Delivering the 75th Independence Day (ID) address on August 15, 2021, Prime Minister, Narendra Modi set the country a target of 2047 – to achieve self-reliance in energy production through a mix of electric mobility, gas-based economy and making the country a hub for hydrogen production.
While, electric mobility and hydrogen are futuristic areas, as regards gas-based economy, pursuit of this goal will involve increase in gas consumption to (i) meet additional energy needs for sustaining high growth and (ii) replacing polluting fuels such as coal, fuel oil etc. This could result in further increasing dependence on gas import which is already high at 50%. To prevent this and put India on the path of self-reliance, there is need for a massive push to domestic production of gas. Where do we stand today?
India has 26 Sedimentary Basins (SBs) covering an area of 3.14 million square kilometres (sq km). Of these, only six SBs covering 0.518 million sq km or barely 16% of the total area are under commercial exploitation. Even these six SBs are sub-optimally utilized.
An overwhelming share of throughput comes from fields discovered over four decades ago in the 1970s, namely Bombay High and the South Bassein fields and so on, with no major discoveries in recent times. The only exception was finds in the Krishna Godavari (KG) basin in early 2000s, touted as ones that would contribute nearly 50% of the country’s total gas production. Even that turned out to be a damp squib with the high-profile KG-D6 operated by Reliance Industries Limited (RIL) ending up with meager reserves of about two trillion cubic feet (Tcf) against an initial estimate of 10 Tcf.
The current production is 28.6 billion cubic metres (BCM) (2020-21). While two-third of this is contributed by state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) from blocks or areas given to them on ‘nomination’ basis, the remaining one-third comes from blocks given under the New Exploration and Licensing Policy or NELP (the policy was launched in 1999; since then, nine bidding rounds have been held to assign blocks) and pre-NELP blocks given to private entities before 1999.
The production sharing contracts (PSCs) under NELP offered lucrative terms including among others allowing operators to fully recover the cost incurred in exploration and development of the field before they start sharing profits with the Union Government. Yet, global firms didn’t come and Indian private firms such as RIL who came in have not delivered. The domestic gas production declined from a high of about 52 BCM during 2010-11 to 28.6 BCM during 2020-21 (the reduction was mainly due to KG-D6 exhausting almost all of its reserves within 5 years of starting production in 2009-10).
In March, 2016, Modi Government gave a special package for deep/ultra-deep and high-pressure/high-temperature (D/UD/HP/HT) fields (KG-D6 and neighboring KG-DWN-98/2 operated by ONGC fall in this category). Under it, supplies from these fields are allowed a “premium” price linked to the prices of alternate fuels viz. fuel oil, naphtha and imported LNG. This is almost double the ‘normal’ price (effective from Nov 1, 2014, normal price is a weighted average of the costs at four global locations viz. UK, US, Russia and Canada).
Even this special dispensation has not helped in reversing the declining trend in production. The Hydrocarbon Exploration and Licensing Policy (HELP) also known as the Open Acreage Licensing Policy (OALP) launched in July 2017 (under it, operators have freedom to choose new areas; they also enjoy freedom of pricing and marketing) has not lifted the sentiment either.
As per the Exploration & Production Action Plan prepared by Directorate General of Hydrocarbons (DGH) – the technical arm of Ministry of Petroleum and Natural Gas (MPNG) monitoring production of oil and gas – India will be able to reach 50 BCM by 2023-24 only which is even short of what it achieved in 2010-11.
The logjam has to do with (i) regulatory hurdles; (ii) multiplicity of prices; (iii) controls on supply and distribution.
Till date, as many as 37 processes and procedures were required to be followed by a firm exploring oil and gas in a block awarded under NELP or pre-NELP rounds. These covered almost every stage viz. declaring a discovery (albeit commercially viable), annual work program (AWP), appraisal, field development plan (FDP) including its revision, extension of the contract etc. No wonder, work in the assigned fields got stuck for years. For instance, KG-DWN-98/2 was discovered in 2004/05 but production from this field has commenced in this year.
Only recently, these procedures have been cut to 18. The DGH claims certain approvals such as declaring a discovery, submission of quarterly reports, insurance & indemnity and bank guarantees etc are now allowed on Self-certification whereas others viz. appraisal, FDP or its revision are allowed on ‘deemed’ approval basis (if official letter does not come within 30 days of submission of self-certified documents, it will be deemed to be approved).
But, as long as approvals are required; even if there are few (even now, statutory approvals will be needed for extension of the contract, sale of stake and annual accounts), the bureaucrat is capable of delaying the project for years!
As for (ii), there are at least half-a-dozen prices. Apart from normal price for fields given on nomination to ONGC and OIL under pre-NELP and NELP; premium price for so called D/UD/HP/HT fields; market-based price for fields under HELP/OALP; special price for unconventional stuff viz. shale gas, coal bed methane (CBM); yet another for small and marginal fields recently transferred from ONGC/OIL to private firms etc. This is an open invitation to discretion and bureaucratic red tape.
As for (iii), who gets, how much gas and from which field? This is decided by an inter-ministerial committee under Secretary, MPNG. It creates a fertile ground for intense lobbying by interest groups from both the suppliers and users. For instance, a urea manufacturer tries to get all of his needs at the lowest price whereas, a supplier firm is ever keen to sell all of its output at much higher premium price. While, the latter have little interest in maximizing production, there is no compulsion on the former to use gas efficiently.
To conclude, the objective of gas-based economy supported by domestic production is laudable. But, an ‘incremental’ approach (some relaxations or incentives here and there) won’t get us there. Instead, the Government should go for major reforms by dismantling the existing regime of gas allocation and administered prices. The suppliers should be free to decide their marketing and pricing strategies. Gas import should be deregulated and infrastructure for handling and transportation hived off from PSUs such as GAIL and vested in an independent entity. The entity should make the infrastructure accessible to all suppliers in a ‘transparent’ and ‘non-discriminatory’ manner.
These changes will create a ‘stable’ and ‘conducive’ policy environment for private companies including global energy giants to take long-term bet in Indian gas sector thereby increasing domestic supply to meet the growing demand. Efforts on the demand side can also help in achieving better balance. For instance, if we can achieve 450 MW power capacity based on renewable energy (set by Modi), this can take pressure off gas. Likewise, reduction in excess urea use will help in moderating the demand for gas.