Competition and Regulation in India’s natural gas sector

1. 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

2. Presentation outline • Sector overview/trends • Policy initiatives and impact • Competitive assessment framework • Recommendations/conclusions

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. Thanksfor more, please contact sarkardk@nic.in