Killing the hen, India’s gas pricing

Killing the hen, India’s gas pricing

Like most emerging economies, India too is dependent on fuel imports to meet its energy demand. The country bore a crude oil import bill of $64 billion in FY16 and effectively banks on imports to meet 80% of its’ oil consumption. Gas on the other hand paints a prettier picture with India meeting almost 60% of its demand through domestic production. But this data point only reveals a portion of India’s much messier natural gas story.

Gas is flared off from a flame boom aboard DCOR LLC's Edith offshore oil and gas platform in the Beta Field off the coast of Long Beach, California, USA, 18 May 2010. Senators from California, Oregon and Washington introduced legislation last week to ban offshore oil drilling off the West Coast amid mounting concern about the BP Deepwater Horizon rig spill spreading in the Gulf of Mexico. Photographer: Tim Rue/Bloomberg via Getty Images
Gas is flared off from a flame boom aboard DCOR LLC’s Edith offshore oil and gas platform in the Beta Field off the coast of Long Beach, California, USA, 18 May 2010.Photographer: Tim Rue/Bloomberg via Getty Images

Plagued by litigation over allegations of favoring industrialists and price curbs, domestic gas production has been on a steady decline. According to data compiled by EY, “the share of natural gas in the country’s primary energy mix declined from 10% in 2009 to 7% in 2014, compared with the global average of 24%, mainly due to a sharp drop in domestic supplies.” Global energy giant BP in its assessment of India’s energy market during 2015 notes that “gas production fell by 3.8%, its fifth continuous year of decline, 20 Billion cubic metres (Bcm) below the 2010 peak of 49.3 Bcm.”

This decline of gas production in the country has correlated with the government’s move to curtail gas prices. In principal, domestically produced gas from fields won after bidding was to be sold at market price. An April 2015 study titled ‘Gas Pricing Reform in India: Implications for the Indian gas landscape’ by the Oxford Institute for Energy Studies, notes that initially, “…no specific guidelines were issued on price discovery, the government published suggestions from a 2006 consultation on gas pricing, essentially leaving the process up to the producer.”

The twist of fate

But in 2010, the Supreme Court ruled that, “…proper interpretation of the PSC (Production Sharing Contract) mandates the Government to determine the price of the gas…” By January 2013, the government appointed C Rangarajan Panel recommended a formula that effectively doubled the then existing gas price to $8.4 per million British Thermal Units (mmbtu). This panel was followed by another one that tweaked Rangarajan’s formula and, from November 1, 2014, enabled a marginal hike to $5.61/mmbtu from the earlier price of $4.2/mmbtu.

In its finality, India’s gas price was a volume linked weighted average of prices prevailing in multiple global markets. The volume linked weightage for a certain price was based on the market’s familiarity to India’s import assisted natural gas economy. Essentially, the government tried to balance the price of natural gas in India to reflect a favorable price for a market that had substantial production as well as import dependence.

While initially the price did go up, the government also effected a bi-annual revision for gas price in the country. Tragically for gas producers in India, prices tanked globally. Subsequent price revisions brought down the price of domestic gas to $3.82/mmbtu and then to $3.06/mmbtu as of today. Another revision is going to be effected in September 2016 and price is expected to fall below $3/mmbtu following global cues.

Moving towards life support

This price depreciation threatens India’s domestic gas exploration industry. The US Energy Information Administration, notes in its India country analysis“…persistent lower energy prices could affect the capital investment needed to develop India’s more technically challenging upstream oil and natural gas projects.”

With prices plummeting, Government run Oil and Natural Gas Corporation (ONGC) has sought contingency measures. ONGC Chairman, D K Sarraf has said in an April 2016 interview that “When the domestic gas price formula was institutionalized, we didn’t expected the price to come down to such levels. We have now requested the government to put a floor on the price at $4.2/mmbtu.”

At a price nearer to $2/mmbtu, importing and processing natural gas in the country is a much more viable option rather than exploring it. Government run Petronet LNG charges $1/mmbtu for regasification of imported Liquefied Natural Gas (LNG). The company’s stock price has been surging since the government strengthened curbs on domestic pricing, reflecting strong sentiments in favor of the business model. Since October 2014 end, the company’s stock is up over 69% on the bourses. Comparably, oil and gas exploration companies such as ONGC and OIL India have been down almost 40%.

Looking up?

While the government has introduced a higher price for existing ‘difficult gas discoveries’, that price too is linked to the same benchmarks. The price is currently $6.61/mmbtu and it slated for another, very likely downward, revision after September 30, 2016. The crippling of the domestic production industry has become a boon for imports.

According to EY’s overview and future outlook for India’s gas market, “India’s gas demand could at least double from the current consumption levels of 139 mmscmd (in 2014) over the next 10-15 years.” The report also notes that imported LNG has grown to command a 40% share in FY15, double the share it had in FY10.

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