The gas paradox: Govt encouraging huge investment to push demand but imposing policies that deter domestic exploration and production

Source: The post is based on an article The gas paradox: Govt encouraging huge investment to push demand but imposing policies that deter domestic exploration and production” published in Business Standard on 23rd January 2023.

Syllabus: GS 3 – Economic Development

Relevance: import dependency of India on oil and gas

News: The article discusses the policies adopted by the government which makes India import dependent on natural gas.

What is the current situation of India in natural gas?

The government encouraged investments of over Rs 2 trillion in natural gas infrastructure and offered subsidies under the PM Ujwala Yojana (PMUY) to expand access to cleaner burning fuels, CNG and LPG.

However, the government has also come up with policies that have held back the development of domestic oil and gas resulting in lower domestic production.

This makes India rely on gas imports with volatile global fuel rates.

The growth rate of domestic natural gas is too weak to match the rising demand in India.

Moreover, the government has come up with new guidelines which has affected the oil and gas companies.

What are the new guidelines for natural gas given by India?

The new guidelines have capped the trading margins on resale of gas and provided complex conditions on prioritising sales to households and transport sectors in the case of similar bids at e-auctions.

It also requires a huge amount of paperwork that gas producers must produce before officials. This policy change was announced without any warnings.

This has made Reliance Industries and BP to postpone an auction in which it decided to sell 6 million cubic metres (mcm) a day of gas to Indian consumers at half the rates of international liquefied natural gas (LNG).

What has been the trend in consumption and import of natural gas?

Overall consumption of natural gas rose 22 percent between 2015-16 but the growth rate of LNG imports surged 58 percent a day during this period.

This led to imports growing at 53 per cent in 2019-20 from 41 percent in 2015-16 because domestic production failed to catch up with demand.

The dependency on overseas suppliers for cooking gas rose to 62 per cent from 47 per cent in 2017-18, after which the government decided to offer subsidised connections under PMUY.

This import dependency will also affect India to reach the target of 15 percent natural gas in the energy mix by 2030 which currently stands at 6 per cent.

Moreover, natural gas demand from the city gas distribution sector for domestic cooking fuel and transport is expected to grow 15-17 per cent over fiscal 2022-2027.

Therefore, this rapid growth in city gas use will make India more dependent on foreign fuel due to limited domestic production.

Moreover, there were also changes made by the current government in capping the price of gas but none was successful.

What changes were made by the government?

In 2014, the Rangarajan Committee’s gas pricing formula was diluted by removing LNG prices as a benchmark to calculate domestic gas rates.

It then capped the price of gas produced from unconventional areas, including deep waters.

However, when these measures did not work, it constituted a committee last year led by former Planning Commission member Kirit Parikh.

It recommended a price cap on domestic supplies that is around 20 per cent lower than current levels which will come effect from April this year.

What is the way forward for India?

Policies such as interfering with fuel prices, arbitrarily capping margins of traders, constantly disturbing with gas pricing formulae, and pursuing pointless arbitrations have discouraged foreign explorers from coming to India.

Therefore, India needs to adopt such policies which build a trust of foreign companies in India and make India more dependent on domestic production.

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