Gas as transportation fuel

Should the prices of petrol and diesel be freed? This is a tough call for decision makers, though expert panels, including the Kirit Parekh committee, have voted for price decontrol. But not freeing the prices would mean losses to the three oil marketing companies, thereby weakening the pillars of energy security in India. The burden of under recovery on four administered products, petrol, diesel, LPG and kerosene oil is estimated at Rs 80,000 crore in 2010-11. 

This can be partly bridged, at the expense of their own requirements of investment and growth, from the upstream PSU oil companies as has been the practice over the last few years. But, the government will have to issue either bonds or cash to protect the bottom-lines of OMCs. This will, however, lead to macroeconomic distortions at present or in future. 

If prices are freed and aligned with the international prices, petrol and diesel would cost more by over Rs 3.50 per litre each immediately. This would further fuel inflationary pressures. So far, the government has been managing the situation, trying to balance the interest of consumers, the OMCs and the exchequer. Product prices are adjusted to some extent, the upstream PSUs and OMCs are asked to chip in and balance of the underrecovery is met by government subsidies through bonds and cash. This arrangement, though ad hoc, has worked for the past few years and may work this year too. 

The government should re-structure the taxation of petro products. Replacing ad valorem by specific rate of duties will bring in relief to the customer, while reasonably protecting government revenues. The future is scary. A spurt in crude prices to $100 per barrel is imminent. It will be no surprise if the prices touch $120-150 in the next five years or so. If we find it difficult to free the prices at the current level of around $75 per barrel of crude oil, how are we going to manage in the years to come? 

Based on current policies and projections, the International Energy Agency (IEA) in its report of 2009, has estimated India's crude oil requirements to grow at the highest rate, by 3.9% per annum. By 2030, India's import will go up to 92% of the country's consumption requirement, excluding the requirement of processing for exports. 

India's import bill is bound to rise substantially and the balance of trade will become more adverse. The burden on consumers or the OMCs or both will be a matter of serious concern. Such a scenario has grave implications for energy security and calls for a strategic shift in our approach. We have to reduce our dependence on crude oil to the extent possible. This can be done through many ways, by involving measures to promote efficiency and conservation of fuel use and using substitutes. An important way is to use gas as transportation fuel instead of petrol or diesel. 

This is feasible and happening in Delhi and Mumbai. Gas users pay less. In Delhi, the per km cost of running a car with gas is Rs 1.31 at present as against Rs 2.54 with diesel and Rs 3.20 with petrol. If all the three fuels are sold at market prices, the running cost with diesel and petrol will be even higher. This is because gas is cheaper than Oil. One barrel of crude produces the same energy as 6 mmbtu of gas. Therefore, at crude price of $ 80 per barrel, gas should be priced at approximately $13 per mmbtu. Happily, most of the gas in India is sold at $ 4.2 per mmbtu, and the imported gas is available at about $5 per mmbtu. So, there is a clear disconnect between the price of crude oil and gas. 

Unfortunately, less than 6% of the vehicles in Delhi are on CNG. Imagine the savings to the economy and the consumers and the political dividend it will generate if all vehicles in Delhi and Mumbai, where gas supply infrastructure exists and also throughout India, run on gas at half the cost of diesel and further less of petrol. 

The 21st century is said to be the century of gas as the 20th century was that of oil. Availability of gas within the country as well as globally is more than oil. As per IEA 2009 estimates, while domestic oil production will decline to less than half of its present level by 2030, gas production will double. If oil reserves globally are to last for 30 years, gas reserves are estimated to last for 60 years.

Moreover, newer sources of gas, such as shale gas and coal bed methane gas will increasingly be available. Gas is also cleaner than oil. Tax rates on gas are lower than on petrol or diesel and as a tool to disincentivise pollution, are expected to remain lower even in future. 

So, it makes sense to substitute oil by gas to the extent possible. Since about 40% of petroleum products are used for transportation and since much of the expected increase in petro consumption is for transportation, it is necessary to switch over to gas as transportation fuel as speedily as possible. 

The present market mechanism will not be able to bring about this change fast. Besides a policy thrust, work needs to be done on promotional activities such as creating a road map for covering the country with a network of pipelines, devising fresh funding strategies, firming up availability and infrastructure for import of gas, coordinating with state governments, municipal authorities and the automotive industry, dealing with bottlenecks in replacing existing retail outlets with CNG stations and so on. 

The regulatory regime also has to adopt imaginative approaches with a suitable organisational arrangement to bring this about. Energy security imperative would call for a time bound target to substitute petrol and diesel by gas as transportation fuel. This has to be implemented in a mission mode. It should be possible to substitute about half of transportation fuel by gas in the next ten years. And if this happens, it will also have a salutary effect on international prices of crude even in anticipation of its happening since India is amongst the largest consumers and importers of crude oil. Connectivity of habitations with gas will also connect kitchens with PNG instead of LPG thereby reducing imports and under recoveries of LPG. 

India aspires to be in the top league along with China and the US in the next two to three decades, but India's vulnerability in matters of oil for energy is much more than that of China and the US. Energy security is as critical as national security. 

Source: Economic Times

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