Gas pricing in India

MANISH VAID
DARSHIT PAUN

ACCORDING TOthe BP Statistical Review of World Energy for 2016, India's primary energy consumption has increased by 24% from 565 million tonnes of oil equivalent in 2011 to 700.5 MTOE in 2015. The world's third-largest energy consumer, India is in the early stages of energy transition, but its consumption per capita remains about one-third of the global average. About 240 million people still have no access to electricity.

With its economy expected to grow at over 7% for the next couple of years, India's energy demand is set to increase robustly. However, it would be a challenge to offset to the increasing reliance on crude oil and natural gas imports, which currently fulfils over 80% and 40% requirements, respectively, with domestic production.

Therefore, efforts are underway to augment domestic oil and gas production through several policy measures such as early monetization of discoveries, assessment of about 1.5 million sq. km of un-appraised area in India's sedimentary basins, re-assessment of hydrocarbon resources, setting up of National Data Repository, use of modern technology for maximizing production from mature fields, and improving the recovery factor.

Further, by introduction of a new Hydrocarbon Exploration Licensing Policy covering all kinds of hydrocarbons under a single licensing framework, the government has simplified the auction process. This policy permits the use of a revenue-sharing model through an open acreage mechanism. Future exploration opportunities will come mainly from offshore basins, and the government has introduced marketing and pricing freedom for new gas production from deepwater, ultra-deepwater, and high pressure/high temperature areas.

India's push for a natural gas economy requires a conducive gas pricing environment for domestic natural gas, as relying on LNG imports could become costlier after the gas prices rebalance. For natural gas to play a pivotal role in shaping India's energy future, it is important to have a balanced gas pricing mechanism that takes into account consumer affordability and the viability of producers.

In an effort to make upstream investments attractive, the Cabinet Committee of Economic Affairs in 2014 approved revised pricing guidelines for domestic gas that went into effect in November of that year. The formula is linked to a weighted average of a set of international energy prices, including the US Henry Hub, UK National Balancing Point, the Alberta Reference Price, and the Russian domestic gas price.

The government set the new gas price, which is revised biannually, at $5.05 per MMBtu on Nov. 1, 2014. The ceiling price of gas produced from deep-sea, ultra-deep sea, high pressure and high temperature areas, was set as per a formula approved by the Cabinet on March 2016. The gas price for these areas was priced at $6.61 per MMBtu on GCV basis for the period from April 1, 2016 to Sept. 30, 2016.

However, since that decision was made, global oil and gas prices have fallen significantly, impacting the attractiveness of the upstream sector to potential investors. The domestic gas price fell to $2.5 per MMBtu, and the price ceiling for ultra-deepwater, deepwater, and high-pressure/ high-temperature gas dropped to $5.3 per MMBtu. This represents a decline of 18% and 19.8%, respectively, during a six-month span.

Domestic gas prices have now fallen below the average cost of production for many companies, say ONGC and Oil India Limited, which have an average cost of production of $3.59 per MMBtu and $3.06 per MMBtu, respectively. These producers and others have been hit hard by the price decline, which will adversely impact new gas development projects.

However, lower gas prices are having a positive impact on the power, fertilizer, and city gas distribution sectors. The price decline has improved the cost competitiveness of domestic gas-based power projects against coal-based power generation. Similarly, the government subsidy to the fertilizer sector for FY2017 has been reduced due to lower fuel costs. Prices for compressed natural gas and piped natural gas are now more attractive compared to petrol/diesel fuel and LPG, which will create new demand in both segments.

The pricing of natural gas in India, therefore will play a crucial role in supporting India's natural gas ambitions. Since the pricing environment of natural gas in the country fulfills dual, albeit contrary, objectives of incentivizing the domestic natural gas production and making natural gas economics attractive for consumers, these should be balanced well.

As a net importer of natural gas, India thinks the price of domestic natural gas should not be a deterrent for gas producers. It should be such that it allows natural gas producers the incentives to tap into the huge gas resource potential within the country. In this regard, similar pricing and marketing freedom, if allowed for onshore discoveries as well, may create a sustainable pricing environment. However, for this to happen, it is crucial to maintain the competitiveness of natural gas vis-à-vis other fuels.

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