Gas economy: Centre planning to change LNG pipeline pricing policy

In a surprise announcement, Petroleum and Natural Gas Minister Dharmendra Pradhan recently said that the government is planning to change the pricing formula for building gas pipelines.

 
At a virtual workshop with the International Energy Agency this month, Pradhan said, “The present zonal tariff structure for gas pipelines results in additive tariffs for usage of multiple pipelines to transport natural gas from distant gas supply sources. It causes wide disparity in pipeline tariffs, particularly for the buyers.”

 
According to the government’s projections, the building of liquefied natural gas (LNG) pipelines is expected to be a $60 billion investment opportunity by 2024. India has already tendered out projects to build 14,239 km of gas pipelines, which will double the current length of pipelines to about 30,000 kms.

 
Hence, the announcement of a change in the pricing policy is significant. It also means that the earlier viability gap financing model offered to companies to build pipelines is now off the table.

 
The zonal tariff system for piped gas works by nationally dividing a pipeline network into zones. All customers in a particular zone pay the same tariff. The price of gas rises in each succeeding zone. In other words, the farther a zone is from the gas producing field or import point, the higher the price. “India needs to build more gas pipelines. Period,” says Kaushik Deb, research fellow, Kapsarc, Saudi Arabia, a prominent global think tank on energy. He says the demand will come as more pipelines are built. “Which means that it is incumbent on the government to get infrastructure constructed, even if it’s through private participation in the EPC (engineering, procurement and construction) mode,” Deb adds.

 
There are plenty of companies that are keen to invest in gas distribution, including Adani Gas, H-energy and Torrent Gas in the private sector and Indian Oil, HPCL and GAIL in the public sector. In fact, the government plans to divide GAIL into two companies, of which one will only build pipelines.

 
Foreign investors are also keen to pick up shares in some of these companies. Total, the world’s second-largest LNG company, has announced plans to buy a 37.4 per cent stake in Adani Gas.

 
Gaurav Bhatiani, director — energy and environment at RTI International, a global industrial consultancy, says one option for the ministry to correct the pricing policy could come from the recently launched Indian Gas Exchange (IGX), a digital platform for trading in gas. “Efficient pricing of natural gas which needs significant capital investments demands smart locational pricing. The launch of a gas spot market by IGX is a positive step in this direction,” says Bhatiani.

 
In January this year, the oil ministry had offered a viability gap funding of Rs 10,500 crore to companies for laying the gas network, especially in eastern and north-eastern parts of the country. The terms of this funding were, however, rigorous. Once the government offered its share of funds, no changes in gas tariff was to be allowed.  But it turned out that investors were lukewarm towards the idea of viability gap funding. This is the context in which minister Pradhan announced the change in the pricing policy.

 
Transportation of gas makes up about a third of the total cost of gas by the time it reaches Delhi from, say, Dahej in Gujarat where it is produced. Costs become even higher in eastern India, which depends on LNG obtained from the ports of western India.  Srijan Kanoi, LNG market pricing editor at S&P Global Platts, says, “On the integrated Hazira-Vijaipur-Jagdishpur pipeline, a buyer in New Delhi could be paying $0.10-0.15/mmBtu more than a buyer in Madhya Pradesh.”

 
India is trying to ramp up gas usage to try and replace coal. The government plans to establish natural gas stations to supply automobiles and piped natural gas as cooking gas in homes in over 70 per cent of India before 2030. But densely populated states like Bihar, West Bengal and Odisha or states that are farther afield like Assam, which are energy deficient, could feel the pinch of higher prices that zonal pricing entails.

 
An alternative to the current zonal tariff could be the entry-exit pipeline model adopted in North America and Europe. In this model, the buyer is allowed a personalised tariff and it is set according to the distance between the place where the gas is fed into the pipeline and where it exits for use. “This model has fostered greater competition and created different delivery and trading points across the pipeline network,” says Kanoi.

 
The Petroleum and Natural Gas Regulatory Board had mooted this idea some time ago, but it is now up to the ministry to take a call on this.



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