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Vijay Kelkar and C Rangarajan are veteran technocrats, go-to men for governments in a bind and seeking the expertise and shelter of independent experts. It was Kelkar who drew up the blueprint to unshackle the oil and gas sector in the mid-nineties and it was Rangarajan who fixed the price of natural gas in 2007. It's 2013, and the two are still doing the same thing for the government of the day.
This constancy is not a knock on these two gentlemen. It is, though, on the government's handling of a fuel source that was being universally recognised as the fuel of the 21st century around the time that Kelkar was drafting his blueprint. It typifies how the natural gas sector in India has moved in the last 15 yearsand still not moved. "India may, after all, miss the century of gas," says a board member of a large private energy company, not wanting to be named.
The century has barely begun, and India might still catch up. But for now, it is gasping for direction. Even last month, when the government announced the first gas price increase in five years, it was branded as yet another instance of the government coming short by not moving to market pricing. Not just pricing, every piece of the gas puzzle remains patchy and the big picture hazy.
Companies remain cold to exploring and gas production hasn't taken off. Overseas tie-ups with countries in Central Asia and the Middle East for gas supply via trans-national pipelines, once a foreign policy lever, have been reduced to cocktail conversations in the diplomat circuit. A pipeline network in India remains sparse and sketchy. "We are, today, back and beyond where we had started in 1999," says Ram Naik, the petroleum minister between 1999 and 2004 who implemented Kelkar's blueprint and got the sector going.
User industries, which shaped their plans on an inversion of the gas-crude mix, are bearing the brunt. According to the Central Electricity Authority, gas-based power plants operated at 29% capacity in the April to June period, against 61% in 2008. "The government fixing prices, and keeping it low, while controlling allocation, led to muted interest in the sector from investors. says Sudhir Vasudeva, chairman and managing director of ONGC, India's largest oil and gas producer.
"This slowed down market maturity." "The evolution of the natural gas sector in the country has had more to do with politics than ground economic realities," adds P Dasgupta, former CEO of Petronet LNG, a gas company. Since 1999, India has had five ministers lead the petroleum ministry. An appraisal of their respective policy stances and focus points shows that Naik put in place a big picture, but each succession changed or erased that, causing India to miss the gas bus.
The BJP-led NDA presided over significant reforms in the energy sector, the essence of which was a greater role for the private sector in meeting India's energy needs and for the market in deciding how that happened. Naik did not carry strong ideological positions. He was, however, a faithful of Atal Bihari Vajpayee, the then prime minister, who pulled off several big economic moves, including significant stake sales in public sector undertakings, a road project connecting the four corners of India and oil-sector reforms. "We followed the commonsense approach of Vajpayee, as opposed to the economist PM," says Naik, taking a dig at the recent policy stasis under Manmohan Singh.
axis. The first was the National Exploration Licencing Policy (NELP), which forms the basis of handing out oil and gas blocks to companies for exploration. This was the golden period of auctions, in terms of investment and returns. Four rounds of auctions happened, and 90 contracts were signed for 124 blocks. One of those blocks was the Krishna-Godavari (KG) basin block. When Reliance Industries Limited (RIL) struck oil and gas there in 2002, it was the biggest discovery in the sector in the world that year and the first significant find in India since ONGC in 1976.
The second axis was market prices. The government said it would let the market determine prices of both oil products and gas. Around this time, work began on India's first-ever investments in LNG terminals, at Dahej and Hazira. "These policies were not piecemeal, but a full package with the express intent of positioning India in what was seen clearly as the century of gas," says the board member quoted earlier. It has, instead, been a century of missed opportunities.
The Congress-led UPA came to power in 2004, and its nine-year reign so far has seen it field four oil ministers, each one distinctly different from the other in his vision and notions of how energy policies are to be shaped. The first was the voluble Mani Shankar Aiyar, who stamped his foreign policy background on the ministry. Aiyar embarked on what he calls his 'great oil hunt' across Central Asia. "People say I am a dreamer," he told ET in 2005, on touching down in Baku, Azerbaijan. "This is the time to break geographical barriers and herald an Asian resurrection. We are ready to tap every possible source (of oil and gas) in the region."
Wanting to secure India's position on the global stage through energy diplomacy, Aiyar traversed Central Asia and the Middle East, pitching with countries to build gas pipelines to India or transport gas in liquid form (called liquefied natural gas, or LNG) via large ships. He received strong government backing: for example, he went to Iran with a cabinet decision that India could enter into a trilateral agreement with Iran and Pakistan for gas imports.
Aiyar says he wanted to leverage the buzz the K-G basin find had created around India. "I was sure the K-G find would make this the North Sea of Bay of Bengal," he says. During Aiyar's term, India initiated bilateral dialogues on four trans-national pipelines: Iran-Pakistan-India; Myanmar-Bangladesh-India; and TAPI (Turkmenistan-Afghanistan-Pakistan-India).
Gas can be transported in two ways: by pipelines and by ships. The second is slightly complex since it involves converting gas into liquid form and then re-gassifying it. As a result, if gas is sold at its production source at $2 per unit, LNG to India becomes $12-14. Moving it via pipelines leads to the price being somewhere in between, depending on the distance the gas has to travel.
While North America and Europe have used pipelines actively since the 1970s, Asia has not had sizeable pipeline imports, says Howard Rogers, director, natural gas research programme, Oxford Institute of Energy Studies, an independent energy think tank. "...progress has been marred by distrust, stalled negotiations, in large part driven by the realities of the price level necessary to underpin such investments," he adds. Even as the government chased its new gas vision abroad, it went back to old habits at home. As the first LNG terminals were about to be commissioned, in 2004, it started having second thoughts about allowing market pricing. It reneged: the government would continue to fix gas on a project-wise basis. "The UPA has rolled back every reform in the oil and gas sector," says Sunjoy Joshi, former official in the petroleum ministry who was in charge of exploration during 2004-05. "They did not stop at rewriting new contracts, but went on to change old contracts and commitments."
Pricing controls are a dampener, says PMS Prasad, executive director on the RIL board. "Under an APM (administered pricing mechanism) regime, there is uncertainty among investors about either sourcing gas on a long-term basis, as LNG or through transnational pipelines, or making investments in domestic exploration and production," he says. "Investors are willing to take market risks, but not the risk of predicting the level at which the government may fix domestic prices at any time."
The overseas piece disappeared when veteran Congress Party treasurer Murli Deora replaced Aiyar in 2006, ostensibly to further the nuclear deal in the works between India and the US. A Wikileaks cable quotes the then US ambassador to India as saying: "Unlike Aiyar, who cultivated a reputation for anti-Americanism, Murli Deora has been associated with the US-India relationship for years. Lacking Aiyar's ambitions (or entrepreneurial zeal), he will be a more cautious minister." Securing gas reserves abroad and build trans-national pipelines ceased to be a priority. Aiyar's plans to ship 20 million tonnes of LNG from Iran and the Iran-Pakistan-India pipeline were given a quiet burial. While talks have moved ahead on the TAPI pipeline, the Myanmar-Bangladesh-India pipeline is lost in the region's geo-politics.
The focus shifted to domestic gas, at times for the right reasons, at times for the wrong. The country's downstream industries began embracing gas in anticipation of a gush of it flowing from RIL's K-G Basin, more domestic discoveries and LNG imports. CNG was pitched as the fuel of choice for public transport. Companies including Reliance Power, Adani, GMR And Lanco set up power plants to be fired by gas. The setting up of a gas regulator cleared the way for building pipeline infrastructure. RIL announced a Rs 4,500 crore plan to set up a gas pipeline network covering 100 Indian cities and towns.
All this, however, was overshadowed by a court case between the then-estranged Ambani brothersMukesh and Anilover supply and price of the KG Basin gas. Deora's reported proximity to the Ambani family, dating back to the days of their father Dhirubhai, added to the complexity. When they were starting out, Deora and Dhirubhai shared the same telephone and office space, and the brothers, even in their meetings at the ministry, would address him as "uncle". Anil said RIL had promised to supply gas to his power plants at $2.34 a unit, Mukesh said he couldn't at that price. After Anil won the case in the Bombay High Court, Mukesh went to the Supreme Court and said RIL would supply at a price fixed by the government.
The government, citing gas being a national resource, became a party to the case. It suggested a gas price of $4.2 per unit, which the Supreme Court upheld in 2007. "The government getting into a private fight between two brothers as a party was the worst point in the energy sector," says Naik. "This not only reflected on the petroleum ministry, but also on the political leadership in the country."
By the end of Deora's tenure, the entire domestic piece had degenerated into a mess. Exploration was slumping. K-G Basin was pumping way below expectations, relations between RIL and the national auditor had turned testy, and the oil ministry demonstrated an inability to get things going.
He came with baggage that made decisionmaking difficult, says a former petroleum secretary, not wanting to be named, referring to Deora's reported proximity to the Ambani family. "This was the time when decisionmaking at the petroleum ministry got outsourced to special committees and panel of ministers, leading to utter chaos," says Joshi, former ministry official and now director of the Observer Research Foundation.
While India's attention on natural gas focused on a court case, gas producers around the world scouted for new reserves. "We had started off at the same time as China with our LNG plans," says AK Jain, a former petroleum ministry official dealing with gas who is now with the Planning Commission. "But look at where we are now."
In 2011, in what was seen as a damage-control measure, the ministry changed heads once again, this time with the unexpected candidature of Jaipal Reddy. "I am a political rightist, an economic centrist and a social leftist," he told ET in May 2012.
The sector ground to a halt. As RIL's gas production fell, from 62 metric standard cubic metres a day (mmscmd) in April 2010 to below 28 mmscmd in 2012, Reddy increased scrutiny of the company's gas project. Elsewhere, planned investments from new players like British Petroleum (in RIL) and Vedanta (the new owner of Cairn India) waited for months for approvals, and policy files stopped moving. Domestic investments in the sector fell to $1.8 billion in 2011-12, from $6 billion in 2007-08. "What was done in this period cannot be undone in 15 years," says Joshi.
Out went Reddy, in came Moily. The pace of clearances picked up and the gas price revision followed. The higher price, indirectly, fixes some of the ills plaguing the sector. It is a move towards market price. "This will help in attracting investment for exploration and development of gas assets even in challenging frontier areas," says Vasudeva of ONGC. Since it is closer to the imported gas price, this could spur more LNG facilities, which could, in turn, boost pipelines.
At present, India produces 80 mmscmd of gas, of which 55 mmscmd is consumed by the power and fertiliser sectors. As per projections of the petroleum and fertiliser ministries, these two sectors will need 167 mmscmd of gas by 2016-17. This means doubling gas availability, domestically or sourced from abroad, in the next three years. This means having pipelines criss-cross the country. As of now, there is visibility on none of that.
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