All Talk and very little gas

The government has authorized the Petroleum & Natural Gas Regulatory Board (PNGRB) to license the city gas distribution (CGD) business. But the business is unlikely to grow to its potential so long as long-term gas availability to the sector remains uncertain.
CGD is a priority sector in the government?s gas utilization policy. That is why gas has been allocated to the sector from Reliance Industries? D6 block in the Krishna-Godavari basin. However, there is no guarantee that the sector will get enough gas in the future, given that the domestic gas availability is projected to be far short of the demand.

The power sector alone is projected to have such a huge demand for gas that it would not be possible to meet the demand from domestic sources. For example, the power ministry has raised gas requirement of 488 million standard cubic meter per day (mmscmd) for envisaged power projects. Against that, the gas availability is projected at 44 mmscmd.

Since the CGD is below fertilizer and power sectors on the government?s priority list for gas allocation, there is little possibility of its demand being accommodated. This is because of the government?s inability to tackle supply side constraints for gas.
Significantly, international LNG prices have come down sharply in recent years because of the global economic downturn and also because of the large-scale production of shale gas in the US.

Policymakers are aware that importing LNG is the only credible option for India to meet its fast-growing gas demand. However, the government has failed to take advantage of the decline in global LNG prices to sign long-term contracts. LNG prices are likely to start hardening once the global economic recovery picks up momentum.

It is unfortunate that instead of tackling supply side constraints by tying up contracts for long-term LNG supply, the government has indulged in an exercise to formulate policy for rationing domestic gas supply. The result is that the country is now staring at a huge gas demand-supply gap.
Piped gas is a key component of CGD business. It has to compete with domestic LPG that is being heavily subsidised by the government. In calorific terms, city gas distributors like Indraprastha Gas Ltd have priced PNG at the same level as domestic LPG.
Since there is no indication that the government is going to withdraw subsidy on domestic LPG any time soon, matching the price is the only way for city gas distributors to stay in competition.

It is true that city gas distributors are sourcing their gas requirement from imported LNG available in the spot market. There is no issue of affordability as of now. But the LNG market is prone to volatility as it closely follows the crude oil market. Things may change dramatically if there is a sharp upward movement in spot LNG prices. PNGRB plans to issue authorisation for CGD business in more than 200 cities in the coming years. But the prevailing uncertainty about gas availability might well put off potential investors. The government needs to address supply bottlenecks in gas supply if it wants to attract investment in the sector.

Source: The Financial Express, Delhi, Monday, 9th August 2010
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