The keenness of gas suppliers to procure and distribute imported liquefied natural gas (LNG) can easily be dismissed as a market-driven process. Firms such as Petronet LNG Ltd are scouting for LNG terminals in Australia and the US to haul gas that domestic consumers are thirsting for. GAIL Ltd has set up a trading desk in Singapore to make its LNG purchases cheaper. Shell, which has a LNG receiving terminal in Gujarat, is keen to sell more gas through the LNG route.
The renewed interest in the LNG business is bolstered by the drop in production at the country’s largest producing field, Reliance Industries Ltd’s (RIL) D6 block, off the coast of Andhra Pradesh. But there is more at work here.
The uneven policy terrain that investors encounter in selling gas in the country is also a factor. The LNG route travels the path of least resistance since prices are allowed to be market determined; gas can be sold to the highest bidder. Domestic gas, on the other hand, is caught in a cleft. Domestic explorers have to contend with a gas utilization policy which constrains their ability to sell gas to the highest bidder.
This is because this policy defines sectoral priorities for sale of domestically produced gas. So, while the entire domestic market is open to participate in the bids, the certainty of securing supplies on putting forth an aggressive bid is poor given the glaring shortage in the country. As a result, supplies are unlikely to get past the fertilizer and power sectors that are dominated by a clutch of government owned companies. While sectoral allocation priorities have a rationale, market determined prices cause fewer distortions in these markets.
Interestingly, this framework is yet to be tested in the marketplace. For, the policy was born in a vortex that was created when RIL Ltd sought price approval in early 2007 for its mega discovery. The price was discovered by asking around consumers along its pipeline and was only marginally altered before approval by the government that year. But that process can no longer happen.
More importantly, over the last four years, there have been no price approvals. While this speaks poorly of the exploration efforts in the country, the policy makes the situation no better. For, it is a disincentive as explorers cannot hope to realize free market prices for their gas strikes.
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