INDIA: A Gas Based Economy, a reality or a distant reality?
December 30, 2019

a-gas-based-economy

This article is written by Mr. Ajay Marchanda, Director (Energy and Infrastructure), Alaya Legal

Energy sector is the backbone of industrial growth in any economy. In fact, it won’t be wrong to suggest that energy supply and economic growth are highly interdependent. Like all other developing economies, India continues to be highly dependent on coal, oil and gas as primary source for meeting its domestic and or  commercial energy demands.

However, India depends largely on imports as it has limited availability of the primary energy sources. Being a country that has been offering subsidy to its customers in some form or another, the landed cost upon import often leads to various concerns related to the price and availability for the government. Also, the high environmental cost involved on account of use of coal and oil has driven the government to work on building a ‘natural gas based economy’.

The world is fast moving towards gas as its primary energy source and this growth has been rising due to four key value propositions i.e. Abundance, Availability, Affordability and Acceptability, as it has a cleaner footprint than coal or liquid fuels.

An array of challenges that India needs to overcome for becoming a gas based economy include:

Gas Demand

India started importing  LNG from the year 2004. Before that India was dependent on domestically produced gas which was allocated to the industries by the Government, major beneficiaries being Power and Fertilizer sectors mainly because these sectors were enjoying fuel subsidy. Other sectors largely stayed ignored. Even after LNG imports began, the Government continued to favour Power and Fertilizer sectors, but these sectors have still been reluctant to make a long term commitment for RLNG. The unsold RLNG was then marketed by Oil Marketing Companies (OMCs) to other industries. With the improved availability of RLNG, demand has emerged from industries in other sectors and City Gas Distribution. To meet the growing demand, there will be a need to import LNG as domestic supplies are constrained.

Gas Infrastructure

Although a few LNG terminals have come up recently (including the eastern India), the gas transportation network has been limited. The pipelines have been  mainly concentrated in North West India. Upon its formation in 2006, the Petroleum and Natural Gas Regulatory Board has been working for creating a national NG pipeline grid. While the actions have been initiated to spread the pipeline network across the country, a lot needs to be achieved so as to reach the customers in all corners – domestic or commercial.

Affordability

Indian customers, whether commercial or domestic, are both very price sensitive. Often, the alternative fuels are subsidized by Government which presents a big bottleneck in converting households from subsidized LPG to natural gas. Since the demand-supply gap is being bridged by importing LNG, it is important that both, the industries and households are willing to accept market driven prices. The recent campaign launched by the Indian government that is aimed at motivating LPG users who are able to afford to pay the market price for LPG to voluntarily surrender their LPG subsidy has provided an opportunity for PNG to make its inroads to the households.

Increasing Domestic Production

India’s domestic gas production is miniscule as compared to the demand. The current domestic gas supply projections do not provide much hope. India therefore needs to explore non- conventional gas resources like Shale gas, CBM and gas hydrates etc. to boost the production.

Taxation

Natural Gas is not yet covered under GST. Each state levies its own taxes on the commodity. The free movement of gas across the state boundaries is therefore constrained as natural gas is then subjected to multiple state taxes, making it unaffordable. There needs to uniformity in taxation and bidirectional movement of gas in pipelines (swaps) without taxation.

While the Government has taken several steps for making India a ‘Gas Based’ economy, the vision will be realized only after speeding up gas infrastructure projects, gas exploration and implementing consumer friendly taxation policies.

Disclaimer The views appearing in this article are those of the author and not of Alaya Legal. The author may be reached at by writing to Alaya Legal at contact@alayalegal.com. Nothing herein is or may be construed as legal advice.