Competition and Regulation in
India’s natural gas sector
Presented at International Conference on Reviewing the
Global Experience with Economic Regulations, organized by
CUTS
By S K Sarkar
April 18-20, 2011
Presentation outline
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Sector overview/trends
Policy initiatives and impact
Competitive assessment framework
Recommendations/conclusions
Overview of natural gas sector
• India’s rapid economic growth requires high
growth of commercial energy supply
• Natural gas constitutes 8% of commercial energy
consumption against world average of 24 %
• Natural gas sector used to be provisioned by
natural monopolies, with attendant problems
• Following pragmatic and non ideological
compulsions, competition was slowly introduced
in the sector and belatedly, independent
regulation brought into existence in 2007
Sector trends[1]
• Projected gas demands by 2030 vary: 119 bcm
to 405 bcm
• 2009-10, production at 47.57 bcm, of which
private sector about 50%
• 2011-12 Gas imports (LNG) expected at 52.5
mscmd
Sector trends [2]
• 2009-10 gas consumption at 169 mscmd likely to grow to
399.79 mscmd by 2013-14; power (46%) and fertiliser( 23%)
major consumers, CGD about 6%
• Gas consumption dependent on availability of pipelines/gas
network. Density of pipelines about 3 km/1000 sq km( 50 in
USA); gas consumption at CGD networks to grow by 20 %
• GAIL dominant player in pipeline business (67%); early
entrants such as IGL account for about 75 % of CGD volumes
• No single agency to provide full infrastructure data
• Levelised pipeline tariff over all tariff zones
• Share of ONGC/OIL in gas produce decreased from 80 %
during 2008-09 to about 60 % since 2009-10:RIL largest
oil&gas acreage holder among private companies
Sector trends[3[
• Proven gas reserves at 1120 bcm (2009)
• Shale gas at nascent stage of development due to
various impediments such as technological challenges,
lack of policies for shale gas exploitation
• Prognostic CBM resources estimated at about 4.6 tcm
• Fiscal scheme does not permit swapping of domestic
gas with LNG gas ( not treated as declared goods,
varying local sales tax/vat)
• Gas market development needs host of measures in
upstream as well downstream segments
Policy initiatives and impacts[1]
• NELPs (1999 onwards) brought more
competition in upstream, less foreign players’
interest in recent years
• NELP investment (till 1.10.2010) about $ 14.8
billion (of which $ 7.3 billion on discoveries)
• Issues remain on introducing open acreage
policy, data availability, multiple clearances,
implementation of field development plan,
fiscal issues, etc
Policy initiatives and impacts [2]
• Natural Gas Utilisation Policy valid for 5 years
• Under PSC, a contractor has freedom to market
gas, but this is subject to that policy !
• Legitimate concerns due to lack of understanding
about impact of subsequent review of allocations
on long term supply contract, availability of
access to pipelines on non discriminatory basis,
short term perspective of the policy,
government’s long term role in allocation of gas
to various users
Policy intitiatives and impacts [3]
• In 1960s, supplies of gas based on market principles,
over the years, pricing policy evolved as a part of
overall gas allocation policy
• Distinction of APM gas price and non APM gas prices
recently removed, although there are multiple prices
• Apex Court (May 2010) settled government’s right to
decide price of NELP gas and their utilisation priorities,
ownership of discovered gas vests with government
• Price discovery process of KG D6 gas is opaque
• Transmission & distribution tariff are regulated
• R LNG price not regulated
Policy initiatives and impacts [4]
• Sound gas pricing policy be based on market
value of gas vis a vis other fuels
• End use price is important to develop
infrastructure
• Distorted price signals affect investment
choices in markets and access to energy
baskets
• Need to revisit the gas allocation policy, and
fiscal scheme to encourage more competition
Policy initiatives and impacts [5]
• Upstream segment has government regulator, while
PNGRB, an independent regulator, in downstream.
Unlike in electricity sector regulator (in position since
1997), regulator positioned only in 2007. Long history
since May 2002 for bringing the sector legislation in
2006
• Regulator to regulate downstream segment, and to
promote consumer interests by fostering fair trade and
competition among entities
• Regulations inter alia include regulation on non
discriminatory access code, affiliate code of conduct,
pipeline tariff, exclusivity for CGD
Policy initiatives and impacts [6]
• CGD regulation provides 25 year network exclusivity and 5
years marketing exclusivity for new entrants, incumbency
advantage remains in post exclusivity period
• Section 16 notification finally issued in July 2010. This is yet
to settle regulator’s authority regarding licenses issued pre
July 2010 and impact of impending Apex Court judgment
• Government yet to frame rules ( sec 11(6) & 15) specifying
eligibility for registration of entities; ( Sec 2(zc) and 11(f)
notifying petro products, natural gas for securing their
equitable distribution; (Sec 11(f)(v) notifying petro products
and natural gas for enforcing retail service obligations
• Competition regulation for sharing of common use
infrastructure (CUF) at draft stages
Competition assessment [1]
• Freedom of entry and exit eased over the years in
upstream, but not always easy; in transportation
segment subject to meeting criteria; distribution
segment entry restricted due to exclusivity
• Barriers to entry due to multiple and delayed
clearances; presence of powerful incumbents; need for
substantial investment in upstream; non availability of
adequate infrastructure for evacuation of gas; natural
barrier in CGD being highly capital intensive and long
gestation period. Transmission segments entry barrier
due to economies of scale and scope; LNG segment
subject to access to infrastructure
Competition assessment [2]
• Sellers are few and buyers are many
• Price discovery process in upstream not
transparent; competitive tariff for new
transportation pipelines; regulated tariff in
distribution segment based on cost plus method
• Competitive gas price possible with multiple
players, multiple sources, and a supply demand
balance- do not hold good in gas sector
Competition assessment [3]
• Supply side constraints due to inadequate
discovery, inadequate transportation
pipelines, and inadequate LNG terminals
• There exists healthy competition framework in
upstream
• Lack of quality/updated data and full
information for exploration business; lack of
level playing field especially for regional/sub
basin information
Key recommendations/conclusion[1]
• Non discriminatory open access: need to have
redressal mechanism (like in electricity sector),
• Affiliate code of conduct : need to revisit for
having adequate compliance plans and
monitoring mechanisms ,
• Market power increases if open access provider
also owns trading business. In electricity sector,
this has been avoided by legislation
• Open access without unbundling of services is
beset with problems
• Early notification of CUF regulation required
Key recommendations/conclusion[2]
• Consensus on multi utility regulator, else mechanism for
coordination among regulators like in Sri Lanka (under
PUCSL Act 2002)
• Avoid jurisdictional conflicts between CCI and PNGRB:
recent case between RIL and OMCs
– make regulator bound by CCI guidelines, or
– Allow representation of CCI before regulatory proceedings, or
– Constitute a common appellate body to ensure coherence in
law enforcement
– Competition Act ( Sec 21 & 21A) provides a mechanism for
reference to statutory body
– PNGRB Act is silent for such type of consultation
– Need to address legislative gap early
Recommendations/conclusions[3]
• Formulation of policy for development of
competitive gas market where gas is not traded
as bundled products, and two types of markets
are created such as transportation markets as
well as gas market where participants trade
natural gas as commodity.
• Like in electricity sector legislation, regulator be
mandated to promote development of a market
including trading, role of CCI is also important
Recommendations/conclusions [4]
• In upstream only 20 percent of sedimentary basin
explored. Need for independent regulator in upstream
for level playing field, a concept be revisited
• Stakeholder participation in regulatory process,
especially tariff determination be rigorous, legislative
arrangements like in electricity sector be considered
• Cost plus regulation in transmission & distribution
segments, to graduate to light handed regulation
• Early notification of various rules for empowering the
regulator and providing adequate resources for
strengthening regulator
Thanks
for more, please contact
sarkardk@nic.in