Why govt wants a unified gas allocation policy

It will eliminate several anomalies in the current guidelines and redraw the priority list

Among the tasks the Narendra Modi government has taken up is the complete overhaul of the policy framework for the allocation and utilisation of domestically-produced natural gas. The implications are huge and spread across multiple sectors including power, fertiliser, petrochemicals, transport and even atomic energy and space research.

The ministry of petroleum and natural gas last week moved a note detailing the changes for approval by the Cabinet Committee on Economic Affairs. The ministry has proposed to give top priority to those who sell compressed natural gas (CNG) for transport and piped natural gas (PNG) to households. Second in the new priority list are plants that provide inputs to atomic energy and space research. They are followed by hydrocarbons, including petrochemicals, urea plants and power plants, provided they sell the entire electricity at regulated tariff. At present, urea factories are on top of the pecking order, followed by liquefied petroleum gas (LPG) plants, power stations and city gas distributors who sellCNG and PNG.

CHANGING PRIORITIES

EXISTING LIST Urea manufacturing fertiliser plants LPG plants Power plants City gas distribution PROPOSED LIST City gas distribution Strategic sectors Petrochemical and LPG plants Urea plants Power plants

The new gas allocation policy would eliminate multiple anomalies and correct many imperfections in the current policy of allocation. Natural gas available in India is divided into two categories: domestic and imported. Imported gas is unregulated: marketers are free to purchase and sell it as they like. The challenge is with domestic gas. It falls under four distinct sets of rules: those under the administered price mechanism (APM), non-APM, pre-New Exploration Licensing Policy (NELP) and NELP. Each category of gas is allocated under different gas utilisation policies. Though the policies have almost similar order of priority, there are many ambiguities and anomalies, justifying the need for a uniform policy.

The new order
As a first step, the new government issued the new natural gas pricing guidelines on October 25, 2014, raising the price from the existing $4.2 per unit to $5.6 per unit for all categories. Two, under the current policy, APM gas is allocated to a few strategically important plants in preference to other sectors. However, the current utilisation policy for non-APM and NELP gas does not provide any such priority. The oil ministry has already received requests for allocation of small quantities of gas for plants supplying essential inputs to strategic sectors. Hence, the need to accord higher priority to atomic energy and space research.

There is ambiguity regarding extraction of higher fractions in the current utilisation policy. During its exploitation, natural gas is broken down into multiple fractions each of which is processed into a specific product. Higher fractions of gas emerge first during the production process and are wasted if not used. These fractions can be used only by petrochemical and LPG plants but they fall in the lower order of priority in the current policy. Since the higher fractions are of no use for sectors other than petrochemical and LPG, they cannot be utilised if the hydrocarbons are not extracted.

In the case of the fertiliser sector, an Empowered Group of Ministers (EGoM) had last year accorded highest priority to existing gas-based urea plants for allocation of NELP gas. However, in the non-APM gas utilisation policy, highest priority has been accorded to all gas-based fertiliser plants. Moreover, the EGoM decided to "maintain at 31.5 million standard cubic meters per day (mmscmd) the level of supplies of domestic gas to fertiliser sector". While agriculture expansion in the coming years would increase the demand for fertilisers, the 31.5 mmscmd cap would mean higher imports for the sector, leading to higher fertiliser subsidy.

Expansion of the city gas network through replacement of liquid fuels (diesel and LPG) by CNG andPNG is not viable on imported liquefied natural gas. But CNG and PNG are cleaner, safer, cheaper and more convenient than liquid fuels. Also, the replacement of liquid fuels by CNG and PNG will result in savings on foreign exchange through reduction in crude oil imports. Moreover, the Supreme Court in a 2002 judgment had directed the government to give priority to transport sector with regard to allocation of CNG.

Since gas supplies to CNG and PNG have lower priority under the current guidelines, a situation arose where some city gas distributors were receiving 100 per cent supplies, while others were receiving nil. This was challenged in the Gujarat High Court which ordered the allotment of gas to Ahmedabad at the same rate as Delhi and Mumbai. Cuts were imposed on supplies to non-priority sectors in order to implement this directive.

Finally, according to the APM gas policy, in case of reduction in availability of such gas, supplies to customers should be reduced on a pro-rate basis. In case of NELP gas, reverse priority cut order is applicable with reduction in supply of KG-D6 gas. The non-APM gas policy is altogether silent on the mechanism that would be adopted in case of reduction in supply. There is need for uniformity, which the new guidelines seek to bring in.

Step in the right direction
Experts say the new priority order and the overhaul of the gas utilisation policy appears to be a step in the right direction. "It makes sense because of multiple reasons," says India Ratings Director Salil Garg. "As no new urea plant is coming up right now, CNG and PNG must be promoted because they are cleaner fuels. PNG through the city gas route replaces LPG and thus does not carry the burden of subsidy. And the demand from strategically important sectors may not be huge but must be given priority." Garg adds that the power sector is suffering because of investment in new capacities without firm allocation and the decline in gas production from allocated sources, not because of its placement on the priority order.