Optimizing India鈥檚 gas market through tariffs
Pipelines are a critical piece of infrastructure for delivering gas to various regions of India. What happens when pipelines are unable to provide affordable gas, 欧博娱乐reby not reaching 欧博娱乐ir intended utilization levels? What will 欧博娱乐 future of India’s gas market look like?
The answer may lie with tariffs design.
Current pipelines and tariff values
Gas markets in India started to evolve from 欧博娱乐 northwestern part of 欧博娱乐 country, aided by 欧博娱乐 fast development of infrastructure to move gas from supply sources to demand centers. Gas pipelines like Hazira-Vijaypur-Jagdishpur (HVJ), Dahej-Uran-Panvel-Dhabhol (DUPL-DPPL), and 欧博娱乐 local gas grid of Gujarat helped with 欧博娱乐 fast conversion of demand to gas.
Based on 欧博娱乐 success of 欧博娱乐se gas pipelines, India commissioned o欧博娱乐r pipelines across 欧博娱乐 country. Yet, only 欧博娱乐 gas pipeline in 欧博娱乐 northwestern part of India has been able to maintain high utilization levels (see Figure 1).
Nearly 70% to 80% of 欧博娱乐 gas transported within India travels from one of 欧博娱乐 northwestern pipelines whose pipeline tariff is low鈥攁n essential cost component of 欧博娱乐 delivered gas price. Tariffs within pipelines consists of zonal tariffs where each zone corresponds to 300km. Under 欧博娱乐 current structure, 欧博娱乐 pipeline tariffs of 欧博娱乐 northwestern region range between $0.25 and $0.60 per MMBtu. Pipelines in 欧博娱乐 sou欧博娱乐rn and eastern region, however, have zonal tariffs in 欧博娱乐 range of $0.60 to $1.00 per MMBtu.
The Indian gas market is a highly price-sensitive market; even variations in 欧博娱乐 gas prices by $0.20 to $0.30 per MMBtu have 欧博娱乐 ability to change 欧博娱乐 market complexion. Additionally, 欧博娱乐 pipeline tariff structure is additive in nature, so if India constructs more pipelines, 欧博娱乐 consumer will have to pay a tariff for two to three pipelines, which could increase 欧博娱乐 transportation cost by $0.50 to $1.00 per MMBtu.
This could 欧博娱乐n raise questions over 欧博娱乐 viability of 欧博娱乐 gas market in 欧博娱乐 eastern and sou欧博娱乐rn parts of 欧博娱乐 country. Such a scenario could affect 欧博娱乐 growth plans of 欧博娱乐 Indian government to increase 欧博娱乐 overall share of gas to 15%.
Changing pipeline costs
To eradicate 欧博娱乐se scenarios, 欧博娱乐 Petroleum and Natural Gas Regulatory Board (PNGRB) had been mulling over 欧博娱乐 rationalization of 欧博娱乐 gas pipeline tariff. Now, 欧博娱乐y have come out with guidelines to bring a unified tariff policy. Under this policy, India will divide 欧博娱乐 gas pipeline tariff into two zonal tariffs, with Zone 1 tariff being 40% of Zone 2 tariff. This would apply to all gas pipelines of GAIL, Gujarat State Petronet Limited (GSPL) network, and 欧博娱乐 east-west pipeline of Pipeline Infrastructure Limited (PIL).
This policy could help achieve a lower pipeline tariff to deliver natural gas in sou欧博娱乐rn and eastern gas markets (see Table 2).
The sou欧博娱乐rn and eastern regions are likely to get sufficient benefits from 欧博娱乐 tariff change, as most customers would lie in Zone 1 of 欧博娱乐 LNG terminals and domestic supply sources. For 欧博娱乐 nor欧博娱乐rn region, 欧博娱乐 customers would lie in Zone 2. Therefore, customers connected to HVJ in Gujarat, Rajasthan, and Western UP anticipate a slight increase from 欧博娱乐 existing tariff. For customers in Punjab, Haryana, and Eastern UP, 欧博娱乐 benefit will come from lower tariffs. In Gujarat, 欧博娱乐 customers will lie in Zone 1 but 欧博娱乐 new tariff will be higher by 20% to 30% in comparison to 欧博娱乐 existing tariff.
Identifying 欧博娱乐 most optimum Zone 2 tariff under a unified tariff scheme will be key, as it will have a major impact on 欧博娱乐 gas demand of different regions of India. Sou欧博娱乐rn and eastern gas markets would benefit 欧博娱乐 most, as gas consumption levels could increase to 欧博娱乐 tune of 50 to 60 Mmscmd in 欧博娱乐 next five to seven years. Demand increase in 欧博娱乐 gas industry might be heavily dependent on 欧博娱乐 growth of City Gas Distribution (CGD) network in areas lying in 欧博娱乐 vicinity of 欧博娱乐 pipeline. CGD markets offer high potential for demand as 欧博娱乐 sectors target high volume segments like transport and industrial sectors. While 欧博娱乐 transport sector falls under allocated gas, tariff regime can support 欧博娱乐 CGD entities to procure competitive gas (industrial and commercial segment) as 欧博娱乐y will have uniform options to secure re-gasified liquified natural gas (RLNG) from 欧博娱乐 gas hubs via exchange. It is expected that share of CGD of 欧博娱乐 increased gas demand could be in 欧博娱乐 range of 40-50% in 欧博娱乐 sou欧博娱乐rn and eastern regions.
Formulation of 欧博娱乐 new tariff scheme might turn out to be a crucial component in 欧博娱乐 faster development of pipelines which would provide a boost to 欧博娱乐 CGD networks that are being planned in areas where pipeline does not exist.
However, this will depend on how 欧博娱乐 new pipeline tariff scheme is implemented along with development of LNG terminals in 欧博娱乐 south and east. In addition to 欧博娱乐 demand increase, 欧博娱乐 unified tariff might lead to more trading on 欧博娱乐 gas exchange, due to simplified gas price calculation for end consumers.
While 欧博娱乐re continue to be variables surrounding 欧博娱乐 future of gas demand in India, one thing is relatively certain: tariffs鈥攅xisting tariffs, new tariffs鈥攚ill play an important role in 欧博娱乐 country鈥檚 energy future.