Mid-Course Changes In Gas Pricing To Delay Investments: Reliance

Billionaire Mukesh Ambani's Reliance Industries has told a government-appointed panel reviewing gas pricing that any 'retrograde' move to artificially cap rates will add to fiscal policy instability, delays investment and dent India's attempt to become Atmanirbhar in fuel production.

In a submission to the committee headed by Kirit Parikh, which has been asked by the Oil Ministry to look at setting a 'fair price to consumers', the firm detailed how the economics of its about-to-start field in the KG-D6 block, where billions of dollars have been spent to recover reserves lying several kilometres below the seabed, will be impacted under different prices.

The mid-course changes through price caps not just go against pricing and marketing freedom contracts and government policy promises to companies but also add to uncertainty to a fiscal regime which would impact investments, according to sources briefed on the matter and the presentation.

The government biannually fixes gas prices based on rates prevalent in surplus nations. Rates according to this formula stayed below the breakeven price of USD 3-3.5 per million British thermal units for six years starting October 2015 but have jumped 5x in the last one year to USD 8.57 for old fields and USD 12.46 for difficult fields.

This rise has prompted user industries to complain, following which the ministry set up a panel to suggest an affordable rate for the users.

The sources said Reliance told the panel that doubling India's production from current levels to cut rising imports and meet the target of raising the share of natural gas in the primary energy basket to 15 per cent by 2030 from the current 6.7 per cent, would require at least Rs 2 lakh crore to Rs 3 lakh crore investment, which can be viable only if a stable fiscal and contractual regime with market-based pricing is provided.     Only such a regime can attract investors to commit long-term funds for the exploration and development of such areas.

There has not been any large hydrocarbon discovery in the country in the last more than a decade, resulting in a sustained decline in domestic oil and gas production and the consequent rise in imports for meeting the vast energy demands of the world's fifth largest economy.

Natural gas is used to generate electricity, produce fertilisers for crops, turn into CNG to run automobiles and piped into household kitchens for cooking. In absence of adequate domestic production, India has raised imports for the fuel by paying four times to overseas suppliers than the price that domestic producers get.

In the last two years, gas production from Krishna Godavari deep-sea has augmented domestic production because of pricing and marketing freedom granted in 2016, which made it economical to produce from fields, Reliance said, adding India requires sustained reserves accretion to ensure future oil and gas production.

Stating that assurance of marketing and pricing freedom is necessary for continuing long-term investments leading to growth in domestic production, Reliance said the committee should recommend pricing that can assure global investors to make India their preferred investment destination. And this is the only way of ensuring that investments continue to flow to enhance domestic gas production by 2.8 times by 2030.

It is not that marketing freedom will ensure that domestic gas will start collecting the highest international price. Since gas produced in India cannot be exported, gas prices in India will settle at the correct level that reflects the demand-supply scenario for domestic gas in India, it added.

The government should therefore allow complete marketing and pricing freedom to producers through a transparent e-auction process for the sale of gas. 

The mandate of the committee is to promote and develop the gas-based economy in India and this cannot be achieved unless domestic gas production grows, it said.

Domestic gas production in India is at an inflection point. Buoyed by policy reforms, domestic gas production is set to grow over the next few years as new investments bear fruit. Any policy change which takes away pricing and marketing freedom would put India back on increased import dependency.

It went on to state that short-term market developments, like the surge in global energy prices following Russia's war in Ukraine, cannot be the trigger for introducing measures that vitiate the atmosphere for long-term investments.

While the committee deliberates alternate market-based solutions, the current policy dispensation should not be tinkered with until a proper market-based regime is implemented.

Policy and contract instability result in delays in investment decisions, project related economic challenges -- all of which have already adversely impacted potential gas production. To attract investments and desired outcomes, it is imperative to ensure goalposts are not changed once large-scale investments have been committed.

According to the sources, Reliance told the panel that most of the potential hydrocarbon resources are estimated to be in frontier basins/areas requiring huge risk capital and state of art technologies to bring them to production. This is possible only when market-based prices and a stable regime is assured by the government.

It said all existing contracts such as the one for the KG-D6 block, provide for a sacrosanct fiscal stability provision. But in the past, the basic tenet of marketing and pricing freedom enshrined in the contracts and government policy has been "severely compromised" between 2008 to 2014 by the government that decided to fix users in 2008 and then through the "irrational decision" to link domestic gas prices in a gas deficit country to prices prevailing in surplus gas exporting countries, such as the US, Canada and Russia. 

The consequence was a drying up of upstream investments in India as both measures sent extremely negative signals about the government's intention to maintain the sanctity of contracts. As a result, India's import dependency on gas increased from 36 per cent in 2014 to 54 per cent in 2019.

In March 2016, the government restored marketing freedom and put a higher cap price for gas from deepsea, ultra-deepwater and other difficult areas. Though this cap price was still below market price and lower than the rate India pays for long-term LNG imports from Qatar, it helped reinvigorated investments for enhancing gas production (investments of Rs 90-1,00,000 crore over the last 5 years in the deep/ultra-deepwater of the KG basin heled gas production from the private sector double).

And more production is lined up to come on stream in the next two years. "Therefore, the need of the hour is to allow market-based gas prices as has been done for crude oil in the country."

More importantly, each contract for exploration and production of oil and gas has a sacrosanct fiscal stability provisions enshrined as the first principle.

India aims to transit to an increasingly gas-based economy by raising the share of natural gas to 15 per cent of the overall energy mix by 2030 from its current level of 6.7 per cent.

But the share of gas in India's energy mix had been falling instead of rising, the firm said, adding gas would make up for just 10 per cent of the energy consumed even if the current natural gas production of 90 million standard cubic meters per day was doubled.

To limit imports to the current level of 50 per cent of all needs, gas domestic production needs to rise by 3 times to about 290 mmscmd.

India cannot be 'AtmaNirbhar' with such a high degree of import dependence on its basic fuel needs, it said.

Starting at similar domestic production levels in the year 2000, over the last 20 years, China's domestic gas production has increased seven times driven by a significant increase in upstream investments, whereas India's domestic gas production has remained stagnant at about 24 billion cubic meters per day.

To achieve similar growth in domestic gas production India would require significant investments in the upstream sector.