IEA report discussed the possibility of gas meeting 25 per cent of world energy demand by 2035 and that gas demand will increase by 50 per cent. This should have been a wake-up call for India to develop a sound gas plan.

The factors which influenced IEA to predict the golden age of gas were: abundant gas reserves spread across all regions; gas is a versatile fuel used extensively for power generation and gas can compete in most end-use sectors.

Compared to other fossil fuels, gas produces the least amount of green house gases. Unfortunately India lost precious time to shape the right gas policy.

There is a ray of hope now. The NDA government plans some needed reforms. More oriented towards free market than the UPA, the NDA has announced plans to liberalise gas prices though with some control where needed. It is this qualification which may raise concerns in the mind of the investors.

When the Krishna-Godavari (KG) basin was increasing its gas production in 2009-10 and India’s production reached the peak of 51 BCM, it was thought India was also entering a golden age of gas. Since then it has been a downward ride for India’s gas sector.

Private and public sector companies invested in gas power plants mostly after 2002. They were expecting to get access to ‘cheap’ gas production when KG basin came on stream. Total capacity of gas power plants reached 24,000 MW. Unfortunately with the drop in gas production, either they became idle or were operating with low plant load factor of 30 per cent or less.

Why the power producers didn’t go for multi-fuel?

On hind sight it can be argued that these investors should have opted for multi-fuel use (coal, fuel oil or light crude oil apart from gas) or be prepared to run on more expensive LNG. This is the practice in some of the developed countries even if it involved incurring additional investment as an insurance against non-availability of gas. Indian power producers did not do this. As a consequence, large power capacity based on gas remained idle when gas output from the KG Basin declined and imported gas became expensive.

The band-aid solution

When LNG prices started to drop from an average of $16 per million BTU in 2014 to less than $7 per unit in 2015, mirroring the drop in crude oil price (see Graph-3) NDA government came up with a band-aid type solution. They offered subsidy to these stranded power plants to start the idled power plants using imported LNG. Even at lower LNG prices they could not have competed with coal based power plants and it was felt that there is a need to offer subsidy.

Rs 7500 crore subsidy on gas for power plants

NDA government has allocated Rs. 7500 crore to help the stranded gas power companies over two years (2015-17) to subsidise the use of imported LNG. It was certainly necessary to generate more electricity to meet the rising demand for power and provide succour to power-starved states and industry. However our bureaucrats lack the expertise and information to decide on pricing gas or providing subsidies. If it was a blunder on the part of businessmen to have invested on gas power plants without providing for multi-fuels, why should they be helped?

If only the government had liberalised the gas market earlier, such a subsidy might not have been needed. All over the world there have been several examples of such spectacularly failed projects when the gas market was controlled.

The US, which preaches free market to the rest of the world, is the poster child to show what happens to an economy when gas price was controlled. Only when the gas market was liberalised after 1978, it led to the booming gas sector that helped the economy. It eventually resulted in a shale revolution which has brought the US close to energy independence. Partly it is also responsible for the present fall in crude oil price.

Energy outlook...

According to India’s Energy Outlook as part of IEA’s WEO 2015 report, India’s gas demand is expected to go up to about 125 CBM by 2030 from the current level of 50 BCM - still 7 per cent of overall total energy demand. Gas production is expected to be about 55 BCM (with 15 BCM from Coal Bed Methane and 0.2 BCM of shale gas). Thus IEA is pessimistic about India’s potential to increase its gas production from the current level. However, if India has a progressive gas exploration policy, she can produce far more. In any case India should have no problem in meeting its import needs. More than likely it is LNG which is likely to meet the import needs and not the pipelines, despite serious attempts made to import gas from Iran and Turkmenistan.

In 2015 total world LNG trade was 248 million tonnes and India’s imports were 18.9 million tonnes. By 2030, global LNG export capacity is likely to increase to 338 million tonnes based on the LNG projects under construction. In addition about 755 million tonnes of additional LNG projects are proposed. Even if 25 per cent of these projects fructify, there will be enough LNG to meet the likely demand. Thus India should have no difficulty in importing the needed LNG.

It is not prudent to assume that India will be able to import at low prices like today. More than likely it will be tied to crude oil price since most of the end-use where gas can be used competes with oil products. If India wants to depend on LNG imports to meet its energy requirements, it should develop a sound strategic plan by taking into consideration all the factors affecting gas sector.

Graph-2 shows the increasing amount of LPG imported to meet the increasing cooking fuel requirements of households. Even now only 75 per cent urban households and less than 15 per cent household in rural areas have access to LPG. With increasing penetration of LPG as cooking fuel, LPG import is bound to increase in the future. According to IEA report, India may need to import as much as 50 million tonnes of LPG - five times the current import.

The second critical input required is to develop expertise in world gas prices. The long term LNG contract India signed with Qatar should serve as an example for the Indian government to use world class expertise. Had Qatar insisted on the contract terms, India would have been forced to pay a penalty of more than Rs 10,000 crore. Thanks to soft LNG market, surplus LNG capacity and the good relations with Qatar, India was able to re-negotiate favourable terms.

The government should consider the wisdom of continuing subsidies to residential LPG customers even in times of low gas prices. Low gas prices results in misallocation of resources and failure to exploit reserves. There is an additional issue in regard to LPG: the black money generated by diverting residential LPG.