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Liberalise gas markets, make them transparent, regulate them

business Updated: Sep 04, 2009 22:43 IST
Vijay Kelkar
Vijay Kelkar
Hindustan Times

The present policy approach for gas seems to be derived from a mindset that India is relatively “gas short” and this scarcity is attempted to be met through rationing or allocating available gas through quantitative allocation with its consequent under-pricing. Ironically, this approach only reinforces the shortage phenomenon as this discourages supply and enhances demand as prices are not allowed to play their full role. This policy gets reinforced through the “political economy” factors as a number of important players share these rents. The other conceptual shortcoming is that when people think about gas, it is thought of as something distinct from crude oil while in reality both are close substitutes.

The current procedure for determination of gas pricing being somewhat non-transparent, there is an element of uncertainty and enormous variance in gas prices in the same markets in India. Such non-transparency in price determination discourages anchor customers such as fertiliser and power sector, creating further difficulties for making any large investments required for pipeline infrastructure.

To bring in a new paradigm shift, policymakers will have to change their mindset by recognising three important factors. Firstly, both oil and gas being hydrocarbons are close substitutes and these markets move in tandem internationally where the infrastructure for gas is well developed. Secondly, although oil and gas are both hydrocarbons, one is liquid and the other gaseous and therefore requires different logistics in terms of supply infrastructure. Hence, these two energy infrastructures create different market structures which has some regulatory implication.

The third factor is that India is potentially a “gas abundant” country, “gas abundant” compared to availability of oil and compared to the present projections of demand for gas in the next 20 years. Given right incentives for producers, it is possible to foresee India to achieve, over a decade or so, gas output level of more than 500 mmscmd (million metric standard cubic metres per day) from current level of 120 mmscmd.

All these potentially large gas reserves can become a reality only if we allow incentives to producers. This requires that our exploration contracts should have transparency and complete stability. In recent years, there have been instances of unilateral deviations from the stated policy and practices regarding the production sharing contracts and this needs to be eschewed if we want to make any radical gains in finding new gas which is indeed there to tap. What I am arguing is for further liberalisation of gas markets in India. This will also require an improved regulatory regime. One possible regulatory model to strengthen gas markets in India is the recent Australian Natural Gas Act, 2008.

Natural gas is different from oil because of its transportation requirements. Large pipelines are required to transport gas and once such pipelines are created, the market structure can become locally monopolistic. To create a competitive national gas market, we require national gas pipeline grid, what I call NATGAS grid. But working of this NATGAS grid, working as “common carrier”, will have to be supervised by a regulator for ensuring transparency, competition and safety.

One possible way of promoting competitive gas markets could be that even where the cross-country or inter-state pipelines are under the private sector, 25-30 per cent of capacity of such pipelines can be “crown” capacity which can be either on “carried interest” or “participating interest” basis and such capacity will be available to any buyer or supplier of gas with the toll charges which are determined by the regulator. Under a new policy approach, India’s gas market will become competitive like the one obtained in the US or Europe, giving consumers choice as well as supply stability. This way, the gas prices all over India will converge barring inherent transportation costs.

(Former petroleum secretary, the author is chairman, Finance Commission)