Natural Gas Marketing Reforms

ECONOMY/ GOVERNANCE

Topic: General Studies 2, 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation

Natural Gas Marketing Reforms

Context: At the India Energy Forum, a much talked about subject was India’s Natural Gas Marketing Reforms that was announced in October 2020.

What are the Natural Gas Marketing Reforms recently announced by Government?

• The objective of the policy is to prescribe standard procedure to discover market price of gas to be sold in the market by gas producers, through a transparent and competitive process.
• The Director General of Hydrocarbon (DGH) will suggest an e-bidding platform to producers. It will list all government entities and other Credible companies. DGH will also issue guidelines for the same.
• Producers will have a choice between different platforms in transparent public domain akin to how coal, spectrum and mineral auctions takes place in the country.

• While producing companies themselves will not be allowed to participate in the bidding process, all other players and affiliate companies will be allowed to bid. This will facilitate and promote more competition in marketing of gas

• The policy will also grant marketing freedom to the Field Development Plans (FDPs) of those Blocks in which Production Sharing Contracts already provide pricing freedom.

Significance of the reforms

• Uniformity in Bidding: This will bring uniformity in the bidding process across the various contractual regimes and policies to avoid ambiguity and contribute towards ease of doing business
• Enhances Ease of Doing Business: The whole eco-system of policies relating to production, infrastructure and marketing of natural gas has been made more transparent with a focus on ease of doing business
• Encouraging investment in domestic production: These reforms will prove very significant for Atmanirbhar Bharat by encouraging investments in the domestic production of natural gas and reducing import dependence.
• Climate Friendly: The increased gas production consumption will help in improvement of environment.  For example, when natural gas is burned, it produces 45 percent less carbon dioxide than coal and 30 percent less than oil.
• Employment generation: The domestic production will further help in increasing investment in the downstream industries such as City Gas Distribution and related industries. It will also help in creating employment opportunities in the gas consuming sectors including MSMEs.

Criticism of the reforms

1. New reforms doesn’t apply to all gas production

• The new e-bidding process will govern discoveries which came on stream from February 2019 onwards. Essentially, the new regime will be applicable to producers from the areas offered under the Open Acreage Licensing Policy (OALP) rounds
• Government clarified that the existing gas-pricing formula will continue to be in force for production from existing discoveries awarded under the nomination regime
• Almost 80 per cent of Indian domestic gas is produced from blocks given on nomination basis to national oil companies. As a result, this gas doesn’t get the benefit of the new marketing freedom given. 
• The reason for not freeing up prices of all natural gas is that if gas prices rise, so will the costs of fertiliser and electricity; 
• Consequence is muted domestic Production: Unless existing producers like ONGC are able to earn more from the gas they produce, they are not going to get the resources to invest in exploring/extracting more gas

2. Existence of multiple types of prices for gas

• There are the ‘domestic price guidelines’—this used to be called Administered Price Mechanism (APM) earlier—and gas produced under this is sold at $1.79 per mmBtu; the costs of production, though, are significantly higher.
• Since keeping gas prices low dissuaded new investment, in 2016, the government raised the prices (in the range of $4.5 to $5.5 per mBtu) but only for new discoveries and that too, for gas produced in the deep or ultra-deep waters or high-temperature-high-pressure areas; if the gas was produced onshore, it didn’t get the higher price.
• In addition, there are imported prices that are around $5-7 per mmBtu. 
• After reforms, there will be a price for gas that is, for instance, found onshore or in relatively shallow waters; this price will be market-determined.

3. Apart from the fact that the ‘marketing’ freedom has not been extended to crude oil—and to existing natural gas production

Conclusion

The ‘Natural Gas Marketing Reforms’ will bear fruit when domestic production takes off and the market matures