Economics · Governance · Public Policy

Gas pooling for fertiliser sector: An aspiration realised?

The natural gas markets in India are developing rapidly. Over the past decade the volumes have gone up significantly with commencement of NELP gas production, followed by introduction of term LNG and finally with the supplies from RIL’s KG D6 gas fields. In a short span of time the gas supply volumes in the country have tripled. Yet the demand for natural gas has been growing and continuing to grow at an unrelenting pace. Natural gas is increasingly in demand in India. It presently constitutes about 10% of the country’s energy basket.  With a substantial increase of share of natural gas on a rapidly increasing energy consumption base, it becomes imperative to identify new gas sourcing options, creating mechanisms for the markets to absorb the gas, and rationalising the pricing mechanisms in order to encourage efficient consumption as well as efficient and adequate souring of the commodity.

The Cabinet Committee on Economic Affairs, chaired by the Prime Minister Shri Narendra Modi, has approved a major policy intervention, to supply gas at uniform delivered price to all fertilizer plants on the gas grid for production of urea through a pooling mechanism. It is expected that the cost of production of urea at pooled price would be less than the price of imported urea, which will encourage the existing urea units to produce beyond their reassessed capacity. The increase in urea manufacturing capacity will also contribute to the Make in India initiative.

Need:

The need for this intervention arose because, at present, the price of gas supplied to fertilizer units varies from plant to plant depending upon the combination of domestic gas and regasified liquefied natural gas (RLNG). Hence, there is no uniformity in input price. Further, there is wide variation in the conversion efficiency of plants measured in Gcal/MT. As the variation in final urea production cost is a result of variation in two factors (gas price and conversion efficiency), it is necessary to separate the two effects. A uniform gas price at the input stage will achieve this objective and will help focus on improving plant efficiency.

To summarise, the following are the key objectives of a gas price pooling mechanism in India would be as follows:

  • To achieve price stability
  • To develop natural gas market in the country
  • To encourage broadening of gas supplies in the country

Objectives:

The Indian gas market needs to match customer expectations, gas infrastructure expansion with providing flexibility for new and marginal suppliers to enter the market. Price pooling is a mechanism where the potential for balancing the customer and developer expectation with that of suppliers. The need and benefits of pooling for the Indian gas markets need to be considered in the context of the market development objectives. These could be summarised as follows:

  1. Introducing new gas sources in the market;
  2. Ensuring stable price signals for long gestation investments based on gas;
  3. Deepening the pipeline network to expand the gas markets geographically;
  4. Sending appropriate price signals for efficient use of gas; The Indian gas markets are relatively small as compared to the size of the economy, but are expanding rapidly. However, as commented earlier, the expansion has not kept pace with the demand. Domestic gas finds, while substantial, are inadequate to meet the burgeoning demand for gas. In particular, the demand from bulk consuming sectors like power and fertiliser is growing at a rapid pace. At the other end, the demand from city gas is also expected to increase rapidly in the coming years. As a result of this expansion of demand, the country is looking seriously at LNG as a potential source of supply expansion. LNG, as an internationally traded commodity presents two challenges. Firstly, the price of LNG is generally linked to the price of crude oil, especially for long term supplies. The resultant prices of RLNG are typically significantly higher than the prices of domestic gas, including from the NELP fields. Secondly, the prices of such supplies being linked to crude are inherently volatile. The combination of relatively high prices and high volatility make it difficult for user industries like power and fertiliser to plan investments based on LNG. Price pooling can serve the objectives of introducing substantial quantities of new LNG supplies. The existing base of the pool would serve to reduce the price volatility, and given the impetus for infrastructure development.

Recommendations:

The pools are recommended for the power and fertiliser industries only. This leaves adequate room for an alternate market to develop for other industries and even for customers of the power and fertiliser sector (particularly the former), who may not wish to be a part of the pool. This would facilitate price discovery for new gas supplies, and the pooling arrangements would not be a limiting factor for development of the industry beyond the limits that the pool can serve within its rules. This would also provide comfort to new gas suppliers who wish to supply to such industries. It is important to note that the benefits of cost pooling are not necessarily restricted to the power and fertiliser sectors only. However the benefits of central pooling in the other sectors on the lines proposed is more complex on account of the large number of consumers with small volumes, since this would militate against the objective of keeping the pool administration set up and costs to a minimum. For the other sectors such as sponge iron, petrochemicals, CGD and other small customers pooling can be done at the gas supplier’s level. In the present scenario the gas consumers source gas from various sources and pool it at the individual company level. The pooling of transportation costs is not recommended since this distorts the basic economic price signals derived from the location of the customer vis a vis the resource.

In the initial years, when the utilisation is low on such pipelines, the policy framework should place limits on the pipeline charges. Deficits if any can be made good through mechanisms like Access Deficit Charges (ADC) as prevalent in the telecommunications sector. Finally it is recommended that the creation of a roadmap for migration to competitive wholesale markets for gas, which would typically be through bid based pools, and feature a large number of independent shippers. It is important to note that such mechanisms could coexist with cost based pools and also long term contracts for gas supply. This would result in the emergence of a vibrant gas market that could attract new gas suppliers willing to supply for various contract tenures, and would provide a strong signal for emergence of gas trading hubs at key despatch/aggregation points in the country.

About the Author

Archi RoyArchi Roy is a second year student pursuing her B.B.A. LL.B. degree from University of Petroleum and Energy Studies, Dehradun. Her areas of interest are Constitutional and Family Law. Research work has always been her field of special interest. Presently, she is interning with the Model Governance Foundation.

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