Natural Gas Marketing Reforms: A Rush Job that Promotes Rent-Seeking

A recent discussion paper titled “Anybody's Gas: India's New Natural Gas Marketing Reforms”, written by Subir Ghosh, researched by Nikita Mujumdar and commissioned by Paranjoy Guha Thakurta, takes a critical look at the government's new policy directives that were announced in early-October and argues that the so-called "reforms process" was rushed into by ignoring the context, that most of the domestic producers of natural gas would not benefit from the reforms, that key decisions on allocating and marketing would be left to civil servants, who would presumably act at the behest of their political masters, thereby promoting arbitrariness and "rent-seeking."

The Cabinet Committee on Economic Affairs chaired by Prime Minister Narendra Modi on October 7 approved the Natural Gas Marketing Reforms. The idea is to move towards a gas-based economy.

The stated objective of the new policy is to prescribe a standard procedure to discover the market price of gas to be sold in the marketplace by producers through a competitive process, permit affiliates to participate in the bidding process for the sale of gas, and allow marketing freedom to certain field development plans (FDPs) where the production sharing contracts already provide pricing freedom.

This paper looks at the current scenario and different market outlooks, and subsequently outlines the claims and promises made by the Indian government.

The International Energy Agency (IEA) in its India 2020 report, released in January this year, had remarked that India would be “vital for the future of the global energy markets.” The IEA commended the country for “its continuous pursuit of market opening and greater use of market-based solutions through ambitious energy sector reforms.” Noting that India is the world’s third-largest consumer of oil, the fourth-largest oil refiner and a net exporter of refined products, the IEA said, “The rate of growth of India’s oil consumption is expected to surpass that of the People’s Republic of China in the mid-2020s, making India a very attractive market for refinery investment.”

At an event organised by the IEA and the Indian Ministry of Petroleum and Natural Gas in July, Union minister Dharmendra Pradhan had indicated that “in order to give a fillip to the gas-based economy, focus is being given to enhancing domestic gas production, expeditious development of gas infrastructure as well as development of (a) gas market by providing open access to gas infrastructure.” The government was “progressively moving towards a marketing and pricing freedom regime in the country,” he said. The October 7 announcement is a step in that direction.

Many experts feel the government has rushed into the “reforms” process and much of the context has been largely ignored.

The Executive Summary of the paper states:

• Existing sources/producers of gas: A large portion of the domestic natural gas output does not benefit from the reforms.

• Market and price discovery in a system full of monopolies and formulae prices: Formulae prices militate against a market price discovery, which needs a respectable volume to be traded. The measures proposed do not touch the fundamentals required for marketing and pricing freedom.

• No freedom to market: For 60% of India’s gas production, there is not only an administrative gas price based on four benchmarks, which have no relevance to the country’s market, but also no freedom for marketing it. That gas to be sold for customers is decided by bureaucrats. This promotes rent-seeking activity.

• Understanding of energy mix: The situation with respect to producing, raising the share of gas in the energy mix, pricing gas or the Indian energy reality is not well understood. One cannot frame a policy or comment on it in the absence of such an understanding.

• Cut off from global situation: The global gas market prices are declining rapidly, but imported Liquefied Natural Gas (LNG) purchases are locked up in rigid price-insensitive long-term contracts that do not yield the global price decline benefits to the domestic consumers of gas.

• Prevalent distortions: Domestic gas pricing is the key, and the two distortions are the tax structure and the transmission tariffs. If gas is brought under GST and tariff is unified, those are the ways forward there.

• The question of gas imports: Domestic producers have to compete with LNG suppliers. A gas price structure that protects domestic producers from cheaper imports stands outdated.

(The full paper can be read here)