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Moody’s says what S&P has said. S&P has said what E&P industry has been saying. Anybody listening?

Global ratings agencies Moody’s and Standard & Poor’s have both reported that the steep cut in gas prices by the government will hit the already struggling gas sector very hard, hold up investments in deep sea and ultra deep sea and halt India’s march towards increasing domestic production.

To understand how this will happen exactly, it is necessary to understand India’s energy economics and its policy eccentricities. Well, you can only try, because simple as the former is to understand, impossible is the latter to digest. Let’s give it a try, though:

India imports 80 percent of its oil and gas. With the historic global crash in oil and gas, India has saved over Rs 1.5 lakh crore in imports this year. This humongous windfall does not change the basic fact: India is a gas importer.

 Moody’s says what S&P has said. S&P has said what E&P industry has been saying. Anybody listening?

Gas pricing formula under question. Reuters

So, India has signed up nine long term prohibitively expensive contracts to import LNG. The average price of gas being bought is $10 per mmbtu while domestic gas producers are paid $3.82 making them struggle to augment production.

With these lavish LNG contracts, India wipes out Rs 65,000 crore of savings every year to enrich countries like Qatar and Australia. And will end up paying them Rs 14 lakh crore till these agreements expire.

Mind you, India has large volumes of gas resources, nearly 10 tcf (trillion cubic feet). They are lying discovered but distressed. The meagre price of $3.82 per mmbtu offered by the government to domestic oil and gas companies will not allow their development. These gas resources lie in complex areas like the deep waters and require intricate skills and cutting edge technologies.

If a similar price like that of contracted LNG is offered to the domestic companies, the government would gain Rs 2.5 lakh crore revenue through royalty, cess, share in gas produced and corporate taxes. Domestic production of gas will be doubled and LNG imports will be slashed by half. The result, a whopping savings of Rs 6 lakh crore!

Everybody is hurting

The energy economics of India reveals a sorry picture as successive governments indulge in arbitrary policy-making. Sequel after sequel, from a potential of unlocking over 150 mmscmd gas production, for a country starving for energy, delays and defiance have dried up investments.
The country consumes 134 mmscmd of natural gas today against an availability of 90 mmscmd, with the remaining met through imports of LNG. This is over and above the demand which is currently completely unmet due to unavailability. It is unmet today because there are multiple user industries dependent on gas beyond power and fertilizer.

Many of these industries are currently operating on costlier fuel or not operating at all. The demand of gas depends on three main factors – availability of natural gas, infrastructure available to transport the gas and the price of natural gas. When any of these factors turn favourable, the demand increases substantially. The picture gets blurred because in India despite the two factors being positive the pricing factor has let down the industry. Gas has never been promoted as a preferred fuel despite its cleaner and cheaper characteristics.

Historically, prior to the discovery of the Bombay High field in 1974, gas contributed very little to India's energy equation. All associated gas brought up with oil was largely flared reaching alarming levels, even up to 45 percent in the mid-eighties!

Gas is priced not by its intrinsic value but historically has been equated to half the price of oil. This has resulted in an even more vicious imbalance. Today when oil prices have crashed the resultant dive in gas prices is obscene. It is with this salacious background that the Indian policy brokers have rooted for higher imports than incentivise domestic production.

In the last 10 years, while India’s domestic production has grown by 10 percent, India’s imports of LNG has grown by 335 percent.

Tale of five countries

Struggling to grow its economy India has been sourcing energy from all over the world. It imports 80 percent of oil and gas to meet its energy requirements. As a cleaner fuel, all agree gas promotes a better quality of life. It has been a globally marketed and consumed commodity for over three decades. Gas is also far less expensive to import than other fuels.

Most significantly if promoted around a national gas grid, it can help India leapfrog across many years to become an economic ‘power-house’ with smart cities, industrial and energy corridors, expressways and high speed transportation fuelled by gas. It is the cleanest fuel second only to renewables. But Indian policy makers have a skewed interpretation which has embargoed natural gas development in the country. It is absurdly priced for domestic developers and extravagantly priced for overseas suppliers.

Result is that Indian oil and gas industry has slowed in recent years and is gasping to survive while being smothered by regulatory and bureaucratic hurdles. Historically focused in western India and shallow waters ONGC was the pioneer for gas production. In the past decade, the deep waters off the east coast gained in importance as Reliance, ONGC and GSPC made numerous gas discoveries.

The gas growth story was short-lived however. After repeated delays a decision to increase gas prices was made in October 2014. Many discovered fields have had to push back development by over five years due to this uncertainty, while the importing LNG lobby thrived. The Indian domestic producer today gets less than 4 dollars for each unit (mmbtu) while LNG imports are paid 10 dollars. India sits idling on 10 tcf of undeveloped discovered gas resources while the world whistles by.

The five-country comparison

Let’s see how India’s pricing policy compares with five others:

Indonesia: Since five years, the Indonesian government renegotiated a number of legacy gas contracts, increasing domestic prices by 200 percent. The price range there is $5-8/mmbtu. It promoted exploration and development of marginal fields, and ensured stability of domestic gas supply. Incentives were introduced to encourage development of tight reservoirs and deep water fields. Deep water fields were also incentivised to export up to 75 percent volume as LNG.

Israel: Since the last five years incentives to explore have yielded in the giant deep-water gas discovery that has transformed Israel's energy sector. Tamar, at 10 tcf, was brought on-stream in 2013 and is expected to meet bulk of Israel's domestic demand for the coming years. Leviathan, discovered in 2010, is almost 19 tcf and is expected to be developed partially for exports. Subsequent smaller discoveries have increased discovered resources to 33 tcf. Exploration is aggressively ongoing. The Tamar and Leviathan fields in Israel have the best well flow rates in the world.

Tamar field, which is one of the largest deep water gas fields globally with over 10 tcf of reserves has a price range between US$5-7/mcf and includes a floor price above US$5.00/mcf. In addition companies are allowed to export 40 percent of the gas.

Brazil: Brazil has the combination of world-class exploration success in its deep water basins and its openness to private investment to attract the attention of the world's largest E&P companies. Over the past 13 years, the Brazilian gas market has grown threefold, without relying on subsidies to promote growth. Since 2006, gas prices in Brazil have risen sharply with domestic gas price being linked to liquid fuel. Brazil’s oil linked pricing policy ensures that gas prices are in sync with movements in oil prices and cost inflation. This is a crucial incentive to explore and produce gas.

Philippines: Philippines has two giant fields Malampaya and Comango. Natural gas price here is determined by general international pricing principles linked to imports of all energy types into the country. Gas is priced in the range of $11-13/mcf which is sold to domestic power sector ensuring sustained supplies.

Argentina: Although Argentina had the second largest gas reserves in Latin America, administered pricing at low levels failed to provide incentives for new exploratory activity, leading to decline in proven reserves. Much like India! The decline in production and reserves introduced a growing dependence on expensive pipeline and LNG imports. To arrest the declining trend, under their new gas policy, the government took corrective action and recently increased the price three fold to $7.5 /mmbtu. Unlike India!

Look all over and you will not find a more convoluted tale of delay, value destruction and despair as in India.

Different strokes for different folks?

India is witnessing policy profiling of a dangerous kind. It is proving to be the biggest stumbling block in drawing investments to the upstream oil and gas business. India has five different policies to sell natural gas and an equal number of pricing tariffs. Scary but true.

Gas, as a preferred cleaner and sustainable energy option for India needs no debate. It is sold at a measure of mmbtu (million British thermal units). If you produce it from the pits of coal seams in Bihar at 1000 metres depths as methane gas (CBM) then you get a market price that averages $15 / mmbtu. If you strike natural or associated gas in Rajasthan and are a company called Cairn you get a price of $ 9. If you import it as LNG into India on a long term contract then you average $10. When you buy distressed cheap cargoes of LNG from the spot market you are landing around $7.5.

If you are ONGC or Reliance you get $3.82. Even when you produce it from 2000 metres below the sea bed in water depths of over one km! It does make you marvel at the insouciance of a country where pricelists get revised on the basis of the company logo that sells it?

Now with the recently announced marginal field policy the government has given companies the freedom to sell oil and gas at arms-length market prices. This will be the sixth price for gas in the Indian market! Small wonder then that domestic investments in the oil and gas sector are drying up and the import lobbies are having a field day. Perhaps different folks need different strokes in India.

(Disclosure: Firstpost is part of Network18 Media & Investment Limited which is owned by Reliance Industries Limited.)

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Updated Date: Oct 10, 2015 11:20:39 IST