NATURAL GAS PROCUREMENT POLICY IN INDIA: An Overview

-by Aditya Gaggar

The power sector’s importance to any country’s economy cannot be overemphasized. The fact that the Indian power sector is the largest consumer of natural gas on a sectoral basis, consuming about 40% of the total natural gas in the country, only serves to re-emphasise its dependence on natural gas. Still, as important and sizable as it may seem, there does not appear to be any policy guide anywhere laying down the mechanism for procurement of natural gas for new gas power plants from its suppliers in India. This has often led to an entanglement of the consumer, the supplier and the regulatory authorities’ trio in a sort of legal mumbo-jumbo and has time and again proven to be a hindrance in attracting new investments and the realization of the full potential of this sector. The following article is an attempt to fill that void.

Initial Clearances:

To start with, a company which wants to build and operate a commercial gas-fired power house must get environmental, land and water clearances to start operations from the central government and the government of the particular state in which the power house is located.

Regulatory Authorities:

The Petroleum and Natural Gas Regulatory Body formed under the Petroleum and Natural Gas Regulatory Body Act, 2006 is empowered to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas excluding production of crude oil and natural gas so as to protect the interests of consumers and entities engaged in specified activities relating to petroleum, petroleum products and natural gas. The aforesaid board has been given the powers to make regulations so as to ensure an uninterrupted and adequate supply of petroleum, petroleum products and natural gas in all parts of the country and to promote competitive markets and for matters connected therewith or incidental thereto.

Laying of Pipelines:

If a consuming entity wants to lay down pipelines and requires the acquisition of Right of User (RoU) in the land, it approaches Ministry of Petroleum & Natural Gas (MoPNG) for the acquisition under the Petroleum & Mineral Pipelines (Acquisition of Right of User in Land) Act, 1962 (P&MP Act, 1962). The Policy for Development of Natural Gas Pipelines and City or Local Natural Gas Distribution Network covers transmission, pipelines and local or city gas distribution networks.

Allocation and Pricing:

The MoPNG has been regulating the allocation and pricing of gas produced by ONGC and OIL by issuing administrative orders from time to time. A ministerial panel called Empowered Group of Ministers (EGoM) on Pricing and Utilisation of Gas, headed by the Finance Minister, has been constituted to preside over allocation, utilization and pricing of natural gas from fields allotted under the New Exploration and Licensing Policy (NELP). The EGoM serves as the ratification authority of the Oil Ministry’s decision.

Broadly, there are two pricing regimes for gas in the country at present – gas priced under APM and non-APM or free-market gas. While the price of APM gas is set by the Government, the price for non-APM gas is largely regulated by market forces. The non-APM/free-market gas, in turn, can also be divided into two broad categories, namely, domestically produced gas from JV fields and imported LNG. The pricing of JV gas is governed by the provisions of Production Sharing Contract (PSC), and while the price of LNG imported under term contracts is governed by the Special Purchase Agreement (SPA) between the LNG buyer and seller, the spot cargoes are purchased on mutually agreeable commercial terms. 

Gas Linkage Policy:

The EGoM is also responsible to provide gas linkage to various power projects. Under the current Central Electricity Authority (CEA) guidelines, allocation of domestic gas for new power projects is considered only to the extent of 60 per cent of the total requirement, subject to meeting specified criteria and gas availability. For the balance volume, these plants have to depend on other sources. GAIL will source LNG and supply RLNG through its new pipelines to meet the gas requirement while state governments will pursue allocation of domestic gas with the Government of India.

While private sector power projects enjoy the flexibility of ordering equipment and begin initial construction work on projects even before securing fuel linkage, the Department of Public Enterprise (DPE) has issued guidelines that stipulate that state-owned companies cannot order equipment and begin construction activities before securing fuel linkage for the projects.

Gas Procurement or Fuel Supply Cycle:

Proposals and applications for gas linkages are submitted to the CEA for clearance, which prioritizes the projects based upon its grading norms. Then, it is generally the Power Ministry which seeks the allocation of Natural Gas on behalf of the various power projects. For this, the Ministry of Power forwards all applications for gas linkage in a routine manner to the Ministry of Petroleum and Natural Gas (MoPNG), which forwards it to the EGoM in turn, which has been specifically constituted for this purpose.

Thus, Fuel linkage for a project has to be recommended by the Power Ministry to the MoPNG after clearance from the CEA. Accordingly, the fuel supply agreement is to be entered into between the Independent Power Producer (IPP) and MoPNG nominated fuel supplier Oil Marketing Company (OMC). According to guidelines, the responsibility of fuel linkage would be that of IPP and OMC. State Electricity Boards (SEBs) are not to take any fuel supply risk.

The Electricity Act, 2003 has put in place a liberalised framework for the generation of power. There is no requirement of licensing for generation of power as the Electricity Act, 2003 provides that any generating company may establish, operate and maintain a generating station without obtaining a license under this Act if it complies with the technical standards relating to connectivity with the grid referred to in clause (b) of section 73. The requirement of seeking techno-economic clearance from the CEA has also been done away with for thermal generation projects. However, to distribute or sell the power produced by linking to the power grid, the power company has to procure a distribution license in line with the requirements of Section 14 of the Electricity Act, 2003.

Fuel Supply Agreement:

Generating companies may enter into medium to long-term Fuel Supply Agreements (FSAs) especially with respect to imported fuels for commercial viability and security of supply. The FSA forms a part of the Power Purchase Agreement (PPA) between the IPP and SEB. The website of the Comptroller and Auditor General of India (CAG) states that an FSA consists of the following essential elements:

  1. Tenure of agreement with suitable clauses and contingencies for an extension, if any
  2. Minimum guaranteed off-take for the Plant Load Factor (68.5% or 80%)
  3. Price
  4. Source of supply (for primary & secondary fuel)
  5. Other charges (like handling, taxes etc.)
  6. Payment terms & credit period
  7. Minimum guarantee charges to be paid to the fuel suppliers
  8. Penalty for short lifting and incentive for lifting beyond minimum agreed quantity
  9. Commitment charges payable if any by IPP fuel supplier
  10. Alternate fuel & source, if identified
  11. Conditions for the supply of imported fuel or allowing direct imports by IPP

Conclusion:

In 1997, the Government decided to free all but five petroleum products from price control Market Determined Pricing Mechanism (MDPM). Later, in 2002, the MDPM was altogether dismantled. Similarly, coal was also decontrolled. Today, the OMCs vie with each other in offering incentives in the form of a longer credit period without interest, rebates, discounts, etc. For the procurement of fuel from within the State for power generation, the state governments levy concessional rates of sales tax, which also results in reduced fuel price. Thus, the adoption of all these encouraging measures by the government has definitely led to significantly higher production and an improved overall power situation of the country. However, it takes no brains, to see that the country still suffers from a huge power deficit, which could prove a party pooper in the near future, as the country pushes for greater economic development. Therefore, it is only with the introduction of further liberalization and transparency in the petroleum & natural gas as well as power sectors, that India can literally and truly ‘shine’.

The views expressed are personal.

Image Credits: Freight Waves

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References

  1. GAIL-UJVNL June 20, 2011 Press Release
  2. Ministry of Power, Government of India notification to CEA, MOP ID No. 4/14/2010-Th-I dated 11.02.2011
  3. Central Electricity Authority Government of India No. CEA/PLG/IRP/501/39/2010/ dated 27th December, 2010
  4. Study on Common Pool Price Mechanism for Natural Gas in the country prepared for GAIL (India) Limited by Mercados Energy Markets India Private Limited dated 28 January, 2010
  5. Pricing of natural gas in India by Harsh Kanani dated 14th January, 2011
  6. http://petroleum.nic.in/ng.htm
  7. http://petroleum.nic.in/gasutilpolicy.doc
  8. http://saiindia.gov.in/cag/content/audit-fuel-supply-agreements

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