My take on the Proposed Pooling of Pipeline Tariff in India

Today Energy diversity in India is predominantly Gas in Western and Northern India, while Central, Southern and Eastern parts rely on Coal and Oil based Energy. Since renewable Energy is an upcoming prospect commercially, the peak industrial and domestic demand is met through these fossil fuels. Now for diversifying the energy mix and skew it up in favor of Clean Fossil fuels, a proposal has been floated by a Maharatna PSU to fix Transportation Tariff of Natural Gas in the major pipelines to a Pooled price such that the capacity utilization increases and new pipeline projects are able to sustain with lower volumes at grid parity tariffs.

The pipeline market in India is dominated by a few players, mostly Government controlled big organizations and a few private players, and the tariff is bid out under guidelines issued by PNGRB (Petroleum and Natural Gas Regulatory Board, India) under PNGRB Act2006. Now since the major source of supply of LNG is through the Western corridor of India owing to its proximity to the resource rich MENA (Middle East and North Africa) region, the oldest and profitable pipelines are laid in the western part of India connecting the LNG terminals. These legacy pipelines have resulted in Gas consuming units being set up in vicinity thereby providing sustainable demand for business. The tariffs bid and duly approved for these pipelines were based on their projected volumes apportioned to the length of transportation based on delivery zones in the Contractual path. Since majority of the volume was based on LNG being marketed by the same companies or subsidiaries/ JV’s, any decline in pipeline utilization may be a result of poor sourcing/ marketing strategy by the Gas supplier. In fact most of these pipelines have enjoyed monopoly in operation and has given competitive advantage to the parent company. By including these pipelines in the proposed Pooling mechanism shall almost double or even triple their Tariffs which are completely unsustainable and unethical. For the regulated sectors like Fertilizers which depend on Governments subsidy for sustenance, an increase of $0.45 per MMBTU in delivered cost of gas to urea plants will increase urea subsidy by almost Rs. 1400 Cr per year.

The argument in favor of Pooled Tariff is that it would result into newer pipelines being commercially viable for end consumers without being charges exorbitantly high Tariffs resulting into Natural Gas reaching far flung areas thereby improving the ratio of cleaner fuels in the energy mix of India. This however may alternatively achieved by promoting new LNG terminals in the southern and eastern coast of India which has proximity to upcoming sources of Gas as Australia with commensurate equity participation from investors in upcoming projects. It is well known that Transportation cost accounts for as low as only @3% of the delivered LNG cost to as high as @26% for supplies from East coast (KGD6) delivered to Gas consumers in the West coast of India. Thus any change in transportation tariff would severely impact the price sensitive Domestic Gas consumers primarily Fertilizer/ Power sector whereas the LNG consumers may well be able to absorb the rise. Thus setting up of Terminals in the East coast of India and tying up suppliers from Australia at competitive prices would not only reduce dependence of souring from the west, but also give impetus to industries in the Southern and Eastern industrial corridors. This would also result in ensuring that the share of gas is at least 20% in primary energy mix by 2030 vis-a-vis current level of 6.5~7%.

As against the proposed tariff for the Gas grid, LNG suppliers shall find new and energy starved customers for supply thereby pushing up sales and thereby profitability at the cost of existing Gas consumers, many of whom shall be forced out of the business. In fact presently, LNG marketers are faced with uncertain demand owing to fluctuating Spot Gas prices and exposure to Contractual penalties like Take-or-Pay. Increased pipeline connectivity may open up the balance sheets of Gas aggregators who would be able to offer Spot volumes to remote customers and thereby cushioning their contractual obligations. Excluding pipelines owned by private players in the pooling mechanism is yet another sign of monopolistic attitude and market dominance. The regulator should take necessary cognizance and deny such windfall benefits to one entity, even though it is a Public sector entity controlled by the Government.

The views expressed above are personal and does not reflect my professional opinions.

A T Das ([email protected])

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