Mid-term changes in gas prices to delay investments: confidence

Billionaire Mukesh Ambani’s Reliance Industries told a government-appointed panel to review gas prices that any move ‘downgrade’ to artificially capped rates would add to fiscal policy instability, delay investment and hamper India’s attempt to become Atmanirbhar in fuel production.

In a submission to the committee headed by Kirit Parikh, who was asked by the Oil Ministry to consider setting a “fair price for consumers”, the company detailed how the economics of its field about to kick off in the KG-D6 block, where billions of dollars have been spent to recover reserves located several kilometers below the seabed, will be impacted under different prices.

The mid-term changes via the price cap not only run counter to pricing and marketing freedom contracts and government policy promises to businesses, but also add to the uncertainty of a tax regime that would have an impact on investments, according to sources familiar with the issue and the presentation.

The government sets the gas prices every two years according to the tariffs in force in the surplus countries. Rates under this formula have remained below the breakeven price of $3 to $3.5 per million British thermal units for six years from October 2015, but have jumped 5 times over the past year to reach $8.57 for old fields and $12.46 for hard fields.

This increase prompted complaints from user industries, following which the ministry set up a panel to come up with an affordable tariff for users.

According to the sources, Reliance told the panel that doubling Indian production from current levels to reduce rising imports and meet the target of increasing the share of natural gas in the primary energy mix to 15% by 2030. , up from 6.7% currently, would require an investment of at least Rs 2 lakh crore to Rs 3 lakh crore, which can only be viable if a stable fiscal and contractual regime with market-based pricing is provided. Only such a regime can encourage investors to commit long-term funds for the exploration and development of these areas.

There has been no significant discovery of hydrocarbons in the country in more than a decade, which has led to a sustained decline in domestic oil and gas production and the consequent increase in imports to meet to the vast energy demands of the world’s fifth largest economy.

Natural gas is used to generate electricity, produce fertilizer for crops, convert to CNG to run automobiles, and piped into household kitchens for cooking. In the absence of adequate domestic production, India increased its fuel imports by paying foreign suppliers four times more than the price obtained by domestic producers.

Over the past two years, Krishna Godavari’s offshore gas production has boosted domestic production due to pricing and marketing freedom granted in 2016, which made production from fields economical, said Reliance, adding that India needed a sustained increase in reserves to secure the future of oil. and gas production.

Stating that the assurance of marketing and pricing freedom is necessary to pursue long-term investments leading to the growth of domestic production, Reliance said the committee should recommend pricing that can ensure global investors make India their preferred investment destination. And this is the only way to ensure that investments continue to flow in to multiply national gas production by 2.8 by 2030.

It is not that marketing freedom will guarantee that domestic gas will begin to fetch the highest international price. Since gas produced in India cannot be exported, gas prices in India will settle at the correct level which reflects the demand-supply scenario for domestic gas in India, he added.

The government should therefore allow producers full marketing and pricing freedom through a transparent electronic auction process for the sale of gas.

The committee’s mandate is to promote and develop India’s gas-based economy and this can only be achieved if the domestic gas production increases, he said.

Domestic gas production in India is at an inflection point. Supported by policy reforms, domestic gas production is expected to grow over the next few years as new investments bear fruit. Any policy change that takes away freedom in pricing and marketing would put India back into greater import dependence.

He went on to say that short-term market developments, such as the spike in global energy prices following Russia’s war in Ukraine, cannot be the trigger for the introduction of measures that vitiate the atmosphere of long-term investments.

While the committee deliberates on alternative market-based solutions, the current policy waiver should not be changed until an appropriate market-based regime is implemented.

Policy and contract instability lead to delays in investment decisions, project economic challenges – all of which have already negatively impacted potential gas production. To attract investments and desired outcomes, it is imperative to ensure that objectives are not changed once large-scale investments have been made.

According to the sources, Reliance told the panel that most of the potential hydrocarbon resources are estimated to be in frontier basins/areas that require huge risk capital and advanced technologies to bring them into production. This is only possible when market-based prices and a stable regime are provided by the government.

He said that all existing contracts, such as that for block KG-D6, include a sacrosanct budget stability clause. But in the past, the basic principle of marketing and pricing freedom enshrined in contracts and government policy was “severely compromised” between 2008 and 2014 by the government deciding to fix users in 2008 and then by the “irrational decision” to tie domestic gas prices in a gas-deficit country to prevailing prices in surplus gas-exporting countries, such as the United States, Canada and Russia.

The consequence has been a drying up of upstream investment in India, with both measures sending extremely negative signals about the government’s intention to maintain the sanctity of contracts. As a result, India’s dependence on gas imports has risen from 36% in 2014 to 54% in 2019.

In March 2016, the government restored marketing freedom and set a higher price cap for gas from deep, ultra-deep and other difficult areas. Although this price cap is still lower than the market price and lower than the rate that India pays for long-term LNG imports from Qatar, it has helped to reinvigorate investments to improve gas production (investments of Rs 90-1,00,000 crore over the past 5 years in the deep/ultra-deep waters of the KG Basin has doubled private sector gas production).

And other productions are expected to be commissioned over the next two years. “Therefore, the need of the hour is to allow market-based gas prices, as has been done for crude oil in the country.”

More importantly, every oil and gas exploration and production contract has a sacrosanct tax stability clause enshrined as its first principle.

India aims to transition to an increasingly gas-based economy by raising the share of natural gas to 15% of the global energy mix by 2030 from its current level of 6.7%.

But gas’s share of India’s energy mix had fallen rather than risen, the company said, adding that gas would only account for 10% of energy consumed even if current natural gas production of 90 million standard cubic meters per day was doubled.

To limit imports to the current level of 50% of all needs, national gas production must be multiplied by 3 to reach around 290 mmscmd.

India cannot be “AtmaNirbhar” with such a high degree of dependence on imports for its basic fuel needs, he said.

Starting from similar domestic production levels in 2000, over the past 20 years, China’s domestic gas production has increased sevenfold thanks to a significant increase in upstream investment, while China’s domestic gas production India remained stagnant at around 24 billion cubic meters per day. .

To achieve similar growth in domestic gas production, India would require significant investment in the upstream sector.

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