The Turkmenistan-Afghanistan-Pakistan-India, or TAPI, gas pipeline deal that holds the promise of supplying natural gas to India in 2016 can potentially help eliminate the flaws in the domestic gas pricing policy. If only for that reason, it is a goal worth pursuing.
Currently, there are two “flavours” of gas supplies in the country; not only are their origins different, but also their pricing regimes. Domestically produced gas, which accounts for around 72% of total supplies, is sold, for the most part, through two government-controlled price regimes while the imported variety through the liquefied natural gas (LNG) route is free of any such shackles. As a result, LNG is priced at $11-14 per mmBtu of gas while domestic gas hardly reflects the global pattern, selling on an average between half and one-third of it.
A closer look at the domestic production reveals that close to 60% of it is sold at government-administered rates forced down the throat of state-owned producers ONGC Ltd and Oil India Ltd. Another 17% is sold through contracts that were arrived at through price negotiations in the 1990s. The remaining 23% is sold through a recent exploration policy.
It is this 23% basket that needs to grow and is key to the future. For it nets domestic exploration efforts that can enhance energy security both in terms of price and availability. However, the gas utilization policy (GUP) is a retardant that needs to be done away with. After all, imported LNG is not subject to this restriction. Private investors need to be assured that they can earn market prices for their efforts in scouring the earth’s surface to find oil and gas.
So, how can TAPI supplies make a difference?
The government’s resistance to eliminating GUP is born of its attempt to keep the fertilizer and power subsidy bills in check. With domestic production estimates pared, the proportion of “cheap gas” in the supply pool will sharply reduce in the coming years. The TAPI supply is expected to be priced at $10-11 per mmBtu. This will significantly augment the gas supply available to India. This serves two purposes. First, it acts as a check against LNG deals that are struck at runaway prices. Second, by diluting the cheap gas pool, it makes it “easier” for the government to usher in open market price discovery for gas that is domestically discovered.
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