With the prospects of a revision of domestic natural gas price around the corner, the biggest question still remains unanswered: What should be the right natural gas price for India?

Interestingly, the last gas price revision happened rather smoothly on June 2010 (nearly 4 years ago), as APM gas price was raised from USD 1.79/MMBtu to USD 4.2/MMBtu (a hike of ~135%). Then,

  • Why is it now becoming so difficult for the government to notify the new gas price in India?
  • What are the underlying factors that make natural gas price hike in today’s scenario so challenging?

Expectations differ widely among buyers and producers…

Producer expectations

ONGC: USD 10.72-12.63/MMBtu (Mahanadi basin)

ONGC: USD 10.72-12.63/MMBtu (Mahanadi basin)

ONGC: ~ USD 13/MMBtu for deep-sea

RIL: Not less than USD 13/MMBtu

GSPC: USD 13-14/MMBtu

Buyer appetite:

USD 5/MMBtu - USD 7/MMBtu: High

USD 7+/MMBtu - USD 10/MMBtu: Moderate

USD 10+/MMBtu: Limited or Non-existent

It is no secret that a massive discord prevails in the gas price that the buyers want and that the domestic gas producing companies (both, PSU’s and Private) are trying to push. Taking into account arguments from both the sides, the difference is pegged as high as USD 8.8/MMBtu.

With such distant expectations, it becomes critical to understand, what is unique with Indian natural gas market and how is it different from the natural gas markets in other parts of the globe?

The most critical indicator of the prospects of the energy market of any nation is its primary energy consumption basket.

For instance, in Europe petroleum and natural gas accounts for nearly 57% of total primary energy mix, where as solid fuel accounts for only 17%. Europe’s gross inland energy consumption in 2012 was 70,391,875 TJ[1]. The primary energy distribution is as below:

On a contrary, India has been a predominantly solid fuel consuming country with coal as its mainstream primary energy source driving the energy sector. India’s primary energy consumption in 2012 was 563.5 MToE[2]. Coal contributed to about 53% of the primary energy mix, petroleum & natural gas together accounted for only 39%, with natural gas accounting for only 8% in the overall energy mix. The primary energy distribution is as below:

Since India is expected to remain a predominant coal based economy, the consumer perception and appetite will be skewed towards either coal or alternatives that are price economical. Hence, the outlook towards positioning Natural Gas as a fuel needs to be looked differently in Indian context. However, on a slight positive note the domestic coal supply has been facing issues and India has been importing coal from abroad. There is also an interest by the government to explore and develop clean energy sources such as: Natural Gas, Nuclear and other renewable. Possibly, India will take a lesson from Beijing which is facing severe health & environmental issues due to a heavy dependence on coal as a primary fuel.

While significant policy incentives are being imposed and also envisaged for the use of renewable energy sources such as RPO obligations, funding support, generation of funds through mechanisms such as clean energy cess imposed on coal, etc. the natural gas sector has been in a lull and marred with complexities and policy paralysis. The most crucial government agencies for growth and development of Petroleum & Natural Gas: Directorate General of Hydrocarbons (DGH) overseeing upstream activities and Petroleum & Natural Gas Regulatory Board (P&NGRB), have been largely unsuccessful in leveraging the domestic Oil & Gas potential in the country.

Recently, the Indian natural gas market has been severely impacted due to a rapid decline in the domestic gas availability. The market has nearly shrunk to 1/3rd of its potential size estimated as ~ 300 MMSCMD. Given the uniqueness of the energy market in India, it is no surprise that India has not been able to meet large portions of its natural gas deficit by way of increased LNG imports, as it has been the case with Japan.

In such a scenario, is it prudent to have a gas pricing mechanism entirely linked to global LNG dynamics, as proposed in Rangarajan committee report?

The previous government came out in full support of the New and Uniform Gas Pricing Mechanism, which was expected to put the prevailing gas prices to USD 8.4/MMBtu. A key objective behind this hike, as per the previous government, was to incentivize and kick-start domestic E&P projects in India in order to boost the domestic gas supply scenario. The news of gas price hike (at USD 8.4/MMBtu) was mostly welcomed by the E&P companies, however, the end-user market such as Power and Fertilizer came out strongly against this hike. All the same, it was argued that whether adopting a uniform pricing mechanism is suitable approach for a nation where the assets vary widely in a geological. An analysis by Cambridge Energy Research Agency (CERA) on viable prices of natural gas as per different geological characteristics is as follows:

  •          Onshore: USD 6-8/MMBtu;
  •          Shallow-Water: USD 6-10/MMBtu;
  •          Deep-Water: USD 8-12/MMBtu;
  •          Ultra Deep-Water: USD 10-12/MMBtu

On a similar note, RIL has been demanding a domestic price hike in the tune of USD 13/MMBtu to economically explore offshore assets. The incumbent government is yet to finalize the gas price revision. All the same, as the announcement for union budget on 10th July 2014 is approaching, the government outlook towards reducing and/or eliminating the subsidy on alternate fuels such as HSD, Domestic LPG and Kerosene is getting mellow down.

RIL has recently announced that it will be delaying its investment in the tune of USD 4 Billion on the development of R-Series or R-Cluster gas fields, expected to contribute about 13 MMSCMD of gas.

In case of potential market for Natural Gas, the price expectation varies from USD 5/MMBtu (from power sector players) to USD 30/MMBtu (from existing liquid fuel consumers).

Under such events, it becomes even more important to analyze and evaluate,

  •          What should be the right pricing of domestic natural gas for India?
  •          Whether a pricing linked to international LNG prices or a gas price discovered on market factors or some other new mechanism will kick-start the gas sector in India?
  •          Whether the government will have to intervene through policy incentives for priority sectors, such as Power and Fertilizer and increase the gas price to benefit the domestic E&P business landscape?

Focusing on these issues, InfraInsights report on “Impact of Gas Price Hike on Stakeholders and Industries across the Gas Value Chain”, discusses in detail about key issues and their impact on natural gas producers, natural gas pipeline cos, natural gas distribution companies, natural gas consumers, natural gas imports and overall economy.

 

 

 


[1] Source: Eurostat (Energy trends)

[2] Source: BP Stats (2013)

Clients