What is wrong with Indian gas sector?

The demand for energy is ever-growing. While crude oil has been a cause for global concern with its uncertain supplies and incredible price run, natural gas seems to have come to the rescue. Natural gas currently serves around 21% of global energy needs. With high gas shale discoveries and low cost of production, the gas is fast going to replace conventional sources of energy. But that is the scenario in the developed economies. Let us see where India stands in this regard.

Oil and gas business in India is plagued with too much uncertainty, thanks to the lack of clear policies in the sector. With penetration of natural gas in India much lesser than the global average, the country has a huge potential demand for natural gas. However, there is not much happening on the supply side. Few years back, the landscape seemed to change with Reliance Industries announcing huge natural gas discoveries in KG D6 block. The gas supplies surged to above 60 million standard cubic metre per day (mscmd) and were projected to go even higher (80 bcm in a day by FY13) . However, what happened was the opposite. The production witnessed a consistent decline to less than 24 mscmd. And with that dwindled India's energy security.

The share of imported gas has risen to 25.5% in FY12. If things don't change for the better, India will become a net importer of natural gas in the next two years. It is important to note here that the cost of imported gas currently is at least three times that of domestic gas. And it further comes with the risk of over reliance on outside countries and little bargaining power for a resource as crucial as energy that is considered to be the backbone of a nation's economy. As per the latest estimates of the petroleum ministry, the share of imported LNG could rise further to 41% in the current fiscal and to 50% in the next. By FY15, natural gas imports are likely to surpass domestic production.

With all these statistics, an important question here is what went wrong with the domestic gas supplies? The reason for stagnation is not the absence of energy reserves in the country. Had that been the case, companies like UK's British Petroleum would not have shown interest in partnerships with domestic players. The real reason that has blocked India's energy potential is lack of remunerative prices. For KG- D6, at US$ 4.2 per mscmd of gas (almost one third of the price at which gas is imported ), the gas exploration business is not viable for the companies to continue. Hence, for any development to take place, the government needs to come up with reasonable and clear policies on gas prices. While this will imply an increase in domestic gas prices and higher input costs for power and fertilizer sector, one must not forget that we anyway are heading there with increasing reliance on costlier gas imports. Instead, if we incentivize the gas exploration backhome by rationalizing gas prices, there might be a chance that prices come back to reasonable levels as domestic supplies start coming across.