timely payments for electricity they buy. For this, political intervention in fixing price of power sold to consumers/farmers must stop. If, any state wants to give subsidy, it must come directly from its budget instead of states riding piggy back on PDCs/SEBs.
Need for synchronized actions and forward movement
Given the strong inter-connection and any lacuna in one area affecting functioning of the other, the government will have to ensure that actions on the all three fronts viz., gas production, transmission and use are synchronized to get optimum results. The task may be assigned to one of the 8 high powered group of top bureaucrats (G-8 as it is called) which directly reports to PMO.
However, considering the wider political ramifications of tough decisions that may have to be taken viz., acquisition of land for timely implementation of projects or those in regard to plants of FCIL and BVFCL – all located in politically sensitive states – Modiji will have to be pro-active and make necessary intervention at the right time to ensure that execution process does not get in to a logjam.